Thomas Cornelius: Bill your company H.E.B. has grown over the last 100 years from a tiny shop in Kerrville, to today over 300 stores and 56,000 employees. H.E.B. has a dominant market position in Texas, and has out-performed any other grocery retail in the state of Texas. What do you think are the key elements that make your company successful?

Bill Kuykendal: Well, Thomas, I think a lot of it has to do with the corporate culture. Every successful company is largely defined by the human element, and H.E.B. is certainly no different. The people at H.E.B. are very fanatical about the mission, and about being the best, and about providing exceptional service and exceptional products. Generally speaking, customers don’t enjoy grocery shopping. So, to the extent possible, H.E.B. tries to make that an enjoyable experience. Typically you’ll find folks greeting people at the door, greeting them regardless of how busy they are, offering to help. The employees are called partners and our partners at H.E.B. are really dedicated, work hard, want the company to be successful, and they know that H.E.B. is a good corporate citizen, as do the customers. In addition a really unique product assortment, specifically tailored to the surrounding area and the taste of Texans, really contribute to a healthy environment that the people can get behind and that the customers enjoy and support.

Thomas Cornelius: Now let’s talk about the prepaid space – Bill, you’re managing a fairly new category with pre-paid and gift card products. Not only for your organization, but in general in this new industry that has really evolved over the last year, with now hundred thousand of distribution points across the country for gift card malls, what have been the challenges for you to introduce these new products into your stores, and to the consumer? And how were you able to overcome those challenges?

Bill Kuykendal: Actually, the obstacles to overcome were much more internal than they were external. Customer acceptance of gift cards, as a whole, were pretty high. Obviously, we had to ramp up to it with the customer, as we just increased awareness. A lot of our customers are so loyal, as we talked about before, that they don’t really shop anywhere else, or very infrequently, and the places they do shop, like Wal-Mart, have a very limited selection as to third party card products. So, in some cases, even though there’s, like you said, hundreds of thousands of distribution points – some of our customers really weren’t that familiar with buying a Starbucks card from a grocery store, or any other retail outlet besides Starbucks.

We did have some challenges with just building customer awareness and comfort, but that was relatively minor, and overcome fairly quickly within the first year. The biggest obstacles to launching the program, it took nearly two years of effort to get approval to launch the program at H.E.B., and obviously one of the biggest ones in retail is a real estate at the end of the day, and because of that, there’s a lot of internal battles to overcome in order to secure real estate to sell a new line of products. So that was probably the biggest challenge, getting a place in the store, which meant creating space, and people have been trying to get creative about space for 100 years in our particular case. So that was, trying to create space, which we did a little of, and where that wasn’t possible – which is the majority, or a good portion of the merchandising space we have today, it required building a compelling business case, and building relationships, and just leveraging in order to get existing real estate space converted to make room for the gift card mall in our destination location for it. So that was the biggest one.

There were some other pretty hefty battles as it pertains to building an ROI model for dedicating space – or dedicating IT resources and getting them prioritized in the queue in order to do this integration. Here at H.E.B. we have a little bit of an older point of sales system than a lot of our competitors; it’s due to the legacy of the company. So it wasn’t the easiest integration. So, that piece of it’s always a challenge to get IT aligned and prioritized.

I tell you, a third challenge would be just education, for lack of a better way to put it, among the leaders in the organization about the competitive environment, and the purpose of a gift card purchase, especially.

H.E.B. has evolved from a traditional grocery store to a general merchant, and, in some cases, focusing on convenient stores, drug stores as competitors, and even mass merchants. Initially some owners of departments like Electronics understandably – were somewhat resistant to launching, say, a Best Buy gift card or a Circuit City or card. We have movie sections, so there was resistance to Blockbuster, some things like that. And of course we have delis, we sell coffee, and have coffee available in store. So, is Starbucks an acceptable product to offer?

So there were a lot of battles, particularly around individual products, and some we didn’t win initially, but we won eventually. And others, it was just a case of education the particular product owner about the difference between buying a product for yourself – say, buying coffee for your home, versus buying a gift for somebody, in which case maybe Starbucks, which offers both an experience and a service as opposed to a product, and give the individual more options. You may not know what kind of coffee they drink, but you know they like coffee.

