First of a Series

Retail store cards, at times dismissed by bank executives as quaint relics, are gaining new marketing luster.

Some of the biggest names in retailing, such as Sears, Roebuck and Co. and Federated Department Stores Inc., have revamped their private-label cards or plan to. The discounting giants Wal-Mart and Kmart have introduced cards under their names for the first time.

In a sign of more activity in this area-and potential competition for the general-purpose MasterCard and Visa brands-Banana Republic is testing a card in the Middle Atlantic states and plans to take it national this fall. Its sister store, the Gap, will follow.

Retailers say they are turning their cards from loss leaders into money- makers, a result of improved receivables management or outsourcing decisions. As in the past, retailers see proprietary brands as a way to enhance loyalty, but they are becoming more aggressive with rewards and special promotions to lock in desirable customers.

"The market is picking up," said Edward D. Stewart, president and chief executive officer of GE Capital's retailer financial services unit. His company, the largest service provider to the private-label market, anticipates 10% growth this year.

"There are so many more square feet of floor space per capita than there were 10 years ago, and everybody's looking for an edge," he said. "They are trying to combine credit and loyalty programs so they can bind the customer to them and identify their most valuable shoppers."

Unlike MasterCard, Visa, American Express, and Discover cards, private- label cards are accepted only at the designated stores. Private brands tend to have higher-than-average interest rates-usually above 20%-and lower credit limits.

Many retailers offer both private-label cards and cobranded bank cards. Because banks' underwriting standards tend to be too stringent for many retail customers, particularly at discount stores, private-label cards can fill the breach.

"You can run a successful (store) account with a credit line of $250, which allows you to step up and take on a riskier profile of customers," said David Kratoville, vice president of retail sales and marketing at Alliance Data Systems of Columbus, Ohio, a leading private-label card processor.

Retailers, like banks, have jumped on the customer-information bandwagon, and their card programs can yield a treasure-trove of insights.

"The stores feel it's a way of keeping in touch with their important customers-otherwise they don't know who their customers are," said Anita Boomstein, a credit card lawyer at Hughes, Hubbard & Reed in New York.

To track customers and give them more buying incentives, Federated Department Stores has a Family of Cards program that lets people graduate to higher tiers as they spend more money (see related article). Wal-Mart Stores Inc. tempts shoppers with a cobranded MasterCard with an "every day low" fixed interest rate of 14.48%.

The resurgence of private-label "comes from the fact that there is a major transformation going on in retailing-of stores investing in existing customers instead of in expanding their customer base," said George Rosenbaum, chief executive officer of Leo J. Shapiro & Associates, a Chicago market research firm.

"There is a recognition by many retailers that you have to act defensively to keep customers from going someplace else," he said. Furthermore, "consumers understand there is a reward system in place for being a good customer"-that they are "in a better position of power or accountability with the store in case something goes wrong."

Retailers once held the power in the consumer credit business. They developed the revolving-credit concept, which evolved into metal charge plates and later plastic cards, decades ahead of banks.

As banks got into the business in the 1950s and 1960s, with cards that were usable in many places, the assumption was widespread that the days of proprietary cards were numbered. And indeed they did go into decline for years as consumers cut back on the number of cards they used.

But the trend is reversing-partly because retailers are offering new incentives.

Victoria's Secret and Bloomingdale's, for example, will offer a 10% discount on the spot to people who sign up for a card, making a crowded wallet seem less burdensome.

"This idea that the proprietary card is a dinosaur comes from people in the financial industry who have been trained with the left brain," said Ralph E. Spurgin, retired president and chief executive officer of The Limited Credit Services and former president of credit services for Alliance Data Systems.

He said a banker's mind would inquire, "Why in the world would someone want to pay 21% or 22% interest on a credit card with a low limit and a higher repayment term that you can only use in one place? This is not logical; therefore it must die."

On the contrary, Mr. Spurgin said, "There are 179 million (private-label cards) and only 180 million active bank cards, so who's right?"

Gary Shafferman, chief executive officer of Retail Credit Solutions Inc., a Dallas consulting firm, said private-label portfolios are growing at 8% to 10% a year, more slowly than bank cards' recent 20%.

A retailer "should be looking at a penetration rate of 20% to 50% of total sales on its cards," Mr. Shafferman said. "People who have private- label cards buy higher-ticket items, buy more frequently, and at the end of the year they'll buy more merchandise."

John C. Grund, a principal at First Annapolis Consulting, Linthicum, Md., who tracks the private-label industry, said predictions of its demise were "premature and exaggerated."

"As long as there's a middle class there will be a need for private- label," Mr. Grund said.

Nonetheless, competition from bank cards has taken a toll. A low- interest balance transfer offer can wipe away a store account with the stroke of a pen. The rise of secured cards and lenders that specialize in the subprime market has obviated some of the need for store credit. Merchants' interest rates do not come close to the banks' balance-moving teaser rates, and the competition for customers has made some bank issuers more willing to take some credit risks.

