Target May Find It Hard To Promote Its REDcard With The Data Breach Repercussions

Last year, Target (NYSE:TGT) was hit by one of the biggest data breaches in the history of U.S., in which personal information of close to 70 million shoppers was stolen. Following the breach, the retailer’s sales declined meaningfully as a significant number of  buyers lost trust in the company. While Target has taken several steps to ensure that its customers are not liable for any fraudulent charges, rebuilding buyer confidence will be a strenuous task. More than anything, Target will find it extremely hard to promote its REDcard rewards program now, which has been very crucial in stimulating consumer spending at Target historically. REDcard buyers tend to spend significantly more than regular customers and visit stores more often. Over the years, REDcard penetration in Target’s overall customer base has increased tremendously driven by the popularity of its benefits. However, after the revelation of the breach, Target’s customers might be reluctant to use debit and credit cards for payments, and the retailer will have a tough time promoting its rewards program.

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REDcard Is Extremely Important For Target

For several years now, Target’s REDcard rewards program has played an important role in attracting value conscious customers. The 5% reward loyalty program allows customers to save money when they shop at Target stores using its brand credit card or debit cards. The company has stated that its REDcard customers tend to visit twice as often as its regular customers and spend about 50% more. Over the past three years, REDcard penetration in Target’s overall customer base has increased significantly. From 5.9% in 2009, the figure jumped to 13.6% by the end of 2012 and soared to 19.3% in 2013. REDcard’s importance for the company can be gauged from the fact that the proportion of buyers who spend more has been increasing at a robust pace. It is clear that Target would want this trend to continue in the future. 

Data Breach Can Impact Its Soaring REDcard Penetration

Halfway through the month of December, Target revealed that hackers broke into its system and stole details including credit/debit card information of close to 70 million guests. This had a meaningful impact on the retailer’s sales as buyers eluded the company in the wake of compromised credit/debit card security. Target responded promptly to this situation as it ensured zero liability for fraudulent charges and deployed several initiatives to prevent recurrence of such an event. The breach was revealed in mid December and by February, financial institutions had replaced about 85% of cards affected by the breach at Target free of cost. The company also increased fraud detection of REDcard holders and provided them with credit monitoring and identity theft protection. It started equipping  its stores with advanced chip-enabled technology for additional security. Following the theft, Target hired Verizon Enterprise Solutions to investigate and plug the loopholes that caused this breach.

Despite these efforts, rebuilding buyers’ faith in the payment system won’t be easy. That means, Target will have a tough time in pushing its REDcard rewards program that requires buyers to share their personal details and use their credit/debit cards for payment. According to Emily Collins of Forrester Research, consumers are always concerned when it comes to sharing data. They are worried about phishing scams and theft of identity. ^[1] It is likely that the recent data breach will make it hard for Target to compel customers to use credit and debit cards for payments. This will ultimately decelerate its soaring REDcard penetration, putting a downward pressure on its revenue per square feet growth.

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1. Loyalty programs could feel Target data breach fallout, CNBC, Jan 14 2014 [↩]