When it comes to electronic frequent-shopper programs, there's only one thing for certain: The potential for targeting customers and hiking profits is enormous. But cashing in on the benefits can be a daunting task.
There is no doubt the card-based programs are full of promise, and a small but growing number of retailers are implementing increasingly sophisticated and successful frequent-shopper programs. The high potential of the programs was cited by several executives.
Frequent-shopper programs "can tell you who your best shoppers are, which is something most retailers don't know, and who you're not reaching. It can literally put you in touch with your business," said Kim Eskew, director of marketing and advertising at Harp's Food Stores, a 24-store chain based in Springdale, Ark.
"If you're advertising and giving away incentives to customers you already have, you're just giving them a discount," said John King, vice president
of information services at Hughes Family Markets, Irwindale, Calif., which operates 52 stores. "You should be going after consumers who aren't shopping your stores."
Brian Woolf, president of Retail Strategy Center, a Greenville, S.C., consulting firm that works with retailers in setting up frequent-shopper programs, said interest in this area is growing rapidly. But the best is yet to come.
"There are only a few companies doing an outstanding job in this area. I know one retailer seeing double-digit increases in same-store sales as a result of implementing a card-based frequent-shopper program. Another retailer has seen a 2% increase in net profits. Those are not small numbers," Woolf said.
"In all honesty, I think frequent-shopper programs will be the price of entry into the supermarket industry within five years. Unless retailers are tracking customers, it will be like supermarkets without scanning," he said.
Despite such comments, however, the vast majority of retailers today remain concerned that the investment in equipment and time is just too high, and the benefits too difficult to predict, to justify widescale rollouts of the programs.
"These are expensive programs, and a lot of retailers are wondering whether the rewards and paybacks will justify the cost," said Bob Sands, director of financial services at Seaway Food Town, a 44-store chain based in Maumee, Ohio, that rolled out a chainwide program last summer.
"It's not like purchasing a piece of machinery, where you can define the savings in dollars and cents," he said. "It's a nebulous area, and the rewards are not that concrete. It's a competitive weapon, but does it give you a competitive edge? I don't know," he said.
The edge that proponents of frequent-shopper programs are banking on is found in the power of information. The kind of accurate, detailed information the programs deliver on individual consumers can take the guesswork out of marketing, the retailers contend.
Among the potential benefits from these programs most often cited by retailers: reduced advertising costs; increased customer loyalty by offering savings to frequent shoppers, and access to in-depth demographic information.
Still, retailers that have such programs, and those that have considered starting them, said there are major obstacles to putting the programs in place and reaping the full rewards.
The most advanced programs can require considerable investment in equipment, software, time and manpower. In addition, the overwhelming volumes of data the programs can generate are only valuable if they can be analyzed and used to effect positive changes.
"It's a tremendous undertaking that can be incredibly intimidating to the average retailer," said Scott Ukrop, director of marketing at Ukrop's Super Markets, a 22-store chain based in Richmond, Va. "It's a major commitment." He should know. Ukrop's was one of the first chains to offer an automatic electronic couponing program when it introduced its bar-coded Valued Customer card in 1987. Now the chain is upgrading the program by issuing new cards featuring magnetic strips and bar codes that will allow for more extensive shopper data-gathering and check authorizations.
Mike Hubert, information systems support director at G&R Felpausch Co., a 19-store retailer in Hastings, Mich., agrees that the programs require a substantial commitment. The chain began testing a frequent-shopper program in four stores in April and plans a chainwide rollout by July 1.
Like Ukrop's, Felpausch had introduced an initial program around 1987, which it used for check verifications and video rentals, and planned to eventually upgrade it to a frequent-shopper program.
"Two years ago we realized the bar-coded cards would never allow us to move into a frequent-shopper program, and six months ago we finally set the wheels in motion to issue new cards which featured magnetic strips," he said.
The company sent new applications to all 87,000 of its current card owners so it could "clean up" its list -- deleting customers who had moved away or died, for instance.
The company's wholesaler, Spartan Foods, Grand Rapids, Mich., is now processing the applications at a rate of about 1,500 to 2,000 a week, said Jean Story, Felpausch's director of consumer affairs.