"Banks are going down into the bread-and-butter of the store card market," Mr. Grund said. "Store cards were historically the first card that some people got-your J.C. Penney card was your first card. Now these people are being solicited by the banks, and the bar has been raised."

Banks have a natural advantage, Mr. Grund pointed out, since "credit should not be a strategic focus for an apparel seller."

Store cards still generate huge transaction volumes, but the percentage of sales made on the cards has been declining, largely because of bank card encroachment. J.C. Penney rang up $9 billion in card volume last year, Mr. Grund said, but card sales as a percentage of total sales dropped more than 6 points in five years, to 43.4% in 1997.

Relations between retailers and bankers, often contentious because of pricing issues and competition between them for consumer dollars, reached a flash point in 1996 when the major chain stores sued Visa U.S.A. and MasterCard International over the terms of debit card acceptance. The bank- owned associations require merchants that take credit cards to accept debit cards as well; the retailers say this violates antitrust laws. The class action could take years to go through the courts.

"There is a certain resentment on the part of the retailers," Mr. Spurgin said. "The associations can raise fees virtually without any downside risk, other than a lot of whooping and hollering. The retailers aren't going to stop taking one or the other."

Debit is an "irritant," Mr. Spurgin said, but one that most retailing executives lose no sleep over. "Ninety-nine percent of them are figuring out, 'How do I sell more merchandise?' The 1%-the (financial) guy who is involved in the rates-is very irritated."

The bad blood has encouraged some retailers to park their private-label operations with companies they perceive as neutral, such as GE Capital and Associates First Capital Corp.

The two types of programs typically have different goals. A bank strives to attract customers who carry and revolve sizable balances. A store is less interested in credit income than in repeat business from loyal customers.

"To me it's not a question of whether a single card is going to cover the market-it's a question of whether there is a range of cards that cover the market," said Mr. Stewart of GE Capital, which is based in Stamford, Conn. "We believe the trend in retailing is going to make it necessary to have both these methods of payment available."

Most stores that offer both private-label cards and cobranded bank cards promote the former far more heavily. But a few mavericks are putting all their eggs in the cobrand basket, most notably Wal-Mart, which came out with a MasterCard from Chase Manhattan Bank two years ago. More than 1.8 million have been issued, and the product recently topped J.D. Power and Associates' annual customer satisfaction survey.

To a retailer, "the advantages of cobranding are you get out of the business and you don't have to worry about credit card defaults, the mechanics of issuance, or dunning your own customers," said David Wyss, chief economist at Standard & Poor's/DRI in Lexington, Mass.

"The disadvantage is you lose control over who you give cards to, and other people are dunning your customers."

The different outlooks of retailers and bankers can spell trouble for cobranding deals. Beneficial National Bank USA and BJ's Wholesale Club of Natick, Mass., sued each other last year. Beneficial found the BJ's program unprofitable and decided not to reissue the cards.

In a settlement, BJ's agreed to pay Beneficial $1.3 million and to let the bank, which has since sold its portfolio to Household International, charge a $30 annual fee to customers who do not generate that much in finance charges.

Some retailers would never dream of partnering with a bank. Gottschalks Inc., a top-20 department store chain based in Fresno, Calif., relies on its private-label card to "cement a trust and fortify a loyalty with our customers," said Bret Levy, vice president and treasurer.

"I'm not sure we could serve them in that way if we had a bank handle the accounts," Mr. Levy said.

He said customers appreciate the extra credit line that allows them to use the private-label cards even if their Visa or MasterCard cards are tapped out. They also appreciate Gottschalks' low-key marketing tactics, he said.

"You get calls at night from bank card telemarketers, and that's very irritating," Mr. Levy said. "It interrupts dinner and family time and reflects badly on many institutions. We as retailers are very sensitive to respecting the rights and privacy of our customers."

A retailer must understand how to get the most out of private-label, said Mr. Shafferman of Retail Credit Solutions. "Too many companies sell it as an adverse-selection program," he said. "If someone comes in and can't come up with any other payment, they'll get offered a card."

By contrast, successful issuers offer the card to everyone at the point of sale and make it a centerpiece of advertising campaigns. One example: Victoria's Secret invites cardholders to special sales and offers exclusive discounts, said Mr. Kratoville of Alliance Data Systems. His company, which is 40% owned by The Limited, services card programs for about 50 retailers, including the lingerie chain.

Mr. Kratoville said private-label cards have stood the test of time because of they deliver value.

"Store cards are a subject that people have mixed feelings about, and there has been doom and gloom as long as I've been in the business," he said. "While bank cards have had an impact on the retail card, they haven't made it obsolete."

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