December 26, 2006
Competitors Feeding Safeway’s Bottom Line
How good is this? A business you own develops a product that is sold by a competitor and you make money off it. Talk about sweet.
That very scenario is played out daily as the Blackhawk Network, a subsidiary of Safeway, which markets retailer gift cards sold through other merchant locations. Every time a Starbucks gift card is rung up in a Food Lion, for example, Blackhawk hears the beautiful sound of a cha-ching being added to its top line.
Steve Burd, chairman, chief executive and president of Safeway, told investors last month that the cha-chings are adding up and Blackhawk is projected to make a pretax profit of $100 million in FY 2007.
“When we started out, we didn’t think this big,” he said at the time. “Now that we are in the middle of it, we do.”
Charles Cerankosky, an analyst at FTN Midwest Securities Corp, told Bloomberg News that Blackhawk is tapping into a market that should reach $200 billion next year. Blackhawk is expected to grab about $3.45 billion of the total.
Blackhawk distributes the gift cards of about 185 retailers, including Apple iTunes, Barnes & Noble, Home Depot and Starbucks. The company says its kiosks, about 63,000, are housed in over 80 percent of the top-50 supermarket chains in the U.S. It plans to be in 100,000 locations by 2008.
Discussion Questions: What are your thoughts on the Blackhawk business and the growing gift card market? Do you see some point in the future that retailers
will begin to object over the relationship between Blackhawk and Safeway?
BrainTrust
Recent Discussions
Discussion Questions
Poll
I doubt if very many retailers will object to Safeway’s ownership. There probably aren’t that many that realize that Safeway owns it and even less that care. I also think this business will continue to grow and as has been said, it’s much easier to buy the service than create your own.
The economics of gift cards are great for the issuing company. Some percent are never redeemed, there is the interest earned until they are redeemed and then there is the gross margin on the merchandise purchased when they are redeemed. Seeing an end-cap at the local supermarket for a wide range of retailers, I asked the manager what his thoughts were on them. First, the retailer makes only a few pennies on selling gift cards for other retailers. Second and most important is that customers find it very convenient. They are in the store and they can get that gift they need without having to travel to another store.
Customer service and pleasing the consumer are important hallmarks for every retailer, but is selling other’s gift cards a good idea? I think not. It tells me, I as a retailer that I have nothing better to sell the customer in the way of food products. I question whether a real merchant would let the retail space go for pennies.
Safeway had the guts to invest in something new while others dozed. As a result they offer some exclusive brands and smart POS activation technology. Outside of Kroger and a few others, why not work with them? Surely building your own capabilities this late in the game is silly; always buy before building especially when a lot of creative intangibles are required.
I don’t think anyone will object. This is more common than we think. A&P owned Eight ‘O Clock coffee and it was sold in many of their direct competitors. Wild Oates private label is being added to some of their competitors as well. If if makes good business sense, then who cares who owns the company? Sam’s Club sells products to small businesses that compete with Wal-Mart. Who’s complaining?
Unless someone finds a way to do it better, I think it is unlikely retailers will object to the Blackhawk Network and Safeway. Convenience to the customer is a key drawing card here.
This strategy seems to be one that Safeway encourages within its culture. Some years ago, Safeway was developing a strategy and business model to introduce an in-store media network whereby Safeway would charge their brand vendors to participate and those dollars would then, in turn, be used to promote competitive private label products. It seems that through Blackhawk, Safeway has found another way to implement this strategy. The implications of the story of the Trojan Horse comes to mind.
Based upon Steve Burd’s comments and the implicated origins of the Blackhawk name, this business strategy was most likely a ‘skunk-works’ project that apparently has continued to pay dividends to Safeway.
Given the low margins quoted for the Safeway retailers, it seems that they would demand a larger percentage of the revenue given its success and the fact that they have to give up end-cap real estate.
The number of payment alternatives is growing all the time. And the alternatives aren’t free to the retailer. Credit card issuers are getting more and more of the retailers’ margins via their proliferation of reward cards, business payment cards, etc. The Blackhawk network isn’t free, either. Most retailers struggle to achieve 5% bottom line profits after taxes, debt and overhead. A 3% or 6% pretax fee might not seem like much, but when your profits are only 5%, it’s tough.
It’s a matter of competitive positioning. Your competitor (Safeway) offers something customers want, so you should offer it, too, if you can. And if there is a better gift card program than Safeway’s Blackhawk version, use it instead! (Blackhawk, by the way, is the name of the super-exclusive enclave in the East Bay where many Safeway executives reside.)
The gift card display in my local Safeway is quite impressive, covering three sides of an endcap facing the checkouts. There were several satellite free-standing displays in the entry area of the store as well. While the profits per card may be small, calling into question the display’s productivity per square foot, here’s what I think may be its real genius:
Near-zero inventory carrying costs combined with huge dollar density of product on the display. This is a product that sells at $10, $25, $50 and $100 price points but costs pennies to make. When activated at the checkout, the customer effectively loans the product’s face value to the retailer creating a beneficial “float” that is the opposite of the usual cash flow associated with merchandise sales. The small percentage of non-redemption just sweetens the pot further.
