Loyalty Programs Poised to Evolve

MARK HAMSTRA

CINCINNATI — The supermarket industry is on the verge of taking its loyalty marketing programs to a higher level, where product offers are better customized to meet the needs of individual shoppers, according to a consulting firm here that recently released an assessment of loyalty programs across a range of industries.

“The grocery loyalty card has reached its limit of effectiveness as a two-tier pricing program, where you get one price on a product if you use the card and another if you don't use the card,” said Rick Ferguson, editorial director at Colloquy, the loyalty consulting firm that conducted the study. “While the occasional points program can be found on the grocery shelf, the two-tiered price model has become a virtual must-have for those marketers working beyond the walls of Wal-Mart and Costco. The result of this rampant sameness is that loyalty initiatives in the space have devolved into background noise.”

He cited Kroger as an example of a U.S. company, through its partnership with data analysis firm dunnhumby USA, that has taken some steps toward more thorough customer segmentation and used its loyalty card data to tailor offers to specific customer groups. Other regional chains that have done advanced segmentation analysis to create targeted offers include H.E. Butt Grocery Co., San Antonio, and Ukrop's Super Markets, Richmond, Va.

“Kroger, since they brought in an analytical partner, has been diving deep into basket analysis and segmentation, and trying to leverage that data to deliver value relevant to the customer,” Ferguson said. “Everybody has got their eye on Kroger, and you will probably see a lot of the other big players rather rapidly starting to do more segmentation.

“The reason Kroger is going down this route is that they've paid pretty close attention to Tesco in the U.K. and how successful they were at doing this same thing. The model is there, and they know that it works.”

The Colloquy survey, which focused only on the U.S., found that supermarket chains have the fourth-largest loyalty program membership among the industries studied, with 124.3 million memberships (individual customers can have more than one membership). That total is about half the number of airline loyalty memberships, which is the No. 1 category at 254.4 million memberships. No. 2 is the financial services category, with 238.7 million members, followed by specialty retail with 137.4 million members. Those top four business categories account for 57% of all loyalty program memberships.

Ferguson said consumers — especially those in the more affluent demographic groups — have learned from other industries that they should be getting personalized offers from the loyalty programs to which they belong, and they will come to expect such offers from supermarket companies as well.

“What is typical in the grocery industry is segmentation by lifestyle, so you might see segmentation by customers that are interested in healthy food choice, or customers interested in quick-fix meal solutions, or customers that have new children in the household, or customers that have pets,” he said.

“It's not rocket science — you see that someone has a dog because suddenly they have been purchasing dog food, so you send them an offer for dog food. It's a simple concept, but grocers haven't gotten there yet, as a whole. But I think you are going to start to see more grocers go down that path, because it gives more value to the consumer and it deepens the relationship through differentiation.

“If you have a choice of going to the Wal-Mart Supercenter or going to the grocer that is going to have offers that are relevant for you, the idea is that you are going to do business with the store that understands you better.”

EXPANDED BENEFITS

According to the report, membership levels in supermarket loyalty programs are expected to remain flat, but both customers and retailers will likely derive more perceived benefits from the changes they make in their programs.

One of the basic challenges grocers face in using loyalty cards is that they need to better tie individual transactions to specific customers, he said.

“The problem with the grocery loyalty card model is that it has become pretty hard to connect transactional data to an individual user,” Ferguson said. “We've all seen the example where a customer forgets their loyalty card and the cashier has one there and just scans it so they can get their discount. That system is kind of broken. What they need is a system that can tie purchases to an individual customer and start to segment them.”

Ferguson suggested that more supermarket companies might evolve their programs to make them more like airline programs, in which customers can earn points based on their purchase volume.

Another option, he said, could be for more supermarkets to create multi-channel partnerships with other businesses, in which customers can earn rewards for purchasing each other's goods and services. Some chains, such as Price Chopper Supermarkets, Schenectady, N.Y., have been coupling their loyalty cards with local fuel centers.

“[Partnering with other businesses] is a real opportunity for grocers, because they are sharing all the operational costs of the program,” said Ferguson.

One of the reasons supermarket companies set up their loyalty programs as they did was because it was seen as very cost-effective, he explained. In the future, he said, he expects supermarket companies will look to their vendor partners to help fund their more complex loyalty programs in exchange for access to the data that retailers collect about their customers.

Altogether, U.S. consumers belong to some 1.3 billion loyalty rewards programs — up 35.5% since 2000 — with the average household belonging to a total of 12 different programs. However, the study found that only 39.5% of those memberships, or 4.7 per household, are defined as “active memberships” — those other than one-time users or customers whose memberships have been inactive.

“Fat membership rolls may look good in a press release, but active loyalty program members are the only members who count,” said Kelly Hlavinka, senior director, Colloquy, in a prepared statement. “Marketers must adopt highly targeted enrollment strategies and allocate resources where they do the most good. That means enroll the right customers, drive active participation programs, employ reward bonuses selectively and use loyalty data throughout the organization to increase customer insight.”

The strong increase in loyalty memberships over the past several years can be attributed to several factors, according to the Colloquy report, including the growth of the Internet and more advanced POS technologies.