Canadian tire corp. Ltd. is expanding its financial services division, looking to take advantage of its stellar brand recognition among Canadians by introducing high-interest savings accounts, GICs and mortgage products in a two-city pilot program the retailer hopes, in time, to roll out nationally.

By so doing, the retailer of automotive services and supplies, sporting and leisure goods, and household products expects to drive further revenue growth, create synergies between its financial services and core retail businesses, and eventually steal a slice of the banking services pie from the country’s big banks.

“We have some critical competitive advantages: brand name and trust; our capabilities, in terms of financial services; our employees; the traffic we generate through our stores,” says Scott Bonikowsky, the firm’s divisional vice president of corporate communication and investor relations. “We have a lot of distinguishing features that will make this a success.”

In October, Canadian Tire Financial Services, a subsidiary of the Toronto-based parent, announced it will offer the three products in a virtual banking model in Calgary and Kitchener-Waterloo, Ont., through its federally chartered Schedule I entity, Canadian Tire Bank. The project is intended to run about two years, during which time the company will study customer acceptance and funding models, and judge the risks involved in taking the project across the country.

“You’ll find that with every major strategic program Canadian Tire undertakes, we take a measured approach,” Bonikowsky says. “We think managing risk is far more important and beneficial to our shareholders than going fast.”

Professor Mandeep Malik, a professor of marketing at the DeGroote School of Business at McMaster University in Hamilton, Ont., agrees it’s the smart thing to do. “Its expertise is not in this area,” he says. “You can very quickly burn your fingers.”

Malik says that Canadian Tire should easily be able to generate cross-marketing opportunities between its new banking products and its retail business. “The products dovetail well,” he says.

In fact, the three banking products — the company intends to offer more products in the first half of 2007, but declines to elaborate — are now available online and by phone to anyone in the country. But the firm is limiting its marketing efforts to the two cities in the pilot project.

Calgary and Kitchener-Waterloo were chosen, Bonikowsky says, because they are relatively larger-sized population centres that are somewhat self-contained, allowing the company to target its marketing and to study the program. The company intends to have booths manned by representatives at some of the stores in the two cities, but doesn’t intend to build physical structures to support the program.

The retail banking pilot project is part of a larger five-year plan the firm is pursuing for its financial services division, which represents 27% of the parent company’s earnings. The rest comes from its retail businesses — Canadian Tire stores and Mark’s Work Wearhouse — and its gas bar and car-wash businesses.

The company already has a thriving credit card business, featuring four million Canadian Tire MasterCard accounts, and is looking to grow balances from an average of $1,800 to the Canadian average of $2,500. The company converted from a retail card to a credit card business in 1997, and ramped up its efforts to market the card two years ago.

“The way this business works, it builds over time, as people get more used to using our card as a primary card, vs using it as a retail card,” Bonikowsky says. “Over the past two years, we’ve seen quarter after quarter of double-digit growth in our average balances, so we think it’s quite a conservative, low-risk strategy just to grow to the average Canadian balance.”

Canadian Tire Financial Services, which also offers loans and some insurance products, supports its customers through a call centre. The parent also has what has to be the country’s best-known customer loyalty program, Canadian Tire Money, which dates back to the 1950s. Customers, the company figures, are used to dealing with Canadian Tire as an everyday financial partner.

“It is cashing in on the trust it has built over the years,” says Sourav Ray, a professor of marketing at the DeGroote School of Business. “If you want to take out a mortgage, you can do it with a company you trust.”

@page_break@The only other major Canadian retailer to offer consumers a wide array of financial services, including mortgages and high-interest accounts, is Loblaw Cos. Ltd. , through its President’s Choice Financial di-vision, a partnership with CIBC. But unlike Loblaw, Canadian Tire has decided not to partner up with a financial services company.

“In developing the retail banking initiative, we looked at potential partnerships. We didn’t find a relationship that valued our ability to deliver this business,” Bonikowsky says. “So, we ruled it out because our participation in the profitability of it would not be at the level that we would expect, given our capabilities.”

Nevertheless, Canadian Tire is not ruling out a future partnership with an outside firm. “We haven’t made a determination one way or the other, post-pilot program, whether we’ll use a financial partner or not,” Bonikowsky says. “Both options are open to us. We have the capability to deliver it [alone].”

Other Canadian retailers have tried to launch financial services divisions, only to retreat soon after. Sears Canada Inc. obtained a banking licence three years ago, establishing Sears Canada Bank and a credit card business of 10 million accounts. But it sold out in 2005 to U.S.-based JP Morgan Chase and Co. In February, Hudson’s Bay Co. sold its credit card business to GE Money Canada, a deal that saw the transfer of 3.1 million HBC cardholder accounts to the Canadian consumer-loans subsidiary of U.S.-based General Electric Co.

“Many times, you’ll see a distressed or poor-performing retailer situation, and it has had to sell [its financial services arm] to unleash shareholder value,” Bonikowsky says. “In our case, we have a growing, dynamic underlying retail business, and the synergies between financial services and retail have been driving significant growth.”

Canadian Tire reported net income of $330.1 million in 2005, a jump of 13.3% over the previous year. For the second quarter of 2006, the company posted net earnings of $103.3 million, a gain of 12.0% over the same quarter the previous year.

Canadian Tire expects to spend $10.2 million to launch the retail banking product project, most of which will be incurred in the fourth quarter of 2006, and hopes that the initiative will start to show a profit in about two years. “It’s very reasonable for investors to think that we’ll be investing in this for a couple of years before we start to see the benefits,” Bonikowsky says.

It remains to be seen, however, if Canadian consumers will make the leap from auto parts, garden hoses and hockey skates to mortgages, GICs and high-interest savings accounts. While a credit card business makes sense for a retailer, home financing is more of a stretch. “I find it hard to imagine a customer walking in to Canadian Tire to look for a mortgage,” Ray says. “The tentative approach [to rolling out banking products] makes sense.”

But Canadian Tire researched its two target markets extensively and has found that consumers have an appetite for banking products from non-traditional sources. As well, the firm enjoys brand goodwill, in terms of friendliness and service, that would be the envy of the banks.

“It’s not as if we’re offering wealth-management products and hedge funds,” Bonikowsky says. “We’re offering basic financial products that help clients with their everday lives. It’s in line with what Canadians would expect of Canadian Tire.” IE