July 16, 2004

Prepaid & Safeway

With a win-win concept, Safeway has partnered with best-in-category specialty retailers to provide an innovative gift card program. Read how the grocery giant is enabling retailers - such as Starbucks - to expand their presence and sales.

Like any successful implementation, it begins with a concept. The concept to market prepaid gift cards from specialty retailers at Safeway grocery stores came about in 2001 when Donald Kingsborough, founder of Safeways Marketing Services group, recognized that payment options and prepayments were an emerging product category.
Founded in the summer of 2001, Safeway Marketing Services mission is to innovate and generate revenue from nontraditional sources. "Were an incubator of new ideas and try a lot of things," explains Walter Paulsen, vice president of Safeways Marketing Services group and the individual responsible for all of Safeways prepaid gift card and telecom products. "Carrying prepaid gift cards came out of that initiative to think differently, drive revenue from nontraditional sources and, essentially, surprise and delight our customers."

It didnt take long for the company to start surprising and delighting. By October 2001, Safeway was selling prepaid gift cards from six specialty retailers in all of its stores. It was a successful launch, but not without some bumps along the way.

Innovate or fade away

Safeway has been in business for 75 years and has stores in 23 states. The company has a reputation for providing outstanding quality at a competitive price and is known for service, selection and cleanliness. Despite this reputation, Safeway has come under increased pressure not only from direct competitors but from the likes of Wal-Mart, Costco, Trader Joes and Whole Foods Market. "Weve got more competitors coming at us from all angles than we did years ago," Paulsen says. "If all we do is compete head-to-head with traditional grocers, then we risk being the last dinosaur in the cave. We dont want to be the last dinosaur and are working aggressively to reinvent how grocery is done in a more competitive way."

Service, selection and convenience are where Paulsen feels Safeway differentiates itself from discounters such as Wal-Mart and why Safeway is the ideal outlet for prepaid gift cards. "People who shop at a full-service grocery store like Safeway care more about convenience, selection and service than a person who shops wholly at Wal-Mart," Paulsen explains. "We felt that retailers who compete with Wal-Mart had a strategic interest in sharing their traffic and their customer base. Consequently, our customers are more likely to shop at Nordstrom; Old Navy; Bed, Bath & Beyond; or another best-of-category retailer."

Working from that hypothesis, Safeway began courting specialty retailers such as Starbucks, Sears, Nordstrom and Blockbuster, among others.

Behind the scenes

The launch of the program was timed to coincide with the 2001 holiday gift-giving season. Implementing the program required significant point-of-sale modifications. "We did a lot of IT work to enable us to offer secure activation and payment," Paulsen says.

Before rolling out the program, Safeway Marketing Services had to fight for space in its checkout aisles space that some of its candy retailers werent excited about giving up. It also went through a number of iterations on the rack design and learned through trial and error the best locations at checkout to place those racks. Later, additional racks were added in other parts of the store, boosting sales considerably.

The decision to launch the program at all Safeway locations without any test trials may sound like a gamble at first blush, but for Paulsen and company, it was the only way to go. "There are certain things you want to test in small areas, roll out and make bigger," Paulsen says. For Safeway, this way was not an option.

"Its much easier for partners to pull out if theyve just made a tiny commitment," he says. "Like the Vikings used to burn the ships behind them, we decided to make a bold move because we really believed in the concept."

Selectivity pays

Most of the deals Safeway signs with its retail partners are multiyear exclusive for distribution within the grocery category. Safeway has been extremely selective in choosing its retail partners, and Paulsen points out that there are only so many cards that Safeway will carry. "There is a point of diminishing returns where adding more cards in the same category doesnt really increase sales," Paulsen says. "With too many choices, customers get lost and dont find what they really want. Our goal is not to expand the mix but refine it. We want to get the strongest partners that we can, and we want to stand behind them and sell a very high volume of their cards."

Partners such as Sears are indeed pleased. "Safeway provides another convenient channel for our customers to purchase a Sears gift card and an additional opportunity to drive sales," notes Bill Kiss, vice president of Sears Promotions LLC, a wholly owned subsidiary of Sears.

The program has been such a success that retailers are constantly knocking at Safeways doors. "We turn down several proposals a week," says Paulsen. "At the end of the day, what really work best are strong multibillion-dollar retail consumer brands that are giftable." According to Paulsen, premium brands outsell discount brands. "Premium brands tend to have a mid to upscale consumer whos a good match with Safeways customer base as well as the people who are buying gift cards."

Paulsen explains that the company only has so much space, and its goal is to maximize the value of each and every peg. Not surprisingly, the pegs at the front of the store at the checkout aisle are where Safeway focuses on best-selling brands. "The best-selling brands get the best space, and because they get the best space, they get the highest sales," he says. "And it gets harder to break into that circle because weve had strong success in getting the people we want into the program."

Lessons learned

Although the program wasnt a rousing success from the get-go, Safeway and its retail partners were satisfied with its progress after the first holiday season. But there were lessons learned that have been instrumental in making the program even stronger.

