This article was first published in the second-quarter 2015 edition of Personal Finance magazine.
I confess upfront: I am a Cape Consumers member. When I started my career in journalism at Die Burger, everyone working with me on the business section of the newspaper had a buy-aid account, but I’m not sure everyone understood how it worked. I certainly did not – as my research for this article has shown.
Like many people, I suspect, I use the card, enjoy the certainty of a cash windfall in my account at the beginning of the holiday season each year and don’t analyse the costs in detail.
Buy-aid organisations were founded in the 1930s and 1940s to harness the joint purchasing power of the collective to obtain cash discounts on goods. Buy-aid has remained more or less unchanged for three generations, so its greatest strength is also its major weakness as flashier credit/rewards schemes emerge.
The buy-aid model is similar to that of the co-operative, which is an organisation owned and operated by the people who use its services. Profits are shared among the members, rather than among shareholders, and members participate in the running of the organisation, as members of the board of directors or by making use of their voting rights at annual general meetings.
“Buy-aid organisations work for and on behalf of the members, who are also the shareholders and, ultimately, receive all the returns,” confirms Marthinus Fourie, the managing director of Cape Consumers.
Cape Consumers started in 1947 as the State Employees’ Buy-aid Association and is the largest of the purchase card groups, with 40 000 cardholders, more than 6 600 retailers accepting its b-Smart card, and an annual turnover in excess of R1 billion. As the website explains, “Cape Consumers negotiates discounts with selected retailers on behalf of cardholders. This discount is then paid as a bonus (in November each year) to the cardholders, based on their purchases for the preceding purchase year.”
The other main players in the market are Samba, established in Bloemfontein in 1938, with about 22 000 members; Pretorium Trust (1938), with 24 000 members; and Koopkrag (1937), which has just over 10 000 active account-holders. The Pretoria-based financial services co-operative Iemas also offers a buy-aid card to its members, who are the employees of contracted companies such as Sasol, Mediclinic and Mittal Steel. It is evident from this list that buy-aid is particularly successful among Afrikaans-speakers.
How buy-aid works
Originally, buy-aid members paid for goods and services with coupons and used cheques to settle their monthly bills. Today, all purchases are done with a card. Like a credit card, the card has a monthly purchase limit based on the income and affordability profile of the member. Exceeding the limit results in the transaction being declined.
Buy-aid cards, no matter the brand, are accepted by major retailers such as Woolworths, Shoprite, Checkers, Pick n Pay, Hyperama, Game, Dis-Chem, Pep Stores, Ackermans, Bata Shoes, Builders Warehouse, Shoe City, Cape Union Mart, Old Khaki, Poetry and Tekkie Town. Although retail is the dominant sector, buy-aid is accepted by some service providers with national networks, including the Mediclinic group of hospitals and Tiger Wheel & Tyre.
Each buy-aid organisation also negotiates discounts with regional providers, such as veterinarians, restaurants and bottle stores. In all, each has between 5 000 and 7 000 shops and services in its supplier network. They all also offer financial services such as personal loans, hire purchase, funeral cover, motor finance and short-term insurance, through providers such as Hollard, Mutual & Federal and Santam.
According to Fourie, Cape Consumers members use their cards mainly to buy groceries, with the remaining spend divided among clothing, pharmaceuticals, furniture, appliances, eating out and fuel.
Transactions are settled at a time agreed with the merchant, which is typically 45 days after month-end. Around the 20th of the month, the buy-aid organisation sends members their accounts, reflecting purchases from the 16th of the previous month to the 15th of the present month. Members must settle the total amount on the last working day of the month, and the organisation funds its operating costs by collecting interest in the period between receiving the money from members and paying the merchants. Interest is also earned on short-term loans, hire purchase agreements and budget accounts, which offer extended credit for between three months and 24 months. All the monthly payments on these financial products make a contribution to the annual bonus.
The amount must be settled in full at the end of each month, unless the member has a budget account arrangement. If the payment falls short of the total due, interest is charged and the member loses the bonus for that month.
