Sears Roebuck & Co., which has had by far the most success among retailers in building a card business, is at it again.
The company, whose store-card operation is the nation's largest, is signing up retail partners to accept its private-label card and plans to undercut competitors' merchant interchange rates.
The program is already having some success in Canada and will probably start up in the United States in early 2003.
As a rule, private-label cards are accepted exclusively in the stores that issue them. But Sears - which not only runs the largest proprietary card program in the country, but also owns a separate portfolio of MasterCard-branded general-purpose cards - wants to promote the use of its store cards outside its own stores, which blurs the private-label definition.
Indeed, general-purpose cards, which can be used at any retailer that accepts the particular card brand, were store card offshoots, as consumers quickly found that carrying a single piece of plastic was more efficient. But Sears, the creator of the Discover card (which it sold to Dean Witter, now Morgan Stanley & Co.), says this time it is not seeking to create a new national card brand.
"We're trying to find out what works for the customer," Kevin T. Keleghan, the president of credit and financial services at Sears, said in an interview. The overriding goal, he said, is to boost use of all Sears-branded cards by making the programs more flexible.
"We will charge interchange, but we will undercut the market as one of the incentives" to get other merchants to promote use of the Sears card at their stores, Mr. Keleghan said.
He would not name any of the "strategic partners" that Sears is working with but said the Hoffman Estates, Ill., company had signed "about a dozen letters of intent" with businesses in industries that do not compete with it, including companies in the grocery, pharmacy, restaurant, and hotel fields.
"We want to low-key it," Mr. Keleghan said. "We want to get the systems up and running. We want to line up the partners. Then test it. Then, if the customers do what they told us they would do, then we roll it out."
Sears has tested merchant partnerships before. Under a multivendor loyalty program launched last year, Sears MasterCard holders get points for shopping at certain merchants, including Barnes & Noble, Denny's Restaurants, Borders Books and Music, and Courtyard by Marriott.
The same companies may well be the ones working with Sears on the private-label program. "The strategic partnerships we're developing will give our customers access to discounts and special offers at a select circle of businesses and the option to use their Sears card for those purchases," Mr. Keleghan said.
Sears is by far the largest issuer of store cards, with nearly 38 million accounts and more than $22 billion in private-label receivables, according to The Nilson Report, a newsletter that tracks the card industry. It has also vaulted into 13th position among bank card issuers; its outstandings grew 274% in 2001, to more than $5 billion, helped by the mid-2000 launch of the general-purpose card.
And the portfolio is likely to grow a lot bigger soon: Mr. Keleghan said his department plans to introduce a MasterCard for Lands' End, the catalogue retailer that Sears bought in June. "They have a very upscale, loyal customer base," Mr. Keleghan said. The Lands' End database has about 30 million customers, and about 13 million of them are listed as active, he said.
Some customers carry both Sears' private-label card and its MasterCard, Mr. Keleghan said, adding that the company has found "no cannibalization" in the way the customers use their cards.
"They use the Sears card at the Sears store and the MasterCard everywhere else," he said. "They compartmentalize their spending."
An estimated 65% to 70% of customers in Sears stores carry a Sears card, either the private-label card or the MasterCard offered through Sears National Bank, but less than half of store transactions go on those cards, a ratio that Mr. Keleghan said he wanted to raise.
"MasterCard, I believe, is the better value proposition" for most Sears customers because of its wide acceptance, lower interest rate, and rewards program, he said. But some customers have expressed interest in making more use of the private-label card. "The partners that we're lining up will give our customers value," Mr. Keleghan said.
Sears has contracted with Global Payments Inc. of Atlanta to serve as the Sears payment gateway for processing services to the other companies. Global Payments will work with those companies' processors to implement the program.
One market watcher said Sears faces an uphill fight to win broader use of its store card in other settings. "I think it's a bold move, it's a risky move," said George Rosenbaum, chairman of the Chicago market research firm Leo J. Shapiro LLC.
Though the move "might result in some incremental business," Mr. Rosenbaum said, Sears may have trouble getting other merchants to promote their acceptance of its card: "Sears is not going to be regarded as an image-enhancing brand."
But the bigger danger is the credit risk, Mr. Rosenbaum said. "Sears is taking a huge risk of its cardholders' drawing down their lines of credit. It's going to be precisely the people who do not qualify for increasing their line of credit who will be drawing down their existing line of credit."
Mr. Keleghan downplayed the credit quality concern. "The majority of these customers are very creditworthy," he said, adding that customers typically have five credit cards in their wallets. "There is a risk there, but we think it's minimal."
