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Best Buy Increases Loyalty Rewards in Move to Spur Sales

04/03/2013 | 12:48pm US/Eastern
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--Reward Zone credit-card holders to get 5% back in towards future purchases, up from 4%

--Move is latest in CEO turnaround plan to reverse sales slide

--Follows other attempts to throw off perception of Best Buy as showrooming victim

By Joan E. Solsman

Best Buy Co. (>> Best Buy Co., Inc.) is increasing how much it rewards customers who use its loyalty-program credit cards by 25%, part of its chief executive's plan to turn around the struggling retailer and increase purchases of higher-priced items.

Starting Sunday, Best Buy will give 5% back in rewards points to customers paying with a Reward Zone program credit card or MasterCard, up from 4%.

The increase puts Best Buy's rewards program at the high end among retailers, indicating the pressure it's under to spur sales. The company hopes the higher points, good for future purchases, will prompt purchases of bigger-ticket products, which it will need to offset the potential dent to profit from higher rewards.

The move is the latest attempt by Chief Executive Hubert Joly to revitalize the retailer, where sales at longstanding stores have stagnated for the past four years as consumers increasingly go online to make purchases, especially technology products. Mr. Joly has said enhancing Reward Zone will play a part in accelerating online growth, one of Best Buy's top turnaround priorities.

Since becoming chief executive in September, Mr. Joly has been aggressively trying to increase sales. During the holidays, Best Buy instituted a price-matching program that gave the same price to customers who found the same item elsewhere online for less. The strategy helped Best Buy post a rare quarterly increase in U.S. same-store sales without hurting the company's profitability. The company made the policy permanent in February.

B. Riley analyst Scott Tilghman said Best Buy and other operators of voucher-based rewards have found that every $1 in certificate face value tends to reap $2 in purchasing. And, of course, a fair amount of points go unused.

"The cost is relatively minimal because more than likely they will make it up on increased sell through," he said.

An increase to 5% from 4% may seem like "small potatoes," said loyalty program expert Rick Ferguson, vice president at Aimia, a Montreal loyalty marketing and analytics provider. But the industry generally regards 5% "as the 'sweet spot' for motivating consumer incremental spend and behavior change," he said.

Under the rewards arrangement, members also will have the option to choose 0% financing instead of points.

Mark Williams, president of Best Buy financial services, said the 5% change makes the reward competitive with the high-end of what is offered by competitors.

Target Corp. (>> Target Corporation), for example, offers a 5% automatic discount on purchases made with its "REDcards." The difference, though, is Target puts the cash back in customers' pockets, while Best Buy's reward gives credit toward more spending at the store.

Mr. Williams said the company has found its most loyal customers prefer accumulating the points for aspirational, high-price items.

Michael Pachter, a Wedbush Securities analyst who is bearish on Best Buy, said the "very high" 5% level would grab loyal customers' attention. However, with Best Buy's slim margins, giving away an additional percentage point of sales is significant.

Nontheless, the move should slow market share loss to Internet retailers like Amazon.com Inc. (>> Amazon.com, Inc.), where lower prices and taxes can stoke shoppers to use Best Buy like a showroom to browse products without buying.

Best Buy launched the Reward Zone program nearly a decade ago. At the time, the program was considered ahead of the curve in terms of mining data to gear selling strategies to shopper types and influence store design, but those advantages eased around the time the recession hit.

This is the first major change to Reward Zone credit cards since 2010, when the store increased the reward to the current 4% from 2%.

Write to Joan E. Solsman at joan.solsman@dowjones.com.

Stocks mentioned in the article : Best Buy Co., Inc., Target Corporation, Amazon.com, Inc.
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