The rates of interest vary: Cape Consumers, for example, charges six percent above the banks’ prime lending rate, while Pretorium Trust charges eight percent above prime. At the time of writing (February 2015), the prime lending rate was 9.25 percent, so these rates were 15.25 percent and 17.25 percent respectively. This is in line with the interest rates on credit cards over the same period: for example, Standard Bank’s Blue, Gold and Platinum credit cards were subject to interest rates of 22.65 percent, 20 percent and 16 percent respectively.
It should be noted that interest rates on budget accounts with buy-aid organisations are lower than the rates of interest on unpaid balances – for example, prime plus four percent at Pretorium Trust. As credit providers, buy-aid schemes are subject to the National Credit Act and the supervision of the National Credit Regulator.
The negotiated discounts vary from supplier to supplier, but are generally between two and five percent on retail purchases and up to eight percent on short-term insurance premiums. Discounts are not credited to members’ accounts immediately. Normal prices are paid at the till point, and, at the end of the year, usually in November, the discounts on all purchases during the preceding year are paid to you in the form of a cash-back bonus.
The buy-aid year runs from June 16 of one year to June 15 of the following year, so you wait for between five and 17 months for the benefit of the discounts you have earned. The bonus is credited to the card and used to pay for future purchases. There is no risk of forfeiting your bonus if you stop using your card for some reason during the course of a year, or even cancel your membership. Any credit balance you earn during the year, however small, is paid to you.
In 2014, Cape Consumers paid out R36 million to its members, Pretorium Trust members received R47.2 million, R34.33 million went to members of Samba and more than R13 million was given back to Koopkrag members.
Fee structure
Two buy-aid schemes – Cape Consumers and Pretorium Trust – impose surcharges on spending at certain retailers and all charge additional fees: card fees, administration fees, transaction fees and/or a levy on fuel purchases.
Surcharges
If buy-aid members do complain about anything (and by all accounts, it is rare), it’s about the surcharges, which are designed to compensate for very low discounts at certain retailers and to ensure that all members receive the same percentage bonus at year-end, no matter where they shop.
Cape Consumers levies a surcharge of between two and 2.5 percent at stores within the Shoprite Group and Pick n Pay stores, and of two percent at Woolworths and selected Spar, Seven Eleven and Fruit & Veg City stores. At Builders Warehouse, DionWired, Game and Game liquor stores, a surcharge of 1.25 percent applies. On my latest account, for example, I spent a total of R8 753.62 in 13 visits to Pick n Pay, Checkers and Woolworths stores and paid R201.53 in surcharges, which amounts to 2.3 percent.
Pretorium Trust levies a surcharge of 0.7 percent on purchases at Shoprite stores and at Pick n Pay and Pick n Pay Family Stores.
All surcharges are paid back to members at bonus time, but without interest. The two organisations that apply surcharges invest the income and earn interest on it to help with their costs – effectively, a form of interest-free borrowing. For members, the only benefit is a larger bonus at the end of the year, amounting to a form of short-term, enforced saving. (Bear in mind that some of this “saving” will have been without interest for you for 17 months.)
Anneke Heckroodt, the marketing executive at Cape Consumers, says surcharges were introduced about 30 years ago, when the level of discounts received from retailers began to vary significantly, as they do now. Some merchants offer two percent, while others offer a discount of five percent or more. If members received as a bonus only the discounts they had earned, their bonuses would vary significantly according to where they had done most of their shopping.
Cape Consumers has had a policy of always declaring a bonus – say, four or five percent – which applies across the board, to all members, and Heckroodt argues that surcharges are a way of avoiding cross-subsidisation between members. In other words, it prevents those who shop at the merchants with the higher discounts subsidising the bonuses of those members who shop at the low-discount retailers.
Monty Stephenson, the financial director of Cape Consumers, says the surcharges do not amount to a significant percentage of Cape Consumers’s turnover – less than two percent – and could be scrapped without putting the viability of the business at risk. A greater risk to the organisation, however, might be the reaction of members to the news that their bonuses would be variable in future, or significantly smaller. Surcharges almost double the bonus amount paid to members at year-end, so the real saving on buy-aid spending may be a net amount of, say, 2.6 percent, rather than a nice round four percent.
