PLAYING THE LOYALTY CARD

DAN ALAIMO

If customer loyalty is the undiscovered terrain, supermarkets are in danger of drowning in the sea of frequent shopper program discounts before they get there.

Retailers and key marketing consultants agree that these frequency programs need to progress beyond their emphasis on price offers and to take advantage of the data-mining opportunities they represent to build loyalty. Some chains are doing it well now, but the industry has only scratched the surface of what could become a powerful marketing tool.

In the old days, retailers knew they were going to have promotions like back-to-school and others based around the major holidays, said Charles Owens, director of database marketing, Balls Food Stores, Kansas City, Kan. "Everybody had their promotions, and it was about who could sell cranberry sauce the cheapest. But those days are over," he said.

"You have to give customers what they want and to do that, you have to analyze what customers are buying. That's what we are doing. We do focus groups. We do data-mining on the purchase history, trying to give customers something extra that they want," he said.

"Our program is more than just a vehicle to give discounts. We use it to reward our members, and thereby instill loyalty," said Kevin Doris, president and chief executive officer, Gerland's Food Fair, Houston. "We use it to reward our members, and thereby instill loyalty," he said.

Focusing on price-oriented promotions is expensive for the overall grocery industry, with manufacturers spending over $25 billion through retailers to promote products and services, said Victor Orler, partner, Andersen Consulting, Chicago. "No matter what measure you look at in terms of incremental volume, in no way does that create any value. We are just not selling enough merchandise to justify those kinds of expenditures. We have gotten ourselves into a situation where we have conditioned customers to only look for deals," he said.

"We have created this reliance on price promotional spending that has undermined the equity of both retailers and manufacturers," he said.

Retailers in general have a spotty track record in advancing from price promotions to loyalty building, and smaller chains have made more headway than the bigger companies, he said.

"We are all sort of admiring the problem right now. These loyalty programs are a lot like teenagers and romance -- everybody is talking about it, but nobody is really doing it." With 10% to 20% of a typical retailer's customer base accounting for 65% to 80% of their profits, "there is a great opportunity to rise above the fray of the typical promotional carnival atmosphere that is out there and really serve the consumers who are most loyal to the retailers," he said.

Among the bigger companies, many of which have card-based frequency programs offering discounts, the loyalty component has suffered from a lack of attention. "There have been ad hoc projects. But I don't think there are a lot of larger retailers who have said this is going to become our core competency. The opportunity to create enormous shareholder value by intimately and better understanding the customers that are most loyal is significant," Orler said.

One obstacle to focusing frequency programs on loyalty is that many of the traditional factors that create loyalty are difficult to do on a customer-specific basis and do not necessarily translate to the world of electronic marketing, said Ken Wyker, president, Wyker Marketing, Charlotte, N.C.

"You drive loyalty through a clean store, customer service, all those things that you wouldn't want to limit to specific customers," he said. "So what is happening is not in fact loyalty, but is more like continuity of purchase through discounting." For example, some meaningful rewards for loyalty would be separate check-out lanes and preferred parking spaces, but these are hard to implement in the real world. "Conceptually, it sounds great, but just try it logistically."

A more practical focus for many retailers is to avoid alienating good customers, which is not as easy as it seems. "People generally will shop the store that is closest and most convenient until they get alienated, and then they will go someplace else. Grocery retailing ends up being about avoiding those negatives. That's why the best operators don't have things in their stores that irritate customers and drive them away. The loyalty programs are aimed at driving them in, but really you need to not drive them away -- not discontinue an item they care about," Wyker said.

The retailers who are doing the best job at building loyalty are using the data from the card programs to improve their category management, he said. "If you make sure that your planograms, your store set, your promotional activities, are all geared to what your customer base responds to and likes, you are going to get that loyalty. It's not just targeting customers one-to-one, but making all your customers loyal by using the data to run your store better," he said.

Many retailers are not yet taking full advantage of the information they have, said Barry Kotek, managing partner, Retail Systems Consulting, Naples, Fla. "They are not mining the data. There are very few people out there who are really looking at the data and trying to determine who is cross-shopping and how do I incent them to buy more at my store, or how do I develop some tools that help create loyalty," he said.

With that, the retailer can start to build a two-way communication with the customer, he said. Without it, "you are going to find a stagnation in the program and eventually some push-back on the part of the consumers," he said. The key is trying to find out what motivates the consumer, and consumers are motivated in different ways. "With today's data-mining technology, you can determine whether a person is promotion-sensitive and what type of promotion they are sensitive to."

This summer, one retailer will test a program offering discounted Internet service to card-holding customers and then communicating to them through a dedicated portal page, Kotek said. The portal page will include news, weather, stocks and sports, but will also allow the retailer to poll customers on their likes, dislikes and shopping habits. Working with manufacturers, customers will be offered credits for purchases that will allow them to further reduce the cost of the Internet service, or be used for other purposes, such as paying for long-distance telephone service.

"This is using the Internet for two-way communication, getting closer to your customer and helping to create loyalty through an alternative currency. This gives them something different than just cents-off while tying the customer to a physical presence in the marketplace," Kotek said.

"Discount programs aren't loyalty programs, they are frequent shopper programs," said Lavonne Kipp, loyalty marketing manager, Supervalu, Eden Prairie, Minn. Frequent shopper programs are a valid retail strategy, she add. "But it is very important for retailers to understand what their goals are and to make sure that they are trying to achieve them," she said. Misunderstanding the terminology can lead retailers in the wrong direction, "and I think that is the biggest hurdle," she said.

Discounting is one facet of loyalty programs. "You have to bring a value to your customer. That is where the discounting comes in, but it can't stop there. Customers want to know that they are valued, and simple financial kickbacks aren't enough. It goes into the emotional appeal. You can achieve that through many avenues in your program. The golden question is, how are you going to do it?" Kipp said.

"We feel the loyalty program should be loyalty-building rather than just discounting," said Rebecca Sanders, vice president, marketing, Brookshire Grocery Company, Tyler, Tex. "We are doing that in a variety of ways, such as mailers that actually target customers based on their purchase history." Brookshire first tested its program in four stores in 1998 and has since extended it to 23 of its 100-plus total units.

The key challenge lies in the data-mining, she said. "The loyalty program is successful or not based on how you use your data. That's its purpose."