| Fargo & Company (WFC) is a huge Western | | | | aspire to if it hopes to continuously earn |
| and Midwestern bank that provides a diverse array | | | | extraordinary profits. |
| of financial services to its more than 23 million | | | | Unfortunately, most businesses, however well run, |
| customers. The company employs more than 150,000 | | | | can not attain this kind of mind share. The products |
| people at its over 6,000 locations nationwide. Wells | | | | and services they provide can never be as |
| Fargo has about $500 billion in assets. | | | | differentiated and memorable as a motion picture. |
| While the company continues to derive more than | | | | Just as importantly, the positive associations will not |
| half its revenues from interest income (about $26 | | | | be present, simply because the product or service is |
| billion), its activities are not limited to collecting | | | | not inherently exciting, entertaining, or pleasant. This |
| deposits and lending money. Wells Fargo engages in | | | | is clearly the case in financial services. |
| other businesses such as brokerage services, asset | | | | So, what can a financial services company do to |
| management, and investment banking. The company | | | | improve its mind share? The most obvious tactic is |
| also makes venture capital investments. | | | | simply to “wow” its customers. In |
| Over the last ten years, Wells Fargo has averaged a | | | | fact, Wells Fargo’s CEO discusses this |
| 1.57% return on assets and an 18.19% return on | | | | particular option in the “Vision and |
| equity. | | | | Values” section of the company’s |
| Location | | | | website: |
| Wells Fargo is closely associated with California in the | | | | "We have to 'wow!' them. We know what that feels |
| minds of most investors. The company now | | | | like because we’re all customers. We go to |
| operates in 23 different states. However, the | | | | the cleaners, the grocery store, a restaurant or |
| concentration in California remains. | | | | whatever, and we find a situation where |
| Mortgage lending in California accounts for | | | | we’re 'wowed!' We walk out and we say, |
| approximately 14% of Wells Fargo’s total | | | | those people really listened to me and helped me get |
| loan portfolio. Commercial real estate loans in | | | | what I need. All of us hear stories about customers, |
| California account for another 5% of the | | | | say, who pick a certain line at the supermarket |
| company’s total loans. No other single state | | | | because they know the person who bags the |
| accounts for a similarly sized portion of total loans. In | | | | groceries connects with customers — smiles, |
| fact, neither mortgage lending nor commercial real | | | | greets regular customers by name, asks how their |
| estate lending in any other state accounts for more | | | | families are doing. When a personal banker helps a |
| than 2% of Wells Fargo’s total loans. | | | | customer in one of our stores, or when a customer |
| Cross-Selling | | | | gets help from one of our phone bankers or does |
| Wells Fargo’s focus on cross-selling is well | | | | transactions on we want them to say, 'That was |
| known. The company has a stated goal of doubling | | | | great. I can’t wait to tell someone.'" |
| the number of products the average consumer and | | | | Another option worth pursuing is widening the |
| business customer has with Wells Fargo to eight | | | | associations present in the customer’s mind. |
| products per customer (from the current four | | | | Financial services is a business where associations |
| products per customer). | | | | tend to be more conscious, categorized, and |
| Cross-selling increases customer stickiness. It also | | | | hierarchical than the associations formed in more |
| helps increase profitability by decreasing expenses | | | | heavily branded businesses. Put simply, the (potential) |
| relative to revenues. The need for a large physical | | | | customer usually thinks of a “set” |
| footprint is reduced – as is the need for a | | | | before thinking of an “element” within |
| large number of bankers. Instead, the existing | | | | that set. Like many mental associations, the |
| infrastructure is able to provide additional revenue | | | | information can be returned in either direction. For |
| from the same customers. | | | | example, the customer may normally think |
| Wells Fargo’s Chairman & CEO, Richard | | | | “banks” and then think “Wells |
| Kovacevich, explains the importance of the | | | | Fargo”, but will also be able to return the |
| company’s cross-selling in the “Vision | | | | word “bank” if prompted by the |
