Target's REDcard revs up sales

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Julie Oachs of Woodbury
Julie Oachs of Woodbury uses a Target sore REDcard every time she shops at the retailer, saving at least 5 percent on her purchases.
MPR Photo/Martin Moylan

Patty Nickelson of Cottage Grove uses her Target REDcard religiously.

"Every time I come to Target; four out of seven days, more than likely," Nickelson said during a recent shopping sojourn at the Woodury East Target.

With the REDcard, Nickelson can get discounts of 5 percent and sometimes 10 percent. She's confident she won't find better prices elsewhere, especially on big ticket items.

"I think it's great," Nickelson said. "On a camera, we saved about $27."

THE PRICE WAR

Shoppers with Target's store-branded credit and debit cards get discounts on virtually everything the chain sells. The loyalty program is not only rewarding for shoppers but also Target.

The program helps the retail giant rev up sales by convincing shoppers Target can meet or beat the prices of other retail rivals, including Walmart.

Target aims to be within 1 percent or 2 percent of competitors on sticker price. The retailer also recently implemented a price-matching policy. But when shoppers use REDcards, they further reduce what they pay at the check-out.

"We win. We actually win on price," Target CEO Gregg Steinhafel said in a recent speech. "In the past, it was we were going to neutralize on price, because we didn't think we could win the price war. And we still don't want to get into price wars. But we now win when you add that 5 percent REDcard reward program."

Target will not disclose how many customers are currently packing its REDcards. But the cards accounted for 17 percent of the company's U.S. sales in its most recent quarter. That's a three-fold increase in just three years.

The REDcards help Target dismiss doubts about the retailer's price competitiveness, said Mark Bergen, a University of Minnesota marketing professor whose research focuses on pricing.

"They are actually very competitive on price," Bergen said. "It's just that people don't perceive them that way. So, that's where this 5 percent may be helpful to them. If you're not going to believe they're necessarily the lowest priced and they're going to win on price, maybe the 5 percent becomes big enough where you do believe that."

Nor will Target disclose how much shoppers save with the cards. But doing the math, it looks as if savings could have totaled about $150 million just in the retailer's most recent quarter.

Despite the discount, Target still has plenty of room to make money off these discount-digging shoppers.

Target REDcard
Store-branded credit and debit cards that provide discounts on virtually everything that Target sells. Target's unique REDcard program is helping the retailer trump rivals like Walmart in the war to convince shoppers where to find the lowest prices.
MPR Photo/Martin Moylan

"The customers you make money from are the customers who come in for everything," retail consultant Howard Davidowitz said.

REDcard discounts do end up boosting Target's profits, especially by helping the retailer retain its best customers, he said.

"A loyalty approach is critical because that customer tends to not just buy the sales," Davidowitz said. "That's a regular customer. They're more likely, for example, to buy high-margin apparel."

As well as other items with hefty mark-ups.

CUSTOMER LOYALTY AND TARGETED MARKETING

Target says the purpose of the REDcard rewards program is to build customer loyalty and get customers to shop more at Target. The company insists it's not about trying to reduce fees paid to other card issuers or collecting more data about customers.

The retailer says households increase their spending at Target by more than 50 percent, on average, when they begin using a REDcard. Those increased sales more than offset the cost of the 5 percent discount, according to Target.

But Target can also save serious money by moving sales to REDcards. For example, Target may save a roughly 2 percent fee on a sale by getting the purchase put on the buyer's REDcard instead of a third-party credit card, said David Robertson, who publishes the Nilson Report, which tracks the credit and debit card industry.

"Factor that into the 5 percent and you can see where they're going to be able to play a little bit more in offering a 5 percent discount on their own proprietary card product," Robertson said.

The retailer can also learn more about its customers when they use REDcards, he said.

"What you're buying, who you are and how to communicate directly with you," Robertson said. "That's to make sure the Target customer doesn't become the Walmart customer."

HOW THE REDCARD PAYS OFF

Robertson said the payback on the Target cards beats other reward credit cards, which typically provide, at most, 1 percent to 2 percent in cash value back.

All but the greatest of road warriors would likely find the Target cards provide a better return than any airline reward card.

"Your 25,000 miles to get a coach class ticket, [it's] pretty clear there that if you were going to be spending that kind of money, and you could spend all $25,000 at Target, you'd be better off doing it at Target," Robertson said.

For some well-off shoppers it would not be unusual to spend $25,000 at Target over a few years. Indeed, just 4 percent of Target's shoppers account for nearly $20 billion of the retailer's annual sales. Spending $25,000 at Target would yield such customers at least $1,250 in discounts.

Analysts say in the long-term the REDCard program also pays off for Target and its shareholders.

"When you look at prices, they're pretty competitive," said Brian Yarbrough, an analyst with Edward Jones. "But once you factor in the REDcard, they're usually as cheap as Walmart or possibly even cheaper. Overall, it is positive for shareholders and positive for the company."

Whether it's because of the REDcard or not, Target has beaten Walmart in comparable store sales growth in seven of the last eight quarters. Target is now looking to get the cards in the hands of more customers, with a goal of landing 30 percent of sales on the REDcard.