A handful of supermarket retailers are staking out their own territory and shaping the next frontier in electronic payments: co-branded credit cards.
Co-branding, which involves retailers and banks teaming up to offer their own nationally sponsored credit cards, is only in its infancy now but promises to become an important way for retailers to tap into credit's enormous growth.
The potential benefits of co-branding have prompted retailers such as Kroger Co., Cincinnati; Harvest Foods, Little Rock, Ark., and Hy-Vee Food Stores, Chariton, Iowa, to offer their own credit cards. More recent converts like Tops Markets, Buffalo, N.Y., and Penn Traffic Co., Syracuse, N.Y., have joined the ranks of this exclusive group and signal more growth ahead.
"Customers are always on the lookout for the next best card that gives them the benefits they're seeking, and hopefully ours is one of them," said Reuben Shaffer, manager of communications at Kroger's Cincinnati/Dayton division.
Co-branding is "an opportunity for us, sometime down the road, to introduce new products, send coupons and samples, and do market research," he added.
The number of supermarket retailers launching co-branded credit cards could double in the upcoming year, with MasterCard, New York, and Visa International, San Mateo, Calif., set to announce four or five new partnerships each.
Furthermore, industry observers point to the explosive growth of credit card volume in supermarkets -- up 90% since 1991 -- and say it is only a matter of time before co-branding dovetails with that trend.
Kroger's Cincinnati/Dayton division, which rolled out a co-branded card last month, gives incentives for consumers to make frequent, high-ticket item purchases. The more a customer shops at Kroger, the higher the discount.
"Our card has a rebate program where customers can earn up to 2% off their purchases," Shaffer told SN. "The rebate is 1% off anything up to $2,499 [annually] and 2% off $2,500 or greater."
Rebates like that offered by Kroger's credit card are a key component of a co-branded program, retailers say, encouraging frequent card usage and store loyalty. Rebates may be offered at the point-of-sale or as discount certificates mailed to cardholders.
Some retailers are structuring their rebates to encourage store loyalty. Harvest Foods, for instance, offers a card that gives consumers a 1% rebate on purchases made at competitors' stores and other merchants, while a trip to Harvest earns a 2% rebate.
"The card entices the customer to shop with us," said Bobby Gabbard, assistant controller. "It's a great marketing tool. The card is always in the wallet or the purse with your logo on it."
Co-branding is an effective way to gain exposure for the chain and build customer loyalty, said Michael Wheeler, chief financial officer and treasurer at Hy-Vee. "[Cardholders] probably were a fairly loyal customer when they got the card," he added. "Now every time they pull the card out they see our name."
The supermarket logo's prominence on the card puts the retailer's name out in front wherever the card is used. Other promotional opportunities co-branding can offer is the ability to enhance direct-mail efforts and track consumer purchases.
For example, Hy-Vee is using monthly credit card statements as a direct-marketing tool. The company encloses coupons each month that can only be redeemed at its stores.
Kroger views its cardholders as a valuable target audience for future direct-marketing programs and product tests, Shaffer said. "This is one way to do direct marketing with people who are tried-and-true Kroger shoppers," he added.
More intensive direct-marketing programs could be developed in the future. Visa, for instance, recently released a software package for its co-branding partners that allows the retailer to track all purchases made on its card.
Dillon Stores, a division of Kroger subsidiary Dillon Cos., Hutchinson, Kan., launched a co-branded card last month with Visa and may use the software later this year, when all 66 stores have rolled out the card.
Because retailers offering their own credit cards are not subject to the same interchange fees as nationally sponsored cards, co-branding lends some degree of control in cost containment.
Barbara Hall, supervisor of corporate retailer accounting for the Milwaukee division of Fleming Cos., Oklahoma City, said the wholesaler sees co-branding as one option to avoid rising fees of nationally sponsored credit cards.
"If interchange fees went up significantly, we would have to seriously look at a co-branded card and accept only that," she said.
"It's always an option we're going to consider," Hall said. "At some point in the future [interchange fees] may play a role. A co-branded card is one possibility, as is a completely private, in-house card."
Hy-Vee's Wheeler added, "Because of competitive issues, more and more grocery chains are taking credit cards. That means contending with interchange fees that, while relatively low [compared with other retail channels], have the potential to rise."
He noted that even if credit card fees increase substantially, discontinuing their acceptance is not a viable option for most retailers. "If you used that logic, you'd turn off your lights in the store if your utilities got too high," he added.
Chains that encourage shoppers to use their co-branded card instead of a nationally sponsored card greatly reduce the burden of interchange fees and decrease the cost of offering the credit payment option.
Retailers see co-branding as a way to reduce the overall cost of accepting credit, Wheeler said.
Co-branded card programs may eventually change in nature, some observers said. Currently, supermarket cards are similar to those offered by gasoline suppliers: rewarding consumers with discounts on regular store purchases.
Supermarket cards may become more points-based, observers said, such as cards offered by airlines or automobile manufacturers, where consumers earn points that may be applied toward airfare or a down payment on an automobile.
"The advantage of a points program is that because it is not transaction-based, it prompts or motivates customers to keep coming back," said one industry observer.
