For the past year and a half, the grocery industry has embraced Efficient Consumer Response as a way to bolster its competitive position. While ECR is necessary to become more competitive, it is not enough. We propose that a critical area of retailer focus should be maintaining and increasing customer loyalty. Just how important are loyal customers? Research by the Center for Retail Management at Northwestern University on A.C. Nielsen panel data shows how much loyal customers contribute at four leading grocery chains in two major markets. For most chains these customers are only 12% to 15% of the customers in the market, but they represent 55% to 70% of the volume at the chain. What happens if a chain loses 10% of its loyal/preferred customers? Using an incremental margin of 20%, the data show that sales would decline by 6%, while profits would be cut by more than half. What can be done to maintain the loyal customer base? First, retailers must recognize their importance. Second, loyal customers must be identified -- which implies the need for database marketing. Third, retailers must reward them.
In the old days, when Mrs. Jones walked into the corner grocery store, the owner knew her name and knew she was an important shopper. While he may not have rewarded her with discounts, he did make her feel special. Today, retailers need to use technology as a substitute to identify the best customers, and then create one-on-one marketing programs to treat them specially.
Preferred cards are a step in the right direction, but anyone who shops in a store and wants a preferred card is eligible to receive one. There is really nothing "preferred" about the card. Other retailer formats have created exclusive clubs, like Neiman Marcus' "In Circle," which offer special benefits to top customers including special showings and significantly better service. Grocery retailers need to develop similar programs, offering their best customers meaningful benefits.
A retailer's focus on loyalty plans has implications for packaged goods manufacturers, particularly their promotional funds. Money will have to be directed into more targeted promotions, as across-the-board off-invoice or scan promotions become increasingly less responsive to the retailer's need to target loyal customers. Also, manufacturers must understand how to use more targeted promotional vehicles to support customized offers for shopper loyalty groups. In short, retailer loyalty programs mean that manufacturers will have to contend with even more varied trade promotions and will need to develop new strategies which benefit the retailer, while also generating financial returns for the manufacturer. This will require new, more creative promotions.
Robert C. Blattberg is Polk Bros. distinguished professor of retailing and director of the Center for Retail Management, J.L. Kellogg Graduate School of Management, Northwestern University, Chicago. Edward J. Fox is associate director at the center.