Last week, several major retailers, including Walmart, Target, CVS, Sears, Publix, and 7-Eleven, announced that they had formed a joint venture to develop a mobile payment network. Called the Merchant Customer Exchange, the venture intends to build a new way for customers to pay using mobile phones. The idea is to replace the legacy credit card systems that accept Visa, Mastercard, American Express, which the retailers do not own, with a modern system they control.And in a related press release, one of these is not like the others:
This is a major development and one that is going to be fun to watch play out.
While the announcement of the plan has received a fair amount of press, I haven’t seen a good analysis of why these traditionally fierce competitors have embarked on an unprecedented level of cooperation presumably in an area they consider a closely guarded state secret: sharing customer purchase data.
As the founder and CEO of Endorse, a next-generation offers platform for consumer brands in stores like Walmart and Target, I have spent the past two years working in the space. Here are a few reasons why I believe these particular retailers feel the urgency to do something like this now:
- Cost reduction: Scale-based, low-margin industries like that of modern traditional retailing, are constantly looking to their value chain to wring out any cost efficiencies they can find. Walmart is the king of forcing brands to conform to their EDLP strategy (Everyday Low Pricing) and to alter everything from package sizes to delivery methods to pricing and promotion strategies in order to get Walmart shelf space. Every dollar these companies save drops directly to the bottom line. As you can see from the chart below, 5% to 6% EBIT is the norm — eliminating 1%-2% transaction fees for credit card payments is a significant savings.
- Revenue growth: As you can also see below, revenue growth in this industry is hard to come by. I see three opportunities for revenue growth here: increasing basket sizes (giving incentives for buyers to spend more when they shop), increasing trip frequency (giving incentives to shop one more time a month), and increasing exposure to brand trade dollars associated with product-level offers and increased customization. By tying purchase behavior and history to the mobile phone, all of these are now on the table, and all are multibillion dollar opportunities.
- Customer behavior is changing: Shoppers are now far more tech-savvy than the retailers, and the retailers know it. They use their mobile phones while shopping and they are more deal-driven than ever before. They are busy, always on the go, and are shopping in more short-burst trips and spending less per trip. The planned, once a week major shopping trip that Walmart and Target have both dominated for years, is happening less frequently. Retailers need to be more real-time and in-tune to making it more convenient for a consumer to go to one place over another....MORE
Wednesday, August 22, 2012
Why Walmart, Target, and other big retailers are teaming up on mobile payments (TGT; WMT)