Talks between the AA and Hastings are over and, according to some sources, never really got started. The problem facing the two companies now is that some might be wondering whether their insurance businesses are in need of some roadside assistance of their own.
AA shares have performed poorly this year, even before boardroom antics prompted a further recent slump in the stock. Meanwhile, although Hastings has continued to keep the engine revving on its motor insurance-led business, its doubters wonder whether it can continue to grow at the same pace. Not everyone believes that it can hit its target of three million policies in 2019 and one analyst — Eammon Flanagan, at Shore Capital — said after its half-year results this summer that the company’s aspirations in household cover were “way too aggressive”.
So is it a case of two drunks trying to prop each other up? Not quite. It hasn’t been plain sailing for the AA since its flotation in 2014, but there is evidence that its IT restructuring is working and that its app is gaining greater traction among customers who have broken down, which should lead to greater efficiency and productivity.
Some company-watchers believe that its cadre of younger senior executives are doing a good job, so the ousting of Bob Mackenzie as executive chairman in July after a physical altercation with Mike Lloyd, head of insurance, may be embarrassing but is by no means the end of the world.
Still, joining forces with a lean, mean machine such as Hastings, which does most of its business through price comparison websites, could make sense. The AA has battled with falling personal members of its roadside assistance business, which dominates the group. Hastings’ core insurance expertise and ability to be very nimble with pricing could provide a growth spurt to the AA’s insurance side, which at present makes up only about 15 per cent of its revenues.
As for Hastings, which is run by Gary Hoffman, the former Northern Rock chief executive, the business produced a strong set of results this summer. However, either buying or forging a partnership with the insurance side of the AA would give the Bexhill-on-Sea-based company access to a huge new pool of customers. Hastings could write the insurance, which would still be branded AA. Such affinity deals are common in the insurance world and allow a company with insurance expertise to team up with another that has lots of customers to distribute to.
One downside is that while they can work well when the executives who set them up are in place, change a few faces and one or both parties can find themselves in a dysfunctional relationship and decide that they want out.
Mr Mackenzie was so opposed to the idea of a tie-up of the AA’s insurance side with Hastings that he clashed with Mr Lloyd, who did support it. The official line now may be that the talks are off, but there is nothing to stop them coming back, apart from a bit more embarrassment for some of the people involved. If not, the AA could keep looking for an insurance partner. With its respected brand, it should be able to extract a good deal.
Meanwhile, Hastings (which at the moment does not do affinity deals) could also keep looking, to help both its large motor unit and much smaller home cover business. With Mr Hoffman’s experience of cut and thrust in the business world, it would almost be expected of him.
My advice Buy AA, sell Hastings
Why The AA could sell its insurance unit and has value to unlock elsewhere; Hastings has raced too far and the risk is that it will stall
Greggs
Every other day another retailer seems to bemoan the squeeze on wages inflation and falling consumer confidence. However, there is one that is always seems to be worth a punt — Greggs, once best-known for its sausage rolls but now selling everything from yoghurts to boxed salads to wraps.
Greggs is becoming a solidly reliable performer after a turnaround initiated by Roger Whiteside. Under its chief executive, Greggs has improved its stores and dramatically lifted both the quality and range of its food. In particular, it has increased its breakfast sales while bolstering its operational efficiency.
These achievements have not come easily and there have been job losses as Greggs’ bakery operations are consolidated. The proof of the turnaround, however, is in the pudding. Last year pre-tax profit of £75.1 million was up from £73 million and total sales jumped by 7 per cent to £894.2 million. Like-for-like sales were also up by 4.2 per cent in a good showing for a food seller operating in a tough market.
Greggs’ comparable sales have continued to rise, too, most recently by 3.4 per cent in the six months to July, at a time when input costs are rising thanks to the fall in sterling since the Brexit vote. Greggs continues to open new stores and is experimenting with different formats, including “drive-thru” shops.
While the company has its work cut out keeping prices low in an inflationary environment, the potential to roll out its new strategy, while making further efficiency gains, could deliver significant upside.
UBS said yesterday that there was the capacity for more than 2,500 Greggs shops, substantially ahead of the retailer’s own target of more than 2,000 outlets. It said that Costa Coffee was still delivering good growth even though its store base was about 25 per cent larger than Greggs’.
Greggs’ stock has jumped from £10.18 a share a year ago to close at £12.19 yesterday, so the market has clearly priced in some of the retailer’s roll-out potential. However, there is still more expansion to come here as Greggs continues to drive product and store innovations.
My advice Buy
Why The returns could be tasty
