The Continual Decline in Bank Supermarket Branches
The concept of putting a bank branch inside a supermarket has been around for decades. Initially, it made sense. Distribution strategists know that aligning branches near supermarkets tends to yield better deposit growth, so why not put them inside the store? We’ve learned a lot in those decades … about why supermarket branches rarely make financial sense. The number of bank-branded supermarket branches has been declining for years, and last year was no different.
The latest FDIC Share of Deposits database was recently released. My followers know that the release invariably leads to a series of articles on the health of bank branches. Here are some topline observations:
Bank branches aren’t going away anytime soon. As of the June 30, 2021, report, there are still over 78,000 bank branches, even after cleaning the file for closed, limited service, and non-depository branches.
Instore branches (branch service type 12), though, continue to show a faster decline than other branch service types, down 44% in the last 10 years, and down 17% in the last year. Note: These figures do not include credit union instores, as they are difficult to identify.
The average branch deposit base continues the rapid growth we saw between the 2019 and 2020 SoD report. Average branch deposits hit $112 million, up from $98 million in 2020, and $84 million in 2019. This is largely due to the huge series of stimulus investments the government has pumped into the economy. Note: Branch deposits are capped at $500 million to minimize the impact of institutional and large commercial deposits.
The difference between traditional branches and instore branches in deposits is also significant. Instore branches (branch service type 12s) hold average deposits of $33.7 million, compared to $115.3 million for traditional branches. That $81.6 million gap between the two branch types is up nearly $10 million in the last year.
The median branch deposit level for instores is far worse at only $19.4 million, so it’s no wonder those branches are closing at a faster rate. It’s hard to make money with a $20 million branch in today’s interest rate environment.
Instore Deep Dive
Let’s take a look at who still operates bank instores and where they still exist. In total, 317 banks still operate instore branches, but ¾ of those banks only operate 1 or 2 instore branches. Only 27 banks operate 10 or more instore branches.
Woodforest’s whole business model relies on instore branches. Most are located in Walmart stores. But even Woodforest has nine fewer instore branches than two years ago. More surprising is that some of the largest banks in the country still operate instore branches.
US Bank operates 455 instore, but that is down 41% from just two years ago.
Citizens Bank operates 244, down 21% from 309 two years ago.
Huntington operates 201, up 13 from two years ago.
Wells Fargo operates 164, down by nearly half in the last two years.
PNC operates 112, down 10% in the last two years from 125.
Perhaps in Huntington’s case, they have figured out the trick to operating these small spaces. Based on this year’s SoD data, Huntington’s instore network averages over $35 million in deposits, and the median level is near that level at $32 million, both better than the industry average.
You can find instore branches in most metro areas across the United States. In fact, they exist in over 300 metro areas in the latest dataset. The markets with the largest number of instores are concentrated in Texas. As expected, the country’s largest markets have the most.
Do instores do better in some markets than others? Apparently, market conditions do impact performance. Among these largest markets, the two northeast markets Boston and New York have the highest average deposit bases at $77 million and $64 million, respectively.
Do Instore Branches Make Sense?
Rarely, in my opinion. Let’s look at some figures.
Banking is a very profitable business. In the first half of 2021, FDIC insured banks generated $145B in net operating income, even with the lowest net interest margins in recent history. Using FDIC national averages of 2.5% NIM (net interest income) and 1.5% NII (non-interest income), and accounting for charge offs, it takes about $20MM in deposits for an instore branch to break even, and $30MM for a traditional branch. This assumes that a traditional branch costs about $1MM annually to operate, and instores 2/3 that level. You might think that instores would be much cheaper to operate but due to 70+ operating hours versus a traditional branch’s average of 45, employee expense is higher.
By my estimates, only half of the 3310 instore branches reach breakeven profitability on a direct basis. If those figures were fully loaded with corporate overhead the situation would be even worse. This is in comparison to traditional branches where 5 out of 6 are likely profitable on a break-even basis.
At firms where I worked during my long career, our goal was to have every branch generate three times its direct expense level on an annual basis. Few branches were unprofitable, and most of those were new and hadn’t yet reached maturity.
One has to ask; would you continue to operate an unprofitable business?
A quick counterpoint. This analysis looks at instores as a singular portfolio, but in reality, many firms have found ways to make instores work for their business model. They generally operate leaner staffs and have focused sales strategies. In fact, some industry players continue to experiment with the model. One example is Hawaii State FCU who announced they will open four new instores. Additionally, operating costs vary by market so instores in lower cost Midwest markets have lower profitability thresholds to reach.
Why are instores still being built? Thirty-seven new instore branches have opened in the last two years of FDIC reporting. The allure of instores is real.
They take less capital to build due to the small size (average 600-700 square feet).
They can be built pretty quickly compared to traditional branches.
They cost less to operate than traditional branches.
You get visibility to the thousands of supermarket visitors every week.
While the allure is real, however, the facts say the numbers don’t work.
