PLEASANTON, Calif. - Within five years, prepaid cards for gifts and other purposes have become one of the biggest categories for Safeway here.
The rapid growth of prepaid cards has been widely reported, but with aggressive merchandising and marketing, combined with a marketing subsidiary unusual in the supermarket industry, they have played a central role in Safeway's resurgence, top executives reported.
For example, Steve Burd, chairman, president and chief executive officer, said this month that gift cards are Safeway's fastest-growing category.
Don Kingsborough, chief executive officer of Safeway's Marketing Services Division, told SN that prepaid cards rank second or third in size among all dry grocery categories at the chain.
The Safeway program has been so successful that the company formed a separate subsidiary, Blackhawk Network, also based in Pleasanton but in a different location, to market prepaid cards to other retailers and provide payment services. It has grown to become one of the biggest firms in that sector, said Kingsborough, who also serves as Blackhawk's CEO.
"We have virtually all the major grocery chains with one or two exceptions," he said. These include Giant Eagle, Pittsburgh, and Ahold USA, Braintree, Mass.
"It's just going to become a bigger and bigger category for Safeway," Kingsborough said.
Safeway consumer research has found "extraordinarily" high satisfaction rates for the card program. "They thought it was a great time saver. Then we saw these same consumers increasing their frequency of shopping in our stores. Essentially, it was an attraction to drive traffic to our stores and, at the same time, we could make some money," he said.
While Kingsborough would not reveal specific numbers on the program nor the financial arrangements, he said margins range from the "middle single digits to high teens," depending on the business model of the card provider. Safeway and Blackhawk now have over 100 "card partners," including other retailers like Macy's, Barnes & Noble, Bed, Bath & Beyond, Home Depot, Best Buy and Gap; restaurants like Starbucks, Bennigan's, Chili's and Olive Garden; entertainment providers such as AMC Theatres, National Amusements Theatres and iTunes, as well as regional venues for sports teams; travel companies American Airlines and Marriott; phone cards for prepaid cellular service and regular long distance; and MasterCard and American Express cards. In addition, retailers sell gift cards for use in their own stores.
Kingsborough expects the number of partners to increase to nearly 150 by the end of the year, and the number of storefronts carrying the program to increase to 60,000-70,000, up from 40,000 at the beginning of the year. Most of these are from the food, drug and mass channels, but convenience is also represented. Blackhawk has an office in Canada and just opened a location in Peterborough, England, to support its entry into the United Kingdom.
Estimates of the size of the prepaid card market vary from $35 billion and $90 billion, depending on how the market is defined, according to Packaged Facts, a division of MarketResearch.com, New York. For example, some researchers only count gift cards, while others include all prepaid instruments including payroll and phone cards, Packaged Facts noted.
By the end of the year, when more retailers will have their programs well under way, supermarkets will represent 8% to 10% of the overall prepaid market, Kingsborough told SN. Taking the low range of both estimates, that makes prepaid gift cards in supermarkets a $2.8 billion business, easily one of the biggest of all nonfood categories and one of the largest for the total store, which is confirmed by Safeway's experience. It also is one of the fastest growing alongside fuel, where dollar increases have been inflated in part because of the rising costs for all petroleum products.
"The reason it is growing so fast is because giving gifts is a huge part of the U.S. economy, so we are taking advantage of dollars that the grocery industry has never gotten before," Kingsborough said.
Safeway started its card program in the Christmas season of 2001 and had the idea of extending to other chains almost from the beginning, Kingsborough said, although Blackhawk was not established as a separate business until 2003. In 2001, "no one had ever sold cards besides their own," he said. Safeway tried selling cards from six or seven companies, notably Nordstrom's, "and it was a success from the first day we put it in our stores."
The program evolved as Safeway personnel saw the sales the card program was generating, and the research verifying customer acceptance, he said. "Like in all chains, you have champions. We had people in our Vons division who got very excited about it and started promoting it and merchandising it, doing in-store announcements and other things," Kingsborough said.
"[As a result,] the consumer reacted even more enthusiastically and we started to see significant sales increases based upon this promotional support. So we then took the best practices that were developed at Vons and started rolling them out to the rest of our divisions," he said.
DISPLAY AND PROMOTION
Merchandising was one of the first developments as the program grew from the checkstands to front endcaps.
Promotional efforts progressed from in-store signage and announcements to advertising in the retailer's circulars. From that came "significant uplift and increased traffic," he said.
"We learned over time that as we kept adding ingredients to the formula of promotion, the consumer kept increasing their awareness that these products were for sale in the store, and that started to increase sales substantially," he said.
Now the cards are an essential part of Safeway's overall program, "and we advertise it like we do other major categories. We do TV advertising, radio advertising and billboard advertising. It is fully integrated with our marketing and promotional support just like all of the large categories in our stores. We treat it like we do beverage or snacks or anything else that is very consumable," Kingsborough said.
Another step in developing the card program came with merchandising it around the different holidays. "So on Valentine's Day, we'll merchandise it not only on the endcaps, but in the floral department and the greeting card department," he said.
The biggest challenge for Safeway, as well as other retailers that have taken on the program, has been "migrating" the card displays from the checkouts to bigger and more prominent locations, such as a front endcap, Kingsborough said.
"It is hard to give up an endcap. So even with all the financial proof, there are emotional issues around that for grocery chains to come to grips with. But the results speak for themselves. Ultimately, that's a very powerful motivator for grocery chains when they see that's what the consumer wants, and see a category go from nothing to the second- or third-biggest category in the store," Kingsborough said.
Supply and Demand
PLEASANTON, Calif. - It's unusual, although not unheard of, for one supermarket chain to provide products or services to others, especially if they have a wholesale division.
Through its Blackhawk Network subsidiary, Safeway, which is not involved in wholesaling, is breaking new ground providing prepaid cards and services to major chains across the country, including competitors. Blackhawk has become one of the leaders in its market segment due in part to the retail expertise it derives from its relationship with Safeway. Both are based here.
"We get to test new concepts and document them, and take them out to our partners fully fleshed out [being able to tell them] the results that they can expect," said Don Kingsborough, chief executive officer of Safeway's Marketing Services Division, as well as CEO of Blackhawk.
Blackhawk was set up as a separate company in a different location here in Pleasanton "because we wanted our partners to understand that they were doing business with an entity that, although it is owned by Safeway, is different. We wanted to separate out the control of information and have an arms-length relationship with Safeway, so the alliances would be on equal footing," Kingsborough said.
For Safeway and Blackhawk, the result is a "symbiotic relationship," he said. "Blackhawk got its support and the ability to test, as well as other things, from being part of Safeway. Meanwhile, I think Safeway benefits from the ideas, products, revenues and profits that are generated from Blackhawk."
Initially, there was some resistance on the part of other retailers to doing business with Safeway, he said. "After the other grocery retailers in the country saw it working not only in Safeway, but in Giant Eagle, Ahold and other retail chains, we suddenly had a lot of interest from the rest of the grocery chains in the country." This month, Blackhawk opened an office in Peterborough, England, with an eye toward developing business in that country.
Meanwhile support from top management at Safeway continues. "They are really enthusiastic and eager to expand Blackhawk, growing the space and promotion in stores, while continually driving to satisfy the customers that shop at Safeway," Kingsborough said.