PHONE-CARD FIRMS BULLISH ON GROWTH, BUT FACE STATIC

PAT NATSCHKE LENIUS

CHICAGO -- Prepaid phone-card companies exhibiting at the Food Marketing Institute convention and exposition here earlier this month had optimistic projections for growth of phone-card sales in supermarkets, but also recognized that some barriers to growth must be addressed.

One of these is fear of theft, whether by store employees or customers. This can be addressed in several ways, such as point-of-sale activation, locked dispensers, vending machines or closely monitored inventories of dollar-bill-sized cards kept in register drawers.

Another issue is how to most effectively merchandise the cards while still thwarting efforts at theft.

Pricing, customer service, reliability and financial stability of the phone-card companies were also identified as barriers or challenges to growth by phone-card company representatives at the show.

"The biggest challenge retailers face is how to merchandise prepaid calling cards in an optimal fashion. This is an incremental sale, much like a candy bar," said Geoff W. Baker, national sales manager for prepaid cards at Sprint, Overland Park, Kan.

"One of the biggest barriers is those phone-card companies that price below their actual cost or price so they cannot support the program long-term in the marketplace. Retailers are afraid of phone-card companies that offer 'X' cents per minute, but then are not around two years later," said Richard B. Genece, marketing manager for prepaid phone cards at Ameritech, Chicago.

Here is a sampling of comments on this subject from phone-card companies that exhibited at FMI:

On shrink or theft of phone cards:

Mike Brennan

director, business development

Frontier Communications

Dallas

We have addressed every barrier and come up with solutions. We have several solutions for shrink and theft, including the use of dummy phone cards. If the retailer will accommodate us in POS activation, we can bring dead cards to life.

Richard B. Genece

marketing manager,

prepaid phone cards

Ameritech

Chicago

Retailers are concerned about both customer and employee theft. Our program and platform does not expose retailers to any risk from employee or customer theft. Our cards are not sold live. They are activated and controlled by the retailer. The retailer controls how many cards are activated, when and by whom they are activated. He pays for the minutes associated with the phone card upon activation. He is not on the hook for cards that are not activated.

Craig Oliver

prepaid phone-card

solutions consultant

Ameritech

Chicago

Our security features virtually eliminate or certainly minimize the possibility of employee theft. If theft occurs, the retailer is not held liable for the cost.

Gary Halvorson

general manager

MANA Corp.

Bentonville, Ark.

Internal theft can still be a problem for retailers carrying phone cards. With our POS activation system, we can tell the retailer which register rang up the sale, who was logged on, and what time the card was activated down to the second. We can also locate spikes in activation. We will notice if one afternoon at 4:45 register number 13 rang up 14 phone cards. Control numbers are printed on the phone cards that also print out on the sales receipt. Once we discover which cards were stolen, we can kill the PINs [personal identification numbers].

One membership club retailer had a problem with customer theft. A customer slipped one phone card into his pocket and bought another, then returned the one that had been hidden in his pocket for a refund. We were able to track down that transaction and deactivate the stolen card.

Terrilyn Beal

prepaid marketing

associate

ATCALL

Vienna, Va.

Retailers worry about theft. With our phone-card program the retailer is only billed after the card is activated. If the card is stolen, they do not lose anything. With POS activation internal theft can be addressed by programming the system to assign cashiers a number. We will be able to track who is activating the cards.

On the most effective merchandising methods for phone cards:

Geoff W. Baker

national sale manager,

prepaid cards

Sprint

Overland Park, Kan.

The biggest challenge retailers face is how to merchandise prepaid calling cards in an optimal fashion. This is an incremental sale, much like a candy bar. The goal is to get the phone cards out from behind the courtesy counter and into the checkout lines.

Mitchell Beem

national accounts

Talk 'N Toss

division of BLT Technologies

Vancouver, Wash.

We are really focusing on merchandising. With some retailers it is difficult to know [how] they sell phone cards. We provide interchangeable poster holders. The retailer has to get the phone cards out there. We will work with the retailer to see what works for him.

On POS activation:

Justina Sun

MCI Communications Corp.

Alexandria, Va.

