FirstRand’s latest Aussie foray
But can it succeed where others have failed?
COULD FIRSTRAND’S LATEST international venture be doomed to follow the failed example of numerous South African predecessors in the notoriously tough Australian market? Shareholders will hope OUTsurance has learned from the lessons of many companies that have underestimated the complexity and competitive nature of Australian business and won’t repeat the mistakes made there over the past decade and a half.
Six months after the withdrawal from Australia of a bloodied WesBank, FirstRand is betting its direct short-term insurer will have a better chance at taming that country’s tough consumer market. Australia’s regulatory framework is infamous for stymieing the efforts of overeager South African companies. However, OUTsurance CEO Willem Roos says Youi – its Australian subsidiary – received the necessary approvals to run its business from the Australian Securities & Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) within six months and was able to set up its business in a relatively short space of time.
Most short-term insurance in Australia is sold through existing direct channels, with three dominant players cornering 90% to 95% of the market. Roos is undaunted. “It’s actually easier to provide an alternative when the market is tightly controlled than if there were more players,” says Roos. “We calculate we can be more cost-effective and competitive than the established players.”
However, fellow South African insurer Auto & General, which also owns direct business Budget Insurance, has operated in Australia for the past seven years and estimates it has less than 3% of the market, even though it has ambitions to sign up more. It’s been profitable for just the past three years.
“There are no inefficiencies to capitalise on,” says Auto & General CEO Leon Vermaak, who points out that Budget’s client base in SA is three times the size it is in Australia but marketing spend is the same, giving an indication as to the costs of entering that segment. “Just because you’re going direct doesn’t differentiate you in the Australian market,” he says.
FirstRand is committing an undisclosed amount of capital to the venture: Roos confirms it’s in excess of “tens of millions” of rand. The group, which has faced a range of disappointments in operations outside SA – including considerable losses at its proprietary trading desk in Britain over the past 18 months – is being very cautious about its allocation of capital to risky new businesses.
A primary difference between the South African and Australian business models is that the unit plans to use the Internet as its primary delivery platform. It relies more on call centres in bandwidth-starved SA. Like its South African model, it’s planning to provide cash back to customers who don’t claim.
“We tried that and it didn’t work,” says Budget’s Vermaak, who concedes it could have marketed the initiative more effectively but remains sceptical about its potential in Australia.
It’s not all doom and gloom for South Africans in Australia, as evidenced by the success of banker Gail Kelly, formerly of Nedbank. And BHP Billiton CEO Marius Kloppers shows that South African executives can thrive and succeed in that environment. However, SA companies have tended to struggle more.
Investec and Bidvest have built solid Australian businesses. However, more companies fail than succeed in that environment. WesBank is a recent high-profile withdrawal from that market after it failed to achieve targeted returns. Other companies, including Nu-World Coatings, withdrew due to regulatory constraints. And Pick n Pay, in its second incarnation, is yet to prove its viability there.
No doubt doubtOUTOUTsurance will learn from WesBank’s mistakes, including misunderstandmi sunder s tanding the regulatory e nv n v i r o n nme m e n t , underestimating the locals’ appetite for a fight and assuming that a one-model-fits-all-markets approach works in different countries. WesBank chairman Ronnie Watson conceded the group had been arrogant and assumed it would overcome sluggish Australian opposition. Precisely the opposite happened.
The decision by OUTsurance to enter the Australian market pre-dates WesBank’s decision to withdraw, and the FirstRand board, now chaired by Laurie Dippenaar, is vigilant. Roos anticipates break even within four years, but accepts that financial services start-ups take time to settle. He’ll be working furiously to meet interim targets to ensure the board remains more enthused about his venture than it did about WesBank.