Kmart rolls out loyalty credit card

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Kmart Holding Corp., in the thick of a $100 million lawsuit against Capital One, this week launches a loyalty credit card aimed at getting customers to buy more products and visit its stores more often.

The Kmart Rewards card offers a $10 gift certificate with the first purchase of $50 or more, and an additional $10 gift certificate with each $250 spent at Kmart. In order to boost sign-ups during the holiday season, Kmart will offer no interest and no payments for 90 days on purchases over $100.

building database

"This is one of several tactics to help us with conversion and frequency," said Paul Guyardo, Kmart's chief marketing officer. At the same time, the card will enable Kmart to build its database, improve its customer relationship management and market directly to its customers through private sales and extra promotions throughout the year.

Kmart plans to market the no-fee card through in-store and out-of-store campaigns, including promotions in Sunday circulars, online at, and through greeters at about half of the stores in the chain, Mr. Guyardo said. In addition to the credit card, Kmart also plans signage throughout the store to increase sales, such as one saying every new pair of shoes deserves new socks. Display ensembles will showing complete outfits such as tops, skirts, shoes and handbags.

The new card comes as Kmart continues its legal battle in Michigan Circuit Court over a co-branded credit card Kmart and Capital One launched in 2000 which, unlike the new Kmart-only card, could be used both at Kmart and at other retailers. Kmart is seeking $100 million to compensate for "harm to its brand, reputation, goodwill and trademarks," the retailer said in court documents.

Mr. Guyardo declined to comment on the lawsuit. Capital One did not return numerous calls, but in court filings responding to the suit it denied most of Kmart's allegations. In regard to forcing Kmart holders to other cards, Capital One specifically denied "that any cardholder was improperly coerced."

HSBC Retail Services, provider of credit cards at retailers including Saks Fifth Avenue and Best Buy, is issuing the new Kmart cards.

In the suit, Kmart said it was the victim of a "massive bait-and-switch." Historically, Kmart's customers had been considered subprime by lenders. Its first credit card, launched in 1996, became problematic because only 20% of applicants were being accepted for credit. When it switched to Capital One, Kmart anticipated a higher acceptance rate for its customers and expected the card would generate more than $5 billion in incremental sales over the contract's five-year term.

The deal required Capital One to pay Kmart fees, which included $1.50 for each new Kmart account and up to 1.5% of each purchase at Kmart made with the Kmart Card as well as additional revenue from purchases made on the Kmart co-branded card at other stores.

At first, sign-ups went well, with 4 million Kmart customers using the card. By the third year, as Kmart struggled with bankruptcy, and Capital One was having its own difficulties with government regulators, Capital One began to move its business toward consumers considered better credit risks, the suit alleges. "In admitting its intent to move away from what it calls the `subprime' market-the very core of Kmart's customer base-Capital One was also admitting that it was turning its back on Kmart," documents filed in the case stated.

In its suit, Kmart said Capital One spent $55 million in marketing to back the co-branded card in the contract's first year, but, in a "bad-faith sabotage of the program," committed no marketing money subsequently when the retailer expected between $30 million and $40 million in marketing support.

The case is set for trial June 20, 2005.

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