Consumer loyalty to retailers

Does Consumer Loyalty to Retailers have a Future?

The UK 'High Street' retail market is dominated by several large groups who control the majority of the shop front brands familiar to most consumers. This environment is currently characterised by intense competitive pressure in the pre Christmas and January sales period with many retailers continuing to use sales discounting and extended credit facilities to try and tempt consumers into buying.

The sector is also characterised by the focus on retail branding in response to the growing trend of consumers fragmenting their buying habits. Retailers are seeking relevant differentiation and branding this promise. In this dynamic environment the introduction of the customer loyalty card scheme is seen as both a technique to reward consumer loyalty and a source of customer information that enables the retail brand benefits to be communicated direct to customers.

The growth in this type of marketing has been very marked in the UK since the recession of the early 1990's and the number of separate retailer schemes operating is estimated to exceed 180 different offers. Clearly a consumer who is an enthusiastic participant in these programmes would need a separate shopping trolley to transport their different loyalty cards on shopping forays. The result of this extensive choice has been a rise in the concern of 'loyalty fatigue', 'loyalty card constipation' and the 'fight for real estate in the wallet'.

Ultimately this environment created the opportunity for the Nectar initiative in the UK.

Consumer research has validated these concerns with evidence that the average consumer will only carry five plastic cards in their wallet. Since debit and credit cards will account on average for a least two of the available five 'slots', the battle amongst retailers running loyalty schemes has been to ensure that their scheme is filling one of the remaining choices.

The shopping frequency and relatively high average 'basket' for customers has tended to favour the major Grocery Retailer schemes (Tesco Clubcard, Sainsburys Reward Card) in the development of database driven customer loyalty schemes. The strength amongst the female of the species of the Boots Advantage card, who have a customer footfall believed to be the highest in the UK with the exception of the Post Office, testimony to further pressure on the choice of which card to select for regular space in the wallet.

The UK has 35 million loyalty cards in use on a regular basis. This compares with less than 20 million users of credit cards. By anyone's measure this is an impressive figure of utilisation in a country with a total workforce just exceeding 27 million.

A nation-wide survey of 1000 adults conducted for Air Miles in mid 1998 found that two thirds of UK consumers feel reasonably loyal to their regular suppliers. In fact 60% claimed that their loyalty has not wavered much over the last three years. This survey divided consumers into four groups:

• Advocates who are intensely loyal (19%)
• Judges who are firm but fair moderately loyal customers (12%)
• Jurors who are easily swayed and prime candidates for switching between suppliers (58%)
• Muggers who are serially disloyal and have no allegiance to any supplier (10%)

One in eight consumers in the UK is now involved in four or more loyalty schemes.

Women are greater loyalty collectors than men and ABC1 social groups are more likely to collect than C2's, D's and E's. In terms of age segmentation, 40% of 16-34 year olds claim to have signed up to a scheme that influenced their spending.

The survey also suggested that a gap exists in the current market for a scheme targeting the young affluent male with high disposable income since most of the supermarket, oil company and major high street programmes running are firmly aimed at the travelling businessman or working women shopper.

The percentage of consumers active within loyalty schemes has remained very stable over the last three years and is evidence of the mature state of the UK market for loyalty schemes.

The supermarket schemes dominate the landscape for loyalty schemes in the UK. Tesco Clubcard has an awareness level amongst all adults of 66% and a participation level of 28% (Carlson study). Sainsburys Reward scheme, despite being late to the party, is only just lagging this performance by a few percentage points.

The key learning from much of this analysis is that loyalty schemes can only assist brand values and ultimately encourage repeat custom if they are part of an overall core proposition. The real value of the schemes to most companies is going to be the database of information that is facilitated by running a scheme.

The idea of listening to customers and then delivering what they want is not rocket science but very few companies have actually been successful at delivering what is often stated in their annual shareholder reports.

Amongst the top ten UK retailers ranked by turnover (Corporate Intelligence. The Retail Rankings), six already operate a customer loyalty programme and a seventh is reported to be considering (Marks and Spencer).

The next ten retailers in terms of turnover also include five existing loyalty schemes supporting their overall customer offer with another three of the remainder reported to be considering introducing a loyalty scheme. This fact alone seems to be testament to the fact that 'know thy customer' has already been taken on board by most of these leading retailers.

With so many loyalty schemes on offer, why question their future?

Most Loyalty programmes are designed to influence customer's behaviour and attitude. Rewards are the currency created to influence customer behaviour whilst customer attitudes are generally approached by recognition and then relationship building

The ultimate justification for many of these programs has historically been to lead to the supposed Holy Grail of 'one to one' marketing. Evidence to date suggests that most schemes are still struggling to achieve segmented customer marketing and have some distance to go to offer real personalised service. In this context the issue of 'Trust and confidence' in the brand is more attributable to traditional mass advertising and focus on product quality rather than the result of customer loyalty scheme.

Any card that exists between the retailer and customer has a potential impact on loyalty, it is therefore important to consider the view of the retailer and the customer.

Customers tend to view loyalty cards as providing them with benefits that would not otherwise be gained. Research also supports the view that they satisfy a psychological 'need to belong' urge similar to the following of sporting clubs. The customer has to decide 'will I subscribe to the card scheme' and 'how will I use the card'.

