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
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
‘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,’
If Bishop is right, then the dancethon analogy will undoubtedly be
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.
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%
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