Rewards Network Inc.

views updated

Rewards Network Inc.

2 North Riverside Plaza, Suite 950
Chicago, Illinois 60606
U.S.A.

Telephone: (312) 521-6767
Toll Free: (877) 491-3463
Fax: (312) 521-6769
Web site: http://www.rewardsnetwork.com

Public Company
Incorporated: 1984 as Transmedia Network
Employees: 400
Sales: $93.25 million (2004)
Stock Exchanges: American
Ticker Symbol: IRN
NAIC: 561499 All Other Business Support Services

Rewards Network Inc. operates reward and loyalty programs for the hospitality and credit card industries. In 2004, Rewards Network's 3.8 million card members could choose from nearly 22,000 restaurants and merchants. Rewards Network's main U.S. regions of operation are New York City (which typically accounts for 40 percent of its revenues) and southern Florida. Rewards is headquartered in Chicago and has a support center in Miami.

The company provides restaurants with interest-free loans in exchange for blocks of meals sold to Rewards Network for half price. The company also has a program for restaurants to offer discounts on specific off-peak times. In addition to straight discounts on restaurant meals, members receive reduced hotel room rates and frequent flyer miles.

From Security Alarms to Media Barter: 1963–84

The founder of Rewards Network Inc., Melvin Chasen, took the long road to success. Beginning as a young entrepreneur in Colorado, Chasen had experimented with everything from selling security alarms to running a mergers-and-acquisitions firm before he settled on the media barter concept that became Rewards Network's business model.

In 1963, while still in his early thirties, Chasen founded his first company, Midway Enterprises Inc., in Colorado. Within five years, it had evolved into Pike's Peak Turf Club and by 1974 became Pike's Peak American Corporation. In the early 1980s, Chasen, with the help of ad agency executive Hank Seiden, entered the media barter industry. In media barter, companies buy up blocks of advertising from media outlets such as newspapers, radio, television and exchange them with companies for their excess merchandise or services. Often such companies will get an advertising equivalent to the wholesale price of their goods or services rather than having to settle for the heavily discounted price they would charge in a closeout sale.

To capitalize on the media barter idea, in 1983 Chasen renamed his business Transmedia Network and located it in New York City, where he began arranging advertising-for-services exchanges between radio stations and potential radio advertisers who needed ready cash. The majority of these companies were restaurants, which because of the dining industry's notoriously high turnover and thin profit margins were often unable to get loans from banks. Early on, Transmedia also operated as a media placement firm, earning 15 percent commissions on ad space purchased from such publications as New York magazine.

By lining up $500,000 in investment capital through the private placement market, Chasen financed Transmedia's early growth and merged the company into a public shell corporation in 1984. In exchange for financing his new business, Chasen's investors insisted that he run it, and in 1983 Chasen introduced the Transmedia card through which restaurant goers could receive 25 percent off meals at restaurants that had bartered meals for blocks of advertising. Chasen soon discovered, however, that restaurants much preferred cash to advertising space, and despite his own tight cash reserves he began offering pure cash advances to restaurants that agreed to accept the Transmedia card. The change in strategy paid off immediately and cash-strapped restaurants began lining up for Transmedia loans.

The amount of money Transmedia loaned restaurants was based on their reputation and capital needs as well as the amount of time Chasen estimated it would take Transmedia's cardholders to "pay off" the loan through restaurant visits. In exchange for a $5,000 interest-free loan to a restaurant (the standard amount Transmedia loaned to a new restaurant), Transmedia received $10,000 in meal credits, which Chasen anticipated would be used up by Transmedia cardholders within six months. Since restaurants' actual cost for food and beverages ranged from only 30 to 40 percent of the cost charged to customers, Chasen's major obstacle was not in finding restaurants willing to participate, or investors willing to loan Transmedia capital, but in getting consumers to believe they could get 25 percent dining discounts without some "catch." When even ads offering to waive the $50 membership fee for new members failed to do the trick, Chasen began hawking the Transmedia card to teachers' unions, law and accounting firms, police departments, and other professional groups to widen Transmedia's member base.

