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  1. 1. GE Capital Retail Bank Value of Credit and Growing Share of Wallet Case studies on how Retailer-Branded Credit Programs affect sales, loyalty, attrition, and share of wallet. Why Retailer-Branded Credit is critical to retail growth strategy. shareofwallet6 profit 6
  2. 2. Contents Introduction1 Retail internal view 2 Sales and foot traffic Case study on annualized sales Case study on attrition Case study on tender shift Retail external view 5 Methodology Share of wallet Shifting share Opportunity to drive additional 7 retail sales with analytics Elements of a successful credit program 8 Conclusion9 Bibliography10
  3. 3. 1 Introduction In the U.S. retail market, retailers have found that in a given year, on average, one in five shoppers will not shop at their stores the following year (i.e., customer attrition is nearly 22% per year). In an ever-challenging retail environment, retailers of all sizes are constantly competing to increase customer satisfaction and engagement, gain wallet share, and grow incremental sales. Retailers must provide increased value to customers while maintaining profit margins. The question of profitably satisfying customers often comes down to: 1. Acquiring customer insights through data. 2. Building a unique customer experience across all channels and touchpoints. 3. Developing tailored offers by leveraging customer insights to attract and retain customers. 4. Leveraging a retail store card as an opportunity to maximize loyalty. Retailers that employ all four strategies have the best chance of growing customer loyalty and retaining customers One approach that has proven effective at increasing overall customer loyalty is investment in retail credit card programs. Many case studies have found that customers who acquire retail store credit cards shop more often and spend more than customers who pay with other methods. Retail credit cardholders stay more engaged, resulting in higher customer lifetime value and lower customer attrition. Additionally, retailer card programs save retailers about 2% to 4% in interchange fees on every transaction processed on their store cards. This value alone can aid profitability. Highlights Retail credit customers have: • Higher lifetime value • Lower annual attrition • More frequent store visits This paper examines the value of credit from two perspectives: 1. Retail internal view: Measures the distribution of sales across payment tender types, analyzing the percent of sales on credit to total retail sales; provides an internal share of wallet and penetration view. 2. Retail external view: Measures how much of the competitive pie an individual retailer captures vis-à-vis other competing retailers; provides an external share of wallet and overall market penetration. Retailers’ benefits: “Do credit programs lead to higher revenues in terms of sales and foot traffic?”
  4. 4. 2 Retail internal view 1,2 GE Capital Study: Winter 2010 (data refreshed December 2011) Sales and foot traffic: In looking at the retailers’ holistic view of sales across all payment tenders, case studies have shown that store cardholders are more engaged. This is reflected in higher average monthly sales and lower attrition rates. A 2011 study for a large regional department store showed that store cardholders outspent non-cardholders by an average of 29%. During the card acquisition period, sales spiked from initial purchases. When those sales are included, the average of 29% rises to 43%. Figure 1: This chart compares two groups (test and control) where both had identical pre-period purchase behavior and only differ by customers who obtained a store card and those who did not. What is the primary driver of the continued performance difference in the test group when both test and control had similar spends in the pre-period? Available credit is one factor that led to the initial spike in larger ticket purchases at the time the customers acquired a store card, but note the continued separation in the eight-month-post window between test and control.1 The monthly spends show that, after the acquisition spike, the remaining months’ separation is primarily driven by an increase in foot traffic or average trip frequency (ATF). Store visits increase because store cards are typically designed with compelling value propositions in the form of exclusive cardholder benefits/discounts and point programs that offer regular and accelerated points accumulation. It is this increased foot traffic and the increase in average ticket size that drive sales lift. Figure 2b: The Average Ticket Value chart shows that consumers typically return to the average ticket amounts observed before the acquisition of a store card. After the larger initial purchase, consumer transactions fall back to an average basket size of $55. However, store visits increase from 1.4 per month to 1.7 per month (nearly four extra trips per year2 ). The higher traffic continues through normal retail and seasonal cycles. Thus store cards provide value to retailers in multiple ways: $160 $120 $80 $40 $0 jan–10 apr–10 jul–10 oct–10 jan–11 apr–11 oct–11 Figure 1: Avg. sales/month per customers Before Retail Card After Retail Card control test 1.8 1.2 0.6 0.0 jan–10 apr–10 jul–10 jul–11 oct–10 jan–11 apr–11 oct–11 Figure 2a: Avg. trip frequency per month control test $100 $50 $0 jan–10 apr–10 jul–10 jul–11 oct–10 jan–11 apr–11 oct–11 Figure 2b: Avg. ticket value per month control test
