Saturday, January 22, 2005


Is Your Store a Bank in Drag?


Is Your Store a Bank in Drag?
Some chains are starting to look a lot like credit card companies.
By David Stires

As if hooking customers on lattes and frappuccinos weren't enough, Starbucks
will soon begin pushing another great American addiction: plastic. The coffee
retailer announced in late February that it was teaming up with Bank One and
Visa to offer a Starbucks card that will combine a regular credit card with a
rechargeable Starbucks store debit card. The card will be available starting
next fall.

Starbucks is the latest in a long line of retailers that have quietly been
developing a plastic addiction of their own. In 2002 more than a dozen large
companies, including BJ's Wholesale Club and, introduced either a
general-purpose credit card, to be used anywhere, or a private-label card, to be
used only in their stores. These days virtually every retailer now issues at
least one of the cards, says David Robertson, publisher of The Nilson Report, a
trade journal.

Counting on Credit

Percentage of profits derived from credit cards

Circuit City 100%
Sears 54%
Target 15%
Kohl's 5%

Sears and Target figures are for 2002. Circuit City and Kohl's figures are
Argus Research estimates for fiscal year 2003.

Why the plethora of plastic? Some retailers simply want to build loyalty or
boost sales by giving customers easier access to credit. But others are drawn to
financing because it offers more growth potential than their slow-growing,
increasingly competitive core businesses. Indeed, many companies have come to
rely on their credit operations for a substantial chunk--and in one case all--of
their profits.

At Circuit City, arguably the biggest card junkie in retailing, credit income is
expected to account for 100% of the company's fiscal 2003 earnings, according to
Argus Research analyst Marie Driscoll. She estimates that Circuit City could
lose up to $17 million on its bread-and-butter business--consumer
electronics--while its credit arm brings in $55 million. "They're only making
money off the financing," she says.

Like much of corporate America, says Morgan Stanley investment strategist Steve
Galbraith, retailers are increasingly becoming banks in drag. Overall, he
estimates that almost 40% of the earnings in the S&P 500-stock index are from
lending, trading, and other financial activity. Of those earnings, a third were
at nonfinancial companies.

Like any addiction, this one comes with a dark side. Most store chains,
including Starbucks, Home Depot, and Best Buy, now either outsource credit card
operations to financial companies like GE Capital or issue co-branded cards with
Visa or MasterCard, which means that they don't carry any credit risk on their
books. But about two dozen stores, from Federated Department Stores and
Dillard's to Saks and Nordstrom, still run their own credit programs. It's at
this latter group that some big blowups have occurred. Last October, Sears
shocked Wall Street when it announced that it would have to kick in an
additional $222 million to cover unpaid credit card debt in the third quarter.
More recently the financially troubled Spiegel Group, parent of the Spiegel
catalog and Eddie Bauer stores, warned in late February that it may soon run out
of cash because of escalating problems with its credit card portfolio. With
consumer debt at an all-time high of $1.7 trillion, this addiction could be a
whole lot more dangerous than caffeine.

From the Fortune 500, Mar. 17, 2003 Issue

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