Thomas Cornelius: You know, this is such an important insight. This is really interesting to hear about these different battlefields, or challenges, to get this approved across the organization. Let me ask you from your perspective, you were talking about these different types of retail gift cards. The prepaid category has expanded into many new segments. If you look at the gift card mall, what it was initially and what it is today, it has really new categories, from game cards to prepaid, reloadable Visa, Master Card, American Express products; how do you think local offers will play a role in the gift card mall space, where you have all these different offers? I realize what it is now, or today, you have really national offers; you don’t have local offers. What do you see is the place for local offers in the gift card mall space?

Bill Kuykendal: I think local offers are really an untapped opportunity, and H.E.B. in particular has always been about aligning the product assortment to the individual consumer in a local area and their needs. I think customers in general would prefer a gift that’s close to home and a gift that’s a more thoughtful, overcomes that barrier to giving gift cards, which perceived as less personalized and less thought given to the gift. So, if there’s a local place, it at least communicates I thought enough about you to provide you something nearby, in your area, and particularly if you know they enjoy that, it’s just more personal than a nationwide product offering. So I think that’s, from H.E.B. and just from a general standpoint, I also think if it differentiates your store from the store across the street, creates more of a destination for local fare, local gifts, and also generally, the profit margins tend to be, and need to be, higher for a local product like that. And so, the profitability is generally more substantial in order to help overcome the effort involved in unique planograms and unique assortments and giving up that space, which may not have the same kind of turn as a nationwide offering, but is an essential portion of the overall portfolio.

Thomas Cornelius: So that concept is not new to you, you just adopt it to this new display. Bill, you have been many, many years in this space now, and you’ve seen products come and go. What do you see on the horizon as new development when you look at the prepaid or gift card shelf space? What are the products that excited you the most, and you believe will have the greatest impact on the future growth of gift card malls in general?

Bill Kuykendal: Okay, well I will start by kind of expanding the definition of, from gift cards to prepaid, because I think a lot of the exciting new developments that are on the horizon are really not gifts at all. They’re either for self-consumption for enjoyment, or they’re for self-consumption for life, as in prepaid debits, and even some prepaid health, potentially even prepaid electrical. There’s a host of different applications that people just haven’t figured out yet, that I think present some great opportunities. There’s bill pay, there’s money transfer, there’s a host of products that are not gifts, but are multi-billion dollar industries that I think there’s definitely an opportunity to digitize and monetize those as they’ve begun to do with albums and movies and magazines.

My theory is that anything that can be digitized and monetized probably will be and should be. Do I think books are gonna go away entirely? No, but we’ve seen with the Kindle and iPod and books on tape, that sort of thing, that it’s more convenient for the individual. It’s faster, and it can be nearly as enjoyable an experience. I think there’s going to be growth in three major areas. One is just generally self-use for the unbanked and underserved. Whether that’s physically going to be on a card product, I don’t think it always will be. But I think it will be at least in the short-term. Obviously there’s other forms of tender and applications, whether they be biometrics or near field communications, or a host of other applications that are still to be proven. But it all for me falls into the prepaid realm, which is why I said I wanna get away from two words, gift and card. But I think the prepaid card business is definitely on the forefront of those innovations, whether they remain cards or not.

So I would say, the big three areas are again: number one - media, books, magazines, music. I think there’s a long way to convert that massive industry. Number two: prepaid financial services. And then, for me, I think the last one would be value-add type products. I think, particularly we saw with the last holiday season, that it wasn’t enough to buy a $25 gift card to a department store anymore for $25, because you could go to that same department store and spend $25 and get $60 worth of value. It kind of turned the industry on its head, as we saw a lot of restaurants in particular that had signs and marquees up, “Buy a $25 gift card, get a $5 or $10 gift card as well.”

I think there’s a big opportunity for aggregated customization, if I can coin a phrase here. So you have businesses like yours that partner and offer local value which meet the need for tailoring, and also customers looking for a value.

