Management at Woolworths (ASX: WOW) just keep coming up with ways to squeeze more money out of the franchise. In recent times this has included the renewed push into home brand products, attaining even skinnier margins from suppliers and an expansive move into hardware via the Masters chain to try and grapple market share from leader Bunnings Warehouse.
Woolies is also no stranger to cross-selling products to its enormous customer base. It has been selling Woolworths-branded mobile phone plans for quite some time and in 2011 entered the insurance market by selling life and pet insurance policies. As The Australian Financial Review reports, Woolworths insurance offer has now expanded to include car and home insurance. Having only rolled these offers out in late 2012, the AFR reports that management is ahead of budgeted sales and pleased with the take-up rate. The beauty for the supermarket chains is the low spend required to cross-selling thanks to the sheer number of Australians walking through their doors each week.
Wesfarmers (ASX: WES), the owner of Coles Supermarkets, is of course never far behind its rival and also sells car and home insurance through its long established in-house insurance division Wesfarmers Insurance. The supermarkets are not alone in their aim to grab a slice of the lucrative general insurance pie. Financial planning firms and the banks are also trying to boost profits through cross-selling insurance products to their client base.
What does this all mean for the largest general insurers, Insurance Australia Group (ASX: IAG) and Suncorp (ASX: SUN)? As neither insurer have an underwriting role with the supermarkets, it is certainly not a positive. Just how negative though, depends on how much market share the supermarkets capture from the insurers — only time will tell.
Foolish takeaway
For many insurers distribution of their product is expensive, requiring large commissions to be paid to brokers. General insurance margins are high at present; the result of rising premiums caused by the many natural disasters in recent years. With their low marginal distribution cost and focus on maximising profits in a low growth environment, the supermarkets will undoubtedly continue to innovate and encroach on other firms' profits.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Tim McArthur does not own shares in any of the companies mentioned in this article.
