At a time when digital is king and 50 is the new 40, Saga PLC (LON:SAGA) seems to have lost its appeal with its over 50s customer base.
The insurance and holiday specialist shed a third of its market value on Thursday after it slashed its dividend and warned profits would be lower in the new financial year as it tries to address struggles in its retail broking business.
A growing number of consumers are using price comparison websites to search for insurance policies, which has hit Saga’s retail broking performance.
READ: Saga Group slashes dividend as it warns insurance turnaround plan will hit profits
Tough competition and regulation changes, which have increased price transparency and made it easier for people to switch insurance providers, have added to Saga’s woes.
In a bid to tackle the sector-wide challenges, Saga said it plans to change its insurance strategy by focusing on more direct to consumer products that “move the conversation from price to value”.
The group has also launched new home and motor policies with three-year fixed pricing and will spend more on marketing to lure in customers.
Execution concerns
The cost of pursuing this strategy will squeeze Saga’s margins, leading to weaker profits in 2020, while some analysts have raised execution risks.
UBS analysts said management execution was a major concern since Saga has “clearly disappointed the market since coming to market”.
“We already sensed significant market concerns around management execution, which we now expect to be higher,” they said.
Does Saga understand target audience?
Another analyst suggested Saga needed to reassess the needs of its target audience, particularly those at the lower end of its over 50s customer base.
“An increasingly price driven insurance market isn’t a new trend, and while the group’s made some slight innovations, including a three year fixed-price insurance contract, and is boosting marketing, it might all be too little too late,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
“While the speed of deterioration has taken the market, and us, by surprise, there have been worries for some time that the Saga brand was losing its appeal at the lower end of its ‘over 50s’ customer base.
“Without brand loyalty, Saga is just another insurer.”
With healthier lifestyles and advancing medicine, people in their 50s feel younger than they once did, so it's fair to say they don't want to be reminded they are getting older through targeted advertising campaigns.
For this reason, Saga may need to rethink its marketing strategy, especially since the firm plans to plough more money into promoting its insurance products.
AJ Bell investment director, Russ Mould, said Saga has a strong brand and has previously boasted of having loyal customers but this is becoming harder to maintain.
“The key issue is that customers don’t really need to be loyal to Saga unless they are getting something special,” he said.
“After all, it has never been easier to search the internet to find the best price on an insurance policy or to find a specialist holiday such as travelling with like-minded individuals.”
New strategy means make or break for management
Mould noted that the company is taking action to overhaul the business but this requires investment, meaning profits will come under pressure for some time.
To Saga’s credit, Mould said the company has admitted to its mistakes and is working to address them, which could make the management look stronger.
“The test is whether shareholders take the same view and let the current leadership team stay in place to complete the turnaround,” he said.
While the insurance business is the biggest headache for Saga, bookings at the company’s travel business for the coming year were 3.4% lower than a year ago.
Saga blamed Brexit uncertainty, saying Britons were deferring their travel plans until there was more clarity on the UK’s departure from the European Union.
Until recently, the travel business has been shielded by the slowdown in consumer spending since the 2016 Brexit vote, thanks to affluent pensioners.
But worries about the UK leaving the EU without a deal have seen more people hold back on holiday bookings.
To tackle this issue, Saga said it would switch its attention away from “undifferentiated, low value products” like short haul holidays towards “higher-margin, more differentiated products”, such as escorted tours and river cruises.