Discounters charge into new credit card programs

Discount Store News, Feb 17, 1997 by James Mammarella

NATIONWIDE DSN REPORT -- Discount chains testing credit card programs are finding that they all have one thing in common: growing pains.

While the majority of department store purchases are made by plastic, they represent less than 20% of total purchases in the discount channel, leaving the industry with plenty of room to grow

Savvy upscale chains can register up to 50% of their sales on private label credit cards--but it's a whole other universe in discount stores, where smaller average transactions tend to generate purchases by cash and check.

Discounters eager to even the balance have leapt into the fray with new private label (good only at the issuing chain) and cobranded (for universe acceptance) credit card, Each of the Big Three chains has launched a new program in the past year. The differences in offer and marketing approach reveal some of the challenges common to all mass merchants.

Kmart debuted its private label card last August, with a Kmart Rewards program that offers rebates up to 6% on Kmart merchandise.

Target tested both a private label and a Visa co-branded program dropped the co-branded card last month.

While both chains have chosen the private label route, their strategies differ. K-mart wants to increase market share and develop customer loyalty. "If the customer with fewer credit options is walking around with a Kmart card, she may choose to go to that store," said Dennis Shea, managing director of Auriemma Consulting Group. "Kmart is a cash business, but Target, as part of Dayton Hudson, has the whole point of view of the department store business. It may be more focused on the greater control of a private label card and the flexibility of tightening or loosening credit."

Wal-Mart, with its cultural preference for strategic partnerships. last fall rolled out a co-branded MasterCard. That hasn't stopped the biggest retailer from launching a class action suit against both Visa and MasterCard. Wal-Mart and other retailers said they don't want to be forced to accept debit card programs by their partners in credit card acceptance.

Incremental sales, overhead reduction, customer loyalty and database marketing are the main reasons retailers are in the game.

Not everyone subscribes to the incremental sales theory, although it is widely accepted that private label cards do generate an average ticket as much as three times higher than the average cash sale at a given chain, said Lori Engler, vp relationship manager, Citicorp Retail Services. The underlying benefit to the retailer may be in the card's value as a marketing tool.

"With our private label credit card, the average transaction is higher, but I don't think it generates incremental sales," said Bradlees chairman and ceo Peter Thorner. It does give your customers `open-to-spend' available only in your store."

Discount chains have jumped in for three reasons: to generate greater return from their recent capital investments in checkout, telecommunications and data processing systems; to bring down the labor, service, time and shrinkage costs associated with handling checks and cash, and to defend the "wallet share" they need to obtain from customers hungry for ways to minimize the credit cards they use.

There is no sure way to gain all these goals. The card program that Target dropped may have faltered by confusing its customers.

"The hardest thing for discounters is to develop a proposition that works: It must be relevant, tangible and fit with the corporate image," said Scott Carter, vp new market expansion for MasterCard. "Visa and Target created a consumer proposition and reward structure that was not a relevant fit with the Target image."

When discounters offer rebates with their cards, as Target did, their shoppers may feel that the retailer is otherwise holding back on delivering value on an everyday basis.

The Wal-Mart card is designed to avoid such conflict. There is no rebate program to muddy Wal-Mart's everyday-low-price image and no teaser rate on sign-up purchases. Just one of the lowest annual percentage rates (14.48%) in the industry.

"It overlaps perfectly with their `advocate for the consumer' image," Carter noted.

The Wal-Mart co-branded card should also advance the chain's ability to conduct targeted marketing. In connection with the card, Wal-Mart has partnered with the First Data processing firm to use the First USA Value Exchange (USAVE) program. In cooperation with the bank, in this case Chase Manhattan, USAVE inserts promotional materials in billing statements to cardholders.

"We'll know through our database that a consumer is eligible" for a given retailer's promotion, said Bill Baustien, vp national sales for First Data. He added that there is more pressure than ever to offer innovative marketing and loyalty products.

Mass merchants tap into plastic
(Highlights during the past 18 months)

1995            BJ's Wholesale Club and Beneficial National
August          Bank launch co-branded MasterCard.

                Toys "R" Us/Kids "R" Us launches co-branded
September       Visa with Bank of New York.

November        Wal-Mart accepts American Express.

1996
January         Target and First Bank launch co-branded card.

                Blockbuster Entertainment and NationsBank
March           launch co-branded Visa.

                Kmart launches private label credit card
August          with Beneficial.

                Credit card delinquencies reach 3.66% of
                accounts-an all-time high, according to
                American Bankers Association.

                TJ. Maxx/Marshalls parent TJX Cos. launches
September       co-branded Visa through People's Bank.

                Wal-Mart forms 10-year joint venture with First
                Data to process the chain's credit card and
                Internet transactions.

                Wal-Mart launches co-branded MasterCard
                with Chase Manhattan Bank.

                Wal-Mart and The Limited file antitrust suit
                against Visa. The lawsuit later broadens to
                include MasterCard. Other retailers and IMRA
                join the class action suit.

                PriceCostco launches private label card
October         with Beneficial.

                Venture Stores launches private label credit
November        card with Beneficial.

                Personal bankruptcy filings for the year
December        surpass 1.2 million-an all-time high.

1997            JCPenney sells its Visa and MasterCard
                co-branded operations, keeps private
                label card.

                Target First Bank drop co-branded card.
January         Target continues its private label credit card.