A Turning Point For Retailers

  For retail cards, 2003 may be remembered by industry historians as a turning point. The Big Daddy of store card programs sold its portfolio, merchants and consumers opted for cobranded cards, and gift cards moved into the front row of payment options.
  Sears, Roebuck and Co., the company that created the retail card industry, completed in November the sale of its portfolio to Citigroup Inc. Sears received a $3 billion premium for its $28.6 billion proprietary and bank card portfolio and will get residual income from Citi for 10 years based on new accounts, retail sales volume and sales of financial products.
  The Sears portfolio had 35 million Sears Card accounts as well as 27 million MasterCard accounts, most of which were converted from the proprietary portfolio.
  Last year was a career maker for Steve Freiberg, chairman and chief executive of Citi Cards N.A. Citi became the top retail card issuer with $34 billion in receivables, besting GE Consumer Finance with $26.6 billion. Along the way, Citi took over the $7 billion card business of Home Depot Inc. from GE.
  Another large seller was Circuit City Stores Inc., which unloaded its $1.5 billion bank card portfolio to FleetBoston Financial Corp. for $1.3 billion and its $1.8 billion store card file to Bank One Corp.
  Merchants continued to seek the magic card bullet that would build business while lowering costs. Some ideas worked, some didn't.
  The Duetto Visa card from Starbucks Corp. and Bank One made a splash, offering prepaid and credit capabilities along with loyalty points for Starbucks purchases. The partners declined to release the number of cards issued or usage statistics for Duetto. But the stored-value program the Seattle-based coffee seller began offering in late 2001 now has over 26 million cards activated ("A Prepaid Latte, With a Shot of Credit," April).
  Conversely, Target Corp. failed to convince Americans to take to smart card-tied rewards programs. The Minneapolis-based retailer announced this March it would phase out the chip aspect of its self-issued Visa card over the next 12 months ("Target's Chip Misses the Bull's-Eye," April).
  Target has become a big bank card issuer by converting many of its proprietary Target Guest cards into cobranded Visas. The Visa card now has about eight million cardholders and $4.19 billion in receivables.
  But Target never appeared to put much promotional oomph behind the chip rewards, although the retailer, with considerable help from Visa USA, spent an estimated $30 million to $40 million on point-of-sale readers for the card. Target said consumer usage of the chip feature was too light to continue the program.
  With Sears leaving the market and other retailers laying low, the value of new securities backed by store card receivables fell 89% in 2003 from the prior year. Moody's Investors Service reports that the $848 million in new retail card bonds was a 10-year low. Moody's attributed the decrease to the absence of historically active card-bond issuers, particularly Sears, Household Retail Services and Target. The credit quality of securitized private-label card portfolios fell, with chargeoffs hitting an all-time high of 11.1% of receivables last July.
  Despite 2003's setbacks, private-label and retail cobranded cards remain powerful tools that facilitate sales, says Alan Schultheis, a director with banking consultant Edgar, Dunn & Co.
  Consumers shop 60% more often at the retailer where they have the retailer's card, according to Edgar, Dunn's PaymentDynamics 2004 Preferred Card study. And 93% of consumers said that the values and features of a cobranded card prompt them to use the card more than their other cards.
  Meanwhile, evidence of the mass consumer acceptance of gift cards last year has many merchants pondering their options. The National Retail Federation reported that gift cards accounted for over $17 billion, or 8%, of retail sales during 2003's holidays. First Data Corp.'s ValueLink division estimates that 45% of the U.S. population bought a gift card leading up to the season.
  Boston-based Mercator Advisory Group calculates $40 billion in gift cards were sold in 2003 and estimates the market could be worth $220 billion. Tim Sloane, Mercator principal analyst, says the marketing of gift cards will expand with merchants offering them in kiosks as cards that can be loaded at the point of sale, and as payment tools for specific products.
  One new model comes from Bellevue, Wash.-based Coinstar Inc. Coinstar is attempting to use the 11,000 kiosks it has installed at grocers to get into the plastic-selling business. The kiosks now are coin changers.
  Coinstar began last year to offer cellular-telephone recharge services through the kiosks. This March it bought CellCards of Illinois, which had deals with several major drug-store chains to sell prepaid cards for long-distance providers.
  AT&T Corp. began last year to market its Prepaid Web Cents cards for purchases of online digital content. The target market is young people who want to play online games from Disney's Blast and Shockwave.com's GameBlast. Prior to Web Cents, games were sold on a monthly subscription basis. The card allows for less expensive one-time or occasional use, a nice draw for youths. AT&T declined to disclose sales figures but the cards are now available at 20,000 outlets.
  "One door closes and another opens" may be the retailer's motto for 2003.