CUSTOMER LOYALTY: Loyal to what end?

Reward schemes bring varying benefits to consumers but the costs to the retailer make them a risk, writes Virginia Matthews

Reward schemes bring varying benefits to consumers but the costs to the

retailer make them a risk, writes Virginia Matthews

Loyalty is like a dancethon where everyone feels they must participate

and no one dares to be the first to stop, however much it’s hurting.’

As the cost of attracting and then keeping fickle customers spirals,

this retail analyst’s quirky view of the customer loyalty world makes


Retailers just getting into the game, like Sainsbury’s, are in the

unenviable position of having to invest millions to get the scheme

started, give customers a reward of at least equal value to what is

already available, and then wait years until it starts to pay dividends.

And, to raise the stakes further, it can cost millions to wind the

scheme down if it doesn’t work out.

No wonder retailers face an economic minefield when they starting

setting up a scheme. How much can they afford to give away and how long

can they wait before it begins to pay off?

‘At this stage,’ says UBS supermarkets analyst Jonathan Pritchard, ‘it

is difficult to prove that even the most successful of the loyalty

schemes is doing any more than covering its costs and breaking even.

‘However, as the stores get more proficient at coming up with offers,

and putting to good marketing use all the information that these schemes

are gleaning about customers, then I would predict that loyalty will

ultimately become a genuine profit-making tool in its own right and one

that no top store can afford to do without.’

According to Sainsbury’s marketing director Kevin McCarten, the Reward

scheme has the capacity to lift sales by around 3% per year, a figure

which has most analysts sucking their teeth in disbelief.

Sainsbury’s confirms that the start-up costs of the card and all its

paraphernalia were between pounds 10m and pounds 15m - a reasonably

modest sum even for a company which has been short of luck in recent


However, in order to recoup the running costs, says an internal memo,

the stores will have to increase their sales by between 2% and 4%, or an

estimated pounds 400m, per year.

While Sainsbury’s ultimately hopes that the Reward Card will be taken up

by around 78% of the nine million who pass through its stores each week

- and as the table on page 39 shows, the retailer is already well on the

way to achieving that target - that figure would still be considerably

less than the 8.5 million customers who already hold a Tesco Clubcard.

In contrast to Sainsbury’s, Tesco, which saw like-for-like sales growth

of more than 8% last year, believes that a 1% to 1.5% increase in sales

this year will be enough for its own loyalty scheme to break even, which

on current forecasts more than justifies Tesco chairman Ian MacLaurin’s

belief that Clubcard is already paying its way.

While the supermarket chain says it is unable to quantify exactly how

much extra profit it has made either through Clubcard or Clubcard Plus -

the financial services version - Tesco is happy to reveal that it has

already given away more than pounds 81m in vouchers, and in excess of

pounds 121m in ‘product-specific’ money-off schemes to an apparently

insatiable public.

Analysts believe that in its first full-year, Sainsbury’s will give away

as much as pounds 40m in vouchers, with a steep rise in giveaways

thereafter. However, most are adamant that Reward will not break even,

let alone make a profit, until the third year at the earliest. Not so

for Tesco.

‘Tesco is clearly on a high at the moment,’ says one senior analyst,

‘but it would be wrong to say that loyalty had done anything more than

provide the icing on the cake.’

We believe that it is Tesco’s essential offer and retailing skill that

is bankrolling the company, and while loyalty schemes are part of that

offer, they are still new and untested.’

This point is emphasised by Verdict Research’s managing director Richard

Hyman. ‘Being the first of the big four supermarkets to get into loyalty

was quite a leg-up,’ says Hyman, ‘but I think that its recent

spectacular success is basically down to what’s in the store, not the

brilliance of Clubcard.

‘After all, loyalty only works if enough consumers value the product

that is being discounted. If the grocery offer isn’t up to much, it isn’t up to much whatever the price.’

Bernard McDonnell, project director with product development consultancy

Innovate, subscribes to the view that Tesco’s loyalty scheme has not

only acted as a recruiter, but may also have boosted both the frequency

of trips by and the spending of primary customers.

Early on in the scheme average spends went up from pounds 43 to pounds

46, according to Superpanel.

But regardless of whether the success of Clubcard can be quantified,

particularly in the early days before it had any serious rivals, Asda is

not entirely convinced of its worth.

Despite having given the idea a very public thumbs down several months

ago, Asda is currently testing its own scheme at selected stores. Yet

chief executive Archie Norman’s assertion that cheaper groceries will

always be more attractive than any amount of loyalty bonuses and divvies

appears to hold true.

Even without a national loyalty card, Asda’s like-for-like sales growth

soared by 12.1% in the year to April 1996.

