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Private-label credit cards spawn loyalty, drive sales - Brief Article

The changing face of consumer loyalty now includes more than a strong brand and low-pricing strategy. Private-label credit cards have made their way into the mix--quickly becoming a standard tool for businesses looking to increase sales and profitability, create customer loyalty and build a marketing database.

For retailers, the value of these cards is undeniable. Research shows private-label card customers are more likely to read circulars and visit stores. They'll also make purchases twice as often as bank card or cash customers, and are more likely to make impulse purchases and buy expensive skus. For these reasons, a growing number of retailers are turning to private-label programs to stimulate sales by giving consumers added buying power.

Looking at the big financial picture, private-label credit cards bode well for retailers despite the exorbitant administrative costs and lengthy implementation cycles. Target Corp., which changed its name from Dayton Hudson in January found the credit business to be the hidden jewel of its $10.93 billion company--supporting its retail operations and contributing to profits. Target Corp. expects the credit business to continue to add 10 to 15 basis points to its annual operating margins over the next several years. Approximately 10% of Target's $8.56 billion sales are processed through its private-label card. Credit sales represent approximately 30% of the $1.27 billion in sales at Mervyn's and 40% of the $935 million in sales from the department store division.

Wal-Mart, the world's largest retailer, is also counting on a store credit card as one of its strategic assets. In October 1999, Wal-Mart launched its private-label credit card--the company's first in its 37-year history--and rolled out the card to all of its then 2,500 WalMart locations in the United States and Puerto Rico. Wal-Mart's senior management team paired once again with GE Capital to create, administer and finance the in-store card. GE Capital also led the Sam's Club credit-card program in September 1995. Although Wal-Mart will not say what percentage of its $51.4 billion sales are from its private-label card transactions, it goes without saying that the card carries the potential to leverage Wal-Mart's retail locations with its budding online operation by building the site's customer base with loyal bricks-and-mortar shoppers.

Hoping to revive its sinking profits, The Sports Authority, which has been swimming in a sea of losses, launched its proprietary credit card last year. Trying to stay afloat in a competitive sporting goods sector that encountered some challenges in 1998 and 1999, the initiative was part of a plan to reverse losses and return to profitability as it competes against trendy specialty soft lines retailers. The intentions are good, but it may take more than a credit-card business and a recently launched in-store TV network to bring customers back into its stores. For the fiscal year ended Jan. 29, The Sports Authority reported a net loss of $160.5 million on sales of $1.5 billion, down 6.25% from 1998.

Also accustomed to seeing its sales on a downward spiral, Service Merchandise implemented a private-label credit card and has seen moderate success with the program. Since its voluntary Chapter 11 case in March 1999, Service Merchandise saw an improvement in its customer relations by re-establishing its private-label credit card program. Other contributing factors include a refocusing of the stores' merchandise mix, and the reduction of out-of-stock occurrences from 14% at the onset of the filing to 2% at the beginning of the 1999 holiday season.

Spiegel, the catalog and e-tailer of apparel and other goods, said fourth quarter profits climbed 80% to $74.7 million, or 57 cents a share, well above the 46 cents analysts expected, as more customers used its private-label cards.

And other retailers are eyeing the same surge in sales from consumer-driven cards. In February, Staples rolled out a no-fee, private-label credit card, primarily targeting small business owners. The card can be used at both online and off-line stores, has a credit limit of $50,000, and offers points toward merchandise and travel services, along with rebates through Staples' dividends program. Pep Boys also launched its private-label card in February. The automotive aftermarket retailer has an employee incentive program associated with its card--rewarding associates every time they process 10 approved applications. In addition, Pep Boys is making regular use of monthly statement stuffers and coupons, and giving its customers emergency roadside assistance services.

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