Working in Transmedia's favor were the features that made its card an improvement over earlier incarnations of the discount dining concept; no coupons had to be clipped and presented, maitre d's and waiters did not have to be forewarned that the customer intended to pay with the Transmedia card (though large parties had to make reservations in advance through Transmedia), and there were no limits on dining times or menu choices. As a Transmedia executive later recalled to the Los Angeles Times, "We designed the card so that there would be no restrictions, no coupons, no negatives."

Building a Franchise: 1985–91

The first directory listing the restaurants that honored Transmedia's "Executive Savings Card" (41 in all) was issued to Transmedia's 225 New York City members in 1985, just as a new competitor, In Good Taste (IGT), entered the meal barter/discount card market. In 1986, with revenues approaching $1 million, Chasen issued Transmedia shares in a public stock offering that infused $1 million of much-needed expansion capital into the business. By 1987, Transmedia had posted revenues of $1.8 million but suffered a net loss of $422,000. In July, Chasen reincorporated Transmedia (which, as an outgrowth of Chasen's earlier ventures, had been a Colorado corporation) in Delaware.

By painstakingly expanding consumer awareness of the card and marketing the Transmedia concept to the ever-growing pool of new cash-starved restaurants, Chasen realized a net income of $35,000 in 1988 on sales of $2.9 million. The Transmedia card generated traffic for restaurants, filling up empty seats and conferring an image of popularity on struggling startups in the business. Despite the heavy two-for-one price of the Transmedia loan, restaurant owners began embracing the idea of cash-on-the-spot loans that never had to be repaid in cash and offered the prospect for increased word-of-mouth traffic as Transmedia card users brought in new customers. Although the risk that a new restaurant would fold before customers used up its meal credits was unavoidable, in 1990 Transmedia wrote off only $109,000 in meal credit losses.

In its sixth year in business, Transmedia's sales vaulted to more than $4.4 million and net income nearly tripled to $99,000. To expand his business even further, Chasen began offering Transmedia franchises for sale in 1990, and by 1991 its first franchisee was offering the Transmedia card for restaurants throughout the New Jersey area. With 13 employees (nine of whom were independent sales staff under contract), 500 participating restaurants, and 25,000 cardholders in 1990, Chasen opened a Cardholder Service Center in North Miami and saw sales rise 70 percent to almost $7.5 million.

In 1991, the torrid pace of Transmedia's growth began to draw the attention of Wall Street and the national media. The Wall Street Journal boosted the company's profile with a favorable piece describing happy Transmedia cardholders pocketing $50 a month in savings and Business Week listed Transmedia as one of its top "Hot Growth Companies" in the spring. Not coincidentally, Transmedia's shares rose from $3 in February 1991 to $12 by late summer. By the end of 1991, Transmedia's staff had grown to 21, membership had risen to 50,000 cardholders, and sales had climbed to $13 million.

Competition and Growth: 1992–93

With his company now servicing New York, New Jersey, Connecticut, and Florida, Chasen offered 500,000 shares in a private placement stock offering in 1992 that generated close to $5 million in additional capital. In 1990 and 1991, a new entrant in the discount dining market, The Signature Group of Chicago, began negotiating with Transmedia for a joint licensing agreement in which the companies would honor each other's cards. Chasen allowed the talks to collapse, however, and the stage was set for Signature's entrance as a new player in the industry in June 1993. Already, in 1992, a fourth discount card service, A la Carte International Inc., had begun offering restaurant-goers a discount dining card plan. By 1993, the discount dining card market was ruled by Transmedia, Executive IGT (In Good Taste), and a new participant, Entertainment Publications. Each offered variations on the others' program, tweaking the discount card business model to strike the right balance with consumers.

Company Perspectives:

Restaurants and hotels that participate in our programs benefit from the following: incremental customer traffic that fills tables and guestrooms, receipt of upfront working capital for growth, marketing support and promotion, and development of consumer loyalty programs.

Moving forward, the future never looked brighter for Rewards Network. We're adding restaurants on a daily basis to broaden our dining opportunities and provide an even more rewarding member experience. Our hotel program now includes over 10,000 hotels and resorts—including independent and marquee properties. Building on this momentum, Rewards Network is seeking to expand our variety of rewards currencies and loyalty platforms in order to offer still richer rewards to members while offering an ever-expanding number of restaurateurs, hoteliers and other merchants programs that effectively increase traffic and sales.

