A Reward Program Without The Credit Card: What Target Could Learn From Macy’s, Nordstrom

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If there’s one reward lesson Target could learn from Nordstrom, Macy’s and others, it’s this: Red could be the new black.

Red as in Target Red, the reward program the mass-retail chain is testing in Dallas-Fort Worth. And black as in profit-maker. If it tests well, Target Red could become the alternative to the Target REDcard credit card. Unlike REDcard, which kicks back 5% of each purchase to its cardholders, Target Red rewards shoppers 1% on all purchases no matter how they want to pay, even if it’s with cash.

Such multi-tender programs have become more prevalent in recent years, as Nordstrom, Kohl’s and most recently Macy’s transitioned to the model. Based on the results among these retailers, Target’s Texas test might not be necessary.

Here’s what Target, and its shoppers, could expect from a multi-tender rewards program.

Good company

By lowering the barriers to entry, Target is nearly certain to see an escalation in its overall reward program memberships — but they may not be higher spenders. Look no further than Nordstrom for evidence.

The Seattle-based merchant in 2016 extended membership into its Nordstrom Rewards loyalty program to include all shoppers, not just those who held its credit card. In the first year, enrollment nearly doubled, to 7.8 million active members from 4.1 million. In 2017, membership rose to 10.5 million, a 35% increase, according to its annual report.

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That breaks down to 3.7 million new members in 2016 and 3.8 million in 2017. Sales from Nordstrom Rewards customers represented 51% of its total in 2017, an increase from 44% in 2016.

That 7% increase in penetration, on a membership increase of 35%, indicates the program is attracting lower-spending customers. This could present opportunities for targeted promotions.

More opportunities to engage

Target Red enriches the shopper’s omnichannel experience by providing special perks on online ordering and delivery, which consumers have increasingly come to expect. In addition to the 1% reward sum Target Red members earn on all purchases, they also receive free next-day delivery through Target Restock, a limited-market service through which shoppers can have boxes of self-selected staples, such as household goods, delivered for a flat rate of $4.99 per box.

Members also receive 50% off memberships with the same-day delivery service Shipt, which Target acquired for $550 million in December.

In similar fashion, Kohl’s, when it introduced the multi-tendered Yes2You Rewards in late 2014, focused on omnichannel opportunities, including the notable acceptance of Apple Pay. Its rewards, whether they’re Kohl’s Cash coupons or Yes2You rewards, can be redeemed online or in stores regardless of where they were earned. Further, in-store members who use its app could receive mobile coupons to redeem before checking out.

In 2017, Kohl’s posted a 1.5% sales increase in stores open at least a year, while sales per square foot rose to $229 in 2017 from $224 in 2016, according to its annual report. Macy’s, by comparison, posted a 2.2% decline in comparable sales, while J.C. Penney posted a 0.1% increase.

A new generation of loyalists

Younger shoppers are less likely to apply for credit cards, and therefore are less likely to be REDcard members. Just one-third of consumers between the ages of 18 and 29 had a credit card in 2016, according to Bankrate’s Money Pulse Survey. That compared with 55% credit card ownership among those between the ages of 30 and 49.

Many major brands are reckoning with the reality of credit card aversion among younger consumers. As Macy’s CEO Jeff Gennette told gatherers at a conference in March, when discussing Macy’s recently overhauled Star Rewards program, which is now multi-tender: “We believe that’s going to be very sticky with customers who don’t want a credit card.”

In particular, it should appeal to younger consumers — both millennials and their Generation Z cohorts. Among the goals of the revamped Star program is to attract new or infrequent customers in addition to increasing spending among Macy’s best shoppers.

Target Red should equally encourage new spending, not to mention potential future credit card holders, by getting younger (and colder) feet through its membership door.

Opportunistic shopping 

If Target Red’s rewards resonate well with new members and deliver on perceived value, those members will be more likely to combine multiple shopping trips into one Target excursion. This will especially be the case among those shoppers who tend to use multiple payment methods.

OfficeMax’s card-free Office Depot OfficeMax Rewards Everything program, released in 2017, is a good example of incorporating incentives that encourage consolidated spending. The program includes a VIP tier that rewards members who spend more than $500 a year. Among the perks are free delivery and 5% back on products important to its customer base — ink, toner, paper, printing and copying services.

If Target Red introduces similar spending-based incentives, it could encourage shoppers to shift purchases they make at other stores, from food to footwear, to Target.

Each of these opportunities is worth considering, but perhaps the most compelling reason for Target to broaden and open up its rewards program is to capture a wider base of customers. In today’s retail environment, it’s better to allow regular shoppers to earn rewards no matter how they pay, since it’s rare to find a retail experience that is based on limitations. Retailers should instead focus on how to fully recognize their better customers, enhancing the value and experience they have as regular customers.

There are benefits to connecting with customers, but choosing access over exclusivity may be the surest way to turn Red into the new black.

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