  5. 5. 3 1. Provide a mechanism for retailers to capture sales on high-ticket special purchases. 2. Generate repeat store visits through increased value-added card benefits. 3. Provide traceable sales that can capture loyalty and behavioral data of customers. 4. Increase customer retention over the long term. In addition, retailers with competitive value propositions on a store card build incremental brand affinity and win share from competitors Higher profitability and customer lifetime value Case study on annualized sales: Higher sales were demonstrated at three different retailers by measuring customers who shopped with other tenders in their first year before opening a store card in their second year. A comparable “look-alike” control group was selected that matched the test group in terms of sales and store visits during the one-year pre-period. Customers in the test group—new cardholders—had retail spend that ranged from 39% to 86% higher than the comparable control groups. The higher sales were not due to tender shift, but represent higher retail sales at each retailer (conclusion based on full tender data including cash). Not only did the new cardholders spend more at these retailers, they were also less likely to leave the retail brand, leading to higher profitability and higher customer lifetime value. Case study on attrition:3 A retail credit program drives greater initial customer engagement in the retail brand. But what are the longer term effects on attrition? Case studies show a marked decrease in attrition rates for store cardholders, who are, on average, 75% less likely to stop shopping at each retailer. Cardholder vs. non-cardholder attrition rates Figure 4: This chart shows comparisons between store cardholders and non-cardholders over a 12-month window and across three retail segments: Online, Specialty, and Department stores. Based on pre-period purchasing levels, non-cardholders attrite at 28% on average, whereas customers with store cards attrite at 6.7%. In the short run, the study found attrition accounts for a 25% drop in sales. More importantly, in the long run, the lifetime value of customer attrition demonstrates even higher losses in customers and sales. Case study on tender shift: When analyzing the lifetime value of customers, a natural question arises “How much of the monthly sales increase is really an exercise in ‘tender shift’?” 3 GE Capital Study: Attrition Lifetime Value Across Retail Segments, Summer 2011 $1,600 $1,200 $800 $400 $0 Averagesalesupby 59%6 Retailer A Retailer CRetailer B CardholderNon-cardholder 52% 3 39% 3 86% 3 Figure 3: Annualized retail sales cardholder vs non-cardholder 50% 40% 30% 20% 10% 0% Figure 4: Attrition rate Retailer A Retailer CRetailer B CardholderNon-cardholder 76% 4 63% 4 88% 4 Cardholdervsnon-cardholder averageattritionrate 75%5
  6. 6. 4 The hypothesis is that store cardholders do not spend more at the retailer, but instead engage in a “transfer game” where sales are shuffled from one tender (cash or debit) to another (the store card itself). The idea is readily disproved on two points. First, store cardholders spend more on average after acquiring a card, and there is a gain in their total wallet size. Second, modern POS systems coupled with Multi-tender Loyalty Cards (Frequent Shopper Cards) can capture total retail sales at an individual or household level. The store card spend is greater than pre-period spend across all tenders combined Examining household payment types on all transactions demonstrates that spending for retail cardholders diminishes by roughly 50% across the board for credit and cash equivalents (including debit cards).4 Figure 5: This chart shows that store card spending increases overall by 57%. In fact, the store card spend is greater than pre-period spend across all tenders combined. Figure 6: This chart shows there is relatively flat utilization across all tenders, except an 11% rise in debit usage, and only a moderate 5% uptick in year-over-year sales in the control group. Providing significant economic value to retailers From an internal perspective, the value of credit is clearly demonstrated. Retailers gain from higher incremental spend coupled with lower customer attrition. Another financial benefit is the gain in royalties and interchange savings. Store card issuers typically offer a percentage of sales (“royalty”) back to the retailer for all sales made on the store card. Retailers gain royalties on sales and avoid interchange fees as significant portions of in-store purchases (as much as 60% at some retailers) are processed through store cards. The combination of royalties and interchange savings can range from 3% to 5% of the store card sales—that’s a significant economic value to retailers. $120 $80 $40 $0 Figure 6: Year-over-year monthly non-cardholder spend and tender shift Credit DebitCash Before-control After-control 11% 3 3% 3 3% 4 +5% YOY 3 $120 $80 $40 $0 Figure 5: Year-over-year monthly cardholder spend and tender shift Before-test Credit Debit Store cardCash After-test +57% YOY 3 4 GE Capital Study: Tender Shift Through the Lens of Multi-Tender Loyalty Program, Fall 2011