In August 1991, Transmedia had optimistically predicted its membership would reach 100,000 by 1992. When 1992 closed, however, more than 112,000 members were actually toting Transmedia cards, which were now honored at 1,449 restaurants. With sales approaching $24 million, Transmedia moved its corporate headquarters from New York to Miami and continued its national expansion. By the end of 1993, Transmedia was adding 200 new restaurants a month, had extended its program throughout most of the East Coast, and had established franchise beachheads in San Francisco and Chicago. To extend the Transmedia concept overseas, in late 1992 Chasen announced a $1.25 million deal with Boston-based merchant bankers Conestoga Partners Inc. to license Transmedia's service in the United Kingdom and Europe. In February 1993, Transmedia Europe (comprising Transmedia Europe plc, Transmedia UK plc, and Transmedia UK Inc.) was incorporated to extend the Transmedia cards' reach from the British Isles to Turkey and the former states of the Soviet Union.

In late 1993, Chasen began a policy of partnering Transmedia with selected U.S. companies in order to broaden the company's offerings beyond restaurant dining. Among the first to sign on was the New York Times, which allowed Transmedia customers to take advantage of the benefits of its "Times Card" discount and membership program through a co-branded Transmedia/Times card. Transmedia also absorbed the restaurants honoring the Times card into its own network. The program had produced 64,000 new Transmedia cardholders by mid-1994 and spawned a series of co-branding, "retail loyalty" deals with such direct mail catalog merchants as The Sharper Image and Jos. A. Bank Clothiers and eventually even cruise lines like Carnival. Moreover, by the end of the year Chasen had announced plans to introduce the Transmedia program to Los Angeles, Texas, Georgia, Arizona, and Mississippi. With close to 200,000 cardholders and 2,300 participating restaurants, Transmedia's sales had swept past the $36 million mark by the end of its 1993 fiscal year, and its stock could boast two- and five-year total returns of 205 and 2,732 percent, respectively, placing it 14th on Business Week 's 1993 annual "Hot Growth Company" ranking.

Doubts and a Falling Stock: 1994–95

In March 1994, Transmedia struck a $1.25 million deal with Conestoga Partners II to allow them to license Transmedia's program in Australia and New Zealand and to sublicense it elsewhere on the Pacific Rim under the name Transmedia Asia-Pacific. With more than 222,000 cardholders and 2,467 participating restaurants, Transmedia struck agreements with Cellular One, the cell phone service provider; Prodigy Services, the commercial online service provider; Amtrak; credit card issuer MBNA America Bank; and cable company Comcast to market the Transmedia card to the four companies' customers. Transmedia picked up 4,500 new card members when Cellular One offered its San Francisco customers the card as a premium, and Comcast generated another 3,500 members through a similar program. Prodigy made a blanket offer of the Transmedia card to any of its 700,000 subscribers who lived within 20 miles of a Transmedia-affiliated restaurant, and in July 1994 Amtrak began binding the card into copies of its on-board magazine on its East Coast routes. Aided by a new federal tax law that reduced the allowable business meal deduction from 80 to 50 percent, which forced many business people to look for cheaper ways to wine and dine clients, Transmedia went ahead with plans to expand outside Los Angeles into Orange County and basked in the glow of a Financial World magazine article that ranked it as America's third-best growth company. As Chasen doubled his staff to 90 employees, Transmedia finished the year with a net income of $4.4 million on sales of $48.6 million.

The year 1995 marked a watershed in the company's history. On the one hand, it expanded its network to 5,330 restaurants and almost 600,000 cardholders, began trading on the New York Stock Exchange, established a literacy-promoting philanthropic program called "TransReadia," and continued to expand its offerings beyond restaurant discounts. In an agreement with GE Capital it offered cardholders substantial discounts on long-distance phone calls and initiated a new program called Transmedia Dollars that allowed cardholders to forego the 25 percent discount on meals in exchange for credits toward the purchase of airline tickets. Members could also use the Transmedia card for discounts at a growing number of hotels, ski resorts, and spas.

