FirstRand’s lat­est Aussie foray

But can it suc­ceed where oth­ers have failed?

Finweek English Edition - - Companies & Markets -

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.

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