Loyalty schemes have enabled some retailers to outperform, but others regard them as a gimmick. George Macdonald asks who is right

Loyalty schemes have become one of the most powerful weapons in retailers’ armouries during the harsh trading conditions of the credit crunch and its aftermath. While store groups always battled ferociously for their share of spend, and loyalty and reward programmes pre-date the recession by more than a decade, such schemes have frequently marked out the downturn’s winners, such as Tesco and Alliance Boots.

So the news of Boots’ decision potentially to offer its Advantage Card scheme to partner retailers (Retail Week, May 21) has prompted intense interest among store chiefs who do not at present have similar schemes nor access to the treasure chest of customer data they provide.

Boots has not revealed which retailers it might tie up with, but its existing relationships with grocer Waitrose and maternity specialist Mothercare are obvious examples of the type of non-competing businesses that might make suitable partners.

But, despite the apparent merits of loyalty schemes, evidenced by the increasing number of retailers participating in the umbrella Nectar operation, as well as the success of proprietary programmes such as Clubcard and Advantage, not all retailers are convinced they make sense.

Asda, the most prominent critic of loyalty cards, prefers instead to invest in lower prices for all its customers and believes that is the foundation on which a sustained relationship with shoppers can be built.

But one of the reasons why the loyalty debate has broken out again is that those of Asda’s rivals that do have schemes have been outperforming Asda - and, moreover have pointed to their programmes as key to their success. In the middle of last year, for instance, Tesco was lagging behind its grocery rivals. One of its responses was to reward Clubcard holders with double points and the effect was highlighted in the retailer’s last set of preliminary results.

Tesco reported then: “Double points has encouraged more customers to sign up; a higher proportion of transactions are now using a Clubcard and 18% more households are redeeming Clubcard vouchers than a year ago.”

While some City analysts were initially concerned at the potential financial impact of the double points giveaway, their worries were laid to rest and Tesco is still running the deal.

Benefits of membership

Similarly, Sainsbury’s has spotlighted the benefits of Nectar membership and an associated money-off coupon-at-till promotion. Its success over Christmas prompted Sainsbury’s chief executive Justin King to talk of a chasm emerging between retailers with loyalty schemes and the rest.

“There are now the haves and have-nots of data and our loyalty programme has been very powerful for us in the quarter,” he said in his report on the Christmas period.

In spite of such comments and business performance, Asda insists that its stance, reflected in the just-launched Asda Price Guarantee scheme, is right. A spokeswoman says: “The true driver of loyalty is to give customers unbeatable value for money, great customer service and products that are available each time they shop - that’s why we launched the Asda Price Guarantee. Loyalty cards are really designed to capture customer data but, given the huge technological advances now taking place, the cost of capturing data is coming down all the time.

“For example, our home shopping database, Retail Link, our Tell Asda survey and social media channels all give us incredible insight and opportunities to target our offer even more effectively to customers.”

Planet Retail research director Bryan Roberts notes that loyalty card holders shop at many other retailers, but he believes the schemes are increasingly important in the retail marketing mix.

“Asda does have a great degree of insight, but it can’t hold a candle to what dunnhumby [Tesco’s data partner] can generate,” he says. He notes also that Nectar, which he says previously had a “scattergun approach”, is improving quickly.

Mining customer data

David Roth, the former B&Q marketing director and now chief executive of marketing business The Store WPP, says: “After the recession the mix has been moving towards promotional activity and the knowledge and information you get through loyalty schemes is an efficient way of doing it.”

Tesco is one of the most advanced of retailers in its ability to mine customer data and use it effectively and, notes Shore Capital analyst Clive Black, has put its scheme at the heart of its business, rather than run it as an add-on.

Black says: “Clubcard is integral to what Tesco does. It is central to its broad strategic development, from petrol discounting to the bank.” He believes the scheme pervades Tesco more deeply than Nectar does Sainsbury’s, but expects Nectar to become increasingly important to Sainsbury’s.

Loyalty schemes are costly, which is, in part, why some retailers prefer to join a shared scheme such as Nectar. King, while unwilling to go into detail on the matter, said after Sainsbury’s third-quarter update: “You can be sure that the most effective and most measurable marketing money we spend is the money we spend on Nectar, because we can see the precise connection between the vouchers - be they specific targeted vouchers or individual products, or be they basket incentives - and we can measure the productivity of that investment.”

But what do shoppers think? A survey conducted last month by business intelligence firm YouGov SixthSense seems to back up Asda’s position [see box top left]. But YouGov SixthSense research director James McCoy points out that the 17% of consumers who choose where to shop based on loyalty scheme participation actually amounts to a large number of people.

However, he adds that retailers need to do more to demonstrate the value of schemes to consumers. “I feel that cards have become ubiquitous. They need to create an exclusive feel, the idea that it is specially tailored to you,” he says.

McCoy also points to loyalty scheme developments in the US that have not yet been adopted here, such as different prices in-store for members. Shoppers carry fobs that highlight the reductions available to loyalty customers. It is an approach adopted, for instance, by US grocer Jewel.

And he can envisage loyalty schemes which, like premium bank accounts, customers pay to join.

What is certain, as technology moves on and consumers adopt new ways of shopping such as online and mobile phone commerce, is that customer data will only become more important and loyalty schemes will offer a key advantage in gleaning it.

Black says: “When Clubcard first came out, the world was a very different place regarding information management. In terms of their capacity to market to clients, there is no doubt that Tesco and Sainsbury’s have more information than Asda and Morrisons.”

Homebase strategy and marketing director Ajay Kavan says the DIY retailer’s adoption of Nectar last year has brought tangible benefits.

He says that participation has enabled Homebase to improve targeting of direct marketing and to make business changes based on customer insight - the launch of its website Getintogardening.com was strongly influenced by use of Nectar data.

Kavan says Homebase shoppers had expressed a preference for a scheme “that gave them options spread across multiple retailers” rather than its previous programme, Spend & Save.

Loyal to the last

Black concludes that, over the long term, retailers that do not have a loyalty scheme, or equivalently powerful ways of mining and using data, face a “strategic vulnerability”. A world of haves and have-nots then, as King argues?

“I have increasing sympathy that King is right,” says Black.

Roth agrees. He observes: “The world is going to divide between those who can organise and make use of their customer data and the others, who will wake up in five or six years’ time, outmanoeuvred. The person who owns the data, owns the customer.”

But he maintains that loyalty schemes are primarily a means to an end and will not on their own make a retailer successful.

He says: “Gaining customer loyalty is about a lot more than a scheme. The value proposition will be important.”

For all the interest in loyalty and the success of some programmes, they will never be a panacea for retail’s ills and typically cannot answer one vital question. As McCoy says: “Loyalty schemes can tell you what people are buying - but not what they’re not buying.

“As well as whatever they are spending at one retailer, they might be spending another £40 a week at Lidl, which you have no idea about. The challenge is to find the data you don’t have.”

Loyalty in numbers


of consumers would not stop shopping with a particular retailer if it scrapped its loyalty scheme


choose where to shop based on their participation in such schemes


regularly use a loyalty card


did not think it worthwhile collecting points


would prefer store groups to run more promotions, rather than points

Source: YouGov SixthSense