QSRs Make Quick Use of Cards

  Fast food may mean small tickets, but it is no small potatoes. The National Restaurant Association projects 2005 sales of $134.2 billion for quick-service restaurants, or QSRs. Sales have grown 20% at Burger King, Arby's and McDonald's and their brethren since 2001, the association says.
  Restaurants in related "fast-food" segments look tasty, too. Snack and nonalcoholic beverage bars, such as Starbuck's and Dunkin' Donuts, should see sales of $16.8 billion this year, up nearly 37% from $12.3 billion in 2001, the restaurant group predicts. Sales for the two categories will total $151.1 billion this year.
  The card industry is hungry for a piece of the pie. Despite inroads, card payments remain relatively new to fast food, though the industry is adapting, says Hudson Riehle, the restaurant association's senior vice president of research and information services.
  Card acceptance "is a major trend in the QSR industry. But there's not great penetration due to the small ticket," says Riehle. "That's changing, and cards will become a major convenience in the years ahead."
  Just three years ago only 10% of all QSRs accepted cards, according to Visa USA. This year, more than half of the 10 largest fast-food chains are accepting cards or are upgrading their systems for acceptance, Visa reports.
  And consumers are using cards at the QSRs that accept them. In 2004, Visa cardholders spent $10.8 billion at QSRs, a 67% increase from 2003. This past June alone, they spent $1.5 billion at QSRs, an average of $11.18 per ticket, Visa says.
  Kurt Metzler, executive vice president of acquirer Chase Merchant Services, says the average ticket at a fast-food restaurant is 15% to 30% higher when a card is used instead of cash. Further, Chase's card-accepting clients are experiencing a rise in total sales of between 7% and 13%, so cards are not cannibalizing cash sales, says Metzler. Chase counts several of the 10 largest QSRs as clients.
  Implementing card acceptance at QSRs is not easy. "Fast food can be a complex installation," says Oleg Firer, CEO of Acies Inc., a New York-based payments processor with clients that include the Carl's Jr. and Subway chains. "Along with in-store, you have to address drive-through windows, which may be multilane. [And] some owners want a high-speed broadband connection to quicken transactions."
  MasterCard claims to have launched the fast-food trend in 1991 when it began its Quick Payment Service. That program eliminated signature requirements for tickets less than $25 in certain retail categories, and it reduced merchant chargeback liabilities for those transactions, according to a MasterCard spokesperson. American Express, Discover and Visa followed suit, though Visa uses a $15 cap before requiring signatures.
  Merchant response remained underwhelming for years, however, because card transactions were slower than cash purchases. That changed with technical improvements.
  Visa cites a report from Burger King that shows cashless payments authorization times have dropped from 23 seconds to 13 seconds. MasterCard brags its PayPass contactless technology cuts 12 to 18 seconds off an average QSR purchase.
  The benefits of accepting cards are straightforward-higher tickets on average, reduced cash handling, enhanced customer convenience and now faster transaction times.
  Indeed, card acceptance at fast-food merchants may well explode in the next year because of the tap-and-go contactless technology supported by MasterCard, Visa and American Express (see Industry News, page 12.) Cards, key fobs or other devices embedded with contactless chips are designed to get consumers through lanes quicker, making them ideal for QSRs.
  McDonald's Corp. appears to be ready for the next phase in payments, having led the move to plastic acceptance and tap-and-go implementation. In its latest move, the Oakbrook, Ill.-based fast-food giant is rolling out the Arch Card, a reloadable gift card, to all of its U.S. restaurants by the end of the year. Customers will be able to purchase the card in denominations of $5, $10, $25 and $50, according to a spokesperson.
  Card acceptance also has helped McDonald's to offer new products and services through kiosks. The company reported in August that customers had rented about 2.5 million movie DVDs through its redbox kiosk since the project's 2004 launch in the Denver area. Redbox is a wholly owned subsidiary of McDonald's.
  Each redbox kiosk offers up to 40 movies per night that consumers older than 18 can rent with a credit or debit card. The rental fee is $1 per night plus tax for each DVD.
  There are 557 redbox kiosks operating in seven metropolitan areas, including Minneapolis and Houston. McDonald's has reported it plans to have 1,200 redboxes operating by year-end.