So why should 63,000 Safeway competitor stores welcome Blackhawk’s program? Because it’s turnkey and profitable and it may even help the store’s image with shoppers. Because it’s 100% auditable due to the activation/clearing process. And because it out-delivers almost anything else that can be put on an endcap.
Our local grocery store in Pittsburgh (Giant Eagle), sells gift cards for just about every store under the sun, and gives you back a discount on gas at their fuel pumps in the form of 20 cents/gallon for every $50 you spend. On a 15-gallon fill-up, they’re giving back $3 on a $50 gift card, which probably means they’re losing money. But it really drives traffic to the stores and also (I would imagine) really boosts their revenue numbers. It’s an interesting approach to say the least, and I’m curious how it will play out in the long run.
More Discussions
Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?Should IKEA Be Flattening Management?
Should IKEA be trimming down its management headcount?Is Legislation the Answer on Visa, Mastercard Swipe Fees as ~$200 Billion Record Is Set?
Is lawmaking the way forward on swipe fees?
I doubt if very many retailers will object to Safeway’s ownership. There probably aren’t that many that realize that Safeway owns it and even less that care. I also think this business will continue to grow and as has been said, it’s much easier to buy the service than create your own.
The economics of gift cards are great for the issuing company. Some percent are never redeemed, there is the interest earned until they are redeemed and then there is the gross margin on the merchandise purchased when they are redeemed. Seeing an end-cap at the local supermarket for a wide range of retailers, I asked the manager what his thoughts were on them. First, the retailer makes only a few pennies on selling gift cards for other retailers. Second and most important is that customers find it very convenient. They are in the store and they can get that gift they need without having to travel to another store.
Customer service and pleasing the consumer are important hallmarks for every retailer, but is selling other’s gift cards a good idea? I think not. It tells me, I as a retailer that I have nothing better to sell the customer in the way of food products. I question whether a real merchant would let the retail space go for pennies.
Safeway had the guts to invest in something new while others dozed. As a result they offer some exclusive brands and smart POS activation technology. Outside of Kroger and a few others, why not work with them? Surely building your own capabilities this late in the game is silly; always buy before building especially when a lot of creative intangibles are required.
I don’t think anyone will object. This is more common than we think. A&P owned Eight ‘O Clock coffee and it was sold in many of their direct competitors. Wild Oates private label is being added to some of their competitors as well. If if makes good business sense, then who cares who owns the company? Sam’s Club sells products to small businesses that compete with Wal-Mart. Who’s complaining?
Unless someone finds a way to do it better, I think it is unlikely retailers will object to the Blackhawk Network and Safeway. Convenience to the customer is a key drawing card here.
This strategy seems to be one that Safeway encourages within its culture. Some years ago, Safeway was developing a strategy and business model to introduce an in-store media network whereby Safeway would charge their brand vendors to participate and those dollars would then, in turn, be used to promote competitive private label products. It seems that through Blackhawk, Safeway has found another way to implement this strategy. The implications of the story of the Trojan Horse comes to mind.
Based upon Steve Burd’s comments and the implicated origins of the Blackhawk name, this business strategy was most likely a ‘skunk-works’ project that apparently has continued to pay dividends to Safeway.
Given the low margins quoted for the Safeway retailers, it seems that they would demand a larger percentage of the revenue given its success and the fact that they have to give up end-cap real estate.
The number of payment alternatives is growing all the time. And the alternatives aren’t free to the retailer. Credit card issuers are getting more and more of the retailers’ margins via their proliferation of reward cards, business payment cards, etc. The Blackhawk network isn’t free, either. Most retailers struggle to achieve 5% bottom line profits after taxes, debt and overhead. A 3% or 6% pretax fee might not seem like much, but when your profits are only 5%, it’s tough.
It’s a matter of competitive positioning. Your competitor (Safeway) offers something customers want, so you should offer it, too, if you can. And if there is a better gift card program than Safeway’s Blackhawk version, use it instead! (Blackhawk, by the way, is the name of the super-exclusive enclave in the East Bay where many Safeway executives reside.)
The gift card display in my local Safeway is quite impressive, covering three sides of an endcap facing the checkouts. There were several satellite free-standing displays in the entry area of the store as well. While the profits per card may be small, calling into question the display’s productivity per square foot, here’s what I think may be its real genius:
Near-zero inventory carrying costs combined with huge dollar density of product on the display. This is a product that sells at $10, $25, $50 and $100 price points but costs pennies to make. When activated at the checkout, the customer effectively loans the product’s face value to the retailer creating a beneficial “float” that is the opposite of the usual cash flow associated with merchandise sales. The small percentage of non-redemption just sweetens the pot further.
So why should 63,000 Safeway competitor stores welcome Blackhawk’s program? Because it’s turnkey and profitable and it may even help the store’s image with shoppers. Because it’s 100% auditable due to the activation/clearing process. And because it out-delivers almost anything else that can be put on an endcap.
Our local grocery store in Pittsburgh (Giant Eagle), sells gift cards for just about every store under the sun, and gives you back a discount on gas at their fuel pumps in the form of 20 cents/gallon for every $50 you spend. On a 15-gallon fill-up, they’re giving back $3 on a $50 gift card, which probably means they’re losing money. But it really drives traffic to the stores and also (I would imagine) really boosts their revenue numbers. It’s an interesting approach to say the least, and I’m curious how it will play out in the long run.