The following examples explain the effect of the surcharges on the bonus:
* A Cape Consumers member who spends R1 000 at Pick n Pay will pay a surcharge of R25 (2.5 percent) a month and receive a gross bonus of R40 (at a bonus rate of four percent) at the end of the year. The net bonus is R15 (R40 less the R25 surcharge), which is 1.5 percent of the R1 000 per month.
* If she spends R1 000 at Woolworths, she will pay a surcharge of R20 (two percent), but she will receive back a gross bonus of R40 (at a bonus rate of four percent). The net bonus is R20 (R40 less the R20 surcharge), or two percent.
* On the other hand, if she buys goods valued at R1 000 at Pep Stores or Ackermans, where no surcharges apply, the bonus on the transaction will be a net R40, or four percent.
According to Fourie, the Cape Consumers gross cash-back bonus averages four percent a month. Net of the refunded surcharges, the bonus is 2.6 percent, which compares favourably with the cash-back benefit received by members of some bank reward programmes.
Johann de Wet, the general manager of Pretorium Trust, says his organisation’s bonus in 2014 averaged 4.3 percent a month on purchases made, and the net bonus was 3.9 percent.
Transaction fees
Samba is the only buy-aid organisation that does not charge transaction fees. The other three charge a fee every time you shop in a store or spend on a service, and these fees are not refunded to members. Instead, they are used to cover bank fees and operating costs.
Cape Consumers’s members pay a transaction fee of 85 cents each time they use their cards at participating stores and service providers, and considerably more if they use their cards at pharmacies or to buy fuel at petrol stations, where the fees are a percentage of spend: 1.25 percent at pharmacies and 2.5 percent at petrol stations. This amounts to R3.75 on a pharmacy bill of R300 and R7.50 when you buy R300-worth of petrol. If you buy petrol once a week, you will spend at least R30 a month in extra transaction fees and R360 over the course of a year.
Pretorium Trust and Koopkrag charge 80 cents a transaction and 1.75 percent per fuel bill (R5.25 on a fuel bill of R300, or R252 over a year). Since transaction fees are not paid back to members and participating petrol stations and pharmacies do not offer discounts, the only beneficiaries of this arrangement are the buy-aid organisations. Heckroodt says these suppliers are part of the buy-aid network for the convenience of members, but it is a high price to pay for the convenience of paying with a card that allows you to delay payment to the end of the month.
In the account referred to above, the transaction fees on a total of 14 transactions in a single month was R11.90. Clearly, it is important to manage your spending so that you minimise the number of transactions. If you do small “bread and milk” purchases at Pick n Pay daily, you could incur twice the level of transaction fees, and if you opt for the “convenience” of buying your prescribed medicines and petrol on your Cape Consumers card, you could end up spending at least R50 in transaction fees, which will not be refunded at the end of the year. This is unlike a credit card, where no transaction fees apply.
Card and administration fees
Cape Consumers charges a monthly administration fee of R20 if you opt to take the Global Assist option, which gives you access to a range of services, from discounted security installations to emergency services. There is also a compulsory annual fee of R6 for cover against fraud in the event of the card being lost or stolen; and an annual service fee of R48 for each additional card issued on a member’s account.
Pretorium Trust requires a once-off membership fee of R10, and an annual card fee of R80. A card protection fee of R12 a year is optional. Samba charges an annual card fee of R165. Koopkrag charges R45 per card issued and levies a monthly administration fee of R3.50 per account (R2.50 if the account is paid by debit order).
Competition from loyalty schemes
Comparing the benefits of buy-aid with the benefits of other reward schemes is very difficult.
“It is important that people realise we don’t compete with loyalty cards,” Fourie says. “Our cards can be used with loyalty cards, such as the Woolworths card and Pick n Pay’s Smart Shopper card, so our members can get back a percentage of their spend on their buy-aid cards, as well as the points earned through retailers’ loyalty cards.”
