Paying Dividends

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Paying Dividends

By Mitch Morrison - 05/13/2003
Cutthroat phone wars have made the cost of a simple residential call comparable to that of penny candy. For barely more than a nickel a minute — and sometimes less — families can talk from Tacoma, Wash., to Teaneck, N.J.

This telecommunications revolution has extended consumer benefits to prepaid cards, arguably one of the fastest-growing and most dynamic categories in the convenience sector.

Tracking the category's precise growth remains a challenge. According to the CSNews Industry Report, prepaid telecommunications in 2001 soared to $677 million in c-stores, an increase of 61 percent from 2000 — and many experts say the growth continued at a similar clip through 2002.

Interviews with retailers and prepaid providers underscore the rapid ascent and popularity of prepaid, a phenomenon closely linked to the increasing ubiquity of cellular phones, Web surfers and the emergence of Internet kiosks at cafes and retail outlets.

"Whether it's prepaid cell phones or the iGEN MasterCard or Internet, it continues to grow in our company," said Chad Breheny, director of corporate development at West Des Moines, Iowa-based Krause Gentle Corp., operator of the 300-plus Kum & Go chain.

"We carry just about everything that's out there," he said of the popular checkout product. "We see the movement for prepaid cell phones growing rapidly. You purchase a cell phone for, say, $99 and instead of paying a monthly bill, you come to us and pay $30 or whatever amount you want and load up."

Unlike traditional cell-phone cards, Kum & Go sells airtime, passing along a PIN number that is tied to the provider.

"They're lower-margin items but you don't pay for them until you sell them," Breheny said. "If you buy cases of candy bars and they sit, you're stuck with inventory until you sell them all off. Here, they bill you about five days after you sell them. So there's no upfront risk."

The plethora of providers and prepaid options is reminiscent of the enthusiasm captured in the early dot-com rise. Each day, it seems, a new card company pops up and a new name or gimmick is marketed. A recent visit to a local c-store found 1-cent and 1.9-cent phone cards, along with the more common 6- and 7-cent prepaid cards.

"There are a lot of guys who promised a lot and went out of business," said Steve Loehr, vice president of operations at Kwik Trip Inc., the La Crosse, Wis., operator of some 350 stores. "You've got to be careful or you could be stuck with cards of companies that no longer exist.

"The telecom industry has gone through a lot of gyrations. You have to do your research and go with someone you think is going to be around for a while," he said.

New Attitude

It wasn't long ago that prepaid cards were targeted for the credit-deprived, the cash-strapped and the college crowd. But a study last year by market research company The CPR Group cast aside such thinking when it reported that more than half the highest-income households have used prepaid phone cards.

"Initially, prepaid appealed to more transient people, possibly lower-income people who'd have trouble entering into long-term contracts," said Jon Hauptman, vice president at Willard Bishop Consulting Ltd. of Barrington, Ill. "But today, with everybody on the move, it makes prepaid a much more appealing offering."

Hauptman praised the emerging category as another solution to providing consumers access to services without requiring detailed credit checks or invasive background searches or meddlesome activation fees. Although prepaid is wending its way into a broad array of retail outlets, he does not expect saturation to slow sales anytime soon.

"I don't believe prepaid will lose its appeal even when it becomes more widely available because it fulfills consumer demand for non-cash options," Hauptman said. "It's a natural extension of the growth of debit-card usage. For consumers, it serves as a way to create a sense of order and structure. They can regulate their spending and track their spending."

Indeed, the business continues to boom. Boston-based telecommunications market research group Atlantic-ACM said revenue for prepaid long distance hit $3.6 billion across all retail channels last year and is projected to hit $4.1 billion this year. Even more impressive, prepaid wireless is expected to climb from $3.3 billion to $4.5 billion in 2003.

In that vein, it's not surprising that prepaid distributor Austin International Marketing & Investments reported a sizzling 2,600-percent increase in the eight-month period extending into March. Average per-store sales for the Overland Park, Kan.-based company have soared from $500 last spring to $2,000 this year, said CEO Joseph Bodine. "As post-paid gets more competitive," he said of the telecommunications sector, "prepaid plans are following with more aggressive pricing. You're not finding the 20-cents-a-minute for domestic calls that you had a couple years ago."

Prepaid Branching Out

Open that birthday card. Good chance you'll find a $20 Blockbuster Card or $15 Starbucks. You might even find a gas card for $25.

Miami-based Blackstone, one of the first private companies to embrace prepaid in the mid 1990s, sees unlimited uses. In addition to the traditional telecommunications line, the company produces gift cards and has more recently introduced a program for Florida's motorists to pre-pay for a four-hour traffic safety course that can be accomplished online.

"We consider prepaid to be a category, not a product," said Clare Morgan, Blackstone's communications director. "Consumers have become more savvy and more aware of their budgets and want to control their spending or the spending of their children. It's a budgetary tool that has unlimited applications.

"I think you're going to see it with all future generations who have seen their parents struggle with credit-card debt and consolidation. It's not just an ethnic or age-related product anymore," she said.

One prominent c-store chain is employing prepaid credit cards. It's been a year since The Pantry Inc., the Sanford, N.C., operator of roughly 1,300 stores, unveiled the iGEN card created by MasterCard and Next Estate Communications.

To date, the program's performance has been respectable but hardly dramatic. "We're relatively happy," said Steve Ferreira, The Pantry's vice president of administration. "It's not going to replace Marlboros, but it has a place here."