Sears, Roebuck and Co. is moving into the age of custom marketing.

For years the venerable retailer has offered a one-size-fits-all credit card, currently with a 21% interest rate. Plain-vanilla though it may be, the program has given Sears entree into about 40% of U.S. households.

It owns by far the largest private-label card portfolio. If it were a bank, Sears' $27 billion of receivables would place it sixth, behind Chase Manhattan Corp.'s $34 billion.

But with MasterCard and Visa issuers increasingly using data base technology to make highly customized offers to individuals, a standard product like Sears'-especially if it can be used only in Sears stores store-packs less punch.

Fewer new customers are signing up, and the proportion of Sears' sales on its card, though still significant at 55%, has been sliding.

"There is no question that we have lost either current or potential cardholders by the fact that we have had only this one product offer," said Alan J. Lacy, president of Sears Credit.

"The market obviously has gotten far more differentiated in terms of credit card offers, and one of our issues over the last few years has been that we have not had the infrastructure-primarily the systems platforms-to do anything other than what we've been doing."

In May, Sears made the big decision to turn its account processing over to an outside company-Total System Services Inc., the subsidiary of Synovus Financial Corp. of Columbus, Ga.

Sears is hoping to restore luster to its card by relying on the processor's new TS2 technology, which affords more flexibility than Sears has been accustomed to in such areas as pricing, credit limits, and loyalty enhancements.

"We're going from no flexibility to essentially infinite flexibility," Mr. Lacy said. "We will be able to have a much more precise view of a particular customer's purchasing patterns and be able to structure pricing that is appropriate to the risk of that person."

Twelve percent of Sears' portfolio will be converted to TS2 by next month, Mr. Lacy said. New accounts will begin to be placed on the system after Jan. 1. The whole conversion process is expected to be finished by April.

"We clearly have not had the kind of bottom-line profit growth last year, and this year that we'd like to have," he said. "But I think that will be behind us as we move into 1999."

The last two years have been turbulent for Sears Credit, which is based in Hoffman Estates, Ill. In a management shake-up last December, Mr. Lacy, who had been the retailer's chief financial officer, succeeded Steven D. Goldstein in the credit job.

Besides lagging performance, Sears Credit had to deal with a spate of lawsuits over its attempts to collect debts from borrowers who had declared bankruptcy. Sears has paid or agreed to pay $178 million in penalties for the so-called reaffirmations, and the issue is "substantially behind us," Mr. Lacy said in a recent interview.

"All of the civil aspects, in terms of the class actions, have been dealt with," he said. "All the related stock-drop suit issues have been dealt with. The state attorneys general have all been dealt with. The Federal Trade Commission was dealt with.

"The one thing that continues is a (federal) investigation through the U.S. Attorney's office in Boston."

Also put to rest were several initiatives begun under Mr. Goldstein, including a "starter card" program that offered people with above-average credit risk a Sears card with a 24% interest rate and a low credit limit.

Sears still charges 24% to borrowers who do not qualify for the 21% card, but it has stopped marketing the starter card as such because "we did not find it to be successful," Mr. Lacy said.

"As we move forward in this Total System environment, we are likely to have multiple price points," he said.

On hold is a MasterCard launched in 1996 and issued by a Sears-owned bank in Phoenix. The program remains "in pilot form" with a few hundred thousand accounts, and Mr. Lacy said it will be reviewed next year.

"We had so many issues as we came into 1998 that we decided to leave" the cobranded bank card alone, Mr. Lacy said. "We're principally focused on finding ways with the Total System platform, with some lower-rate products on the Sears cards, to achieve the things that the MasterCard was trying to achieve."

He added, "We can't achieve all of them, because obviously that was a general-purpose card and the Sears card is not."

The switch to Total System is itself another watershed. It was Mr. Goldstein who first decided to go the outsource route, agreeing in principle with First Data Resources in 1996.

Mr. Lacy said the First Data Corp. subsidiary's technology was fine, but "we just couldn't come to terms with them." Total System, No. 2 in bank card processing to First Data, stepped into the breach.

Despite the recent setbacks, Sears is still in a private-label "class by itself," said Sally H. Wallick, a retailing analyst with Legg, Mason, Wood Walker in Baltimore.

Sears "went from having hyper-attractive returns to very attractive returns," said John C. Grund, principal of First Annapolis Consulting, Linthicum, Md.

According to Sears' annual report, 48% of operating income comes from the credit operation.

"It is the most profitable store card in the industry," Mr. Grund said. "If you open May Co.'s or Dayton-Hudson's annual report, they can barely break even. Sears makes a billion dollars."

Sears' merchandise mix accounts for much of the success. More people use credit to pay for tools, appliances, and installation and repair services- Sears' bread and butter-than for clothing.

For many other retailers, said Ms. Wallick, a credit card serves as "an additional service to their customers, as opposed to being a meaningful earnings generator."

Average account balances on the Sears card have risen more than $100 since 1995, to $1,058 in 1997. Of 60 million cardholders, 28 million are active enough to get a statement every month. Though new-account growth has slowed to four million a year from six million in 1996, part of that decline is attributed to credit-quality trends, Mr. Lacy said.

"We did a fairly significant recalibration in our pre-approved mail program at the end of 1996 that led to the bulk of the drop," he said. "We also eliminated what we thought were some very good credits that were never going to become active enough to make any money from."

Sears has some rewards programs and 0% financing offers, and more will be created once the work with Total System is done. Already there is a Craftsman Club for people who buy a lot of tools and a Kidvantage program for frequent buyers of children's clothing.

With TS2, all the transaction data from those programs will be blended with data from other business lines, providing "a much better sense of the whole-house profitability of a customer," Mr. Lacy said.

Roddy Hunter, a vice president at Total System who directs the Sears account support team, said Sears will have "virtually unlimited" pricing options and " a myriad of rebate and reward capabilities at the account levels."

"Our clients have demanded that their marketing initiatives not be bound by systems restraints," Mr. Hunter said.

Until now, Sears' credit unit has operated somewhat apart from the merchandising and services units. With an integrated data base, Mr. Lacy said, "we will have the insights from the credit perspective to say, 'This person may not be a top-tier credit opportunity because they don't revolve much of a balance, but because they shop quite a bit at the company, we ought to utilize the credit vehicle to develop the relationship.'"

Cross-selling is another goal. If a customer buys most of his major appliances from Sears, for example, Mr. Lacy would like to arrange for a discount for apparel.

Mr. Lacy, 44, joined Sears in 1994 after holding senior positions at Philip Morris Cos. From 1980 to 1993, he was a top finance manager at Kraft General Foods, a Philip Morris acquisition.

At Sears Credit he has overseen the launch of a prepaid gift card that was developed by ValueLink, a service of First Data Corp. The card is meant as a replacement for a paper gift certificate. The program is similar to one that Kmart recently rolled out.

Mr. Lacy's plans include a purchasing product that might be used by an apartment superintendent who has to pay for dishwasher repairs-or for a new dishwasher.

"Right now those different transactions could touch about six different business units at Sears, all of which would view you as a different customer," Mr. Lacy said. "We've got a commercial organization that is trying to present a more uniform face to those types of customers by having a payment product that supports that activity."

"We'll have a good growth story to talk about," Mr. Lacy said.

"Are we going to grow as rapidly as Capital One," the successful credit card monoline? "No," Mr. Lacy said. "But is this going to be a highly successful, profitable part of Sears, Roebuck? I certainly think that it will be."

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