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Cost of Loyalty – For Retailers

Blog post by on October 28, 2010 Editor's Pick No Comments

Often times, as I cash in my CVS Extra Bucks or Nordstrom Notes, I wonder how much these loyalty programs cost retailers. For some, I imagine they are a valuable loss leader. And done well, a good number should cross over into profitability.

So I ran a quick check of several recent quarterly reports and, well, it turns out a lot of retailers do not provide much detail. Costs related to their loyalty programs are typically included in the selling, general and administrative expenses, and not broken out.

But I did find a few, and the figures are interesting.

Nordstrom

The service-minded retailer is willing to pay a premium for our rewards. In its second-quarter report filed with the Securities and Exchange Commission, Seattle-based Nordstrom said the cost of sales and related expenses, which include the “Nordstrom Notes” redeemed under its Fashion Rewards Program, rose to $18 million in the quarter, from $13 million the year before. For the first six months of the year, such expenses rose to $34 million, from $25 million.

Nordstrom went on to explain that the higher expenses were due to the increased use of Nordstrom credit cards and of program benefits. “We provide these benefits to our customers as participation in the Fashion Rewards program generates enhanced customer loyalty and incremental sales in our stores.”

Sales rose 12.5 percent in the second quarter, to $2.42 billion from almost $2.15 billion the year before. Credit card revenue, which includes finance charges, late fees and third-party interchange fees, rose 12.6 percent, to $98 million from $87 million.

Target

The style-focused value chain delivered lower costs from its loyalty program. In the second quarter, program-related costs declined to $17 million, from $21 million in the year-ago quarter. For the first half of the year, these discounts totaled $34 million, compared with $41 million in the first half of 2009.

Sales in the quarter rose about 4 percent, to $15.13 billion from $14.57 billion. For the first half of the year, they rose almost 5 percent, to $30.28 billion from $28.93 billion.

For those interested: Minneapolis-based Target lumps its rewards redemption costs with its new credit card account expenses. It then moves these expenses from retail SG&A and plants them in the credit card segment, as operations and marketing costs.

Ann Taylor

The specialty women’s apparel chain is scaling down on its loyalty costs, which are accounted for as either the cost of sales or sales discounts.

All together, those two expenses equaled $1.5 million in the second quarter, down from $1.7 million the year before. But in the first six months of 2010, these expenses rose to $3.1 million from $2.9 million in 2009 (most of that increase is weighted in the cost of sales).

Quarterly sales rose almost 3 percent, to $483.47 million from $470.23 million. For the first half of the year, sales rose 7 percent to $ 959.65 million from $ 896.98 million.

So next you get a “gimme” from your favorite retailer, it’s worth keeping in mind that someone is counting it.

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