Saturday, May 06, 2006

HSBC's Expansion in Canada

The Globe and Mail, Omar El Akkad, 6 May 2006

The challenge: To expand into Canada's lucrative suburban market by building branches in wealthy, rapidly growing communities

The call: Understand that it's a real estate, not a banking game you're playing, and find the well-connected insiders who can get you in on the ground floor (literally) of new developments

HSBC Bank Canada's ambitious drive to cash in on Canada's suburban construction boom was hitting a brick wall. Every time the bank's strategists identified a growing community with the potential to sustain a lucrative branch, they found one of two other companies had already beaten them to the punch. Either Toronto-Dominion -- widely recognized as the Canadian bank industry's leader in snatching prime real estate -- had already secured the best spot, or Tim Hortons had.

That's one of the frustrations the bank has had to deal with as it pursues its expansion strategy in Canada's fastest-growing suburbs. HSBC's plans include a dramatic expansion in Toronto, Calgary and Edmonton. The bank has 43 branches in Ontario, of which 32 are in Toronto. Over the next 18 to 24 months, it wants to add another 20 in and around places such as Burlington, Mississauga and Aurora, at an average capital cost of a quarter-million dollars a branch. The goal, according to HSBC Canada CEO Lindsay Gordon, is to reach a "minimal critical mass" of locations that'll convince customers at the Big Five banks to switch.

The expansion marks a strategy shift for a company that started up in Canada 25 years ago primarily to serve Western Canada's Chinese community. Today, Mr. Gordon says Canada's growth, driven by India and China's demand for natural resources, is part of a long-term trend, one that HSBC hope to cash in on.

The problem is, so does everyone else.

"It's an expensive proposition," Mr. Gordon says of the bank's suburban expansion strategy. "There's no question there's competition from TD, Tim Hortons, you name it."

HSBC's corporate makeup gives the company several key advantages over other banks. The Canadian arm's parent company, HSBC Holdings PLC, is a global giant with operations in almost 80 countries. That gives HSBC Canada the kind of international access that draws high-net-worth clients and customers with overseas banking needs. But one strength HSBC doesn't have is a major Canadian presence on the ground. Its 130-odd branches are no match in number for big players such as Royal Bank of Canada and Bank of Nova Scotia.

HSBC is also hindered in achieving its expansion ambitions by a lack of real estate know-how. The company has its own in-house real estate team, but relies heavily on well-connected outside consultants who can mean the difference between a prime location and the odd lot out in a new shopping development. And because HSBC doesn't want to get into the real estate game, it leases, rather than buys its locations.

But suburbia is where many of HSBC's target customers live, so that's where the company must go. The bank has always been a favourite of customers who do a lot of travelling, but Mr. Gordon says it's now targeting "soccer moms and dads" -- families who have their own homes and are looking for more than a simple chequing account. Even as on-line banking grows at a much faster rate, Mr. Gordon says branches are vital to attracting those people.

"I'm a very big believer in the 'bricks and clicks' strategy," he says. With more customers doing their banking on-line, he adds, branches are becoming a destination for financial services and advice, rather than basic transactions. "Very few [banks] have succeeded on a purely virtual basis," he says.

Branches are also an important part of HSBC's marketing strategy. Last year, the bank began an aggressive marketing campaign, partly in an effort to convince those soccer moms and dads to switch from the Big Five banks. Even though most branches typically don't make any money for the first couple of years, they enhance brand recognition immediately (worldwide, HSBC is the 29th best-known brand, between Sony and Nike. In Canada, it barely registers compared with the Big Five). That's also part of the reason HSBC branches become heavily involved in corporate donations and sponsorships in their communities.

"Clearly in Canada, outside mainland B.C., we have to build our brand," Mr. Gordon says. However, he believes success lies in targeting where they set up shop, rather than just littering the country with new locations. "If you build [branches] on the basis of 'if you build it, they will come,' it probably won't work."

Lindsay Gordon, CEO, HSBC Bank Canada

Age: 54

Education: Bachelor of Arts degree in economics (1973) and MBA (1976) from the University of British Columbia.

Family: Married, with four children.

First bank account: He didn't get his first account until 1970, when he came to Canada from England as a student. He got his first loan from a company that was eventually merged into HSBC's finance arm.

Best banking experience: Opening a high-interest savings account with HSBC a couple of weeks ago.

Worst banking experience: He won't say which bank it was, but one of his first employers refused to give him a loan to buy furniture for his new home. "Apparently my credit rating wasn't good enough. I hope that wouldn't happen today.'

Travel mileage: He's in the air almost every week, usually visiting one of the company's Canadian operations. However, last week he was co-host, along with the head of HSBC's U.S. operations, of a vacation retreat in Bermuda for last year's top-performing 100 North American employees.

What he does when he's not working: He maintains that the real reason he came to Canada wasn't to study, it was for the skiing. "I like to say I have three priorities: family, work and skiing. But my wife says they're not necessarily in that order." Now that his youngest son is finishing high school, he's also taking up sailing in his spare time.

Charitable side: His youngest son was diagnosed with Crohn's disease at age five. That led him to co-found CH.I.L.D. Foundation, a group that raises funds for medical research into intestinal and liver diseases. He's also vice-chairman of the United Way's 2006 campaign cabinet in B.C.'s Lower Mainland.