| & Values” section of the corporate | | | | name “Wells Fargo”. This |
| website: | | | | categorization is important, because it provides |
| "Cross-selling — or what we call | | | | (limited) permission for Wells Fargo to expand its |
| “needs-based” selling — is our | | | | mind share horizontally (across service categories). |
| most important strategy. Why? Because it is an | | | | In other words, providing a diverse range of financial |
| “increasing returns” business model. | | | | services doesn’t just make sense from the |
| It’s like the “network effect” | | | | provider’s perspective, it also makes sense |
| of e-commerce. It multiplies opportunities | | | | from the user’s perspective, because the |
| geometrically. The more you sell customers the more | | | | user of financial services has already grouped |
| you know about them. The more you know about | | | | deposits, borrowing, credit cards, insurance, |
| them the easier it is to sell them more products. The | | | | brokerage services, asset management, etc. together |
| more products customers have with you the better | | | | in a very loose way within his mind. As a result of |
| value they receive and the more loyal they are. The | | | | this mental network, one positive experience with |
| longer they stay with you the more opportunities | | | | Wells Fargo will greatly affect a customer’s |
| you have to meet even more of their financial needs. | | | | desire to pay for an additional service, even if the |
| The more you sell them the higher the profit | | | | two services are not really all that similar. |
| because the added cost of selling another product to | | | | The three key elements here are: a broader definition |
| an existing customer is often only about ten percent | | | | of what Wells Fargo is (a place that does |
| of the cost of selling that same product to a new | | | | “money things”, not just a bank), a |
| customer. This gives us—as an aggregator | | | | positive experience, and some sense of trust that |
| — a significant cost advantage over one | | | | the quality of service will be consistent. The last |
| product or one channel companies. Cross-selling | | | | requirement is the easiest to meet, because |
| re-invents how financial services are aggregated and | | | | it’s natural for a customer to assume that |
| sold to customers — just like other | | | | the positive experience was not a fluke, much the |
| aggregators such as Wal-Mart (general merchandise), | | | | way a diner assumes the good meal he had at a |
| Home Depot (home improvement products) and | | | | particular restaurant was not caused by his picking |
| Staples (office supplies)." | | | | the best offering from the menu. The diner usually |
| Mr. Kovacevich’s enthusiasm for the | | | | assumes the overall quality of the |
| cross-selling model is well justified. It is difficult to | | | | restaurant’s various entrees is superior. |
| quantify the importance of meeting all the varied | | | | Likewise, a good experience with one of Wells |
| needs of your customers, because you can not | | | | Fargo’s products or services will likely rub off |
| measure the opportunities you missed. However, it is | | | | on its other offerings. |
| obvious that reducing each customer’s | | | | Valuation |
| interest in considering a competitor’s services | | | | Shares of Wells Fargo currently yield just over 3%. |
| will greatly increase long-term profitability for any | | | | The stock trades at a price-to-book ratio of just |
| company engaged in any line of business – not | | | | under 2.75 and a price-to-earnings ratio of less than |
| just for a bank. | | | | 15. |
| Later, in the same website section, Mr. Kovacevich | | | | Conclusion |
| addresses the importance of customer stickiness: | | | | Wells Fargo’s CEO makes the case that his |
| "(Cross-selling) is our most important | | | | company’s P/E is simply too low. Wells Fargo |
| customer-related sales metric. We want to earn 100 | | | | has a solid history of strong growth and profitability. |
| percent of our customers’ business. The | | | | So, why should it be valued similarly to most other |
| more products customers have with Wells Fargo the | | | | banks? Shouldn’t it be awarded a multiple |
| better deal they get, the more loyal they are, and | | | | more in line with a growth company? |
| the longer they stay with the company, improving | | | | There’s actually some merit to this argument. |
| retention. Eighty percent of our revenue growth | | | | Wells Fargo is unusually well positioned for a bank. |
| comes from selling more products to existing | | | | Often, those banks that seem certain to earn very |
