Loyalty Marketing

To sum up our discussion from last month, the present system of supermarket loyalty marketing may be effective for the early adapters who are technologically primed, but it may become less and less appealing to new entrants who have to pay the high cost of admission and win the favor of a wary public.

The previously examined alternative of a manufacturer-supported loyalty program has the benefit of having a funding source for the program but the difficulty of finding a trustworthy middleman and skirting around antitrust implications. This scenario helps the industry compete against its food-selling competitors but may be too difficult to implement.

Is there another alternative that lets supermarkets keep their individualized programs and data intact and yet get the advantage of additional marketing dollars into the system?

The answer is yes.

To see how this system works, let's travel to Ireland, where Superquinn has the model for a workable system based upon non-competing retailers' common interests. Shoppers apply for and receive their SuperClub cards, then receive points wherever they shop within the loyalty card system. Instead of the supermarket being the sole provider of loyalty benefits, shoppers can receive benefits from more than 25 non-competing retailers. Superquinn offers points that can be redeemed for food or for merchandise from a catalog.

"The program is now about three years old," says Frank Murphy, director of SuperClub. "We intend to keep it going right into the next millennium. In fact we couldn't imagine doing business without it at this point."

Shop at a Texaco gas station or at the sporting goods store affiliated with the SuperClub card, or the jeweler or the travel agency, and you receive points. The card, which originated at Superquinn supermarkets, is now a separate organization, wholly owned by Superquinn.

The benefits of cooperation among non-competing retailers are enormous. Because of the high perceived value of the points earned, consumers are going to think twice before they shop outside the system of cooperating retailers. Retailers can run joint promotions across categories, thereby pooling their advertising dollars and making advertising more efficient.

"We don't allow Superquinn to swamp the other retailers," Murphy says. "The catalogs and material we send out either talks about SuperClub as an entity in its own right or else it talks about all of the partners."

Potentially, the value of the consumer information collected by this system can be enormous. For instance, wouldn't it be useful for a toy retailer to know which consumers are buying diapers and other baby products? Once consumers' fears about privacy issues are satisfied, perhaps by an opt-out system for those who don't want special offers based on their purchasing habits, the possibility of specifically targeting offers based on someone's lifestyle, demographics or purchase history becomes tantalizing for retailers.

Gathering and sharing information about consumers, giving discounts to card holders and creating marketing partnerships among non-competing retailers are among the advantages of a frequent shopper alliance.

But there would be difficulties in making the Superquinn model work in the United States.



Southern Ireland is confined geographically. While leading retailers may find it geographically manageable to band together in Ireland, it may be much more difficult to form similar alliances in the United States.

The nature of the supermarket industry in America is that it is a regional industry. With the exception of the IGA alliance, even large chains are confined to distinct regional gatherings. And IGA, whose independent stores stretch across the nation, is organized regionally by suppliers.

Other retail outlets that could prove natural allies to the supermarket industry have national distributions. Branded gas stations, for instance, stretch from coast to coast. Fast-food chains and the book store giants and auto supply outlets are national in nature.

Would it be possible to form a consortium of food retailers stretching from coast to coast that would unite under the umbrella of a loyalty card? It would be difficult, maybe impossible, but such a supermarket alliance could attract other retailers and provide the marketing strength for mass market TV and radio ads. Such an alliance could help the supermarket industry flourish against its competitors.

Even if no such national alliance of supermarkets united under a loyalty card brand is forthcoming, it may be possible for supermarkets to band with other retailers on a regional basis.

In fact, such alliances are already happening throughout the country. In Massachusetts, non-competing retailers give discounts when customers present their Lees Supermarket loyalty card. Lucky Stores in California sends coupon books with others from over 30 non-competing retailers to its customer list. Casel's Supermarket in New Jersey sends birthday offers to customers with the help of advertising dollars from non-competing merchants.

Such alliances make economic sense for every merchant involved. The difficulties include:

• In order to enhance their images, the demographics of the aligning retailers should be similar. Otherwise, joint marketing programs may not make sense.

• The important question arises: Who should decide which retailers can join the alliance? Is it the supermarket, because it generates the largest customer count and may already have a loyalty program in place? Superquinn solved this problem by setting up a separate entity to run its partnership program.

• Also important is whether the benefits of such an alliance are worth the administrative problems and costs. Solving the creative and administrative hassles of getting retailers with differing marketing and business needs to join together may be too difficult in many cases.

Despite the problems and costs, retail cooperative programs look like a good solution to giving benefits to customers and cutting marketing costs by splitting those costs among a larger group.

