By Walter Paulsen
Payments Industry Consultant
As the 2009 holiday season bears down on retailers, one payment innovation that seems poised for continued growth is the grocery store gift card mall. Virtually every major grocery retailer has at least one (if not two) front-end caps devoted to prepaid products, while drug and convenience stores have smaller assortments but even more points of retail distribution.
While different surveys generate different numbers, there are certainly no fewer than 40,000 retail locations selling third-party gift cards and other prepaid products, and some counts go as high as 75,000. How did this massive distribution network get started, and what lessons can be learned from its success?
With the current breadth of retail gift card distribution, it's hard to believe that not a single grocery store in the United States carried third-party gift cards during the 2000 holiday season. Long-distance phone cards were popular in convenience stores, and prepaid wireless companies were beginning to make inroads. But third-party gift card distribution didn't exist as a retail business. A consumer had to go to a Gap Inc. store to purchase a Gap gift card, a Nordstrom Inc. store to get a Nordstrom gift card or a Borders Inc. store for a Borders gift card. People who wanted to buy an assortment of gift cards at the last minute had to go to a mall and wait in separate lines for every retailer. Retail gift card malls simply didn't exist.
In mid 2001, a former video game and toy executive named Donald Kingsborough joined Safeway Inc., a $35 billion grocery colossus with a reputation long on financial and store operations expertise but short on innovation. Kingsborough had a flurry of ideas he wanted Safeway to try, from leveraging Safeway's Club Card data to new approaches for selling general merchandise.
One of Kingsborough's ideas was that Safeway could sell gift cards from other retailers. While the idea was thought to have promise, huge obstacles stood in the way of its success. For starters, every square foot of space in Safeway stores was already designed to maximize sales. Space near the checkout was highly sought after by candy, gum and magazine vendors.
Safeway was also starting late in the season and had no contracts with gift card retailers, no way to activate cards, no POS integration, no racks to put cards on, no logistical process for putting cards on racks and little interest from store management to launch a completely untested retailing concept in less than 120 days.
Recruiting from outside the grocery industry, Kingsborough assembled a small team and inspired them to think "outside the box." The challenges to launching the program came down to solving three interconnected problems. First, Safeway had to convince quality retail brands to put their gift cards into grocery stores. There had to be enough brands to offer consumers choice, and some brands had to be prestigious; otherwise, the stores wouldn't carry them. Without appealing brands, the idea simply wouldn't work.
Second, the information technology (IT) had to work flawlessly, with minimal fraud, and the cards had to be valid when buyers tried to use them. Selling cards couldn't slow down grocery checkout lines, and the cards had to scan like any other products. Whether it was a box of cereal, a can of beans or a $50 gift card, the sale had to be seamless.
Finally, there had to be a permanent, in-store location for the mall so shoppers could find the cards. At first, Safeway management offered seasonal placement near greeting cards but did not want a year-round program.
However, without a guarantee of full-time, first-class space at the front of the store, retailers would balk, the IT resources wouldn't be available, stores wouldn't support the program and the whole idea would die before even a single card was sold. If any one of these three elements was missing - brands, IT or retail space - the program would fail to launch.
So what did Safeway do to launch this new program in over 1,500 grocery stores in less than four months? Despite numerous hiccups and setbacks, the key goals of gift card selection, IT/POS management and permanent rack space were met.
For card supply, Safeway hired salespeople to scour the retail landscape for merchants who wanted to participate. Kingsborough signed Nordstrom, and his team signed Blockbuster Inc., Borders, Pier 1 Imports, Wherehouse Music, and KB Toys. Safeway's own gift card offering filled out the rack. Nordstrom cards were sold in three different denominations; the others had two.
Instead of waiting for a perfect assortment, Safeway was determined to launch what it had by Christmas. Better to launch with a program with room for improvement than to wait for perfection - and give potential competitors a chance to catch up.
To manage complex IT issues, Safeway took advantage of a highly advanced and uniform POS system that had been deployed in all stores; if a gift card worked in one Safeway store, it would work in any Safeway store.
Unlike Walgreen Co., which could only activate gift cards from a single processor (First Data Inc.), Safeway established dedicated connections to gift card processor Stored Value Solutions, as well as First Data, and was even willing to connect directly to retailers like Nordstrom that processed their own cards.
For retail space, Kingsborough's team negotiated internally and secured dedicated gift card racks at every checkout. Instead of replacing existing candy racks, the new gift card racks attached to the top of the candy and magazine fixtures, essentially creating more retail selling space. Skeptics, however, claimed the racks were too high, untested, unattractive and certain to interfere with existing sales. They also believed the malls wouldn't generate enough margin to make up for all the trouble.
Initial sales after the November 2001 launch were modest, as it took time for consumers to notice gift cards were available at Safeway and move from sample purchasers to repeat buyers. Even with moderate sales, gift cards had established a beachhead in Safeway stores, IT problems had been solved and the cards of premium retail brands were selling in grocery locations for the first time, paving the way for future growth.
By the second year-end holiday rush, the program had more than tripled in size, and Safeway continued to extend its lead by aggressively expanding the program to other retailers, including grocers.
Today, with the holiday season in full swing, Safeway's gift card program is carried nationwide, and the company controls over 80 percent of gift card distribution in U.S. grocery stores. The program became the core of Blackhawk Network, a new business unit of Safeway that develops and markets a wide range of prepaid products and services.
What can we learn from the origins of the gift card mall? Retailers and payment entrepreneurs can take away three key points from the success of the Blackhawk Gift Card Mall.
First, even if the long-term business vision is big, it's all right to start a program before everything is perfect. An initial foot in the door with just six retailers - several of which have since gone bankrupt - created a template that Blackhawk would roll out aggressively in other retail locations.
Instead of an idea, Safeway had tangible results it could point to, and satisfied gift card retailers. Blackhawk quickly learned how to market the program, signed more retailers and enjoyed triple-digit growth rates for most the rest of the decade.
Second, innovation will almost always meet with resistance - from internal and external sources. Safeway's gift card team, led by Kingsborough, was creative and tenacious in figuring out how to solve problems and overcome opposition.
Despite technical, regulatory and business hurdles, the Safeway team pushed ahead. The existence of skeptics and strong opponents - inside and outside the organization - does not mean a business idea lacks merit.
Third, more than anything, the success of Blackhawk demonstrates the power of a good idea pursued with vigor. In innovation it's not always going to be possible to do things right: there will be problems, and mistakes will be made. But if a company is doing the right thing, there is room for error and experimentation, because the idea itself is so robust.
Kingsborough recognized the power of the gift card mall idea and pushed his team to launch the program quickly, learn from mistakes and never stop innovating. The results speak for themselves. Every time someone buys a gift card at a grocery store, that purchase validates the power of a good business idea to overcome obstacles and create big, new business categories.
Walter Paulsen is a board adviser and consultant to prepaid, payments and social gifting companies. He was most recently President of CardFact, an unclaimed property services company that was purchased by CardCompliant in September 2009. Prior to CardFact he was a Vice President and founding member of Blackhawk Network, where his team built the industry leading Gift Card Mall. Walter can be reached at walter.paulsen@post.harvard.eduhttp://www.linkedin.com/in/walterpaulsen or 650-465-7929.
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