Diversified conglomerate Wesfarmers (ASX: WES) is well known for its expansive retail store operations, which include the long-held Bunnings and Officeworks businesses and more recently the Coles, Target and Kmart businesses. However, it is its less-well known insurance division that is causing a stir amongst investors.
The insurance division is a big business in its own right. For the financial year just ended, the division recorded operating revenues of $2.1 billion and earnings before interest and tax of $205 million. The business incorporates both underwriting and broking spanning Australia, New Zealand and the UK. This network and skill set is now being utilised to cross-sell Coles-branded insurance products to the Coles customer base.
According to the Australian Financial Review since setting up the Coles-branded insurance in 2010, Coles has sold 220,000 car and home policies — with 100,000 of those policies sold in the last financial year — which suggests the products have traction and are starting to gain momentum.
It's worrying news for the major established players in the home and car insurance space. Insurers Suncorp (ASX: SUN) and Insurance Australia Group (ASX: IAG) control around 65% of the market, now they have to compete with the enormous distribution and marketing power of not just Coles but also Woolworths (ASX: WOW), which is also offering its own branded insurance products backed by The Hollard Insurance Company.
Foolish takeaway
New brands and disruptive marketing can be effective ways for companies to capture market share from incumbents. Given that the majority of Australians shop at either a Coles or a Woolies supermarket each week and that the majority of Australians also have home and car insurance, the cross-selling potential is obviously huge. Strategic moves such as these have the potential to add significant value for shareholders and turn these large and seemingly slow growth retail stocks into something more exciting.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