  Most of the redbox kiosks are at McDonald's restaurants, but a few are deployed in drug stores and grocery chains, including at five Stop & Shop supermarkets in the Northeast. A Stop & Shop spokesperson says it plans to review expanding the program early next year.
  McDonald's also is testing a kiosk program that offers CD burning, ring tones and digital photos for purchase with a payment card. The test is limited, starting at a showcase restaurant near its headquarters in suburban Chicago that McDonald's uses for new ideas.
  McDonald's has implemented an in-store Wi-Fi connection at about 4,000 restaurants, offering consumers the option to purchase the service online with a payment card. Consumers can log on for a two-hour, high-speed wireless Internet session for $2.95 from online provider Wayport Inc.
  "We are trying to make the restaurants more relevant and convenient for consumers," says a McDonald's spokesperson. "We want them to come, use their card for a quick transaction and get online."
  Starbucks Corp. appears to be the payments leader in the so-called beverage bars category. It introduced in October 2003 its Duetto card, issued by Bank One Corp. The Duetto offers a credit card with reward points that can be applied to the store card portion of the plastic. Starbucks and Chase, which bought Bank One last year, would not share sales statistics.
  Starbucks has had success with its own prepaid gift card. The card generated 11% of Starbucks' retail sales in its first fiscal quarter of 2005, up from 9% in the same period in 2004. There were 5 million new Starbucks store cards activated in its fiscal third quarter of 2005, with $73 million loaded on the cards, Starbucks says.
  The card offers an interesting sales trajectory. The Seattle-based coffee merchant reported that net sales on the card fell from $170 million in its fiscal second quarter, from January to March, to $135 million in the third quarter. But that's not bad news, asserts a spokesperson.
  Many consumers buy the card as a gift during the holiday season, and the recipients spend the card funds during the cold winter months. After a third-quarter lull April through June, spending picks up again. Net sales have followed this pattern since the card's launch in Starbucks' fiscal first quarter of 2001 (see chart, page 30).
  The card has piqued the interest of QSRs, says Chase Merchant Services' Metzler. "Virtually all our (client) conversations start with a gift card program," says Metzler.
  Getting a gift card program off the ground creates coordination challenges, however, especially for chains with franchisees, Metzler notes. Cardholders who travel may get turned down at a same-brand store in another region, he says.
  Dunkin' Donuts has limited its rechargeable gift card program to 1,100 outlets in the New England area. It sold over 1,000 cards per shop during the holidays in 2004, with most consumers loading $10 to $15 on the card, according a spokesperson. First Data's ValueLink division processes the transactions. All Dunkin' Donuts outlets are owned by franchisees.
  Like McDonald's, Starbucks has moved into higher ticket items, finding huge success with compact discs. The company, for example, sold 775,000 copies of the Ray Charles duets CD "Misery Loves Company." Offerings from the likes of Bob Dylan and Sly Stone generally target the middle-aged with $15 to $17 to spend on a nostalgia boost.
  Two other projects are designed to keep customers in the store longer. Starbucks has tested a "Hear Music media bar," where consumers can listen to songs, burn an album or create a customized mix of music. Consumers pay $8.99 for seven songs, then 99 cents per song thereafter. The program is available in Santa Monica, Calif., Miami; and several cities in Texas.
  Starbucks also promotes a Wi-Fi program from T Mobile of Deutsche Telekom, where consumers can use a credit or debit card to buy various increments of online access time. Wi-Fi is available at 4,000 Starbucks, and it helps drive sales, according to a spokesperson.
  "On average customers connect for an hour, and about 90% of usage is after 9 a.m.," says the spokesperson. "That means it brings people in throughout the day, and they stay longer."
  Whether other, more traditional fast-food outlets similarly begin to offer such high-tech programs and low-tech DVD rentals remains unknown. Firer, of the processor Acies, says that most QSR operators are followers, not pioneers.
  "It could take 12 to 14 months to judge a new product," says Firer. "They are watching McDonald's."
  That suggests that card acceptance at major QSRs is a done deal. But implementation at franchisees and the introduction of new products will occur only when consumers demand the services.
  (c) 2005 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com