THINK PLASTIC

MATT NANNERY

Accepting credit and debit cards may have its costs, but supermarket executives say electronic payments are a valuable customer service they'd be remiss not to offer.

"If you put a price next to it, maybe you wouldn't decide to take credit cards," said Don Gallegos, president of Denver-based King Soopers. "But maybe taking credit cards is the on-button that makes people shop with us."

Gallegos' view is typical among supermarket executives. Most are uncomfortable with the rates of 1.3% to 1.6% they must pay on credit transactions, but

pleased with the steady business and customer convenience the cards provide.

"Accepting credit cards is costly, but deciding to take them was a good move because of customer service," said Bill White, chief financial officer of Ball's Super Food Stores, Kansas City, Kan.

But proponents of credit and debit card use in supermarkets say the cards do more than just improve customer service for the retailers who opt to take them.

"For retailers, this is an opportunity to reduce bad-check expenses and cashier errors, and it provides a better paper trail if there is a problem," said Jim Williams, vice president of education for the National Grocers Association, Reston, Va.

"There is also a real cost to having money on hand," Williams added. "We are hearing from our independents that the arguments more than balance out in favor of accepting all electronic payments even though debit is the most painless option for the retailer."

Retailers are charged a flat fee, usually 15 or 25 cents, per debit card transaction. The fee structure is preferred by most retailers over the percentage charged on most credit card transactions.

San Mateo, Calif.-based Visa U.S.A. and New York-based MasterCard International charge banks an "interchange rate" of 1% on supermarket transactions -- a rate that is set to rise to 1.1% on April 1. Sponsoring banks add another several tenths of a percent above the interchange rate, which accounts for the varying overall rates charged to supermarkets.

Riverwoods, Ill.-based Dean Witter, Discover & Co. charges a flat rate rather than a percentage on supermarket transactions using its Discover card.

Despite the controversy over where rates eventually will settle, many supermarkets welcome the electronic payments option. Victor Ney, vice president of Woodmere, N.Y.-based Penguin Supermarkets, which runs nine Key Food stores in Brooklyn, Queens and Nassau County, New York, said electronic payments have made a sizable dent in the number of bad checks tendered by his company.

"The number of bad checks and our bad-check expenses have gone down substantially since we started taking credit and debit cards," Ney said. "And we physically don't have to count as much money."

Penguin's Key Food stores began taking credit and debit cards simultaneously in January 1992.

Despite Ney's endorsement of taking credit and debit cards as a way of reducing the incidence of bad checks, others in the supermarket industry say the advent of electronic payments has had no effect on the problem.

Harvest Foods, Little Rock, Ark., has been taking credit cards for more than five years -- first taking manual impressions on the kind of paper-based system familiar in restaurants and recently moving to magnetic card readers. The chain has seen no measurable reduction in bad checks as a result of taking cards.

"Electronic payments haven't cut down on our check losses because the people writing bad checks aren't using credit cards," explained Robert Rough, Harvest's chief financial officer.

Big Y Foods started taking credit and debit cards at checkouts early last year and now has the service in 14 of the chain's 30 stores. Claire D'Amour, vice president of corporate affairs at the Springfield, Mass.-based chain, said reduction in bad-check fees could make the credit cards a cost-effective option for supermarkets. But she said she has yet to see the proof.

"There is a little more surety to a credit or debit transaction, so maybe they'll decrease bad checks over time," D'Amour said. "As yet there has been no appreciable difference."

D'Amour, however, did say the option of paying by credit or debit card is encouraging the chain to stock items Big Y had previously thought shoppers would view as beyond their budgets. And some other chains say there is a potential for changing the product mix because of the increased purchasing power credit and debit cards afford.

"Now we can look toward merchandising higher-ticket items we haven't offered in the past, like giftware, floral, small appliances, floor plants and centerpieces."

Other retailers who've yet to alter merchandising to reflect credit-card purchasing power said the electronic payment option is contributing to increased sales of some higher-ticket items the stores already offer.