Key Dates:

1984:: Colorado entrepreneur Melvin Chasen relocates Pikes Peak American Corp. to New York and renames it Transmedia Network Inc.
1986:: Transmedia meal barter/discount revenues approach $1 million.
1991:: A New Jersey franchise is launched.
1993:: A European subsidiary is incorporated; co-branded cards are started.
1997:: Real estate magnate Samuel Zell invests in Transmedia.
1999:: Dining A la Card is acquired from Montgomery Ward.
2000:: IDine online venture is launched.
2002:: Transmedia is renamed iDine Rewards Network.
2003:: A hotel reward program is started, and the company's name is shortened to Rewards Network Inc.

On the other hand, the shimmer was beginning to fade from Transmedia's growth story. Although Transmedia cardholders charged $85 million on their cards in 1995, 70 percent of that volume came from New York City members alone. Its attempt to franchise its license was also proving costly, and in July it repurchased its Chicago franchise and waited for its so far unprofitable Denver and Phoenix programs to turn the corner. Moreover, two new competitors, CUC International's Premier card and the Florida-based Gusto card, were offering new competition, and in June Transmedia announced that its upcoming quarters would show earnings below Wall Street's estimates. Although revenues grew by 20 percent in 1995, that pace marked the slowest increase in the company's short history and net profits remained stagnant. Forbes magazine questioned Transmedia's business concept as a kind of restaurant-punishing sleight of hand and wondered aloud, "How far can Transmedia go on this marketing ploy?" Transmedia responded that its further expansion into the Midwest, the Gulf Coast of Florida, and the Southwest augured well for its future revenue growth and that its less than stellar performance in 1995 could be blamed on the late mailing of a marketing campaign that would have attracted even more new customers. The rarely spoken doubts behind four years of media hype seemed to come to a head all at once in late 1995, when Transmedia's stock began a harrowing decline from which it still had not recovered more than 18 months later.

The seeds of investors' concerns could perhaps be traced to worry over Transmedia's pell-mell expansion, but the media suggested that the company's trouble might involve the very core of its business scheme. By requiring restaurants to cough up meal credits valued at twice the amount of Transmedia's loans to them, the company was making it all but impossible for some of its restaurants to greet Transmedia customers with a welcoming smile. For every three new restaurants added to Transmedia's bimonthly directory, on average one would drop out or go out of business within a year. Although some restaurants found that as many as 40 percent of their first-time Transmedia customers came back, others complained that though the card attracted new customers, it also encouraged existing full-paying customers to switch to the Transmedia card as well, cutting even deeper into margins. Still others groused that the typical Transmedia customer was rarely a big spender and that by buying into the Transmedia program restaurants were announcing to the community that they were in trouble, so desperate for cash that they were willing to sacrifice profits. As one of Transmedia's competitors frankly admitted, "The nature of the business is that successful restaurants don't need us."

Retrenching in the Mid-1990s

Chasen and Transmedia fought back against Wall Street's doubts on multiple fronts. In January 1996, it struck a deal with Continental Airlines and United Airlines to allow cardholders to earn ten free miles for every $1 charged (versus the two to three miles earned by other charge cards). Its two overseas units reached an agreement to gain access to the 6-million-member database of British discount service provider Countdown Holding, and Transmedia began offering some of its customers a "free-for-life" Transmedia card to bolster card holder retention. Chasen also reached an agreement with Western Transmedia, his franchisee in the western United States, to reacquire control of its unspectacular programs in California, Oregon, Washington, and Nevada. Transmedia also began to exploit the global marketing potential of the Internet by creating its own Web site and marketing itself through the online site of the "Diner's Grapevine" service. Moreover, Chasen announced plans to spend $2.6 million in 1997 on computer software to modernize Transmedia's transaction processing operations, thus enabling it to perform the transaction processing for major credit card companies in addition to its own programs. Finally, in December 1996, Transmedia sold $33 million of its restaurant meal credits (known as "rights to receive") as securities to a group of investors in a private placement offering that promised to generate needed capital. Describing the deal as "a major milestone" in the company's history, Chasen excitedly characterized the newly capitalized Transmedia as a "powerful cash machine" now able to fund its future growth without having to take on new debt or sell shares of stock to the public.

