Having the right rewards card can beat coupon clipping
Dear Cashing In,
At one time, it was touted that supermarkets’ bottom-line profit was one-half of 1 percent. How can they afford to give back rewards? – Art
If I were in the business of grocery store marketing, I would flip that question around: With such a small profit margin, how can supermarkets afford not to offer rewards?
Nowadays, across many different industries, rewards and loyalty programs are understood as an important marketing expense. You offer something of value to people to lure them in, then hope they spend money on things that make you a tidy profit.It is true that grocery is a low-margin business compared with other industries. According to the Food Marketing Institute, a trade group, grocery store chains had a net profit after taxes of 1.5 percent of sales in 2014. In the past 20 years, the yearly average has been closer to 1 percent, with the lowest figure being 0.49 percent in 1992-93 (though the trade group says that figure was pulled down by account changes and other one-time events).
The average profit margin across all industries is more than 6 percent, according to a study by the New York University Stern School of Business.
To make money, then, supermarkets must rely on selling a lot of goods, since the profit margins on individual items tend to be so low. Maybe they lure you in with a deal for 30 cents off a can of baked beans, in hopes you will do all your shopping there. In addition to the few cents they make off the beans and other low-margin products, they hope you’ll buy something that makes them more money, like shampoo.
Credit card marketing works the same way. Many reward cards try to entice you to sign up: “50,000 free points!” “No annual fee for the first year!”
Then once you have the card, they hope you hang on to it and use it. The bank makes money from the retailer every time you use the card, and from any annual fees and interest you pay.
If you’re asking how supermarkets can afford the rewards for credit cards that give bonuses for spending on groceries, you should know that supermarkets have nothing to do with that. Banks set and pay for the rewards structures for their cards.
Some examples of cards that give extra reward points for spending at the grocery store include:
- The BankAmericard Cash Rewards Visa (no annual fee, 2 percent back on groceries, 3 percent back on gas, 1 percent on all else).
- The Blue Cash Preferred® Card from American Express ($95 a year, 6 percent back at U.S. supermarkets on up to $6,000 in purchases per year, then 1 percent, 6 percent back on select U.S. streaming services, 3 percent back on U.S. gas station and transit purchases, 1 percent on other purchases).
- The Blue Cash Everyday® Card from American Express (no annual fee, 3 percent back at U.S. supermarkets, 2 percent at U.S. gas stations, 1 percent on other purchases). There are several others, and there are also cash-back cards that give as much as 2 percent back in cash.
While it might seem like you are beating the system by getting 2 percent back at a grocery store that is making only 1.5 percent in profits, the grocery store is still getting its money. The bank is paying for those rewards, and it is still making money off you in other ways. Credit cards are the most highly profitable banking segment, according to the Federal Reserve.
So if the rewards are working for you, stick with it.
See related:Cash back credit card reviews