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Kroger vs. Visa: Who will win the interchange war?

April 18, 2019
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Recently, Kroger made big news by refusing to accept Visa credit cards at some of their stores in western states. “Visa has been misusing its position and charging retailers excessive fees for a long time,” said Mike Schlotman, Kroger’s executive vice president and CFO. “Visa’s credit card fees are higher than any other credit card brand that we accept. Visa’s excessive fees and unfairness cannot continue to go unchecked.”

Given reports of thin margins in the grocery business, this decision might save Kroger significant dollars in interchange. But will their customers support them?

Our payments research suggests a tough fight, but one that might be mismatched.

Kroger is the second largest grocery chain in the United States, with nearly $80 billion in sales in 2018. Visa is the largest credit card network, with nearly $2 trillion in sales in 2018, representing over half of all credit card purchases made – more than Mastercard, American Express and Discover combined.

According to our data, 34% of consumers, including 57% of upscale consumers, prefer to use their credit card for weekly grocery shopping. And 80% of consumers – 90% of upscale consumers – have a primary credit card that they use. (Raddon defines an upscale consumer as someone over the age of 34 earning at least $125,000 in annual household income.)

Consumers select a primary card for a number of reasons, according to our research. Chief among them is rewards, especially ones that are easy to use and redeem (named by 59% of consumers, and 68% of upscale consumers).

That tendency toward rewards is borne out in the research as well: 73% of consumers and 92% of upscale consumers have a rewards credit card. Put simply, the majority of Americans and the vast majority of upscale consumers have a primary credit card, and in most cases, that card is a Visa.

Given this degree of loyalty to their card, consumers will now be faced with a choice: Use a less-preferred card (assuming they have one; 29% have only one card) or use a less-preferred grocery store.

Costco has been able to enforce its power on credit card networks in large part because of its uniqueness. There are few substitutes for Costco for shoppers; therefore, they will adapt their habits. Kroger, in a far more competitive grocery niche, does not have that luxury. Consumers can choose Albertsons, Safeway, Walmart, Target, Publix, Giant – the list goes on and on. Kroger does not have a particular advantage in that market.

The research suggests that by restricting payment options, Kroger risks alienating customers, particularly the upscale customers who spend more on groceries. Kroger’s recent strategic moves, like adding cheese shops and widening their organic selection, seem geared to attracting those affluent customers most likely to be turned off by the credit card decision.

Finally, given Visa’s dominance in the credit card market (even larger when debit is considered), they have less to lose in a battle with Kroger.

If I had to guess, I’d expect Kroger to blink first.