Placement Strategy Helps Prepaid Prosper

As the U.S. economic recession continues, it’s no secret that customers are altering their shopping habits to save a few dollars wherever they can. The silver lining for convenience store retailers could be the resulting affinity credit-crunched customers have developed for the prepaid segment.

In a credit weary and increasingly online world, prepaid is helping customers effectively manage household budgets, pay bills, conduct online business and even play online video games. As a result, c-stores are in prime position to reap the benefits by marketing themselves as the go-to spot for customers’ prepaid needs.

Furthermore, prepaid issuers like InComm are bolstering their prepaid portfolios. Earlier this year, InComm acquired a comprehensive prepaid product portfolio from Coinstar including approximately 400 individual prepaid card products from more than 65 unique issuers spanning various prepaid segments, including wireless, long distance telecom, branded retail gift, financial services, and digital entertainment.

“This acquisition will expand our retail opportunities, including broadening distribution in c-stores and will give more consumers easy access to the flexibility of prepaid products,” said Brooks Smith, CEO of InComm.

At Handee Marts, which manages approximately 70 7-Eleven stores in Pennsylvania, prepaid has enjoyed steady growth with commission numbers for the category up about 5% annually over the last five years, said Bruce Earhart, vice president of marketing for the Pittsburgh-based chain.

Serious Gaming
That increase is no surprise to Brent Watters, senior analyst for Mercator Advisory Group’s prepaid service, who noted customers are driving the prepaid segment quite aggressively, with general purpose reloadable (GPR) cards, especially, drawing more shopper interest due to the economy.

The economic downturn spurred many consumers to avoid using credit cards, while others saw their limits slashed or simply couldn’t get credit in a difficult lending environment, Watters explained.

What’s more, in the era of online transactions, prepaid cards offer an easy way for shoppers, including those too young to obtain a credit card, to purchase digital media, play online games, buy ring tones and do other online shopping. Plus, as customers shy away from long-term cell phone contracts, especially in a time of job insecurity, wireless phone cards are also gaining more attention.

Determining Demand

Just how popular are prepaid cards with consumers? According to a Mercator Advisory Group study between May 28 and June 4, 2009, 45% of respondents purchased prepaid cards in the last year. Of that 45%, three-fourths purchased gift cards for a specific store, Watters said.

A whopping nine out of 10 respondents bought the cards as gift purchases for someone else. But the second most popular reason for buying gift cards was to help with household budgeting (14%)—a tactic most used by less affluent individuals (19% of those making less than $50,000) and those less educated (19% of those with no college degree). On a net basis, 16% of respondents said they used prepaid in one or more cash replacement application, such as a checking/debit alternative, a way to buy online, or as a way to pay bills. Individuals from households with under $50,000 were significantly more likely to use prepaid cards in this manner, Watters said.

Moving forward, expect to see customers migrate from closed loop gift cards, or cards for one specific store, to open loop gift cards like Visa’s prepaid card that can be used anywhere prepaid cards are accepted. Mercator Advisory Group now predicts the open loop market will exceed the size of the closed loop market in 2012 by $41.8 billion.

Earhart is already seeing this trend at Handee Mart stores where the open loop Visa card offering is attracting 92% of gift card sales. He credited the success of the card with the fact that customers can use it anywhere. In Handee Mart’s prepaid segment, wireless prepaid cards are by far the strongest category, appealing to all demographics and making up 81% of its prepaid segment—with offerings by TracFone (21%), AT&T (17%) and Boost (16%).

Handee Marts has offered ring tone cards in the past, which prospered for a short time before demand dropped off, prompting the chain to discontinue them. However, the chain has seen better luck with digital media prepaid cards. While sales have been flat in a down economy, iTunes cards are attracting a mammoth 93% of sales for the segment, with Napster bringing in 6% and Amazon MP3 at 2% of sales. Earhart anticipates that Amazon and Napster will drop off in the years to come as iTunes overtakes the market.

Currently, game cards make up about 3% of Handee Marts prepaid section. “Our target customer is 18-25 years old, but the game cards are reaching customers across a variety of demographics, including older customers,” Earhart said.

Placement Strategy
Convenience stores are in prime position to grow these prepaid cards as destination category for customers. “C-stores are part of the neighborhood, they’re easy to get to and, if you have a GPR offering, you can become the local financial services provider,” Watters noted. “Folks are going to come back to reload those cards, so now you get the foot traffic and, as they come to reload, they’re probably going to make a purchase, so that’s a great opportunity for you.”

The trap some retailers are falling into is failing to recognize the upside prepaid has. As a result, it’s ending up in a low visibility area rather than getting strategic positioning. This could drive customers to other channels for their prepaid needs.

“If you walk into a Walgreens or a CVS, you’ll find the gift cards in the greeting card section. At Best Buy the gaming cards are by the video games. Both of those operators are thinking strategically about where the cards gain the best traction. C-store owners have the opportunity to do the same,” Watters said.

To maximize floor space, retailers can add the cards to small racks and shelf hangers that can be placed strategically around the store. “Even if the prepaid offering is small, don’t just stick it under the gum and candy where there is low visibility. Place it high up and closely manage your gift card rack even if it’s small,” Watters said.

Above all, marketing is the key to sales. Watters recommended using signage in the forecourt, front counter and other destination areas throughout the store, especially around holidays —including Mother’s Day, Father’s Day and Valentine’s Day—when customers might need a last minute gift.

These strategies have worked for Handee Marts, which markets its gift cards on a spinner rack located in high traffic sections of the store. The chain sees a noticeable spike in prepaid sales around the holidays, particularly from November through Christmas and during the spring season. It feeds the demand by ramping up marketing efforts.

“We put up signage to call attention to our prepaid section during those times,” Earhart said.

Chains that are reluctant to devote more space to prepaid should note the category is expected to grow in 2010 and beyond, especially in the areas of open loop gift, GPR and gaming cards. Between 2008-2012 the actual load for GPR cards is expected to increase 92%, while open loop grows 46% and games and ring tones combined increase 21.2%, according to Mercator.

“We’re far from any point of saturation right now,” Watters said.  “C-stores, especially, if they consider their demographics and customer base, can definitely be profitable in
prepaid.”

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