I also think there’s an opportunity, as I said, for mass aggregation, Say you take the small, the best, most well-known local Mexican restaurant in San Antonio, and you go in, set up their point of sales system, and create a Taste of San Antonio gift card, it resolves the need for the retailer to be sensitive to the tailoring needs and customization, but also allows the product provider to be sensitive to the physical limitations of a local card assortment.

Thomas Cornelius: I’m so glad that you feel that that is a big selling point, because you know, and I gotta plug ourself a little bit here, and thank you for the plug for a company like ours, with our Adility system, not only that we allow small businesses to create value cards and discounted gift cards, so a gift card that is from a local restaurant for $25, the local restaurant can choose to set the price point at $20, but in addition we have created the category that we call club cards, and club cards is exactly that. It allows in a local community to either on a horizontal or vertical, to combine different businesses. So it could be in the restaurant, like Dine Around San Antonio, where you have 50 restaurants in San Antonio, and they provide a discount, which could be 15% off, 20% off, 30% off, or it could be in the form of a gift card. And now you have 30, 40 participating restaurants. Or it could just be Save in San Antonio, and you have your dry cleaner, and you have your restaurant, and you have your spa, and you save across the board at participating locations. I’m glad you mentioned that, and as well that you mentioned that, this is something that the local, the retailer itself, it’s difficult for them to put together, so somebody that is able to aggregate that – so I’m glad to hear that there seems to be a market for our product.

And Bill, thank you so much. That insight was invaluable. And as my last question for you, it goes a little bit on the other side. Not so much on the product side, but really towards the consumer, and the marketing towards the consumer. As an industry expert in the prepaid industry, Bill, you’ve directed your company H.E.B. to the forefront in merchandising, and systematically improving the consumer experience with new sales opportunities and multiple touch points in your stores for prepaid products. How do you feel card issuers, or card partners, and product partners in the industry, can improve their marketing efforts to consumers, helping retailers reach consumers better, and do you think they could do more in merchandising and advertising support for retail partners?

Bill Kuykendal: Yeah, so I think they absolutely could. But before I get to that, I did want to add one point to the end of our discourse from the last question, and that is, as a program manager, I had dozens of local businesses from all over the state call and ask to become part of our gift card mall program, and they were by and large well-known, reputable, successful local companies. And not a single one of them, when I explained to them what it would take to become part of our program and pass them along to our aggregator, our gift card mall provider, not a single one of them ever was able to prioritize it and make it work. So, I think there’s definitely an opportunity there for somebody to pick up those local opportunities and capitalize and make them successful. So, I did want to finish that discourse –

Thomas Cornelius: No, that’s a great point, and I love to hear that of course.

Bill Kuykendal: And as a program manager for a retailer like that, you want to be able to send them somewhere where they can figure out how to make it work, because at the end of the day, it could be a win-win, particularly as some of these local companies that were kind of legendary in their specific trade area.

Let me get back to your last question now. So as far as how the card partners, the prepaid providers, could provide better advertising support to the retailer, I think first and foremost they can help communicate and drive traffic to the gift card mall provider. This is a sensitive area, because they will be the first to tell you that, by and large, their motivation is going to be to drive them into their stores to buy the product, so I think the biggest challenge from a card provider standpoint is that the ROI model is not well developed for the third party gift card retailer.

Rather than just relying on traffic at the Gift Card Mall & the “convenience” play. They also need to use their existing marketing channels to help drive awareness of the product availability at Gift Card Malls.

Thomas Cornelius: Bill, thank you very much for  this interview.

Bill Kuykendal: My pleasure Thomas.



Footnote: Bill Kuykendal has recently left HEB

Safeway CEO Steven A. Burd commented on Blackhawk Networks: ”To give you a brief update on Blackhawk, the value of total card sales—this is what we offer in terms of face value of the card—increased 24% for quarter two and that leaves us at 25% for the first half of this year.

The sales of closed loop partner cards are an interesting one to follow because essentially those cards represent the gift cards of a lot of retailers who are going through the same kind of economic events that we are. The sales of the closed loop partner cards increased 22.4% in the quarter and are growing at a rate that is much faster than our partners’ own card sales.


Year-to-date we are on plan for Blackhawk, both in terms of face value card sales and earnings.”




Coinstar Revenues Q2 2009

Source: Coinstar investor presentation.

