So, the manufacturer of Sugar-oos, my favorite breakfast cereal, has placed a $1 off coupon in the Sunday newspaper ad inserts. I clip the coupon and head out to my favorite supermarket. I find my sweet nuggets on the cereal aisle and head to the checkout. The cashier takes scans the box and the coupon and accepts my payment. I head home to enjoy my sugary goodness secure in the knowledge that I have saved a buck.
But what happens next? What does the supermarket do with the coupon? Do they have to sort all the coupons they have collected that day and send them to the appropriate manufacturers? Who pays for that labor? What if the store made a mistake and the coupon was for the 48oz package, buy I only bought the 24oz package? How is the error detected? Why does the coupon have fine print that says something like “Cash value = 1/20th of 1 cent.” If I collect twenty of those coupons, can I get the store to give me a penny?
Even a modest supermarket is going to collect thousands of these irregularly shaped and valued coupons from hundreds of manufacturers in a typical day. How does it all work?
The grocery store gets the face value of the coupon plus 8 cents. The 8 cents doesn’t really cover their costs, but it makes people on coupon web sites say “They should love us. Look at that 8 cent profit they are making!”
The supermarkets bundle their coupons and send them to one of the clearing houses in El Paso Texas. The clearing houses take them across the border where they have cheap labor. They sort the coupons by manufacturer and send them to the manufacturer’s representative for payment. Depending on the level of service which the retailer selects, they eventually pay the retailer, minus their fee.
Of course, a store is free to send the coupons directly to the manufacturer, but this is cost-ineffective for all but the smallest retailers.
The “cash value” notation is because of the Kansas Trading Stamp Act. Coupons payable by third parties (not the retailer) are treated like trading stamps under the law. The law severely restricts the issuance of trading stamps, but makes exceptions if certain conditions are met. Coupon issuers believe that putting a cash redemption value on the coupon satisfies one of the conditions. Actually, most coupon issuers do not know why they put this on their coupons, but since everyone else is doing it, they figure there must be a reason. Of course, this is meaningless in practice. But I guess if you drive 20 coupons over to the Sugar-oos coupons processing headquarters, someone will hand you a penny just to get rid of you.
If the store sells 48 oz packages and bought enough of them recently to account for the coupons it accepts, it will probably get reimbursed for the coupon. The new barcodes that are on the coupon have a much greater level of detail than the old barcodes, so while it may have once been common for consumers to get away with redeeming for the wrong product, it’s harder to do now. Retailers have to be wary of stings being pulled by organizations like the Coupons Information Center that tries to catch them misredeeming coupons.
And retailers also have to worry about the manufacturer’s representative unilaterally declaring that there was some sort of fraud and refusing to redeem the coupons. One of the most frequent charges they use is that the coupons were “gang cut” and refuse to reimburse for them. “Gang cut” means that basically the coupons look too perfect and look like someone got hundreds of copies of the coupon circular from the printer and used a machine to cut them out.
I did free-lance work for a cash register dealer, doing custom support and modules for a specific cash register software product that he sells, mostly to mid-size supermarket chains and retailers.
He told me that the store managers have their kids working evenings for them, clipping coupons out of newspapers to redeem.
The cash register software, being old, does not support the new detailed coupon codes. I spent some time trying to program an add-on module to do it. I had a copy of all the specs to work with. Holy crap, what a complex system, from a programming point of view.
It sounds like an awful lot of work and expense for the retailer. What motivates them to play along with this setup? The store paid $X for my Sugar-oos, but is out $1 of their rather slim margin. Meanwhile, they still have to pay the cashier and all the other overhead it took to put those Sugar-oos in my basket. How long does it take for the store to recoup their dollar? How much of that $1.08 (including the manufacturer’s payment for handling) gets eaten up with fees from the clearinghouse?
My wife is OCD when it comes to coupon clipping. She takes the Sunday ad insert and rough cuts out each of the coupons that she wants. Then, she goes back and carefully cuts along the dotted lines. Could she be costing our retailer because her coupons are too perfect?
A long, long time ago in a previous life, I was a sales rep for a food manufacturer. On my route was a small independent, one store operation. He got busted for claiming more coupons than the quantity of product he had purchased. My supervisor informed me of this. I told the supervisor that the customer worked well with me supporting other products we carried, and to leave him alone. Nothing more became of it.