In a sign of Chasen's commitment to returning Transmedia to its glory days, in February 1997 he recruited Stephen Lerch, a financial specialist from accounting firm Coopers & Lybrand, to become his right-hand man under the title executive vice-president. The same month, Transmedia's two overseas units, Transmedia Europe and Transmedia Asia Pacific, announced an agreement to combine forces, subject to shareholder approval. Despite an aborted attempt to acquire the operations of competitor, Gusto, in June 1997, with more than 1.2 million cardholders worldwide and agreements with more than 7,000 restaurants and over 400 hotels, Transmedia remained a force to be reckoned with, and Chasen announced that Transmedia's belt-tightening measures would begin to bear financial fruit during the summer of 1997.

Backing and Direction from Zell: 1997 and Beyond

Equity Group Investments Inc., an investment group led by well-known real estate entrepreneur Samuel (Sam) Zell, acquired an initial 20 percent holding in Transmedia in November 1997 for $10.6 million. Equity Group managing director F. Philip Handy succeeded company founder Melvin Chasen as Transmedia's chairman.

In 1999, Transmedia acquired its chief rival, the Dining A La Card (DALC) business of Montgomery Ward subsidiary The Signature Group. According to Forbes, the price was $35 million in cash and $6 million of Transmedia stock. Transmedia became the country's largest dining reward program, with more than two million members, via the DALC acquisition.

DALC's system did not require consumers to brandish a separate discount card at restaurants, which some felt embarrassing. Instead, transactions were tracked using credit card numbers. Transmedia switched to this method after the acquisition.

Around this time, Transmedia also began offering frequent flyer miles as incentives. Instead of a monetary refund, users could opt to receive ten miles for each dollar spent.

Zell and CEO Gene M. Henderson directed a turnaround at Transmedia, which lost money from 1997 to 2000. The company's shares migrated from the Big Board to the American Stock Exchange in April 2001.

The company had been taking control back from affiliates for a few years. Its licensing agreement with Transmedia Europe and Transmedia Asia Pacific ended in 2000.

A new online venture, iDine.com Inc., was launched in May 2000. IDine.com allowed upscale restaurants to set designate off-peak times as discount periods. The site was limited to the Chicago area at first. Wolfgang Puck casual restaurants eventually signed up for the iDine program.

The company was renamed iDine Rewards Network in 2002, reflecting the name of its new Internet-based restaurant rewards program. It was growing fast, increasing from $196 million in 2001 to about $285 million in 2002. IDine had 2.3 million members and 9,500 participating restaurants at this time.

Management was changed in late 2002, with George Wiedemann succeeding Gene Henderson as president and CEO. Sam Zell took the position of chairman following the resignation of Sheli Rosenberg. Wiedemann was founder of the direct marketing agency GreyDirect Marketing Group, Inc. and had also led Responsys Inc., a direct marketing technology supplier.

The company's headquarters was relocated from Miami to Chicago, Zell's traditional base of operations, in 2003. A large call center remained in Miami. The company's name was shortened to Rewards Network Inc. in December 2003 to reflect its breadth of offerings beyond dining.

During the year, IDine launched a rewards program geared toward independent hotels. The program was expanded in October 2003 in partnership with travel distribution company Travelweb LLC, which also represented major hotel chains. By the end of the year, 6,940 hotels were participating.

Sales were flat at $93 million in 2004, though active accounts rose from 3.4 million to 3.8 million. The number of participating merchants was also up, about 4,000, to 21,941. Net income slipped from $15.7 million to $13.2 million. Company president George S. Wiedemann said he expected results to improve as the company promoted new dining products while containing costs.

Principal Subsidiaries

iDine Media Group Inc.; Rewards Network Canada GP Corp.; Rewards Network Canada LP; Rewards Network Establishment Services Inc.; Rewards Network International, Inc.; Rewards Network Services Inc.; RTR Funding LLC; TMNI International Inc.; TNI Funding I Inc.