"People may well not buy a $30 deli tray or a small appliance if they can't pay by credit card," said Paul Nicholson, vice president of finance and management information systems at Pay Less Supermarkets, Anderson, Ind. "If you don't have to worry about how you're going to pay for it when you get to the register, you'll feel freer to buy certain things."

Harvest's Rough said that chain is beginning to offer items that are not traditional supermarket fare, but said taking electronic payments did not figure into the decision.

"We are moving into resin and wicker furniture, but it has nothing to do with accepting credit cards," Rough said.

Despite the feelings among some retailers that electronic payments are gently prodding sales of higher-ticket items, supermarkets remain unconvinced that electronic payments are generating higher total cash register rings.

"We have seen no appreciable increase in order size with debit and credit," said Big Y's D'Amour. "That's why we aren't burning down the doors trying to get electronic payments in every store yesterday."

"It's hard to prove a shopper bought something extra because they can use a credit card," King Soopers' Gallegos added.

The average supermarket credit card transaction is $46.01, according to the Food Marketing Institute, Washington. Checks rank second at $42.25, followed by debit at $37.64 and cash at $9.09. But supermarket officials say those figures are misleading.

"I've heard the studies about high sales and credit cards, but I don't see the proof," said Harvest's Rough. "Sure, the average credit card transaction is double, but I don't think total sales are up because of credit cards."

Rough said small purchases that shoppers would not consider paying for by credit or debit card skew the numbers in favor of electronic payment options.

"When I go into a store to buy Lifesavers, I don't whip out my credit card," Rough said.

"Of course the person who comes in for a gallon of milk is going to pay cash," said Nicholson of Pay Less. "And the person with a $100 order would most likely use a credit card if you offer the option.

"There's a little of the chicken and the egg here. Are people using credit cards because they are buying a lot of groceries or are they buying a lot of groceries because they can use a credit card?"

Some retailers are trying to get a handle on what has emerged as a tough question to answer.

"We know which transactions are credit and which are debit as a percentage of total transactions, and we have seen no appreciable increase in the number of large orders since we started taking credit and debit cards," added Big Y's D'Amour.

"We are trying to measure whether order size is larger," said Sam Blaiss, manager of retail support at Bi-Lo. The Mauldin, S.C.-based chain is accepting credit and debit cards at 17 stores in the Charlotte, N.C., market. Bi-Lo said it will not roll out electronic payments to its 193 stores unless it is satisfied with the Charlotte test.

"It's going reasonably well, but we're still not 100% sure. We are trying to get a handle on the benefits before we go major major on it."

In addition to trying to judge whether electronic payments are generating higher rings, the chain is polling shoppers to find out whether the increased payment options figure into their decision to shop Bi-Lo.

"We are looking at customer reception," Blaiss said. "We're trying to find out if they would shop at Bi-Lo over a competitor because we take credit and debit cards."

Blaiss said most of Bi-Lo's competitors don't accept electronic payments.

Retailers say credit and debit card use is especially high in affluent areas and that it picks up significantly in all areas at the end of the month when shoppers are short on cash.

"The demographics of our stores are very different and that shows up dramatically in our mix of credit, debit, cash and check purchases," said Nicholson of Pay Less.

Nicholson said electronic payments can account for anywhere from 2% to 15% of total dollar volume at Pay Less stores, depending on demographics.

"Our highest credit-card-use store is next to the Purdue University campus," Nicholson said. He attributed the high incidence of credit card use to affluent professional shoppers and a trend among parents to send sons and daughters off to college with credit cards to cover necessities.

Aside from the customer service benefits and the hope of higher rings, supermarkets said that making sure they're ready to handle electronic benefits transfers is figuring decisively into their decisions to bring electronic payments on line.

The state of Maryland and Ramsey County, Minn., now issue food stamps and other government entitlements through debit accounts. Other states are looking into how to administer the federal EBT initiative.

"If we roll out electronic payments, we'll be positioned for EBT and won't have to play catch-up," said Bi-Lo's Blaiss.

Big Y's D'Amour agreed.