  7. 7. 5 Retail external view Methodology: While most retailers can determine the distribution of spend over different tenders for individual shoppers using their internal data, they are also very interested in knowing their customers’ spend at competitors. Using third-party data, it is possible to analyze (on an anonymous basis) the credit portion of the customer’s total wallet. Total credit wallet data can answer the following key questions: 1. What is the retailer’s share of wallet versus key competitors? 2. Does the retailer have higher share of wallet among store cardholders versus non-cardholders? 3. How does the share and size of wallet change when a customer opens a retail card? 4. What impact do retailers’ or competitors’ marketing programs have on share of wallet? In three different studies, consumers who acquired a store card (test) were compared with a similar group of customers who did not acquire a card (control). A clear lift in share of wallet is visible over a period of time ranging from 16 to 23 months in the test group. Like the internal example above, test and control populations were matched on a 6-12 month pre-period, using trips, spend, geographic distribution, and creditworthiness. Once consumers were placed into test and control groups, spending and trips were measured across all credit cards in the shoppers’ wallets for the 11 months after the card was issued for the primary retailer and its self-identified competitive retail set. Highlights Store cardholders: • Have higher sustained lift in store • Spend 39%-86% more • After opening a store card, are 75% less likely to attrite Higher trip frequency after opening a store card Figure 7: The test group showed a similar pattern of lift as observed in the internal example. Shoppers with retail store cards had higher sustained lift. This lift was driven by a higher trip frequency that continued after consumers opened a store card. The rise in Average Monthly Sales is contrasted against the flat negative trend in Average Monthly Sales at corresponding competitors. Note the slight negative trend observed in the control group, which emphasizes the importance of a store card program. The post-acquisition gap between test and control represents roughly $16 per customer per month ($192 annually) in favor of the test group. The introduction of credit and increased spending power appears to greatly benefit the retailer. $160 $120 $80 $40 $0 jan–09 Figure 7: Avg. monthly sales at competitors oct–09 jan–10 apr–10 jul–10 oct–10 apr–11 jan–11 control test
  8. 8. 6 Share of wallet In another case study, the annualized wallet size of the control vs. test is $1,360 and $2,120 respectively. Store cardholders outspent non-cardholders by $760 or 56%. The control group at the retailer accounted for 17% of all credit sales versus its predefined competitors. However, for the cardholder group, retailers benefited from an increase in total wallet size and grew wallet share to 38%.5 Shifting share All things being equal, we would expect the test group portion of the retailer’s sales to remain steady and maintain roughly the 17% share of wallet, as seen in the control group. However, in the test group, the retailer’s share increased to 38%. That means roughly $136, or 17% of the $563 increase in spend is attributable to maintaining a base share of 17% of the larger wallet, while the remaining $427 comes from the competitors’ share. As observed in the case studies (above and previous page), the key driver is a higher number of store visits. Consumers tend to have slightly greater ticket sizes than during the pre-card acquisition time period, but through credit availability and card-based events and promotions, trip frequency rises. Although one might attribute a retailer’s overall marketing and promotions as a key driver of increased sales, it is important to remember that both test and control groups were selected from similar geographies. So both test and control groups were exposed to the same retail marketing offers and advertising, right down to in-store promotions and communications. However, cardholders received additional offers and maintained greater awareness through cardholder communications and card usage. Shifting share: Composition of $563 sales increase $235 $798$427 Attributed to share shift Expected 17% share of larger wallet $136 Shopper Larger wallet Share shift Cardholder Retailer shareCompetitor share 83% 17% 62% 38% Share of wallet Control Test 5 Argus Information and Advisory Services and internal GE analysis: Share Of Wallet and Demographic Segments, Winter 2011