Despite all the claims from outsiders that Archie and his gang would be

forced to launch their own me-too loyalty scheme by July, and then by

August, Asda has so far refused to play the affinity ball.

‘All our research shows that customers want the lowest-priced weekly

shop, week-in and week-out,’ says a spokesman. ‘Although we recognise

that loyalty can be an added-value tool, we must be 100% sure of its

success before we go national.’

When Archie Norman talks about the ‘culture of sameness’ which afflicts

the supermarket industry, he is to some extent describing the loyalty


He believes the one thing that these schemes cannot afford to do is

become identical. If they do, any advantage to operating them will be


As most commentators recognise, Sainsbury’s Air Miles scheme - a unique

link-up with British Airways in grocery land - would have looked as

fresh as a Sainsbury’s cucumber had it not been for the fact that its

launch coincided with Tesco’s move into supermarket banking.

‘The pressure is on to make each loyalty scheme look different by adding

on more and more services,’ says one analyst, ‘but if it ends up, as

seems highly possible, with stores simply returning to cheaper groceries

and money off dry cleaning and cinema tickets, then it will have been a

complete waste of time.’

Rather than try to diversify into money management, a far more

persuasive tactic might be to improve the value of the loyalty schemes

themselves. After all, the ‘gift’ to consumers of 1% of what they have

shelled out in the first place is hardly over-generous.

While cautious analysts would be reluctant to see that 1% rise to 3%, or

even 5%, it is understood that Safeway’s next salvo in the loyalty war

is likely to be an increase in the value of the ABC scheme - an

inevitable move according to consumer writer Jed Bishop.

‘I wouldn’t say that pounds 2.50 back for pounds 250 worth of shopping

was such an attractive offer, particularly not if you’re a so-called

promiscuous shopper who considers going to the same shop each week

something akin to having teeth pulled.

‘For regular shoppers, these schemes do literally give you something

back for nothing, but that something will have to rise as time goes on,’

he explains.

If Bishop is right, then the dancethon analogy will undoubtedly be

proved right.

Esso knows a thing or two about loyalty schemes. In 1986, the company

launched the Esso Collection, complete with its own colourful catalogue

jam-packed with everything you could want, from crystal goblets and

mowers to personalised bathrobes and foot massagers.

By the spring of 1996, however, the entire Tiger Token machinery had

been dismantled in favour of ‘Price Watch’.

‘We certainly didn’t wind up the Esso Collection because it was too

expensive,’ says a spokesman, ‘but our regular review of customer

attitudes showed that the tokens were less important to our customers

than convenience, petrol quality and, of course, price.

‘While we had already largely mastered the first two, we felt that it

was time to focus more on price.’

It’s a lesson that the supermarkets may have to re-learn in the future.


What’s on the cards


Sainsbury’s Reward Card

launched June 1996

Number issued: 1.3 million in first 24 hours, three million in the first

week, current figure 5.5 million (as at August 14)

Minimum spend: pounds 5

How it works: One point for each pounds 1 spent.

What you get for pounds 250: pounds 2.50 off your shopping or, uniquely, 40 Air Miles, which can be exchanged for plane and ferry tickets, holidays, cinema seats and leisure centre bookings. Average shopper

spending pounds 60 a week could get a free flight to Paris after one

year’s shopping, says Sainsbury’s, but that’s a single.

First vouchers to be issued in September; can be used at Sainsbury’s stores, petrol stations, Homebase, Texas or Savacentre.

Tesco’s Clubcard

launched February 1995

Number issued: 8.5 million.

Minimum spend: pounds 5

How it works: Each pounds 5 spent earns one point; at end of each

quarter, each 50 points earns you a pounds 2.50 voucher to be spent in


What you get for pounds 250: pounds 2.50 off your shopping.

If you accumulate fewer than 50 points they carry over to next quarter.

Cardholders also receive regular money-off vouchers. Clubcard Plus,

operated by NatWest, offers 5% gross interest per month on credit, 9.3%

on debit.

Safeway’s ABC (Added Bonus Card)

launched October 1995

Number issued: 4.5 million

Minimum spend: pounds 1

How it works: Each pounds 1 spent earns one point. Each 100 points can be exchanged for pounds 1 off shopping.

What you get for pounds 250: A pounds 2.50 shopping voucher which can be

redeemed against store items, or offers in a catalogue including free

groceries, dry-cleaning or holidays; 70 different forms of redemption in


Asda’s Club Card, on test for over a year, currently available in 18 stores

Minimum spend: nil

How it works: Each pounds 1 spent earns one point.

What you get for pounds 250: pounds 2.50 redeemable against a catalogue

which includes in-store items and special seasonal offers such as garden




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