The Price of Loyalty

A loyal customer is a prize every grocery retailer covets. She buys the majority of her groceries in your store, doesn't just cherry-pick promotions and refers others to you.

She's also more important than ever as grocery retailers face competition from new channels, including those positioned as low-cost alternatives to traditional grocers. Instead of joining the race to the lowest prices, supermarkets and specialty grocers increasingly are looking at ways to enhance the shopping experience to keep customers coming back.

Cultivating the loyal shopper is neither easy nor inexpensive, but it has become an imperative. "Leading grocers must balance the threats of fierce competition, commodity price fluctuations and margin pressures, while meeting changing customer expectations and determining how to deliver an omnichannel experience. Grocers should not only accept, but relish their role as the testing ground for best-in-class customer experiences," says Susan McPartlin, U.S. retail and consumer sector leader at PricewaterhouseCoopers, in a release announcing the consulting firm's new report, "Experience Radar 2013: Lessons from the U.S. Grocery Industry." It suggests companies can enhance the customer experience by speeding up the checkout process, creating stronger relationships with shoppers, providing personal attention, improving customer service with a "catch-all return policy," and offering nutrition information and recipes.

What makes a store's particular customer base loyal is hard to pin down, but the effort includes everything from explicit loyalty programs to making sure the store is clean and attractive.

Explicit Loyalty Programs

Programs specifically designed to build loyalty, such as loyalty cards that offer discounts or earn "points" for customers, have exploded in recent years. Grocery loyalty programs in the United States had nearly 174 million memberships in 2010, up 28 percent since 2006, according to "The Billion Member March: The 2011 Colloquy Loyalty Census" from Cincinnati-based research and publishing firm Colloquy.

The appeal of these programs is obvious. Retailers can offer highly targeted coupons and other discounts, track sales by customer and create promotions using the resulting data. Effective loyalty programs target messages to specific customers in the fashion they prefer. "They provide targeted offers when and how the shopper wants to be reached and can activate those offers," says Michael Kantor, chief executive officer at the Promotion Optimization Institute in Bardonia, N.Y.

Unlike most elements of a loyalty-building effort, it is theoretically possible to measure the return on investment of an explicit loyalty program by examining before-and-after financial figures. According to a 2009 white paper on measuring loyalty program ROI by Atlanta-based consulting firm LoyaltyWorks, retailers can determine the revenue side of the return-on-investment equation by measuring three factors: the revenue generated by increased frequency; larger basket size; and a reduction in the defection rate of program members. These measurements require comparison to non-loyalty card holders, however, which can be difficult in a retail setting, where the majority of non-loyalty card holders are anonymous. The paper suggests several strategies for overcoming that limitation, such as running pilot programs in a few locations or surveying all shoppers.

The costs of a loyalty program, according to the white paper, include the capital expense of building the program, the overhead involved with running it, communications, the rewards themselves, and any other benefits the program offers. If both revenue and costs can be accurately determined, the profit from the program is determined by subtracting the latter from the former. Return-on-investment is calculated by dividing the profit by the costs. (The white paper is available at www.loyaltyworks.com)

Few companies disclose the actual ROI of their loyalty programs, but Target Corp. reported in its 2011 annual report it spent $258 million on its loyalty program that year.

Targeting the Consumer

Building a loyal customer base goes well beyond having a loyalty program, and some experts suggest an explicit program is unnecessary. "The most successful supermarkets in the USA do not have loyalty cards," such as Walmart, Aldi, Trader Joe's, Whole Foods Market and Wegmans, says Milwaukee-based grocery consultant David Livingston. "Loyalty cards are for the sterile, plain vanilla conventional grocery stores that have run out of ideas on how to compete with upscale stores and low price stores."

Building a loyal customer base by focusing on a particular niche may be a better bet, some experts say. Trader Joe's, for example, has grown a loyal base of customers by targeting a group of customers adventurous in their culinary choices who also appreciate value.

"Trader Joe's is highly focused on unique variety and great values," says Tom DeMott, chief operating officer at Encore Associates in San Ramon, Calif. Its tight focus and its friendly, relaxed atmosphere has earned the retailer the status as one of the most-recommended grocery retailers, according to data from BIGInsight, a consumer information research firm.

The August 2012 monthly consumer survey by BIGInsight showed that 65 percent of Trader Joe's shoppers would be "extremely likely" to recommend the store to a friend or colleague. Only Wegmans and Whole Foods Market achieved higher scores of 66 percent and 79 percent respectively, while Walmart garnered a score of 24 percent and Food Lion scored 22 percent.

"Everybody has a different go-to-market strategy, and the people who win at the end of the day are those who meet the needs of their customers and develop the loyalty of their customers week after week and month after month," DeMott says.

So how does a retailer focus on a particular demographic or segment likely to be loyal? DeMott says the process starts with research. If a store has a loyalty card program, that internal data is a valuable source of the characteristics of current shoppers, of course. But pairing that data with survey information from the broader marketplace helps a retailer chart a path toward greater success.

"Your surveys are asking two things: What is most important to consumers in the market, and how well your store does those things," DeMott says. Getting comparative data helps the retailer see where it stands against the competition. "For example, if my survey shows that my store should have high-quality perishables, then the follow-up question is, how do Jewel, Dominick's, Trader Joe's, etc., perform in that area."

How well do stores make use of the data they unearth this way? DeMott says most could do more with it. "I would suggest that there is more data out there than resources to analyze it," he says. "People are making more gut decisions than fact-based decisions."

From an ROI perspective, surveying customers to learn what the market wants offers no return if the information isn't used, of course. But even when the data is used, it likely will point to the necessity of new investments–a better meat department, a larger deli, etc.–that customers want to see.

Measuring the ROI of this strategy–including the cost of surveying customers and then designing the store to match their needs–is not nearly as feasible as measuring the ROI of an explicit loyalty program.

Investing in Fundamentals

A third path to a loyal customer base is simply to invest in fundamentals. Customers might like your snazzy loyalty program and your new focus on their demographic, but if you consistently are out of stock of their favorites, you won't earn their loyalty.

"Your best return on investment is going to be being in stock. If you put forth an offer and have nothing on the shelf, the return on that offer is zero sales and no customers," Kantor says. "It's putting the cart before the horse."

Maintaining stock properly is driven by proper forecasting and solid supply chain relationships, Kantor says. How often do stores succeed in that regard? "It's some of the time, and improving, our research shows," Kantor says. "The use of the data is improving, and people are communicating across functions better. It's not widespread, but it is trending."

Of course, fundamentals go beyond stock management. Well-trained staff, cleanliness, location and many other factors play into the store experience. And different customers respond to different elements.

The Bottom Line

Customer loyalty is typically built through a combination of factors. An effective loyalty program might directly impact some customers, while others are influenced by a tight focus on their needs. And no one will be loyal if the store can't keep things in stock.

Measuring the ROI of each of these elements may be possible individually–at least in some cases– but deciding which element would provide the best return to a given store depends on a multitude of factors.

"It all goes back to asking, 'What are my best customers worth and what does it take to consistently improve my relations with them?'" Kantor says. "We're always looking at return. [Building customer loyalty] is certainly an investment in training, methodology, programs, etc., but the return is this nugget of customer loyalty and resulting profitability."

Chicago-area writer Ed Avis is a frequent contributor to Retail Leader.