Point-of-sale activation is the biggest barrier. The phone cards are money. Retailers can have a problem with both internal and external theft. Many companies say they have POS activation, but no one seems to have it readily available as a turnkey process. We have a package and product line that addresses this with dummy cards. We know of a Midwestern grocery retailer using dummy phone cards that sells about 10 cards per day, per lane, per store, which is phenomenal. More typical is an East Coast chain that sells one phone card per day, per store.

Tim Barclay

director, marketing

U.S. South

Communications

Atlanta

POS activation is key. The prepaid phone card is an impulse purchase. It has to be visible.

On support for marketing:

Simon Bradwell

national accounts sales

manager

U.S. Long Distance

San Antonio

There are two dilemmas faced by retailers when a checkout clerk is assigned to scan the phone card to activate it. On the one hand, a fairly low-paid employee is being given another procedure to perform, that he will probably hate. Also, stores that activate via the magnetic strip on the card are more likely to keep the phone cards in one area of the store, such as the customer-service counter, which limits consumer exposure to the cards. We address this barrier with marketing efforts. We will put point-of-sale at every register, provide signs and posters, have contests for managers and giveaways for store employees. When a retailer asks how much our phone cards charge per minute, my usual response is, that depends on how much marketing you let us do. Our price per minute may not be as low as some companies claim to be, but we make up for it in the increased sales generated by our advertising and marketing efforts.

Alongside our regular phone-card program, we offer retail phone cards associated with special occasions, such as Mother's Day, Father's Day, Christmas, back-to-school. These are sold at deep discounts and help build store traffic. The designs on these cards are changed every year.

On pricing:

Brennan: People buy prepaid phone cards for their own consumption or to give to someone else. Everyone has a use for long distance. We have been able to make these rates competitive.

Everyone believes the phone cards are cheaper than coin or collect calls, but in most instances, they are also cheaper than a regular calling card. Using a major provider's calling card does not guarantee you the same long-distance rate you get when calling from home.The prepaid card is usually a better deal. Many people don't realize what they pay with a calling card, but the word is getting out. There is typically a connect fee, then the first minute may cost 60 cents to $1, and subsequent minutes are 40 to 80 cents per minute. The highest rate for a prepaid phone card is probably 33 cents a minute.

Halvorson: One barrier to growth is price to the consumer. It is up to the retailer to reduce the cost to the ultimate consumer.

We can suggest lower prices and we are lowering our cost to the retailer. If they offer a better price on their phone cards they can win.

On customer service:

Halvorson: Before becoming the authorized marketing agency of WorldCom, we checked around with eight or nine different providers. The key point to us was customer service. We made phone calls as secret shoppers to see how long it took to reach customer service. WorldCom, which averaged 30 to 33 seconds for customer-service pickup, beat everyone else we checked. We had to wait from two to five minutes for customer service with the other companies. Another problem with some companies' customer service is undertrained people. WorldCom has a pool of multilingual customer-service representatives from which to select.

John A. Widlicka

executive VP

Easy Access

Boca Raton, Fla.

We keep hearing from the grocery industry about how many retailers have been hurt by fly-by-night phone-card companies. Retailers should examine three areas before selecting a supplier of prepaid phone cards: the financial stability of the company; the pricing, which does not necessarily have to be the lowest; and the backup system or customer service if the card does not work. Some phone-card companies have a computer backup system rather than live personnel for customer service. We assign a customer support person to each of our accounts.

Other obstacles:

Beem: The biggest barrier is lack of knowledge about applications for prepaid phone cards. Will they really sell? The problem is education. Our presence at FMI enables us to introduce the concept and discuss what it can do for food retailers. We see phone cards as a destination item. Having them will increase store traffic without cannibalizing sales of other items. This is a completely new revenue source.

William Kahn

director, investor relations

SMARTALK Teleservices

Los Angeles

The biggest obstacle to our growth in the grocery industry is that most retailers already have phone-card programs. Our early concentration was on the electronics market, home-purchase superstores and retail outlets other than supermarkets. We are now trying hard to enter the supermarket and drug-distribution channels and have several key clients in this area. We hope to quadruple the number of accounts we have in grocery by the end of the year. We are prepared to spend $10 million in marketing money to support that expansion.

John Ahlman

director, marketing

Frontier Communications

Dallas

Our biggest frustration was that long-distance carriers treated us like a long-distance product. We changed our strategy. This is retail. The rules of retail are different from the rules of long distance. At retail you need marketing, advertising, reward and fulfillment.