Oh, boy, was I wrong. We started the morning with a comparison of macroeconomic data to actual small business data from the last quarter in 2008 and the conclusion was that “small business has not suffered in the same way as it appears large corporation have in this recent economic downturn.”

On this positive note, we started an open discussion about the impact on individual businesses, and I was shocked at the negative outlook in the room and the comments that were soaked in self-pity – the Venture Capitalists suffering a lack of new capital influx and start-up CEOs explaining their performance (or lack thereof) with loosely correlated macro data. I was ready to leave, but I am glad I stayed because it made me realize again why some companies prosper and others fail.

I understand that a recession throws you curveballs and changes your predictions, but a recession means change and opportunity at the same time – granted not for every company, but for some, those with that special DNA that recognizes opportunity in changing times. Companies that are not agile to respond to new market conditions will be attacked in their status quo in a recession. Maintaining your business is the first step toward closing the doors. These times reflect an opportunity for established, larger corporations and smaller, nimble businesses, as well as start-up entrepreneurial organizations, to break into new markets or gain market share. These times provide a reality check to evaluate your services, your leadership and your unique corporate DNA – all in perspective to the value you provide to your customer. This is classical Darwinism. In these times, I am not interested in the followers who can’t show a direction on their own – I am interested in the leaders who seize the opportunity and go to work. I would not follow an old school business model, copy it, and sell the heck out of it – in these times. I am looking for unique value, a drive to succeed, and positive outlook. You know the saying misery likes company, and I like to believe success breeds success and that positivity encourages and empowers.

The reality is that consumer spending accounts for about 70 percent of U.S. economic activity, and borrowing fell at an annual rate of $7.48 billion in December 2008. Since the recession began in December 2007, the economy has lost a net total of 4.4 million jobs, with more than half coming in the past four months. Americans, worried about the possibility that they could be laid off, have cut back on their spending and reduced borrowing. Many are trying to rebuild their savings to help cope with a recession that already is the longest in more than a quarter-century.

So, where can we find opportunity in these market conditions? As one example, I like to point out a business model that we have developed, one that allows businesses to use their products and services as currency in exchange for advertising, with an added benefit that they actually only have an advertising cost when a consumer walks in the door (pay for performance). This is a quasi-offline model of Google Adwords. Our clients use an empty seat – their access capacity, the extra hour of labor that otherwise would be idle, and turn it into an opportunity to wow a new customer with their products and services – all while providing a great deal for the consumer, which is so important these days.

This provides a benefit to all participants in this triangular relationship – retail venue, distribution channel, and consumer. The consumer wins by getting a great deal; the restaurant or golf course wins by getting a new customer, and the distribution channel, i.e., Gift Card Malls, win as well by providing a higher margin, consumable item that consumers actually need and want in these times and buy all year long.

You do not have to be McDonalds or Wal-Mart to beat expectations in a recession. Turn over a few stones and see how you can solve a problem for your consumers and clients in these times, and you will be ahead of the curve. If you are lucky, you just may be in the right spot at the right time!

Sales in these gift card malls grew 80 percent in 2007 and though the expectation for 2008, especially the second half of the year, is slower due to the recent economic downturn and less consumer spending, we still expect a reasonable and exciting growth rate.

Retailers are excited – the relatively small footprint for the gift card mall allows retailers to display hundreds of cards, and the sales per square foot outperform many other products in the stores.

Recognizing the current economic situation and the state of consumer spending, we predict that gift card sales growth will slow down significantly over the next few years as buyers will look for value when purchasing a gift – it’s all about the most bang for the buck! At the same time, retailers need to perform better across categories in their stores to absorb the belt-tightening due to lower overall sales.

Does this mean a grim outlook for gift card shelf space; with margins already fairly low (how much margin can you make exchanging cash for plastic)? We do not believe so – we already can see developments in Costco, where a $100 gift card package for four Starbucks gift cards sells for $75. Driving the consumer to this category with value is the name of the game. Many card issuers, though, will have a hard time following this example due to the fact that the issuer does not know what actual product will be purchased with the gift card. In our opinion, these specific gift card limitations will open the market for a new category of value-driven offers that are sold in the gift card environment – the next generation value (gift) card.

