Consulting » Eggy bread

Spurred on by the lower cost of establishing an internet presence compared to branch acquisition, Prudential plc launched Egg, the UK’s first foray into virtual banking, in October 1998. With a clicks-not-bricks strategy, a small fortune spent on advertising and promotional interest rates, Egg caught the public’s imagination. Within its first week was peppered by 1.75m hits (at a time when hits mattered) and the company received more than 100,000 telephone enquiries.

Demand has been growing ever since. But, with 1.5m customers, interest receivable of Pounds 657.3m and operating losses before tax of Pounds 155.3m for year 2000, the company needs a finance department that can covert operational growth into financial profit. In November 1999, with an IPO around the corner, Egg poached FD Stacey Cartwright from Granada Media with a remit of driving the bank to break-even point by Q4 2001.

Cartwright is 37. She fits the young and vibrant outlook of a company that likes to festoon its coffee tables with the board games from a thirty-something’s childhood, so that Buckaroo and Operation are intermingled with copies of the financial press. But the games boxes are starting to gather dust – it just doesn’t do to portray a decadent, happy-go-lucky image in the cash-strapped naughties.

Cartwright is concerned about the company’s image and how the analysts perceive an internet bank. “There was a certain amount of scepticism that we were just another dotcom at the time of the IPO,” she says. “We have been kept a little under wraps by the City. There are still some people who are sceptical, but the majority of feedback we are getting is positive. We are widely considered to be one of the few winners in the new economy.”

Surviving dotbomb
So far, Egg’s share price has ridden the waves and recovered from the January doldrums to around 160p – the price Egg shares floated at in June 2000. “We have been pleased with our share performance,” Cartwright says.

“If you look at the rest of the market place since we have floated, I think to have held our own as we have done is a great achievement. The marketplace has a better understanding of us, certainly better than last year.”

Cartwright puts Egg’s success (or lack of failure) in the market down to the fact that it is operating in familiar territory for most analysts – financial services. But she also believes the City was astute enough to understand why Egg was different from your usual high-street fare.

“The analysts we first spoke to all had an interest in the key drivers of Egg the business. But they also recognised that it wasn’t a case of taking an existing bank model and just writing Egg at the top while changing some of the key assumptions. The change is much more fundamental than that,” she says.

Egg’s strategy is based on a stable value proposition for customers, where the services of a high street bank are delivered at more favourable interest rates. “We are such good value that customers cannot resist turning to us,” says Cartwright. “Our savings account at launch was paying above base rate at a time when the rest of the marketplace was paying significantly lower. In the time it took the incumbents to move we had taken great chunks of their customers. We did exactly the same with the Egg credit card. The credit card market had APRs of over 20%. We launched at 9.9% and offered you cash back.”

Cartwright gets excited about innovation, first-mover advantage and people who can generate new, exciting ideas for the business. She took the job at Egg on the back of a single meeting with then Egg CEO, Mike Harris.

“Mike is a great visionary. During my interview he articulated Egg’s strategy of completely turning people’s approach to financial services upside down.

I was completely captivated – the only time I have been captivated in that way at an interview, even the interviews at bigger FTSE companies,” she says.

She believes that Harris’ vision is now a reality. “We are evolving financial services into something never seen before. We gradually eat into the margins and hurt the incumbents. We operate on the back of a policy called ‘Disruptive Innovation’ and look for opportunities in the marketplace where there are the fattest margins to be had,” she says.

Cartwright’s CV does not suggest she is a go-getting innovator – and certainly not disruptive. Her first job after leaving Price Waterhouse in the late 1980s was as head office accountant for media giant Granada Group. She soldiered on there in a variety of finance roles for 12 years, culminating in her promotion to commercial director of Granada Media in 1998, which combined the roles of FD and manager of commercial transactions.

However, her career at Granada was not all back-office number crunching.

Asset stripping
In one of the most acrimonious and hotly contested take-overs of the 1990s, Cartwright was at the forefront of stripping the assets of Forte, then the UK’s largest hotel group. In 1996 Granada paid a whopping Pounds 5.3bn including debt for Forte, at a time when Cartwright was pushing some important financial buttons in the group.

There is now little left of the merged entity, and Granada shareholders have seen little return from the acquisition, but the deal was the proving ground for Cartwright. “With Forte we were dealing with about #2bn of disposals. It was my biggest deal at Granada. But in 1997 the programme for Forte was coming to an end. I thought that I had taken the role in the company centre as far as I could,” she says.

Granada did not want to let her go and begged Cartwright to stay on in any finance role of her choice. “I told them that I wanted to be commercial director of Granada’s four main divisions. That role comprised two jobs.

I was still FD but I also had to do all the deals and transactions,” she says.

Cartwright became commercial director of Granada Media in 1998, which gave her a seat on the board of her beloved Liverpool Football Club. But she left by the end of 1999. “I had been with Granada for nearly 11 years by then, so I always dealt with the same individuals and was perceived as number two to the group FD,” she says. “There is only so long you can play that role before you want to be number one.

“I was headhunted in the usual way, but at first I wasn’t interested because it was financial services. There I was in a glitzy media world and financial services had connotations of being staid and boring.” But Egg offered Cartwright a number one role with a juicy IPO to get her teeth into and she went.