The real competition is from credit and other transactional bank cards that can be used with loyalty cards but offer their own rewards based on frequency of use, such as First National Bank’s eBucks, Absa Rewards and Standard Bank’s uCount.
To arrive at the total amount of the rewards earned by buy-aid members, you need only deduct from the bonus amount the combined total of surcharges imposed over the year and all the transaction, card and administration fees. It is much more difficult to arrive at a net benefit from credit card reward schemes, because both the cards and the linked loyalty programmes have higher fees. uCount, for example, costs R240 a year, or R20 a month. It costs R200 to link eBucks to your credit card account; that is apart from the monthly credit card account fees.
All the buy-aid organisations believe they offer more value than the reward programmes of banks, by paying back a higher percentage of spend and depositing cash into members’ accounts.
“Our calculations show that the maximum the average member of a credit card reward programme will receive, after deducting costs, is 1.2 percent on purchases made. The Cape Consumers net cash-back bonus averages 2.6 percent,” Fourie says.
Willem Fritz, a Samba member from Bloemfontein, says his buy-aid bonus invariably beats the rewards he earns from his bank in any year, and it is very welcome in November. However, he adds that bank cards have the advantage of issuing rewards all year round, whereas “with buy-aid, you reap the rewards with a once-off amount at the end of the year”.
On the other hand, Suzanne Marais, a former Cape Consumers member, says she is benefiting more on the highest reward level of Discovery’s Vitality programme. “I get about 20 percent back from Discovery’s retail partners when paying with my Discovery credit card, although there are fewer merchants compared with buy-aid’s retail partners.”
The buy-aid groups argue that their reward structure is as fair as it can be: every member receives the same bonus percentage in cash in their account, no matter how healthy they are or how much they fly, and without having to accumulate points or improve their status in a tiered system.
“Our reward structure is simple and understandable. We offer a reward based on purchases only, no matter who you are or how much you earn. Whether you’re from Sandton or Daspoort, you’ll receive the same reward on your purchases,” Pierre Naudé, the general manager of Koopkrag, says. “Our members reap the rewards; we’re not working for shareholders. We provide a personal service that differs vastly from the corporate environment.”
The co-operative structure of the buy-aid industry is very different from that of the corporate rewards programmes, Loelie Huggett, the chief executive of Samba, says.
“The member is also a shareholder and has a direct financial interest in every aspect of the buy-aid scheme. All profits made are allocated to members. The main purpose of buy-aid is to maximise benefits for members, whereas the priority of banks is to keep shareholders happy by maximising profits,” she says.
Challenges
Despite a relatively simple reward structure and low costs (if you are careful about your pattern of spending), the buy-aid industry is struggling to build membership.
The cards are valid at participating merchants around the country, yet the schemes are little known outside of their traditional areas: Cape Consumers in the Western Cape; Koopkrag in Gauteng; Pretorium Trust in Pretoria; and Samba in the Free State and Eastern and Northern Cape.
Over the past decade, the rise of loyalty cards associated with big brand names has stolen their thunder, despite the argument that buy-aid can co-exist with loyalty programmes.
“A policy of word-of-mouth marketing has caught up with us,” Naudé says. “While the big brands have spent millions on boosting mostly inferior products, we’ve all but disappeared into the background. We’ve kept our members happy by distributing all profits, but we have not invested in our own futures.”
In the past, the buy-aid industry could rely on the loyalty of its client base, but as that client base gets older, it is faced with the challenge of attracting new and younger members while competing with highly advertised reward programmes.
An age analysis of Koopkrag members shows that 30 percent are below the age of 50, 41 percent are aged between 50 and 70, and 29 percent are older than 70.
“The challenge is to familiarise the general public with the buy-aid concept, to make it more attractive to younger people and to convince them that the card is more than a nice-to-have; it’s a must-have if you’re serious about saving on your purchases,” Naudé says.
Cape Consumers has three members of over 100 years of age who still use their b-Smart cards and earn bonuses. More than half of all members joined more than 20 years ago.
