Loyalty and beyond
Will retailers be loyal to loyalty programs?
The idea of rewarding customers for repeat visits to a shop has been around almost as long as shopping itself. Technology has shaped loyalty programs into their current form, with lower prices as the shopper incentive and reams of data as the reward for retailers.
But CPG retailing, especially in grocery, seems to be at a crossroads when it comes to loyalty programs. Technology gives these programs more potential power and flexibility than they've ever had, but at the same time, it offers retailers alternatives to gather information and reach shoppers on a personal level without the hassle and expense of two-tiered pricing.
That's why some major retailers are charging ahead with loyalty programs, others are in retreat, and still others have never had one and don't plan to.
Kroger in February purchased YOU Tech, a San Francisco-based software service for digital coupons and promotions. The company did not say so explicitly (and did not respond to requests for comment), but the YOU Tech acquisition gives Kroger the capacity to route more, and more customized, digital coupons to customers through its Kroger Plus loyalty card program. (Kroger introduced digital coupons in 2009 and now claims to have uploaded 400 million in the last 12 months.)
In the fall of 2012, Walgreens started a loyalty program called Balance Rewards that not only encourages consumers to shop and get prescriptions filled at Walgreens, but to get active. Customers can earn points by logging a pedometer or other fitness tracking device into the Balance Rewards app and reaching goals for walking or other exercise.
On the other hand, Albertsons last year pulled the plug on its retailer loyalty programs. The parent company of Jewel-Osco, Shaw's and Acme Markets announced in the spring that it is going to everyday low pricing (EDLP). And some of the biggest players in grocery, from Whole Foods at one end of the price/quality spectrum to Aldi at the other, have never had a loyalty program.
The statistical picture on loyalty programs in retail is a mixed one. In overall retail, they're on the rise. A study by research firm Colloquy showed that memberships in all U.S. retail loyalty programs rose 26.7 percent from 2010 to 2012. However, the same study also showed that participation in supermarket loyalty programs declined 1 percent in that same period.
SINGLE PRICE, EASY APPEAL
Incentives to get rid of a loyalty program, or never to start one, can be strong. One of the biggest, from the retailer's perspective, is offering a single price structure, which not only simplifies day-to-day operations but offers a clear, easy-to-understand appeal to consumers.
"Our marketing campaign outlines the no forms, no cards, no hassles approach," says Maria Brous, a spokesperson for Publix Super Markets, which has never had a loyalty program. "We believe that every customer deserves the same stellar customer service [and] quality products at competitive prices."
The drawback with that approach is that a store that's going to offer only one set of prices had better make sure they're the lowest around–or if not, then close to it.
"It's difficult for every grocer to be the EDLP [everyday low price] provider in their market," says Drew Carter, managing director for IT & applied analytics practice at AlixPartners LLP. "And so if you're not going to be that, and truly deliver on that promise…then you've got to have some differentiation. Being able to present that broader assortment, that more niche assortment, or those special items is a way to do that. And then figuring out how you get the right product in front of the right people is a way to do that."
Dexter Manning, a partner at Grant Thornton LLP, says it will be hard for most supermarkets to compete on that basis.
"The question for supermarkets is how they will compete for their share of customer spend in the future," Manning says. "What is their value proposition? Can traditional grocery chains compete with big box retailers based on 'everyday low prices'? Most have concluded that they must offer value another way in order to survive and thrive, conceding the every-day low price to Walmart and other big box discounters."
"Can traditional grocery chains compete with big box retailers based on 'everyday low prices'? Most have concluded that they must offer value another way in order to survive."
Grant Thornton LLP
Another incentive to get rid of, or never start, a loyalty program is the possibility of consumer backlash. This falls into two categories: resentment over the two-tiered price structure, and concern over the gathering of personal information.
While many consumers appreciate the savings, others are annoyed by having to carry around loyalty cards and by the prospect of getting gouged whenever they venture into a store where they don't have a card.
Privacy concerns are another bugaboo–part of the overall concerns about privacy that are an ongoing part of the Information Age. But it's far from clear just how much concern there is.
A survey last year by Mintel showed that 32 percent of American respondents "believe that the privacy of their personal information is an important attribute of a loyalty program." The programs require too much information in the opinion of 13 percent of respondents; 10 percent say they're frustrated over a lack of control over the privacy of their information.