Chapter and verse
Before she left, Cartwright had to spend months going to secretive meetings with the Egg directors and its finance team. “I got full chapter and verse before I came on board but I also did my own basic due diligence and kept prodding at things, working out scenarios. I was still being paid by Granada at this point and they didn’t know anything about it at the time so I had to have meetings with Egg early in the morning and in the evenings,” she says.

When Cartwright joined in November 1999, Egg was still 100% owned by the Pru, so “it didn’t feel like plunging feet first into a dotcom”. Even so, she was joining at the defining moment of Egg’s development – preparing for an IPO in June 2000 that would hatch Egg into the FTSE-350 with a market cap of Pounds 1.3bn.

“I knew the IPO was around the corner and the main challenge was getting up to speed as to what is required in a financial services organisation in terms of the regulation,” she says. “Advisors had already been appointed and my role was as the Egg representative overseeing the flotation. The Pru also had a representative managing its interest. I had to step straight into the heart of the business, balancing my time 50/50 between managing the business and the issues arising from the IPO.”

But it wasn’t until a month or two before the IPO that Cartwright was let loose on the financial community. “Up to March 2000 I was kept behind closed doors, but in April we launched the IPO build-up and I began to talk to analysts. We hit the road very fast, went round all the institutions, stage-managed numerous meetings through the day from breakfast presentations to evening meetings,” she says.

City worries
Today, many analysts are still unconvinced by Egg. A disappointing year for ISAs in 2000 has taken its toll. Egg only had Pounds 74m under management in funds during the year, while some analysts had been hoping for hundreds of millions. Moreover, its marketing spend hit Pounds 50m in 2000, prompting City grumbles.

Cartwright denies the accusation of over-spending. “We are now at an outrageous level of 88% brand awareness so our investment has paid off.

We also knew that our marketing expenditure would peak and then fall.

There was a lot of competition last summer with the American players and me-too brands. But it now costs less to maintain the brand. We will probably spend Pounds 40m this year,” she says.

Cartwright is sure that Egg can now predict certain growth after a period of guesswork. “Planning for growth at the launch of the business was like asking how long is a piece of string, but we now work to a cost of Pounds 25 to acquire a customer,” she says. “The results are bearing this out. Obviously we have some product lines that do not attract the numbers we originally thought, but we have a reasonable amount of stability and we can articulate our commitment to breaking-even in Q4 this year with reasonable certainty.”

Bearing in mind that Cartwright compared Egg to Sky in April this year she could have chosen a better example of how to get a business into the black. “No one believed they (Sky) would make any money, now look at them,” she infamously said after the publication of Egg’s Q1 2001 results. Sky lost Pounds 260m in the six months to December 2000.

Egg intends to make up its deficit by bringing in more investors, creating stickiness by cross-selling products such as credit cards, mortgages and insurance. Recently, however, Egg has seen its better-off customers fleeing as the company gradually reduces interest rates on its savings account.

Young, tech-savvy investors are now the target for Cartwright, although their value per head is less. Egg acquired 500,000 new banking customers in 2000, but total deposits fell by 11% to Pounds 6.7bn.

“The vast majority of our banking customers are happy that we have moved to base rate, they were always aware that we would,” says Cartwright.

“We took the needed pricing initiatives and we are now at sustainable rates. Of course, some top-end customers, the guys with #250,000, have migrated their money elsewhere. They are being replaced by a growing number of deposit customers, but these are people with #5,000 or #10,000.”

Cartwright is convinced that customer migration levels will level off.

What they want is a stable interest rate that beats the high street, she says. “The Egg brand stands for sustainable long-term value. Customers know they will get a good deal, perhaps not always the best deal, but that’s fine because customers would rather stay in one reliable place.”

And, as 90% of Egg’s customers who join under promotional offers stay on after the preferential rates have ended, Cartwright is convinced that customer numbers will continue to grow and that cross-selling and money-making will begin in earnest.

“Our intermediation businesses offer very attractive returns as they do not consume capital in the way that the core bank does. From a P&L perspective most of the revenues drop straight to the bottom line,” she says.


Name: Stacey Cartwright Age: 37 Qualification: ACA CAREER: 1999-: Chief financial officer, Egg 1998-1999: Commercial director, Granada Media 1995-1997: Director of finance and corporate development, Granada Group 1994-1995: Finance director, Spring Grove Services 1991-1993: Group financial controller, Granada Group 1989-1991: Group accounting manager, Granada Group 1988-1989: Head office accountant, Granada Group 1985-1988: Price Waterhouse Biggest challenge: For the whole team the main challenge is keeping up to speed with the pace of change within the organisation and the pace of ideas flow. We need to be one step ahead with the financial implications. This is a very fast moving organisation and there are more ideas that we can possibly execute. Biggest hassle: Organising my diary. I make unreasonable demands on my PA. But I try to keep my time under control. I start at about 8am and get away by 6:30pm. I also try to do as few weekends as possible. You can be FD of any company but Egg – which would you choose?: My one regret was having to give up my seat on the board of Liverpool FC when I left Granada. A return to Liverpool in some capacity would be nice.