MINING FOR LOYALTY

DAN ALAIMO

It's a long road to loyalty.

Judging from the responses to SN's questions about data mining and loyalty programs, Technology Roundtable participants felt supermarkets have a long way to go before the programs are successful and used to their fullest potential.

Two of the retailers reported retrenchment, for very different reasons.

Andronico's Markets, Albany, Calif., prefers to focus its resources elsewhere. "We are putting the front end in place, and we are doing other infrastructure types of things," said Mike Miller, director of information systems. "We just didn't feel that operationally we had it down well enough either to execute properly or to use the data being generated."

Harmons, West Valley City, Utah, was deterred from rolling out its program because of a competitor's negative experience. Said Ken Pink, vice president, information systems, "The whole image of cards in this market area is very bad. The only people who have done anything with a card in Utah is the Smith's chain. They rolled it out, in my opinion, very poorly."

But the roundtable participants all agreed that the programs have immense potential for target marketing and understanding purchasing trends, among other uses. Suppliers are also looking for the data from these programs.

Meanwhile, concern over privacy issues has the retailers wary, and all are being careful to stress that they will not release personal information.

Other panelists participating in the roundtable included Gary Butler, vice president of information technology, Brookshire Grocery Co., Tyler, Texas, and Gary Herman, chief information officer, Unified Western Grocers, Los Angeles.

This is how they view the challenges and potential of frequent shopper programs.

SN: How successful have supermarkets been in maximizing the value of customer loyalty programs?

PINK: I think really poorly. That's just in our area. The only people who have done anything with a card in Utah is the Smith's chain, which is now part of Kroger, although they weren't when they started the card program. They rolled it out, in my opinion, very poorly. They picked up their ad and they just moved it to their card. So if you didn't have your card, you ended up paying more for groceries. So the whole image of cards in this market area is very bad and Harmons has not tied the price of groceries to our card.

SN: Are customers being penalized for not using cards?

PINK: Not at Harmons. At Smith's they are and that has hurt the whole image of cards in this area. Smith's realizes that now, but that's a year and a half after the fact. Albertson's came out with a very aggressive campaign when Smith's came out with the card, with TV and radio ads telling people they didn't need the card. And people asked themselves, "Why do it?" For us, we were ready to roll out a card program then, and we decided to wait. Now obviously Harmons and our suppliers would love to have some better demographic understanding of who we are selling to and why.

We have a lot of cards out there, and all that we have chosen to do to date is some charitable stuff, and identification for check cashing, and that kind of thing. We've gone backwards from that plan because of the experience in this area. If we do anything it will be a points-based program. As small as we are, we can't afford to that kind of negative feeling with our customers that they are being penalized for not having a card.

HERMAN: These programs can provide a tremendous amount of data. I believe that most companies do a good job in using this data. It is now a standard to keep the data, the customer, item level, and the industry is finally starting to offer customer-specific promotions. Customer loyalty is really just a marketing program to try to maximize your share of customer dollars. You still have to do the basics to get the customers. Hopefully what these programs do is to increase the share of wallet from these customers that are already in your stores.

BUTLER: In my opinion, you have a few really good programs out there, but the rest are just discounting programs. There's only a few retailers that are doing a really good job at using the data and doing one-on-one marketing, tying in with other businesses and adding value to the card.

MILLER: I'm not sure retailers really have been maximizing the value. You see such mixed results. At Andronico's, we had to put our program on hold. We took a look at our value drivers for this year, and we had other priorities that were more important. We are putting the front end in place, and we are doing other infrastructure types of things. We just didn't feel that operationally we had it down well enough either to execute properly or to use the data being generated. Not until we were finished with the transition from being a small independent to being a small chain.

But we will re-implement the loyalty program probably within a year. At that our time, our objective will be to focus on the data that we generated, and I don't think we have done a good job of that before because we were not focused on it.

HERMAN: The biggest challenge is how to communicate to customers that they are unique promotions. You can go through and analyze data and figure out what ought to be offered to people, but it is very difficult to provide the right vehicle to communicate an offer that is good for one customer and not another. Mailing offers is the easiest method, but it is by far the most expensive. Kiosks have been only marginally successful so far. E-mail, getting there. The problem, at least at this moment in time, is that not yet a high enough percentage of your customers want to get e-mail offers. But I think that is changing quickly and I would expect that in the next year or so, that will be a very common way to communicate offers to customers.

SN: What is the best use of this data?

MILLER: I am fascinated by the correlation of product: What influences the purchase of another item? If we were to analyze the affinities and cross-promotion strategies, we would reap benefits from that. Marketing to segments of customers rather than masses. Defining specific opportunities we have for promotions and monitoring the results. We have a lot of variety in our stores. We have a lot of unique vendors. We are very successful with cross merchandising within the physical store and I don't think we give customers enough promotional, marketing or merchandising influence based on the data that we generated.

SN: Is there a need to move beyond discount-driven frequent shopper programs?

HERMAN: I agree that the programs have to offer more than discounts. In addition, there should be customer-specific promotions, continuity and giveaway programs. These continuity and giveaway programs have been successful in both promoting card use and generating excitement in the stores.

BUTLER: These programs can become tools for retailers to give the customers what they want, put out the items and the products, and tailor their programs to the individual neighborhood. Know what is selling and what is not, what our customers buy when it is on sale and what they don't buy, and identify what promotions are effective and not effective. It's a great opportunity to merchandise certain types of products to your better customers. If you know what products your better customers are buying, you have a great opportunity to partner with vendors to promote the products that they like.

MILLER: I hope that our competition sticks to the discounting strategy so we can exploit it. I really think that we have to go from the price incentive to differentiating the performance of customers and marketing to the customers based on their preferences. That is a drastic departure from the status quo, all those things that we are comfortable with. But you have got to do it.

SN: What impact is the controversy over information privacy having on supermarket loyalty programs?

HERMAN: This is a very serious problem and must be handled correctly. Company privacy policies have to be clearly communicated to customers, and customer names and other information must be kept confidential in the company and never sold to outside vendors.

I think you have seen some retrenchment because of the news reports, which is unfortunate, because when you discard these programs, you lose all this incredibly valuable information. For the future, the programs will stay out there to some extent, but probably will recede more than they will expand.

BUTLER: We see a little of customer resistance in some of our markets. If they knew the real reason why we want the information, they wouldn't be so concerned. We are not going to share it. Absolutely, without any question, we will never share the names and addresses with anybody. But we really need to know who our better customers are so we can better serve them, so we can better merchandise our stores, and this is a tool. Otherwise we are just scattershooting, trying to figure out what our customers want and like, and this is our way of being able to touch each customer.

MILLER: The controversy changes the parameters in which we operate. We have to be a little bit more creative in how we do things. We have to have our customers' confidence anyway. They have to trust that our food is clean, that our employees are healthy. So this doesn't change our mindset at all. It might mean that we do things a little bit differently.

Some retailers have exited frequent shopper programs using privacy as an excuse, and they have in effect, eliminated their chances of ever getting back into a program if they chose to do so. But I think that masks the real issue. Now that we've put our program on hold, I know that privacy is not the issue. I know that operations and organization and execution is really the issue. By us not using privacy as an excuse, we left the door open to get back into it at some point in the future.