The overall cost? About $1 a card when printing, postage, data entry and the like are taken into account, she said. But that's not the only cost the retailer has incurred. About 130 terminals had to be upgraded in 12 of its stores to accommodate the new system, a modification that was a "sizable expense," Hubert added.
Other retailers agree that the cost can be substantial. "Every time we've looked into a program, we've seen costs piled upon costs, and I guess that's why we haven't pursued the concept more aggressively," said Larry Simpson, director of retail systems at Bashas' Markets, Chandler, Ariz., a 68-store chain that has considered the concept for several years.
"I think there's more costs involved than most people realize," said King of Hughes Family Markets. "It's expensive to maintain a massive file on all your customers and what they buy."
Even strong advocates of frequent-shopper programs recognize the challenge of turning raw data into meaningful information.
"The amount of data we're generating in our four-store test is astounding, and we're still wrestling with what to do with it," said Hubert of Felpausch. "Although we plan to use it eventually for target marketing, we're just throwing it on the floor for now.
"The information has to be used for target marketing for the program to be worth its costs," he said. "If you're just generating reports, it's not paying for itself."
"There's a lot of data collection involved," said Charlie Roach, assistant vice president of management information services at Basics/Metro Markets, a 23-store chain based in Randallstown, Md.
"A typical frequent-shopper program can generate one gigabyte, or one trillion bytes, of data per store," he said. "That's 23 trillion bytes for a chain our size. If you don't know what to do with all that data, you're just collecting it for nothing and giving away free coupons and other incentives."
While Roach said he "wouldn't be surprised" if the chain took the first steps toward such a program within a few years, he doesn't believe the company will do so until it can effectively use the marketing information.
"A number of retailers have tried and then discontinued frequent-shopper programs, and the impression I got was that they just couldn't use the marketing information," he said.
While Sands of Seaway Food Town said the "volume and quality of the information" has "exceeded [the company's] expectations," he admits that learning how to use it effectively has required "trial and error" and occasional help from an independent marketing consultant.
"You have to be able to digest the information and use it wisely to the benefit of your company," he said. "You have to make it pay off -- whether it's through promotions or some other special campaigns. If everybody just stands around 'oohing' and 'aahing' over the information, what good is it?"
Sands said his company has run several successful promotions based on the information, but is still learning how to best use the program.
Most of those who believe in the programs say they their return lies in their power to strengthen customer loyalty and make target marketing possible. "The programs' ability to strengthen customer loyalty is its most important function to me," said Harp's Eskew. "It gives positive reinforcement to a shopping habit. Recent studies show that supermarket customers aren't as loyal as we once thought they were. "They shop a store about once every two weeks, which means they're shopping somewhere else, too, assuming they're shopping weekly. I think frequent-shopper programs can build customer loyalty and keep customers from bopping around from store to store," he said.
"Improving customer loyalty is the major way we intend to get money back on our investment," said Ukrop. "We want to use the program to enhance our relationship with our customers by rewarding them for their loyalty." Eskew of Harp's said he also believes the programs can lead to bottom-line success by enabling retailers to reduce the amount of general advertising they do and focus more on target customers.
"You can't eliminate general advertising altogether, since that's how you bring in new customers, but you can cut down on your use of it," he said.
Roach of Basics/Metro agrees. "Frequent-shopper programs can save a company money and increase sales by allowing it to identify and target consumer segments through focused advertising," he said. "It also provides customers with incentives for shopping in your stores."
"Although we haven't run a program, we think we could realize enough benefit to make it a worthwhile investment," he said. "The bottom line would increase through savings in advertising dollars and through additional sales."
Still, despite an obvious interest in the programs, and an understanding of how they can work in an ideal world, the question still remains: Why aren't more retailers introducing frequent-shopper programs?
As one retailer put it, "It sounds real good, but how well does it work? Sometimes things look good and sound good, but they just don't work."
"It's quite an undertaking," offers Hubert of Felpausch. "Plus, there's no real hard facts that make it a guaranteed winner. There's nothing that will make you say, 'Yes, it'll increase your market share and sales.' "