| customers." | | | | high returns on assets and equity for many years to |
| This focus on retention is an important part of a | | | | come are poorly positioned for future growth. These |
| long-term plan to maintain Wells Fargo’s | | | | banks are often smaller than their competitors and |
| above-average returns on assets and equity. | | | | focused on a specific geographic niche. Any |
| Extraordinary profitability comes from differentiating | | | | acquisitions would dilute the exceptional profitability of |
| your product or service from those of your | | | | the bank’s niche. |
| competitors. Increasing customer stickiness and | | | | Of course, there are also many consolidators in the |
| reducing “comparison shopping” is a | | | | banking industry. Unfortunately, many of these banks |
| key part of maintaining extraordinary profitability. | | | | do not have a history of earning the kind of returns |
| Some businesses are blessed with enviable | | | | on assets and equity that Wells Fargo has achieved. |
| economics because of their product’s natural | | | | Even more importantly, there is little differentiation |
| prominence in the minds of their customers. Most | | | | between these titans of the banking industry and |
| businesses are obsessed with market share. But, how | | | | their national competitors. Therefore, their moats are |
| many really think about “mind share”? | | | | highly suspect. |
| Obviously, a product like Coke (KO), Hershey (HSY), | | | | Wells Fargo is a different kind of bank. It has a |
| or Snickers is going to have a positive association in | | | | history of extraordinary growth and profitability. |
| the minds of consumers. | | | | There are two obvious opportunities for future |
| For many people, these products will also have a | | | | growth: geographic expansion and cross-selling. Of |
| prominent place in each customer’s mind | | | | these two opportunities, it's clear I’m more |
| (relative to other products and services on which | | | | enamored with the latter. An eastward push is not |
| money can be spent). A few other businesses have | | | | necessary, and certainly not via an ill-advised |
| a healthy mind share without the positive association; | | | | acquisition. |
| GEICO is the most obvious example. The | | | | There is a lot of value in the Wells Fargo franchise |
| company’s brand conjures up nothing but the | | | | and there is plenty of room within that franchise for |
| words “auto insurance”. Of course, | | | | future growth. That’s one of the great |
| that’s all the GEICO brand has to do. | | | | advantages of the financial services industry. With |
| So, what does all this have to do with Wells Fargo? | | | | the right model, limits to growth are almost |
| Mind share isn’t just the result of exposure | | | | non-existent. In other highly-profitable industries, |
| to advertising. In fact, in most cases, exposure to | | | | there is often nowhere to reinvest new capital at a |
| advertising can not duplicate the kind of results that | | | | similar rate of return. |
| a direct, differentiated experience creates. | | | | If Wells Fargo is a growth stock, it is a peculiar sort |
| Entertainment properties are by far the leaders in | | | | of growth stock. Maybe that is what attracted |
| mind share. People who saw and loved Star Wars | | | | Buffett to the company in the first place. Here is a |
| remember the film. In fact, they don’t just | | | | business with a strong franchise that can grow for |
| remember the film, they actually file it away (or, | | | | many years to come. Perhaps most importantly, it is |
| more precisely, cross reference it) in countless ways | | | | a growth business that frequently trades in the |
| within their mind. | | | | market at value like multiples, simply because |
| The evidence for this particular example is abundant. | | | | it’s a bank. |
| There are countless references to Star Wars in other | | | | At the current market price, Wells Fargo is the sort |
| media. The name, the music, the opening text and | | | | of investment you make once and forget. The |
| countless other elements are immediately | | | | valuation is not so cheap as to promise a good return |
| recognizable. Even the films Star Wars fans hated | | | | if the business falters. But, the business is not so |
| made more money than almost any other movies in | | | | suspect as to require the margin of safety be |
| the history of cinema – and this was decades | | | | provided by a low P/E ratio. Sometimes, near certain |
| after the original came out. So, obviously Star Wars | | | | growth is the margin of safety. |
| has the kind of lasting mind share any business should | | | | |