Target Has a Card Sale Up Its Sleeve
Target executives can’t say they’re not looking at selling the company’s credit card business anymore because they are.
As a Minneapolis Star Tribune report points out, the retailer has steadfastly denied rumors in the past that it was looking to move the business. Just two months back, Target CFO Douglas Scovanner said a sale did not make sense because, in his words, “What we would receive in [a sale] … would be meaningfully lower than what we would give up.”
Apparently, the $2 billion that Target might receive is worth at least considering giving the credit card business up.
The Star Tribune report suggests a couple of possible motivators behind the action including the current state of the credit market and pressure put on the company by William Ackman, a hedge fund investor who owns roughly 10 percent of Target’s stock.
Dennis Moroney, a senior analyst for TowerGroup, said a sale makes sense because credit risk is higher than in the past.
“The same guy who has a subprime mortgage that just went into default also shops at Target. That’s what they’re worried about,” said Mr. Moroney.
According to the Star Tribune, 30 percent of those holding Target cards fit the “subprime” label. By selling now, Target could possibly avoid having to write-off large amounts of bad debt.
Howard Davidowitz, chairman of Davidowitz & Associates, told the Star Tribune that Target would have been wise to sell the business earlier.
“You’ve got the consumer at record debt. You’ve got resets on mortgages. The consumer is tapped out… If you want to sell receivables in the market, this is not a good time to do it,” he said.
Despite the volatility of the credit market, many believe that it will be hard for Target to walk away from a business that has become a cash cow for the company. Last year, Target received nearly 15 percent of its profits before taxes from the credit card operation.
“This is jumping through hoops to satisfy activist investors and make sure they’re making the right moves for shareholders,” said Patricia Edwards, a retail analyst with Wentworth Hauser and Violich.
“They probably will not end up doing a transaction, at least on the credit-card portfolio,” she said.
Discussion Questions: Do you see Target selling its credit card receivables? Beyond this case, how do you see the credit market affecting retail in the near future?
Target probably missed the best opportunity to sell off the credit card receivables if they were seriously planning to go that route. It’s amazing how many retailers now have credit card programs and that consumers are carrying so many of them in their wallets, especially since most of them are Master Cards, Visas, and Amexs. I’m suspecting that this phenomenon will burn out over the next few years because consumers really don’t want multiple cards that basically do the same things, and dilute each other’s benefits.
Target has nothing to lose by shopping the credit card business. If they get a nice offer, they can sell it. Otherwise, they can continue to hold it. If they get worried about defaults, they can always modify their credit score cutoffs and credit limits and payment terms.
Any retail chain of any size should consider sponsoring its own credit card, either private label in conjunction with a bank, or on its own. Several retailers own banks (84 Lumber, Cabela’s). Wal-Mart De Mexico recently got permission to start its own bank. If a retailer can borrow money at 8.25% (today’s prime rate), and lend it out at 19% to 29% interest (typical credit card interest rates), the defaults have to be awfully high to make the cards unprofitable. Statistical measures are well-known in the credit card business, so the risk can be carefully evaluated in advance. And shoppers with store cards typically buy more than other customers.
I see Target selling its credit card business and buying a retail chain in either Canada or Ireland.
If you keep the shopper/consumer purchase data and are still able to market to their email addresses, what is wrong with improving cash flow by selling a company the card rights to collect and maintain? Target’s CFO knows the value of its credit card business and solid receivables when selling! And, the CEO can use the monies for further consumer-oriented purposes and market testing!
Not only has Target niched a very profitable business in a crowded, very price-oriented industry, but its marketing has created a very reliable and financially positive shopper base!
Hmmmmmmmmmmmmm…snd Harris-Teeter could be an example in the supermarket industry, too!
I believe Target is still interested in developing a “smart card” to build customer loyalty and the credit card is one way to do it. It also gives them a view of “share of wallet” for many of their core shoppers and I know they act on the insights that they learn from credit card transactions.
Selling the card program can generate some short term value for Target. A better solution for Target, its cardholders and potentially its suppliers is to seek a partner who can offer a unique payment, rewards and loyalty program with on one-card convenience for Target cardholders.
The centerpiece of such a multi-function, single-card program would be the ability to deliver more relevant value to shoppers by using their purchase history. Coupling relevant communications with one-card payment convenience would offer a more compelling value proposition to help overcome the “I don’t need another card” situation that David noted.
Though Target has not adopted self-checkout, it is probably not immune from the trend of shoppers to use expensive plastic payment vehicles more often.
Any card relationship Target seeks should not only elevate the benefits of the card for Target and its cardholders, it should reduce the fees Target pays for plastic payments. There are clever ways to accomplish both objectives.
I would agree with both John and David but would add the following. One of the main reasons Target implemented the Red Card program was not only to find out what you were buying in Target Stores but also to find out what you were purchasing when you were not at Target. As David stated, consumers have too many card choices often with a better reward. Quite frankly, they just plain forget that they can use the Red Card elsewhere. Regardless, Target was unable to gain that valuable data and now is considering a plan B like John suggested. There are other options I know, because we offer one!
Let’s hope Target sticks to their guns on this one and doesn’t bow to the pressure of an “activist” shareholder looking for short term gain in a long term business… I just pulled up a chart on Wendy’s and I definitely have concerns about “value added” transactions.