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    Prepared for Prepaid

    Retailers look to new technologies for handling exploding category.

    Long-distance phone time. Wireless time. Residential service. The number and types of prepaid products handled by c-store employees is growing faster than a teenager's phone bill.

    In the store, this could mean a plethora of phone cards, each with merchandising and inventory challenges, many as vulnerable to theft as cash. To reduce shrink without hurting sales or profits, retailers are looking at new ways to display and activate these often high-margin products and services. Many are migrating away from batch-activated cards — cards activated in groups and held "live" at the store — to point-of-sale (POS)-activated cards or those printed at a terminal loaded with personal identification numbers (PINs) at the time of sale.

    "Live cards pose an inventory problem and have to be kept in a secure location," said Howard Segermark, executive director of the International Prepaid Communications Association, based in Washington, D.C. Unfortunately, many of today's prepaid items are still handled while activated.

    Giant Industries Inc. is one chain, however, that has overcome the challenges of selling live cards. "On a day-to-day basis, control is not an issue for us," said Mike Polo, director of retail marketing for the 160-store chain based in Scottsdale, Ariz.

    At Giant, prepaid products are treated like any other inventoried item. Batch-activated cards, including country- and region-specific calling cards, Internet shopping cards and, at its Conoco-branded sites, gift cards, are subject to physical audits. The phone cards are put into inventory and activated by the store manager when they arrive at the store. A number of the cards are kept available for sale in each cash drawer, the rest are in a safe, accessible only to the store manager or other authorized personnel.

    The phone cards, which are offered in denominations of $5, $10 and $20, are treated as cash during shift changes. "We have log sheets on which the cashiers record the cards' beginning and ending serial numbers and account for any sales during the shift," said Polo, noting each type of card has its own PLU key on the store's register. "It's a manual process, but it has been very effective in terms of inventory control. They account for the cards just like they account for cash and cigarettes sold during their shift."

    Unfortunately, limited access of batch-activated cards may lead to limited sales in some c-stores, according to suppliers.

    "We found many phone cards are sold on the third shift," said Randy Cherkas, president of GTS Prepaid Inc., a Marlton, N.J.-based company that sells prepaid phone cards, prepaid wireless time and prepaid Internet access. "But the manager may have locked the batch-activated cards up for that shift, which can lead to out-of-stocks. Plus, a retailer has to depend entirely on signage to merchandise them."

    Giant, however, has had success promoting its batch-activated cards, and has not received any customer complaints about out-of-stocks. "Merchandising them has become second nature to our employees, like having enough cigarettes stocked for each shift," Polo said.

    Giant and other retailers also sell some of their phone cards through vending machines. Others have tried dispensing the cards through ATM machines.

    "We want to have the highest-velocity cards in the highest-veolcity stores available to consumers without the consumer have to stand in line for a counter transaction," Polo said. "Other cards, such as the CashX Internet shopping card, Conoco gift card and the Central/South America specific phone cards are sold over the counter in all locations."

    There may be a downside to vending and ATM merchandising ploys, however, if used exclusively. Though they may reduce theft, vending machines and ATMs limit the number or type of cards a retailer can offer. "You usually see $5, $10 and $20 cards in vending machines," Segermark noted. "It is hard to offer a variety of cards. If the cards are behind the counter, it is easier to offer a wider line."

    Batch-activated cards may create another problem. "If you sell all of the activated cards, someone has to make a call to activate another batch," Cherkas noted. "Who knows how many unactivated cards have been sold."

    Expiration dates, found on many suppliers' batch-activated cards, can be problematic, too. If stores build up an inventory of cards more than six months old, retailers should call a customer-service number to see if the cards on hand may still be used, Segermark advised. "Many phone cards today expire 90 days or six months after their first use. These are easier to handle than those with a certain expiration date."

    Some, like the GTS Phonecard, never expire. "'If employees aren't too good at first in, first out, a store may get down to two or three cards of a certain denomination in the till, activate another batch, then let those two or three older cards sit there while others are sold," Cherkas said.

    Also, while fewer in number now, some suppliers still make batch-activated phone cards with exposed PINs, ripe for unauthorized use, Segermark warned.

    Many prepaid phone-card suppliers, however, are looking to diminish the risks associated with live cards by developing better tracking systems. TekTel Marketing Inc., for instance, designed a "control number log" for its wireless phone cards, which are handled live. Every five-pack of cards carries two control number logs that list the serial numbers of each card in the pack. One log stays in a secured place. The other is kept at the checkout. With each sale, the cashier checks off the number of the card sold. "Even if someone steals the whole cash drawer, we can shut the individual cards down," noted Jay Johnson, COO of the Temple, Texas-based company.

    Service with a Swipe

    Not every retailer has been able to control live, batch-activated cards as well as Giant has. Others are migrating to cards activated at the POS with a swipe through a credit-card reader.

