After three years of testing and development, Federated Department Stores Inc. rolled out its Family of Cards program last fall.

The Cincinnati-based retailing giant offers a series of graduated, or tiered, rewards to its private-label and cobranded Visa card customers. As they spend more money in the Federated chain, they trade up to cards with richer benefits, including gift certificates.

Federated has 400 stores under such names as Bloomingdale's, Bon Marche, Burdines, Goldsmith's, Lazarus, Macy's, Rich's, and Stern's. Most of the company's 25 million card accounts are private label; cobranded cards are offered selectively.

Richard J. Savard, a former Bloomingdale's executive who helped design the Family program, was promoted in February to senior vice president of marketing for Federated's financial and credit services group. He answered questions in writing posed by American Banker.

What is the goal of the Family of Cards?

SAVARD: Ultimately, to further enhance the level of loyalty the customer already has for Federated's department stores. We capitalize on the heritage of our stores' brand names and use the card as the vehicle to deliver an enhanced value proposition.

What has been the response?

SAVARD: We launched the program in November 1997, and since then we have seen an improvement in all the key credit performance benchmarks we measure.

Can you explain the tiering system?

SAVARD: It is a hierarchy of program levels. As a customer becomes more valuable, the succeeding levels of the Family of Cards program add more value and enhancements to their store shopping experience.

The hierarchy was developed so that each subsequent Family of Cards level motivates the customer to aspire for and attain the next level. Family of Cards was developed to build a relationship with a customer over a number of years.

Is it a form of customer retention?

SAVARD: Yes it is, as customers need to satisfy a number of criteria to be admitted into each level. But it is only one segmentation model we use when evaluating customers.

Do the programs differ from one division to another?

SAVARD: Yes. While there is a minimum set of benefits that must be offered at each level, the divisions have the option to enhance the program where they deem necessary. Some of the motivations for enhancement are the competitive environment, the store's position in the marketplace, and how aggressive a division wants to be in using this kind of strategy in its marketing mix.

For example, Burdines in Florida offers free alterations in addition to free gift wrap at the "premier plus" level. Some divisions have newsletters and others do not, and from division to division the communication and promotional strategies that support the Family of Cards program vary greatly.

How does the Family of Cards mesh with the cobranded program?

SAVARD: We launched the cobranded program in September 1994 at Bloomingdale's and Lazarus, and it was successful from the start. We learned a great deal from this, and it helped us in developing the overall Family of Cards program. Integrating cobranded into Family of Cards was logical, since we knew that many of our customers liked a cobranded card and the reward benefits that went with it. But we also knew that other customers wanted to keep and use their proprietary card.

The optimal solution was to integrate the cobranded card as a complementary program at the $1,000-plus spending level. Most divisions, except for Stern's, have a cobranded card level at $1,000-plus and a proprietary card level at $1,000. Macy's and Bloomingdale's have cobranded cards at the $2,500-plus level.

The cobranded card is issued by FDS National Bank and can be acquired by invitation only. All of our divisions offer the cobranded program except for Stern's.

Which program does Federated emphasize in its marketing: cobranded or private label cards?

SAVARD: For us, the question is not one over the other, but rather the concept of choice and giving our customers options that best fit the relationship they want to have with us and their preference for a payment method.

The challenge is developing programs that are relevant, successfully creating customer awareness of the programs, and continually enhancing them to make sure they remain relevant and compelling to the customer. The customer wants choices, and by having both proprietary and cobranded loyalty programs within Family of Cards, we deliver that choice.

Are the merits of the two programs considered the same or different?

SAVARD: The programs are different in two significant ways. With the cobranded card, the customer receives a significant reward when they use the card inside the store (3% and sometimes 6% on all purchases) and outside the store (1% on all purchases). There is a quarterly reward summary, and the reward is paid in the form of a $25 store gift certificate. Customers earn certificates regularly, and the vast majority are redeemed quickly.

The other difference is that the cobranded product is a Visa card outside the store, and therefore gives customers the benefit of utility, allowing them to consolidate their spending and maximize their reward potential.

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