  9. 9. 7 One of the primary benefits of having a retail card program is the ability to capture a robust set of data on your customers. While a Multi-tender Loyalty program captures some of this data, some retailers have limited success in tracking individual customer purchases and preferences on most tenders, and the program can be expensive to manage. The store card becomes a traceable tender that allows retailers to determine 1) how much customers spend; 2) how often and what time of the day or month they shop; 3) what they buy; and 4) the promotions and channels they are more likely to respond to. This allows retailers to develop a data-driven strategy to optimize their marketing dollars and increase ROI. The full value of credit is not achieved without a competitively designed and well-managed program. Successful programs can have a significant financial impact, but require organizational commitment. Next we turn our attention to how retailers can establish a world-class credit program, leading to incremental sales, higher retailer brand loyalty, increased customer satisfaction, and higher lifetime retention. Highlights Developing a strong credit program: • Associate training • Store signage and online visibility • Card promotions and offers • Store/District accountability • Best customer program • Best value props on the card Opportunity to drive additional retail sales with analytics store card other credit cards debit cards check and cash equivalents 100% 60% 12% 10% Tender traceability % of traceable sales by tender
  10. 10. 8 Offering credit by itself can yield strong benefits, but offering credit with a compelling value proposition magnifies the impact. Successful programs focus on engagement at both the customer and store level. Signage is a key component to attracting customers and building awareness of the program. Associates need training and should ask each customer if they want to open a store card, and be able to discuss the benefits. Whether sales are primarily brick and mortar or online, it is important to leverage online branding and marketing methods. Prominent banner ads and well-placed interstitials at checkout offer opportunities to grow loyalty and incremental spend. Best-in-class programs engage associates in offering credit. New hires are coached in core values of the program, including customer benefits, saving the retailer interchange fees, and building brand loyalty. Associates train with role playing to be certain they express card benefits appropriately during all customer interactions. Store and District managers need to play a strong role in driving associate accountability and creating a credit- based culture to promote a successful card program. Additionally, repeated studies show that, on average, store cardholders shopped more frequently and spent 30% more than non-cardholders Up to 50% of all retail transactions might be placed on the store-branded card, saving the company roughly 2%-4% in third-party interchange fees, and often earn retailers royalties over competing forms of payment. Interchange fees are the network and banking transfer fees between the financial institutions that underwrite and process credit card transactions. Royalties or participation fees are incentives that a retailer receives from card issuers for processing store card transactions. Best-in-class store card programs offer strong value propositions on the store card. This is because the retailer knows how the program drives customer engagement, and increasing the store card share of retail sales provides economic value back to the retailer. A branded retail card is not merely a loyalty program; it is the foundation of a successful loyalty program Rewarding customers with relevant and timely offers that they deem valuable will increase overall brand engagement and retention. Acquiring deep customer insights through data mining is the key to the development of a customer segmentation strategy. This will allow a retailer to identify its most valuable customers and, therefore, maximize return on investment in the most productive segments. Tiered credit programs offer an opportunity to differentiate how segments of customers are treated based on reaching desired spending thresholds. This allows retailers to create a unique customer experience, adding to overall customer value and satisfaction. Elements of a successful credit program
  11. 11. 9 Well-managed, retailer-branded credit programs can increase customer satisfaction, engagement, and long-term retention. Retailers that utilize branded cards combined with targeting techniques increase foot traffic, drive incremental sales, and save on interchange fees. By providing customers with strong value propositions and a means of purchase, retailers can decrease attrition, increase customer lifetime value, and shift share from competitors. Authors: Irving Turner, Mgr. Retail Marketing Analytics, GECRB, David Liebskind, Retail Analytics Leader, GECRB, Sanjay Sidhwani, VP Marketing Analytics, GECRB, Contributors: Dori Abel, Gautam Borooah, Muhammad Haider, Rob A. Hengelbrok, Doug R. Hooper, Dilip John, Ann Lindsay, Valerie Thomas, Jennifer Vinas, Nilesh Yagnik, Sarah Zupnick Conclusion
  12. 12. 10 Abernathy, Hammond, Weil. A Stitch in Time: Lean Retailing and the Transformation of Manufacturing– Lessons from the Apparel, and Textile Industries. New York: Oxford University Press, 1999 Ingene and Levy. Cash Discounts to Retail Customers: An Alternative to Credit Card Sales. Journal of Marketing, Vol. 46, Spring 1982: p. 92-103 Wolfe. Discover Extends Retailer Pact. Cardline Vol. 10, Issue 14: Apr. 2, 2010, p. 3 D. Soman and A. Cheema. The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Credibility. Marketing Science, Vol. 21, No. 1: Winter, 2002, p. 32-53 McCully Annabel. Retailers Play Loyalty Cards. BT, Nov. 24, 2008 Pearson, Bryan. The Loyalty Leap: Turning Customer Information into Customer Intimacy. New York: Penguin Group (USA) Inc., 2012 Bibliography ©2012 General Electric Company. All rights reserved.