    "Batch-activated phone cards are almost a thing of the past," Cherkas said. "There will be retailers who don't want to switch, but almost none of the chains we work with sell them now."

    Looking for a better way to sell prepaid phone cards, Plaid Pantries Inc. moved from batch-activated to POS-activated cards approximately a year and a half ago. The 105-store chain based in Beaverton, Ore., sells phone cards in denominations of $10, $20, $30 and is adding wireless time cards to the mix this fall.

    "Anything we do now in the area of prepaid cards will be POS-activated," said merchandising manager Butch Fulton. "Going to POS-activated cards has taken 98 percent of the shrink out of the cards."

    Employees activate the cards by swiping them through the store's Verifone credit-card terminals, then ring them up on the touchscreen POS system, which has a PLU button for every card denomination. As more prepaid cards and other products are added to the mix, Plaid Pantries will reprogram the POS system, just as it did the card-swipe terminals.

    "Programming the card swipes was virtually pain-free," Fulton said. "Our IS department did the POS touchscreen internally. Then each store manager simply swiped a card that informed the terminal to start activating the phone cards."

    Because Plaid Pantries' supplier, U.S. South Communications Inc., provides real-time reports on sales by store, by time of sale and by register, card sales may be easily tracked back to the cashiers on duty. Personnel with access to a secured Web site can look at sales trends and compare the number of cards sold to incoming invoices.

    Moving away from live cards also solved Plaid Pantries' merchandising and out-of-stock problems. "We can have hundreds of cards sitting all over the stores, because until the cards are brought up front and swiped, they are worth whatever a piece of plastic is worth," Fulton said. "Merchandising the cards around the store has definitely increased sales. The excuse of not having cards accessible to sell has totally gone away."

    Some retailers are creating kiosks for merchandising all types of prepaid items (see "Faster Than Rabbits: Prepaid Items Multiply"). With swipe-activated cards, the denomination may be set at the checkout, enabling retailers to merchandise tear-off pads of a single card, which customers take to the checkout for activation, Cherkas noted.

    At Plaid Pantries, a supply of unactivated cards is kept at headquarters. Cards are sent to the stores as supplies get low, upon the request of the manager. They are merchandised on clip strips throughout the store and on a display rack at the checkout counter. "As we add different types of cards, we will use a larger display at the check stand, possibly a three-sided spinner rack," noted Fulton. "We'll also use more clip strips around the store."

    At Kocolene Marketing LLC's 72 FastMax stores, swipe-activated cards are merchandised at cooler doors, near the fountain area, "all around the stores," noted Doug Prather, vice president, operations, for the Seymour, Ind.-based chain that offers prepaid phone cards and, in some stores, a Mexico-specific card.

    "With our old program of live cards, we did virtually no merchandising, except for a small amount of signage," Prather said. "When you are not merchandising well, the cards do not move. Now, with the cards activated at the time of sale, we have our money before we have to pay for the cards."

    With most POS-activated systems, if a card is activated in error, it can be deactivated, then activated again later. "Our company policy is for the associate to collect the money before the card is swiped, but sometimes that doesn't happen," Plaid Pantries' Fulton said. "If a customer decides he doesn't want the card anymore, or the wrong kind of card is swiped, the associate just has to punch a code into the terminal and swipe the card again to deactivate it."

    But some swipe systems don't allow deactivation and reactivation and require the retailer to notify the supplier to shut off an activated card. Or, it could be held by the cashier in the drawer like cash until sold to the next customer who wants one.

    While cards that have not been activated are more accessible to the customer, they may pose a merchandising challenge in stores that offer a wide variety. "The cards can be put in front of the customers' face," Cherkas said. "But many retailers are selling many types of cards — long-distance connection cards, flat-rate cards, international cards to specific countries — plus they may have a number of denominations for each card. It can be a problem displaying all those SKUs and keeping them all in stock on a display."

    Another challenge in implementing and properly accounting for swipe-activated cards is synchronizing the billing period. "Since retailers only pay for the cards after they are activated, we have to make sure our clocks are on the same time the chain uses for billing," noted Wayne Washer, U.S. South's executive director of sales. "A 'day' may start at 6 a.m. or 12:01 a.m. That will change the number of cards sold during a billing period."

    Still, POS-activation systems are easy to use and easy to manage, said Shane Palmer, marketing director, for Encompass, a wholly owned member of the Network Operator Services Inc. group, a communications company in Longview, Texas.

    "That is what is driving the business," he said. "[In five years] you will probably find in the c-store industry point-of-sale activation will become more dominant."

    Bottom line: Today's retailers are looking at new technologies to better manage their prepaid programs — but nothing is foolproof.

    "There are so many different cards offered," Polo said, "it can be confusing for store employees to keep them all straight."

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