Worthington, Steve --- "Coming up trumps - Retail case study" [2008] MonashBusRw 8; (2008) 4(1) Monash Business Review 10

Coming up trumps
Retail case study

Steve Worthington

Credit card partnership expands horizons for Australia’s oldest department store, writes Steve Worthington.

David Jones traces its origins back to 1838 when Mr Jones, a Welsh-born immigrant, opened “large and commodious” premises in Sydney to sell, “the best and most exclusive goods”. It is the oldest department store in the world still trading under its original name. Today it is a national retail chain operating nearly 40 stores across Australia. Profits of A$71.1 million in the first half of 2007 were 30.4 per cent up on the first half of 2006.

The David Jones’ credit card business continued its strong performance track record, reporting growth of 6.1 per cent in Earnings Before Interest and Tax (EBIT) up from A$16.3 million in the half year to January 2006 to A$17.3 million in the first half of 2007. This provided nearly 25 per cent of David Jones’ profits, a consistent contribution over the last decade. Financial services products are expected to be one of the underpinnings of the company’s future growth strategy.

David Jones is the only Australian retailer to own its credit card business; its major competitor in the department store sector, Myer, took on GE Money to provide its store card in 1995. The David Jones store card, which predates World War II, has no annual fee, offers up to 56 days of interest free credit and many complimentary services such as gift wrapping and invitations to special events. As of July 2007 the interest rate was 22.9 per cent.

David Jones has established a management team to investigate expanding its personal finance offerings, possibly into ‘own brand’ insurance and home loans. Delivery of such products would be in 2008/09. The David Jones experience with its store card product provides a case study of how retailers can successfully offer financial services ‘in-house’ to support their core retail business and that such a strategy can then offer a platform for a move into a wider range of financial services products.

Within this strategy, one scenario is that David Jones continues to run its financial services ‘in-house’ and to reap the benefits of the associated income streams. This would require capital investment, management time and consumer acceptance of any new products that might be brought to market.

Another scenario is that David Jones has recognised that their store card business will ‘stabilise’ over the next few years and that this is a good time to get out of the business by selling their entire store card book to a generic credit card issuer at a price which would reflect current earnings and therefore be at the top end of the market. The money generated by such a sale could be ploughed back into the ‘core’ business and the new card proposition marketed to existing card holders as having more ‘functionality’ (more opportunities to use it when co-branded with American Express, MasterCard or Visa).

Table 1 Card trick: A strong revenue generator

This could involve partnering with a financial institution to convert its store card into a general purpose credit card, as some retailers around the world have done. Such a conversion could leave David Jones with both a co-branded, widely accepted credit card and for those customers who did not wish to take up that option, a stand-alone store card. This seemed the favoured approach and in 2006 David Jones invited 11 banks and finance groups to pitch for the store card conversion. This was reduced to a short list of four in 2007, although the option of ‘going it alone’ was still being considered. The final choice would be the one that provided the greatest shareholder return. David Jones’ CEO said “We are trying to determine whether one of the financial institutions can provide us with the financial structure and financial benefits equal to or better than going it alone. So if the capability of an existing financial institution is greater than our capability in a shareholder return sense, then we will partner with someone.”

One of the factors that David Jones considered was the value of the initial fee offered by the financial groups to secure access to its customer base in order to market the new card. Industry estimates claim that any interested party would have to offer as much as A$35 million to secure this co-branding, plus continuing revenues and commissions. The key issue would be whether David Jones wants to retain ownership of the customer accounts and the information wrapped around those accounts.

The attraction for bidders is the profile of David Jones’ customers, an upmarket demographic, somewhat insulated from economic fluctuations. Conversion of cardholders from a store card to general purpose credit card would be a challenge, but much could be learnt from others who have already trodden this path, such as Marks and Spencer and the John Lewis partnership in the UK.

In July 2007, the David Jones group selected Citigroup and American Express as the final two contenders for its ‘own-brand’ general purpose credit card. In February 2008, American Express was selected to run the whole of the David Jones payment card operations, with the new co-branded credit card to be introduced in late 2008.

David Jones CEO said , “that while Australian banks had tendered for the business, the international providers had more experience in managing store branded credit cards. Furthermore, American Express recognise the value of the David Jones brand and the value of our existing store card business and they are prepared to invest heavily in both, given the significant future growth prospects”.

To incentivise its customers to apply for, activate and then use the new card as their primary card, there will be a points-based rewards scheme for purchases both inside and outside the retailers own stores and these points could then be converted into David Jones gift cards. The current store card base is around 800,000 cardholders, of whom some 400,000 are ‘active’ customers, considered to be in the middle to high-income brackets. From overseas experience there is likely to be a high uptake of the general purpose card from this attractive customer demographic.

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Cite this article as

Worthington, Steve. 'Coming up trumps'. Monash Business Review. 2008.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 10–11. DOI:10.2104/mbr08008

About the author

Steve Worthington

Steve Worthington is a Professor in the Department of Marketing, Faculty of Business and Economics, Monash University.