For small to medium retailers, the clearing house will usually take all of the manufacturer’s handling fees plus an extra fee for hard-to-handle coupons such as coupons without a readable barcode or coupons that are not for a fixed value (such as free item coupons). Plus there is usually a holdback which is used as a security deposit in case of late chargebacks. What large chains like Kroger and Safeway can negotiate, I don’t know.
Why do they go along with it? Mainly because of customers expectations and competition. The same reason they bag your groceries and take credit cards. Costco, for example, doesn’t take paper coupons, but they are working with different customer expectations and Sams Club doesn’t take them either.
Typically it takes a month or two from the time the clearing house gets the coupons to be reimbursed. Small retailers might send in coupons every month or two. Huge retailers might submit them much more often.
General MIlls’ coupon policy states “General Mills reserves the right to deny reimbursement for any coupons that exhibit signs of improper redemption, including but not limited to signs of gang cutting or similar cuts and tears, having been taped, having sequential number patterns, or being in mint condition.” Each and every coupon isn’t examined by hand, but if your store has a lot of OCD customers, they do run the risk of having their coupons rejected. Tell your wife to mix it up a little: cut some with a little extra on the top, some with a little extra on the bottom, some with an uneven cut, etc. In one major coupon fraud case, the perpetrator used a cement mixer to make the coupons look like they had wear and tear.
Some stores offer double or triple coupons – doubling or tripling the discount amount printed on the coupon. That always has seemed like a money losing proposition to me. Why do some stores offer that?
It’s a loss leader. They hope that people come in and buy a bunch of other stuff which offsets the loss and that it’s a reason to switch to that store from another one.
Holy shit, Alley Dweller. Good answers, but I feel terrible that anyone has to know so much about this industry (I feel safe in assuming you are not merely a coupon enthusiast.)
Publix now offers digital coupons that you redeem using a phone or by printing out a single barcode.
The newer cash register software has logic to catch this. Also using a coupon for an item you didn’t purchase at all. That’s why the cashier can scan all the coupons at the end (or even at the beginning, before scanning the groceries) and the software checks that the couponed item was included in the order, was the proper size (like if it’s limited to the 48oz size) and that you didn’t exceed the count (like the coupon says ‘good for 3 at this price’ and you buy 5 – you only get the X cents off on 3). The cashier is informed if a coupon isn’t accepted, and asks you. I’ve had it happen the bunch of coupons I gave them included one for an item I decided not to get – the machine beeped and the cashier gave me the coupon back. Lately I’ve even had the cashier scan all the coupons first thing, before the groceries. The machine saved them, and applied the discounts at the end of the order (I checked the receipt to see that it worked).
But the manufacturer can always fall back on the manual check Alley Dweller mentioned – compare the number of coupons the store returns to the number of the product they bought. Of course, that’s not foolproof, because in busy supermarkets, many (most?) of the customers don’t use coupons. Recently I managed to lose a coupon somewhere while I was shopping – I mentioned that to the cashier, and he said ‘no problem; I’ve got one here’ and scanned it’. That’s technically misuse, but they aren’t likely to get caught at it.
The difficulty might be that this makes it much easier for a store to cheat a manufacturer, by redeeming e-coupons that they never had. An employee with a smart phone runs that $1 off e-coupon thru the register hundreds of times, at $1.08 profit for the store each time. There’s nothing like the manual cross-check of the number of physical coupons that Alley Dweller mentioned.
It’s also about price elasticity. (Or “first degree price discrimination.”) A certain number of consumers (most of those who buy a particular product) will pay the “regular” price. But there’s a certain number, too, who will buy the product only at a lower price, and are willing to go to the trouble of cutting out and redeeming coupons in order to get it at that lower price. (The rest won’t go to that trouble.) Both the manufacturing and store are still making some profit with the coupon consumer, and they’re making a sale that otherwise wouldn’t have happened.
They’re already doing it. Major market chains now have smart phone apps which will give you the discount (through your registered “loyalty card”) only if you open the app and click on the particular item you want. And even though you’d think this eliminates the inconvenience factor upon which coupons are based, apparently it doesn’t. Research indicates that the resulting sales are the same as with coupons that you physically cut out.