Smart Circle has developed a leadership role in the past 18 years in developing programs with local businesses all across the U.S. and Canada to drive new consumers into their restaurant or spa, concert seats or sports events – any business in which filling excess capacity is part of the solution to higher overall margins is a potential Smart Circle client.

With a portfolio of thousands of value-driven offers to consumers, Smart Circle is positioned uniquely to “hijack the gift card shelve space” for a higher margin and consumable item – which should result in exponentially more profits per square foot for the retail partner that operates a gift card mall.

[ view full diagram ]

Recognizing the opportunity to increase sales with the existing foot traffic in a retail store is not new to us – it is our business. Our company, Smart Circle, provides assisted sales services in retail locations like Best Buy, Home Depot, Sam’s Club, and Costco. When we are in a store, we are not magically creating a new consumer – we are working with the existing foot traffic and increasing sales in different categories from lead generation to product sales by 500–2000 percent. This utilization of the existing foot traffic is one of the greatest untapped assets we see in our retail partners today.

There have been many studies about consumer behavior – entering the retail store, spending time at the checkout, where to approach the consumer, and how. Most of these studies take into account variables that are used for passive impressions on the consumer, generated by displays based on their walk-through flow in retail stores.

Utilizing these studies and consumer surveys to increase sales by just a couple of percent is the status quo in the retail industry. Recognizing the real value in these analytical exercises is to adopt passive display-driven sales engagement into consumer interaction – engaging the consumer in one-on-one sales conversations. The old world rule – to not engage the consumer into initiated sales conversations while shopping – is just wrong. Our sales representatives are managed and trained to assist the consumer in his/her purchasing decision and to drive the attention of the shopper to products that are of interest to him. This is just good business, but unfortunately it has been lost in today’s retail environment by too many retailers.

Positive consumer engagement is not a passive activity; it is a dialogue initiated by sales representatives. With this notion, I like to introduce an article from Business Week. The most profound quote in this article is from Paco Underhill, a retail observer who films thousands of hours of shoppers’ behaviors a year for his retail clients: “There is no new retail customer!”

While reading, utilize the thought process of Paco’s analysis to develop better positioning of displays in retail stores and engage the consumer with sales representatives who are interacting and responding to consumers’ needs and wants.

[view the article from www.businessweek.com]

I wonder how many of these consumers realize the different brands available, and while I am wondering, I may see one or two consumers actually reviewing the display.

Consumers need guidance in the current expansion of gift card malls into stored value cards like prepaid wireless & long distance, reloadable debit cards, open loop, and digital media.

We feel this promise of the self-serve gift card mall is a sound bite of marketing managers who do not recognize the power of human communication in explaining a new product category to a consumer who is willing to listen, so he/she understands this new world of intangible purchases.

While sales in gift card malls may range from 6–10 cards per day, with an average of 200 facings and 75–100 card issuers, I believe most retailers leave a significant amount of money on the table (or more accurately, hanging on the shelf). Smart Circle has developed a network of more than 350 sales offices with thousands of trained retail sales professionals selling consumer value cards for card and ticket issuers like the Atlanta Braves, McDonalds, and many other name brands, and our experience has proven again and again that a great deal never will move if not explained and communicated properly to the consumer.

With sales reps assisting consumers at gift card mall displays, we have seen card sales increase an average of 20 times compared to regular self-service sales. While the Smart Circle consumer value cards may take only 10 facings in the gift card mall, they outsell any other card when a Smart Circle sales representative is present. The interesting fact is that we have seen an increase in sales for the gift card category while selling an additional $500–$3,000 (15–100 pieces) PER DAY in value cards.

The biggest advantage, though, is the education that sales reps provide to the consumer. While the consumer may not purchase the product on the spot, he/she now understands the product, and on the next visit, while the assisted sales rep may not be booked in that retail location, he/she can make a choice.

Assisted sales need to balance the educational element while a product category still is a novelty in the foot traffic pattern by retail location. A grocery environment that the consumer may visit twice a week has a rotating presence of sales representatives for maybe one week out of a month; the time spent in a department store may be one month out of a quarter to follow the distinct consumer visit pattern.