Retailers Shy Away From Plastic

  Consumers may still be packing store cards in their wallets, but retailers' appetite for managing their own card programs is fading fast. The trend became crystal clear in late March when Sears, Roebuck and Co. put its $30.8 billion portfolio up for sale (Card Watch, page 10).
  While Sears' decision shocked many-the Big Store gets about 60% of its profits from cards-the reasons Sears cited for wanting to exit the card business are becoming an all too familiar refrain from retailers. Topping the list is the need for capital to update stores and free management resources to create a more polished image capable of boosting sales. Some retailers simply need the cash to bail them out of financial difficulty.
  In the past year, such stalwarts as Saks Inc. and Gottschalks Inc. have announced or completed plans to sell their card businesses to third-party retail card processors. Gottschalks needed the cash, while Saks said it wanted to offer customers more credit options than it was willing to provide itself.
  Downers Grove, Ill.-based Spiegel Inc., which declared bankruptcy this March, is liquidating its loss-plagued card subsidiary, First Consumers National Bank.
  "Retailers are facing intense competition in their core business today, and many see it as a costly proposition to manage an in-house credit business in such a volatile market," explains John Grund, a partner and retail credit specialist with Linthicum, Md.-based First Annapolis Consulting Inc.
  Retailers are not the only ones selling off their card programs. General Electric Co.'s GE Consumer Finance unit, the No. 1 store card processor, this March picked up the $2.4 billion private-label card portfolio of St. Paul, Minn.-based third-party issuer Conseco Finance Corp. for $310 million at auction. The portfolio became available when Conseco Finance's parent company, insurance giant Conseco Inc., declared bankruptcy.
  Prospect Heights, Ill.-based Household International Inc., the No. 2 store card processor, also has been busy on the acquisition front. Household ended 2002 with $11.3 billion in private-label receivables. Household, now owned by London-based banking giant HSBC Holdings plc, is expected to close soon on Saks' $1.4 billion portfolio, resulting in a $300 million gain for the retailer. Earlier this year Household bought Gottschalks' $100 million portfolio for $103 million.
  If Household decides to swallow at least the proprietary part of Sears' store card portfolio, it would surpass GE as the biggest private-label issuer.
  "Given the acceleration of portfolio sales, it's understandable that Sears has decided to sell," says Richard C. Klesse, national director for Household Retail Services. "It's becoming harder for retailers to achieve the same economies of scale as third-party issuers."
  Klesse declined to say if Household would make a bid for the Sears portfolio.
  Chargeoffs are a growing concern for retailers struggling to keep up sales while waiting for the economy to recover.
  "Retailers are not necessarily as well-equipped as card issuers to manage risk, and that is being factored into decisions by retailers to sell or find partners to launch a card," says Octavio Marenzi, managing director at Celent Communications, a Boston-based payment research and consulting firm.
  As retailers look to third parties to manage their portfolios, some card experts predict they will gravitate to cobranded cards issued by financial-institution partners, as Disney Co. did earlier this year with Bank One Corp. Other retailers making recent forays into cobranding include TJ Maxx, BJ's Wholesale Club and Starbucks.
  With retailers less inclined to issue cards themselves, they have few options other than to find just the right issuing partner to shoulder the bulk of the risk if they want to play in the card game.