From the retailer perspective a strategic choice has to be made to operate the card alone or with another organisation. The retailer is able to decide on both scope of use and card benefits. These strategic decisions then define the relationship with the customer.

The decision to attract, retain or build loyalty should be at the centre of the retailer's strategic decision to launch a loyalty programme in the first instance. Increasingly retailers are also focussing on the need to understand customer groups and even strive of individual relationships. Many retailers are justifying loyalty scheme's as the key to better understanding of customers wants, needs and wishes, this is seen as a route to superior customer segmentation and analysis.

Have loyalty schemes delivered?

Examination of the 'rhetoric vs the reality' is almost inevitably a subjective view at present, but I offer the following observations.

• Can loyalty schemes really build relationships when markets become crowded with carbon copy schemes? As I stated earlier, in the UK market it is estimated that over 170 retailer schemes now operate. Almost every sector has schemes, which effectively cancel out each other's, in terms of competitive advantage. Loyalty is therefore cited as a zero sum game. We should however reflect that traditional mass advertising is also undertaken by most leading brands, and this form of marketing is less often criticised as being an ineffectual position to hold.
• If the objective of these programs is to retain retail margins, it is cancelled out in a market where running a loyalty program is effectively a cost of doing business. In a sense the evaluation of market maturity matters since 'first mover', advantage seems to apply in relatively immature markets.
• The concept of customer 'life time value' is being challenged by evidence of very high customer churn rates and continued allegiance to multiple-buying habits. Professor Andrew Ehrenberg of South Bank University has been researching behavioural data of consumer buying habits since the invention of Brand marketing in the 1950's. In 1996 he published a paper (A Ehrenberg and J Scriven, "Brand Loyalty under the Microscope". The findings supported the answer to four questions relating to loyalty. First, he asked 'is there such a thing as loyalty'. He concluded that that loyal behaviour does exist since people buy the same brands. The important finding here was that customers bought a repertoire of brands and did not routinely stay loyal to a single brand. Second, he demonstrated that loyalty measures correlated in line with market share and this tracked predictably in line with market share. Third, he also established that loyalty does not seem to differ regardless of the product or service. The theory seems to hold good for detergents and motor cars. In this sense he established that the bigger the brand the more loyal was the evidence of customer behaviour. Fourth, he proposed that one hundred percent loyalty was very rare amongst consumers and those that did buy with this degree of regularity did not actually represent heavy buyers. They tended to buy on average less than the more polygamous consumer does.
• Whilst many schemes claim to be linked to cross-sell and up-sell activities within their customer cardholder base it is actually very difficult to find real case history evidence to support this assertion. In studies on some existing schemes, there is evidence of the difficulty of getting consumers to do either. Recent research by Robert East from Kingston Business School into the take over by Tesco from Sainsbury supported the contributory role of the Tesco Club card in the climb to the top slot. It did however emphasise the greater importance of the physical expansion of retail floor space with new store openings in developing Tesco sales by attracting a greater number of customers.
• Strong evidence from studies undertaken in the last few years also supports the assertion that retained customers are more valuable than continual expansion of the customer base. What is not evident from these studies is any suggestion that the most loyal customers are the most profitable. In fact, Professor Ehrenberg's research proposes the opposite.
• At the scheme description level, currency programmes and consumer focus is the dominant breed. Whilst the Business to Business market is more rational in its approach to supplier relationships it seems strange that more Business to Business loyalty schemes have not been implemented.

Loyalty scheme issues

Issues to be addressed in considering the future for loyalty programs will need to resolve the following.

• How do you effectively differentiate your program in a crowded and 'me-too' market? Traditional methods of market research are unable to predict future demands. New products and services are changing consumer behaviour faster than their ability to project themselves into some 'future-world'. It is not until a new player offers a 'taste of tomorrow' that most consumers can understand the options they can pursue.
• In some markets, customers are already showing signs of 'loyalty scheme fatigue' and programs will need to be re-positioned to recapture customer attention.
• Delivering results from these schemes is going to attract the attention of more Board meetings, as pressure on margins, generally, will force companies to seek further cost savings.
• Data protection legislation has not yet received a wide press, but in markets like the UK, it is already causing problems. A recent cross-sector promotion, between a Bank and a Utility provider, has been referred for breaching the new Data protection legislation.
• The issue of which technical platform to run a scheme will become more problematic, as the variety of options available is increased. Choices such as magnetic stripe vs chip cards, standalone terminal vs integrated EPOS and which form of database to construct will feature in more schemes developments.

The thought put forward by Brian Woolf developed in his book 'Customer Specific Marketing' is worth further reflection in the evaluation of were customer loyalty schemes are heading.

"How long before the Data Base that a company holds on its customers is going to represent a more valuable asset than the products that the company actually markets."

Information management and the speed to understand and then exploit new retailing opportunities will be what will divide the profitable and sustainable enterprises from those heading down the road to dusty death. The world economy is replacing markets focussed on industrial goods as the key economic drivers with information goods, basically anything that can be digitised. Some information has entertainment value, some has business value, but regardless of the source people are willing to pay for information. The interesting issue for Retailers of the future is that consumers differ greatly in how they value different particular information goods and financial success is going to depend on how the particular value is identified and marketed. To quote the Nobel Prize-winning economist Herbert Simon, " a wealth of information creates a poverty of attention."

Loyalty schemes have a role to play in developing that idea which is why I believe they will be around for some time yet.

Peter G Wray