Paulsen is hesitant to offer specifics regarding some of the lessons Safeway learned that first year. "We dont want to give competitors the playbook for the things that can go wrong," he says. "We want them to learn the hard way." That said, Paulsen rattles off a litany of problem areas: "There are IT things that can go wrong. There are marketing things that can go wrong, and if the program doesnt get strong support down to the store level, results can be mixed."

Adds Paulsen, "If you put out a rack with six pegs on it with a few cards, that by no means guarantees success. Customers might not find them, or store employees might not put the cards on the racks, or customers might not understand how this works."

During the first year of the program, Safeway learned which marketing and public relations campaigns were most effective. "A lot of this wasnt necessarily intuitive," reveals Paulsen. Employee incentives and contests inspired employees to be proactive in exposing customers to the cards. Other issues that had to be learned through experience were closing contracts with major retailers and dealing with brand considerations. "How do these prestigious brands get over the hurdle of having their brands represented in grocery?" asks Paulsen. "Most of them have never had their brands anywhere except in their own retail locations."

This was a new concept for Safeways retail partners, and many were pleased from the start. "Wed been pleased throughout, but the benefits of the relationship proved to be very valuable on Christmas 2003, when Sears stores were closed for the holiday," Kiss says. "Our customers were pleased to have a convenient way to purchase last-minute Sears gift cards for holiday giving."

Another lesson learned was that expanding the program was a necessity. "We had good success but realized we had to offer customers more choices," Paulsen adds. "With six cards, you dont offer enough choice so that anybody can find something theyre looking for." In 2002, Safeway added 17 new card partners, while in 2003, Safeway focused on strengthening the mix of best-of-category retailers, adding Home Depot and Toys "R" Us, among others.

Marketing matters

Marketing has also been instrumental to the programs success. Marketing efforts are two-pronged, targeting employees and customers. The company conducts extensive in-store training and also uses in-store videos that highlight the cards it offers. Several times a year it conducts contests where the store, the division or the district that has the highest sales is rewarded. "We use every tool at our disposal to achieve enthusiasm and execution down to the store level," Paulsen says.

Gift cards are also included in various Safeway promotions, promoted in circular advertising and in in-store promotions around key holidays where employees are encouraged to be active sales agents for the program. "Our goal is to make sure that every customer who comes into Safeway knows about the gift card program, is aware of the great brands we offer and remembers it the next time they have a gift-giving opportunity," says Paulsen.

"Ultimately, its a great product innovation and a great convenience," he adds. "Everybody is busy, nobody wants to make an extra trip to the mall just to get a gift card, so why not just do it on your trip to the grocery store? In some ways its pretty innovative, but in others its a simple proposition. Were just making it more convenient for our customers and these great retail partners to find each other."

Since the launch of the program in the fall of 2001, Paulsen reports the prepaid gift card program has achieved high double-digit growth rates and shows no signs of abating. Nor do Paulsen and his group plan to rest on their laurels. "We have a lot of competitors, and our goal is to keep innovating so that by the time they get to where we are now, well be somewhere far down the road." ICN

If you cant beat them, partner with them
If a program works, theres bound to be those who try and emulate it. Understanding this, Safeway Marketing Services has expanded its prepaid gift card program to its grocery alliance partners. "If an idea works in Safeway, people are going to try and copy it, particularly in grocery," says Walter Paulsen, vice president of Safeway Marketing Services. "We thought we could either let other companies and entrepreneurs copy our program, or we could expand the program and offer it to other grocers." Safeway chose the latter.

Already, Safeway has signed deals with Pathmark, Ahold and other grocery chains and, between now and the end of 2004, will be rolling out similar programs at Lowes, Price Chopper and others. "We estimate 3,000 to 4,000 locations this year," says Paulsen, who maintains this provides a double benefit for Safeways retail and grocery partners. "Retail partners just sign one contract with us, and they get a national distribution footprint. Our grocery partners get a full plug-and-play program and dont have to go through all the IT, merchandising, schematics and other headaches weve had to go through." Safeway handles the contracts, the merchandising, the marketing, the PR, even the racks. "We provide an absolute turnkey system with the best retail brands in the country," Paulsen says. "Its a win-win for both sides."

Prepaid winners and losers
Outside of gift cards from specialty retailers, Paulsen reports that other types of prepaid products have not had as much commercial success at Safeway. "Music downloads, ring tones, video games for cell phones theres a whole host of content out there that is being discussed as a huge opportunity," Paulsen says. "My perspective on this: Dont believe everything you read."

He adds, "These cards dont typically do a lot of volume. We sell all these things or have tested most of them, so we have a perspective on what works. Some of the more creative ideas seem to be driven by vendors wanting to get shelf space as opposed to consumer demand."

In addition to the specialty gift cards, Paulsen identifies prepaid telecom products as great opportunities, as well as cards for emergency roadside service.

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Posted by Craig at July 16, 2004 02:21 PM