But such privacy concerns are very much dependent on age and are virtually nonexistent among younger generations, Carter says.
"Baby boomers might start to itch a little bit at that kind of information being utilized," Carter says. "Generation Xers will say, 'Eh, I don't know, I'm kind of neutral on that,' and Generation Y will say, 'What are you even talking about?'"
Manning agrees. "Younger consumers seem to be more accepting of the technology risks inherent in using loyalty cards and other on-line programs," he wrote. "One size does not fit all in the loyalty program debate."
Consumers will accept giving up some privacy if they see a clear benefit, says Oliver Harrison, loyalty solutions director for dunnhumbyUSA, the American branch of a company that pioneered the use of loyalty data with Tesco in England in the mid-1990s.
"Companies that demonstrate a clear and transparent use of how the data being collected benefits the customer will stand to gain," Harrison says.
Of course, there's no point in collecting data if you don't do something useful with it. That's one of the biggest obstacles to making a loyalty program truly useful: The sheer volume of transactional data can be overwhelming, especially to an organization without the resources to examine and interpret it.
"Context is everything," Harrison wrote. "Retailers need to understand the data being generated by their customers in the context of their preference for their brand versus competitors. Without the underlying brand affinity to add meaning to the multitude of data sources and individual data points, it will lead to the proverbial 'paralysis of analysis.'"
To gain maximum advantage from this data, retailers have to be willing to share it up the supply chain, especially with product suppliers.
PV Boccasam, CEO of Orchestro, a demand-analytics software company, says much of the approximately $1 trillion a year spent on trade promotions is wasted because manufacturers aren't getting the right data about shoppers from retailers. "The question is, if loyalty programs truly work, why don't retailers share the data back to the suppliers?" Boccasam says. "Because they have this belief that if they share loyalty data with suppliers, they will somehow lose control."
"The question is, if loyalty programs truly work, why don't retailers share the data back to the suppliers?"
Not only are retailers unwilling to share loyalty data with outsiders; it can be a challenge to spread it around internally, says Dylan Bolden, partner and managing director for Boston Consulting Group.
"A lot of times [best practice] involves connecting data sets that typically aren't connected," Bolden says. "For example, pricing and promo data is not always cleanly connected to store sales performance data. Without presenting a specific business problem around [to tell] how are we going to improve promotional effectiveness, and how are we going to leverage this data to do it–without this sort of business question, you're never going to be able to connect those data sets."
Retailers who want the benefits of a loyalty program, without actually establishing one, have alternatives. Smartphone apps and other technologies allow retailers to reach out to consumers and collect their data.
Any retailer in the online space will increasingly be able to deliver a loyalty 'approach' where the data is used to improve and better the experience without an overt loyalty proposition.
"Any retailer in the online space will increasingly be able to deliver a loyalty 'approach' where the data is used to improve and better the experience without an overt loyalty proposition that requires points or some sort of currency to keep score," Harrison says.
Bolden agrees that alternatives exist. "There are some retailers who have found, and are anticipating finding, that [information] through really mining point-of-sale transaction data that has credit card numbers, through using smartphone apps that have the ability to tell you about the customer in-store, or just apps in general, where people are downloading apps and providing information but not necessarily signing up for a program," he says. "There are increasingly ways to build massive data sets and [extend] offers and predict behaviors."
Technological advancements enable Meijer to route digital coupons to customers without the use of a loyalty program. In 2011, Meijer set up Mperks, a program that maintains individual accounts for customers and lets them add coupons online. Mperks enrolled its millionth member in early 2013.
On the other hand, most retailers with existing loyalty programs use those as a vehicle when they start offering digital coupons. One of the most successful such enhancements was Safeway's Just for U. When it rolled out in 2010, Safeway aggressively sought to enroll customers by having associates roaming the aisles with iPads to sign them up. Now it gives shoppers personalized offers and messages across all social media.
There will probably still be a role for loyalty programs for the foreseeable future, industry observers say. But to survive, they'll have to serve as something other than a pricing vehicle.
"I've seen people across multiple industries, not just grocery, shutting down loyalty programs, and most of the time it's because they were just poorly designed," Bolden says. "One thing that's for sure is, most loyalty programs fail because there's no strategy behind it, and it's just a pricing vehicle. And it becomes overhead to give a price discount. I think there's some frustration from some people who have under-invested and therefore have seen poor results."