“Our cheese got moved,” Fourie says, referring to Spencer Johnson’s well-known book about coping with change. He believes strategic change and technological innovation are needed to build membership and to survive. “The older membership is very loyal, but you can’t rely on that for future growth. Innovation is crucial.”
Even the word “buy-aid” is out of date, he says, preferring to refer to “purchase cards”. So, over the past year, Cape Consumers has rolled out some changes. The card has been rebranded as b-Smart, and the organisation has moved offices from an old building in Cape Town’s city centre to a more fashionable space on the Foreshore. Online retailer Takealot is its new neighbour.
For Fourie, who joined Cape Consumers 18 months ago after 18 years in the banking industry, the move signifies the way the company is changing as it becomes part of the digital era. A revamped website will be rolled out in 2015, with a mobile app, and marketing initiatives will aim to increase the membership nationally.
Naudé says Koopkrag is continually modifying its products and offers to make them more attractive to the younger generation and to add value beyond the bonus on purchases. Funding marketing campaigns is a challenge, he says, given the business model.
“Being a members’ organisation, all our profits are divided among our consumer members, which doesn’t leave much for marketing expenses.”
According to Marijanka Foulds, Samba’s marketing manager, Samba has bridged the age gap and is attracting an ever younger membership. “Our biggest percentage growth over the past two years was in the age group 20 to 40. We also offer a card to students, which helps them to establish a healthy credit record at a young age and makes them aware of the benefits of saving. Samba cards are available only to students whose parents are Samba members,” she says.
Samba revamped in 2011, with new branding, an updated website and a new customer-care office with a modern look and feel. Over a five-year period, membership has grown 4.88 percent. “This is real net growth, after taking into account the number of members who departed for one reason or another,” Foulds says.
Besides its focus on the younger generation, Fourie says Cape Consumers is also paying close attention to the creditworthiness of applicants.
“Although we are registered as a credit provider, we don’t take on any undue credit risk. Our members should be in a position to pay their monthly accounts on basic-need purchases. According to our research, our ideal target market are people earning R10 000 or more a month.”
Fourie and Foulds are positive about the growth possibilities of the buy-aid industry.
“Internationally, there is an increase in co-operative enterprises. There are more than a billion co-operative members worldwide and 100 million jobs in this industry – 20 percent more than there are in multinational companies,” Fourie says.
WHAT’S IN IT FOR THE RETAILER?
The benefits of buy-aid schemes for the merchant lie in harnessing the buying power of a consumer group, guaranteed payment of accounts by the buy-aid organisation, and a reduction in credit card charges, because there are no Visa or Mastercard interchange fees on buy-aid card transactions.
Stores can rely on more feet through the door, particularly from the 16th of each month, when the new buy-aid month starts.
Samba members spent R872 million at participating suppliers in the 2014 financial year, while the member spend for Pretorium Trust in the same period was about R1.2 billion. Cape Consumers exceeded R1.1 billion, with double-digit growth forecast for the next five years.
Pick n Pay Family Stores were always part of the buy-aid supplier network, but Pick n Pay corporate stores, including liquor and clothing, joined the buy-aid network only in June 2014. Marthinus Fourie, the managing director of Cape Consumers, says Cape Consumers’s transactions are rising steadily at these stores. “The corporate stores, specifically in the Western Cape, showed growth of eight percent in food sales for the four months until November 2014, which we believe can, in part, be attributed to the Cape Consumer spend increasing compared to credit cards.”
David North, the head of corporate affairs and sustainability at Pick n Pay, says it is difficult to quantify the impact of buy-aid on sales, because some customers may have switched payment methods, for example, from credit card to buy-aid card. “But it has brought new customers who had not shopped in our stores before,” North says. “It is still early days and we expect the number of buy-aid customers to keep growing in the coming months.”
Marijanka Foulds, Samba’s marketing manager, and Anneke Heckroodt, the marketing executive at Cape Consumers, say buy-aid members are extremely loyal, trying to buy only at stores that accept their cards, which forms part of a dependable client pool for the merchant.
Loyal Samba member Willem Fritz confirms this. “I use the card at retailers that accept it whenever I can, even though I sometimes have to shop around,” he says.