But such programs may face a quite different competitor in the future. What if credit card companies or banks or some other third party decided to recruit retailers and customers into a proprietary loyalty scheme?

A natural generator of loyalty card programs would seem to be credit card companies, because they already run programs that invoke some of the same principles. For example, Discover Card for years has run a program that lets its customers earn back one percent of the price of their purchases made with the card. Other credit card issuers offer or have offered greater discounts when holders buy specific products, such as General Motors cars or Apple computers, and others give desired bonuses such as frequent flyer miles when holders make purchases with the card.

Some banks that issue credit cards have even offered affinity cards for supermarkets that allow customers to earn two to three percent back, usually in store coupons, for purchases in the affiliated supermarket and one percent back on purchases at other retail outlets.

At first glance, having supermarket alliances with credit card companies may seem advantageous for supermarkets, but they have not worked out well. There apparently isn't the kind of relationship between a supermarket and its customers that exists in other successful affinity programs, such as alumni and cause-related programs. Also, the market for affinity programs is probably oversaturated.



Finally, consumer acceptance and bank profit from supermarket affinity cards have not been very promising. Consumers were turned off in part because of the low perceived value of the rewards program. They also didn't like the high interest rates charged by the banks.

From the banks' perspective, the sign-up rate was not as great as projected, and more of the supermarkets' customers than projected were paying off the credit card debt during the grace period, depriving the banks of income from finance charges. This made the cards less than attractive for banks, and the wave of supermarket affinity cards was short-lived.

But a future reworking of a loyalty program could take place without supermarkets' special involvement. A credit card company could come up with a nationwide program financed by discounts from participating merchants and tying consumers' rewards to behavior patterns.



The advantage to supermarkets is that they could reward their best customers who participate in the program and not have to invest in the hardware and software required by present loyalty schemes.

The disadvantage is that the system would most likely be open. Supermarket competitors, both within the industry and other sellers of food, would be free to participate in these programs. The advantage of having a proprietary program or sharing one with non-competing retailers would be lost.

In fact, one of the four possible scenarios mentioned in this article and last month's is the right answer for individual stores. Some stores will want their own proprietary programs. Some will want to bank with a group of retailers in a common program for everybody's benefit. Some will wait for the manufacturers and/or credit card companies to figure out a system that will let them participate with much lower entry fees.

Mike Bechtol, executive vice president, retail, of Catalina Marketing, suggests that the industry is in the infancy of figuring out the best way to run frequent buyer programs. He says, "I find that 95 percent of retailers are concerned about the factory end of loyalty marketing—'How do I get the cards in the field? How do I get data captured? How do I start to do data mining?'

"What retailers haven't spent a lot of time on is the really important part of the program: the development and design of targeted programs, the ways to actually engage the customer and the ways to measure results."

From an industry standpoint, one could argue that a standardized approach to gathering customer information will help keep other food-selling competitors at a disadvantage. Perhaps current or future software and hardware providers will offer a more universal solution to the problem of gathering customer information. Perhaps someone will come up with a way to share information so that manufacturers and supermarkets can both benefit from targeted marketing.

Al Lees Sr. of Lees Supermarkets suggests the broad outlines of a compromise approach: Retailers could run different loyalty programs but manufacturers would devise "a template for the information they need." That way, different retailers could keep the privacy of their systems and customer information but still deliver information to manufacturers in a usable form.

Mike Siergiej, segment executive with IBM, thinks it unlikely supermarkets will work together on loyalty programs in the near future. "Because of the competitive nature of the supermarket industry, cooperation will be very difficult to achieve industry-wide," he says. "Look at the struggles the industry has gone through in gaining standardization in ECR. It is very difficult.

"I don't see grocery stores working together on loyalty programs," Siergiej continues. "It may happen someday, but this is an issue which can prove to be a very strong competitive advantage for any chain, and they are not going to give up that advantage easily. That's why the race is on to get these loyalty programs correct."

Perhaps, ultimately, they may not be for everyone in the industry. "As much as I believe in loyalty programs," says Carlene Thissen of Retail Systems Consulting, "I think you're going to see great stores without them. There are companies who are just really excellent merchandisers and operators. If they know what their customers want and know what they need, I think they can compete against frequent shopper programs."

But supermarkets have so many people pass through their doors every day, and the transaction data they are gathering is potentially so valuable, that there will be lots of people who will have solutions to harness that information. Perhaps someone will come up with a system to benefit the supermarket industry, its consumers and manufacturers as well.

Then, and probably only then, will the true potential of loyalty marketing in the supermarket industry be realized.

Neil Raphel is vice president of Raphel Marketing, Inc. (Atlantic City, N.J.).