Summary
Blackhawk Network is the gem within Safeway. It’s well established within the still adolescent prepaid-card-distribution industry, enjoys a network effect, and because of better operating margins and growth prospects deserves to command a much richer valuation multiple than its grocery parent. If however the market doesn’t give Safeway due credit for Blackhawk, CEO Steve Burd should spin it out.
Analysis
Gift and more broadly prepaid card distribution are two-sided network businesses. The greater the number of card issuers enrolled in the network the stronger the value proposition for retail distributors. The greater retail distribution the stronger the value proposition for card issuers. To quite Confederate General Nathan Bedford Forrest on his strategy as a cavalryman, in gift cards Blackhawk is there “first with the most.”
While competitor Incomm has wider distribution and is stronger in other categories such as prepay phone cards, Blackhawk has a richer roster of retail gift card issuer clients.
The card distribution network industry is still young.
Base Blackhawk growth will come from pushing more current product through its existing merchants, and extending both sides of its network.
On the issuing side, Blackhawk can (1) find additional relevant product to distribute over the network, and (2) work with more smaller issuers with local and regional distribution needs.
On the distribution side Blackhawk has 80,000 merchant locations, which pales next to the 6.9 million and 26 million merchants accepting general-purpose payment cards in the US and worldwide respectively. There’s room for expansion. Additionally, it can potentially growth in to date largely untapped distribution categories such as retail bank branch networks.
Safeway’s ownership has not constrained Blackhawk from signing grocer such as Kroger with 2491 supermarkets and multi-department stores - a coup! as distributors.
Nonetheless, Blackhawk is a fundamentally different business than its parent and enjoys spectacularly more attractive operating margins and growth prospects. CEO Steve Burd is resoundingly right in saying "As far as the eye can see, this business will grow faster than the supermarket business." If there is any doubt the market is giving Safeway full credit for it, he should spin it off.
