Retailers Reward Loyalty -- and Reap the Rewards

By Ylan Q. Mui
Washington Post Staff Writer
Thursday, December 7, 2006

Debra Mims of Burtonsville loyally shopped at Hecht's for 11 years. She diligently clipped out an endless array of 10-percent-off coupons and timed her purchases to coincide with the local chain's many sales.

"That would make it affordable," she said. "I'm just one of those people who refuses to pay full price."

But now that Hecht's has become Macy's, the coupon free-for-all is expected to subside. Macy's wants to save its regular discounts for customers who carry its credit card.

Many retailers have adopted similar strategies, known as loyalty programs, tied to their credit cards. They often ramp up promotions during the holiday season, offering extra incentives for customers to sign up for a store credit card. Companies say such programs allow them to reward those who shop the most -- though some shoppers say they're actually turned off by the sales pitch and don't want to carry another card.

But there are plenty of benefits for retailers: The cards encourage shoppers to spend more, allow the stores to avoid fees from other credit card companies and offer the retailers insight into their customers' buying habits.

"At the end of the day, loyalty programs are really targeted advertising or marketing programs aimed at getting more customers in the store," said Shea Long, a vice president at Maritz Loyalty Marketing, which builds partnerships between retailers and credit card companies.

For shoppers, the perks can range from free shipping on online purchases to invitation-only sales and concierge travel services. The more charged on the credit card, the greater the rewards.

Of course, coupons have not disappeared. Macy's ran several ads yesterday in The Washington Post with coupons for $15, $25 and $50 off and for a 20 percent discount. But shoppers who open an account get an additional 20 percent savings, the ad said.

"It is an important part of the marketing mix for the holiday season," Macy's spokeswoman Elina Kazan said of the coupons. But she added that "there is a shift away from it."

Customers who sign up for the Macy's Star Rewards credit card get bonuses beyond discounts: They can return merchandise bought with the card without a receipt for up to six months, and they get notice of special monthly sales. If they spend more than $2,500 on the card, they can receive free gift wrap and alterations and a priority customer-service phone number.

"If you chose to spend your dollars at Macy's, we want to reward that customer and keep that customer," Kazan said.

The payoff for the retailer can be lucrative. Kazan wouldn't comment on how much Macy's credit card holders spend, but Maritz said cards with retail loyalty programs are used 25 percent more often than ordinary credit cards.

Take Target's cards. The retail chain offers two types -- one run by its own banks and one operated in partnership with Visa. Target regularly mails coupons for 10 percent off to its cardholders. They respond in turn by spending an average of $160 at Target, nearly four times the amount of the average sale.

The same is true at the other end of the retail spectrum. Luxury chain Saks Fifth Avenue has found that shoppers carrying its Saks First credit card visit the store three times as much as regular customers, said George Zilvetti, vice president of business development. And though the two groups are demographically similar -- income levels and percent married are close to the same -- Saks First shoppers spend five to 10 times as much.

"They are significantly more valuable to us," Zilvetti said.

Saks lavishes benefits on its credit card holders in return. Last month, the store in Chevy Chase hosted a veritable shopping party for its cardholders, complete with a DJ, champagne and chocolates. Customers earned extra points toward rewards such as gift cards for shopping that day.

This year, the retailer partnered with MasterCard to create a new Saks credit card called World Elite with perks such as discounts on luxury cruises and a free ride on British Airways. Those who spend $10,000 or more on the card get free valet parking at Saks and can store one fur in-house.

Such exclusive events can inspire loyalty in notoriously fickle shoppers at little cost to the retailer, said Rob Markey, head of consulting firm Bain's global customer strategy and marketing practice.

"It creates an experience for the customer that is unique and that they actually earn their way into," Markey said. "That has psychic benefit that goes beyond the cash cost."

The credit cards also give retailers a discount of sorts. Credit card companies normally charge retailers a fee -- an average of 2 percent of the sale -- each time a transaction is made. The National Retail Federation, a trade group, estimates that retailers spent about $30.7 billion last year on those fees, up 17 percent from the previous year.

By offering their own cards, retailers avoid paying the fee or negotiate lower rates from credit card companies. Loyalty programs are one way they encourage shoppers to sign up for the cards.

"Since these cards don't have those hefty fees, I can probably reward my customers even more," said Mallory Duncan, vice president and general counsel of the NRF.

But perhaps one of the biggest benefits for retailers is the ability to analyze customers' purchases and tailor their marketing to different customers.

For example, Target reviewed the shopping patterns of customers who use its Visa card to determine where they were filling their prescriptions. If it wasn't at Target, the retailer mailed them promotions and extended special offers to entice them to switch.

The credit cards have a "powerful set of attributes designed very carefully . . . to make our guests want to come to the store more often and want to spend more on each visit," said Douglas A. Scovanner, Target's chief financial officer.

But some shoppers are not swayed by the pitch. Debra Mims is one of them.

"I certainly will not get a Macy's charge," she said. "I'll just wait for the sales."

Consumer Reports senior editor Amanda Walker cautioned shoppers not to sign up for the cards if they can't pay them off. Many have high interest rates that far exceed the discounts and perks consumers get in return.

"You may want to just take a pass and pay with your debit card," Walker said.

Or, even more radical, consider paying with cash.

"What's that?" she joked.