U.K. RETAILERS' LOYAL CUSTOMER 'CARD WARS' PROVE COSTLY

JAMES FALLON

LONDON (FNS) -- Most major retailers in the United Kingdom have grown their sales over the last two years by launching loyalty-card programs.

But it remains to be seen whether retailers are attracting truly loyal customers, and whether they have the capability of extracting useful information from the data provided by the programs.

Millions of loyalty cards have been issued to U.K. consumers since Tesco, Cheshunt, England, launched the first loyalty-card program in the United Kingdom in 1995.

Tesco was quickly followed by Safeway of Hayes, England, and then J. Sainsbury plc, London, which had initially characterized such programs as "electronic Green Stamps." ASDA, Leeds, England, has also introduced a trial loyalty-card program in 19 of its stores.

Most of these frequent-shopper programs offer participating customers either money back or points that can be redeemed for products or services. But while Tesco and Safeway say the cards are one of the reasons same-store sales have jumped by up to 6%, they admit this comes at the cost of heavy investment and profit margin.

Each of the chains has spent from $16.2 million to $24.3 million to launch its program, according to industry sources. David Reid, finance director at Tesco, recently told SN the store's Clubcard cost it about 0.2% in profit margin in the year ended March 31.

More important, executives and analysts said many of the retailers are far from using the data-collection capabilities of the cards to their full potential.

Food retailers worldwide have leaped on the loyalty-card bandwagon as a way to collect data on individual consumers' shopping patterns, enabling them to better tailor their offerings and promotions to the core 20% of customers who provide 80% of their business.

But while British food retailers are collecting endless streams of data on customers' shopping habits, they admit they've barely scratched the surface in using it. And far from focusing on the core 20% of loyal customers who account for the bulk of their business, British food retailers seem to be in a race to attract as many "loyal" customers holding their cards as possible.

Tesco trumpets that it has 9.5 million Clubcard members; Sainsbury's said it has more than 8 million Reward Card holders; and Safeway estimates there are 5.6 million holders of its ABC card.

So instead of customers holding a card for the store to which they are most loyal, it's common for consumers to have cards from all of the major chains and simply use the one for the store they are in at that particular moment.

"In broad terms the loyalty cards have proven a zero-sum game," said Richard Hyman, chairman of the consulting firm Verdict Research, London. "All the major players now have them and they now are the marketing industry's flavor-of-the-month. A lot of the hype surrounding them misses the point -- customers aren't loyal to a card or a program, but to a retailer."

At a conference last year on loyalty cards organized by CIES: The Food Business Forum, consultant Brian Woolf of Retail Strategy Center, Greenville, S.C., faulted British food retailers for their use of loyalty cards. Woolf contended retailers were failing to use the data they were collecting and instead were using the cards almost exclusively as a promotional tool.

The retailers, while agreeing they've yet to fully mine the data they've collected, defend themselves by pointing out that it has taken time to set up the systems necessary to give them the right information at the right time. They add that such card-based programs result in oceans of data that are difficult to cope with.

"The last 18 months have been about creating the ability to manage the data that flows from these cards," said Steve Webb, corporate development director at Safeway. "But we made an early decision to create a sophisticated database that enables us to capture literally every piece of data and interpret it. That has been the key."

Industry observers say Safeway is the furthest along in using the data from its loyalty-card program. The food retailer regularly mails its ABC card holders information on offers, menus and related topics.

"But you have to proceed with caution," Webb said. "You have to understand their behavior and track them over time. You don't want to just send them junk mail."

A more important development is that Safeway has begun using the data collected via its ABC card in category-management efforts in store. For example, Webb said, if a store manager is doing a range review and finds that a particular customer buys a slow-selling brand but also spends significant amounts of money at that store, it won't de-list that brand in order to retain the customer as a loyal shopper.

"That is what a loyalty card does," Webb said. "For the first time, we have hard data on which to base decisions."

But while Safeway currently is leading in data analysis and usage, Webb admitted that the gap is closing. Tesco, for example, has begun using its data to target promotions to customers based on their shopping habits.

Tesco also recently launched a Baby Club for expectant mothers, which provides them with specific offers related to babies. The club, which was introduced three months ago, now has 200,000 members, Reid said.

Sainsbury's -- which introduced one of the United Kingdom's first retail loyalty cards at its Homebase hardware chain in 1991 -- recently installed its own in-house data warehouse, which soon will become live, a spokeswoman said. This will enable the retailer to analyze its data in even more detail.

Despite these initiatives, analysts remain skeptical about the short-term payoffs from loyalty-card programs. They point out that the cards cost retailers significant amounts in investment and profit margin with no real apparent return. The costs are only going to increase as retailers seek to outdo one another by adding services ranging from savings accounts to check guarantees to their cards.

"Downloading chunks of data and using it to do micromarketing is just the first stage in loyalty cards," said Mike Dennis, a retail analyst at Natwest Securities, London. "They haven't even begun dissecting the 5 billion-plus bits of data they are collecting to truly track customer behavior at the item level.

"The kind of computing power needed to do that is only available at NASA or the C.I.A.," Dennis added. "It's going to take time for them to install that and build a track record. These retailers aren't as far down the road in data warehousing and interpretation as they would like to believe."