Marketing, merchandising and knowing customers’ needs are keys to expanding prepaid profitability.
By Howard Riell, Associate Editor
Research indicates that the amount of money spent at retail on prepaid services continues to grow in the U.S. But that may not necessarily mean the category will pay off handsomely for every c-store operator.
The total dollars loaded through retail card malls grew 19% in 2013, according to the Mercator Advisory Group Inc. But identifying customers’ needs, marketing and merchandising the cards properly and educating employees are all keys to making the category profitable in this unique market.
“I can’t speak for others, but prepaid services are a big part of the convenience store,” said Tariq Khan, CEO of Sentar Oil Inc., an eight-store chain based in Rockville Centre, N.Y. Overall, the prepaid segment has yet to take off, although it has the potential to add to the chain’s bottom line going forward.
“With the economy and more players coming in, (demand) has been more spread out,” Khan said.
How popular prepaid services will be in any given location has a lot to do with the local socio-economic conditions. “If the store is in a certain area where credit is an issue, you tend to do well with the prepaid services. If you are in a more affluent area, prepaid services are not as big,” Kahn said.
Maximizing sales with prepaid means, first and foremost, sticking to retail fundamentals, beginning with an intimate knowledge of the local community.
“They have to do the same thing they always do, which is to know their customers,” said Ben Jackson, director of Maynard, Mass.-based Mercator Advisory Group’s Prepaid Advisory Service. “Some c-stores do very well selling gift cards for retailers. Others are only selling phone cards and gas cards and cards that aren’t traditional gift cards, but are instead either for self-use or are service-oriented cards.”
That, Jackson emphasized, is why customer knowledge is so important. “When a convenience store is thinking about what kinds of prepaid products they want to offer they should be thinking: ‘Are my customers coming in here, recharging their phones and buying cups of coffee and then leaving?’” If that’s the case, they might be more inclined to purchase a gas or phone card, and the store should take that into account.
Common sense should prevail. For example, if a convenience store is selling many greeting cards, it might make sense to bundle them with gift cards. “If they’re not,” said Jackson, “then it may be that there is no demand for that kind of a thing, and it may be better to focus on phone cards and reload cards for prepaid, that kind of thing.”
Khan doesn’t believe that it pays for c-store operators to spend the time and money to actively market prepaid services. “It’s because the margins are so low,” Khan said. “When they came in years ago (margins) were the strong double-digit type. Now they are low single digit margins—4% or 5% on the high end.”
In that respect, prepaid services are much like money orders, Kahn added.
“You get a $200 money order and they charge anywhere from $1-$2. That may not even be 1%. You can’t pay your bills like that,” Kahn said. “But small operators like myself look at it as added income. It’s better than nothing, and I didn’t have to lay out a lot of money. They’re just buying the paper.”
However, there are two reasons for retailers to expect prepaid service revenue to flow more going forward, Jackson said. One is the consumer trend tied to no-contract wireless service.
“People need a place to reload and they need a place to top up, and a lot of those people are using convenience stores for that purpose,” Jackson said.
The other is simply more people prefer using prepaid cards.
“It might be a Starbucks or a Subway card to budget money, or with a spending kind of card,” Jackson said. “Or it’s kids who want to play online games, but they don’t have a way to get digital currency. Of course they don’t have credit cards, so they take their allowance and they skateboard down to the convenience store and buy the card for their games.”
Prepaid, he added, is becoming a spending tool for a lot of different kinds of people. “It’s not just folks who are at the bottom of the economic spectrum,” he said.
Jackson noted that a lot of brands have discovered that convenience stores are the places that a lot of their customers regularly go. “You fill up on gas, you get your cup of coffee, and so there are many brands who are looking at them and asking, ‘Is that another channel of distribution for my gift card?’”
Jackson is adamant that c-store operators should not be thinking strictly in terms of plastic cards on a j-hook. “They can still offer prepaid services like mobile top up, or reloading of a prepaid card, and they don’t necessarily need to have a card. They can just have signage that says, ‘Reload here and top up your phone here.’”
How best to promote prepaid services depends on the service and the savviness of the c-store operator, Jackson suggested. Many times it’s about pairing services with a high-margin item like a cup of coffee, which can easily be discounted or even given away.
“’Top up your phone here. Get a free cup of coffee. Load up the gas card for my particular chain and we’ll give you a discount on gas. Or enroll you in our loyalty program.’ Things like that can certainly work,” he said.
“The other thing too is that as c-stores think about the ways in which they promote, they want to emphasize that convenience factor,” Jackson continued. “The goal of a c-store is to make it easy for somebody to meet a need, whether that need is for a snack or mobile minutes.”
C-stores err when they fail to pay attention to customer preferences.
“It’s easy to say, ‘Oh, if I install a huge rack and I take off an endcap for prepaid cards I’m going to make a ton of money,’” Jackson said. “That may not be the case. It’s not necessarily obvious that everyone is going to shop there for their gift cards, for example, so they need to focus on what the customers want.”
The other major mistake is not educating employees to make them aware of what the cards are, how they work and what they offer. “You’ve got somebody who’s trying to move through the store fairly quickly, or they’re trying to find something to fill a need, whether it’s mobile minutes or a gift for a birthday party that they’re on their way to,” said Jackson. “You want your clerk to be able to say, ‘Oh yeah, that will top up your phone,’ or ‘Yes, we have gift cards over here for whatever it might be.’”
One of the best ways to train employees, Jackson has found, is to have them actually use the cards in a transaction.
“Sometimes it’s a matter of showing them ‘Okay, here’s how you do it—here’s how you top up your phone, here’s how you top up your prepaid card, here’s a card we use this to load our salary,’ that kind of thing.”
Perhaps the most cost-effective way to market prepaid cards is simply to let the providers, companies like American Express and Barnes & Noble market them, which they do. What convenience stores can do is allot space and offer a wide variety.
“Those guys with big stores, 2,500-3,000 square feet and above, can dedicate a lot of space,” Khan said. Stores near colleges and universities also benefit more than others, he added, explaining that students need them for gaming, and can trade dollars for cards so as not to be afraid that their money is going to disappear from their empty dorm rooms.