Loyalty cards seem like a good deal on the surface: you can gather a wealth of information about shoppers, as well as hand them an incentive to come back to your store again and again.
But the numbers don't lie — loyalty programs aren't worth the investment. It's time to either retire retail loyalty programs or step outside the copy-cat format to create a card worth the cost.
The logic of the loyalty card is incredibly appealing: when a shopper signs up for a loyalty card, you can wind up with a wealth of information like who is in the shopper's household or whether she cooks from scratch or buys premade food. You may even be able to discern details like ethnicity or religion by looking at what holiday foods a buyers shops for. With all that data, you should be able to present your shoppers with the perfect products and promotions at exactly the right moment, dramatically increasing sales for your company, right?
But when we look at the numbers, retailers running loyalty card programs have failed to gain an advantage in the market. As the economy has slowed and competition has increased, not only are those retailers failing to outperform the market but many are actually underperforming. Even the earliest adopters have failed to pull ahead of their competition on the strength of their loyalty programs: Safeway, which implemented the strategy early, has long underperformed the market, to the point that the company agreed to a purchase by Cerberus Capital Management earlier this year.
When you dive deeper into the situation, the news gets worse. When TABS Group researched specific loyalty programs, we found that one of the three largest drug chains (none of which are outperforming the industry in sales growth) saw their reported shopper occasions in key health and beauty care categories plummet following the launch of their loyalty rewards program.
Tesco's current situation may provide the clearest picture of the predicament loyalty cards can lead to. The UK grocer took the lead in creating a rewards program, but German discount grocers Aldi and Lidl challenged Tesco and other UK companies. Morrisons' (a key competitor to Tesco) recently promised to implement 1 billion pounds in price cuts over the next three years, in order regain the business of those shoppers pulled away by the discount grocers' prices. Tesco is following suit with 200 million pounds in price cuts, plus investing a similar amount in its ClubCard promotions — which failed to keep customers loyal in the first place. Tesco's biggest shareholders question whether the company is doing enough to counter Aldi and Lidl, however. They're right to worry.
Earlier this year, Aldi and Lidl posted sales increases of 33 percent and 17 percent, respectively. Tesco's market share is at its lowest levels in a decade. To add insult to injury, Tesco's U.S. branch, Fresh & Easy, declared bankruptcy last year. (Fresh & Easy relied heavily on loyalty cards.) Tesco spends nearly 500 million pounds a year on its loyalty card program already, which has to make you wonder what an extra 200 million pounds can really do to turn around the tide of customers leaving for Aldi and Lidl.
Sure, smaller grocers have struggled to get good value from their loyalty card programs. But, on paper, Kroger looks good — and its reward program picks up a little reflected light. Kroger just marked its 41st quarter of identical-store sales growth.
The role that Kroger's loyalty cards played in propelling that growth seems to be minor, however: The grocer runs the program with dunnhumby, a U.K.-based customer research firm Kroger co-owns with Tesco. In Kroger's latest conference call, the company's executives mentioned dunnhumby just twice (and both times were little more than passing comments). That evidence leads us to two possible theories. First, Kroger is pursuing a perfect policy of silence on even mentioning some incredibly useful database that the company has compiled over the two decades since they introduced their loyalty card program two decades ago.
Second, and more likely than the loyalty card conspiracy theory, Kroger may have compiled that database but all that information has little value to the company. Kroger's own reporting suggests this as well. The Kroger 2012 10-K states that Kroger gained share in ten markets, but lost share in nine. That situation suggests that their loyalty program, at best, only makes its customers more loyal in just over half of all markets. Random occurrence could provide the same results as the Kroger loyalty card program.
Kroger's silence may tell us something more: even if you do analyze a mountain of data about your customers and you uncover some detail about them that provides a sales opportunity, what do you do next? You may have a variety of channels to reach out to shoppers, like the email address and mailing address they provided when they signed up for your loyalty program, but actually getting through to those shoppers is incredibly difficult. The odds of a buyer opening an email or an envelope are slim, especially when you consider how much other mail they deal with in a given day.
Using that data more broadly is an option, but one that's difficult to implement. Store clustering — offering different assortments for different stores — requires rethinking your logistics structure, which no major retailer wants to consider. And there's still a lack of data to be able to predict the effectiveness of store clustering, especially based on insights gathered through loyalty programs.
Furthermore, maintaining a mountain of data is rapidly becoming more trouble than it's worth. Even if you're getting full value out of your loyalty program, the cost of protecting that data may soon outweigh the benefits. The damage of a data breach is disastrous; the breach experienced by Target in 2013 has already cost the company tens of millions and executives aren't sure if they'll know the full cost of the breach for months to come. Target's failure to secure their customers' data is likely a key factor in the 16 percent drop in profits just reported by the company. The more data your company has stored, the more likely you are to experience a data breach (either due to an unintentional leak or due to a malicious attack) at some point in the future.
The population of shoppers at a given store who are most likely to use their loyalty cards regularly are among the least loyal shoppers at that outlet. In TABS Group's research, it's clear that these buyers — the people who shop based on price more than any other factor — actually prefer straightforward approaches to getting their deals. Rather than relying on loyalty cards, they'd like more direct options:
Focusing on gathering data about these shoppers fails to account for the simple fact that between 70 and 90 percent of their purchases occur in other outlets — where you can't get the data that a loyalty card program theoretically offers. Any hope of understanding these shoppers or building deeper relationships with a loyalty program is misplaced.
And, yet, Tesco is not the only retailer doubling down on their loyalty cards. Despite both a lack of effectiveness and a lack of recognition of who may even be using a given loyalty card, many retailers have made major investments in new and existing loyalty programs. Sears has added technology to the mix with a new "Shop Your Way" program that integrates online shopping with a more traditional loyalty program (though new numbers suggest that the program is crippling Sears).
The numbers may look drastic for those companies with loyalty programs, but what about the retailers who don't offer such rewards to shoppers? Publix may be the best performing mass market chain in the U.S. — and the company got to that point without a loyalty card program. Coincidentally, Publix had the exact same profit as Kroger last year: $422 million. But Publix earned that profit with just a third of the sales Kroger pulled in. Rather than offering a loyalty card program, Publix emphasizes their good customer service while offering discounts to every customer who walks through the door.
Albertsons dropped its loyalty card program last year, relying on the company's knowledge of the neighborhoods around each store. Shaw's, an Albertsons subsidiary, promoted the new 'card-free savings' on their website at the time of the switch: “The card isn’t so special anymore. Everyone has one. So we want to take the special step of not requiring one anymore.” We can't calculate the impact of the move yet, given the weaker results Albertsons has faced over the past few years, but the company clearly hasn't gotten any worse since cutting up the loyalty cards.
We don't expect every retailer to rush to end their loyalty programs. But given the weaknesses of this approach, you should revisit how your rewards programs are used.
Focus on the shoppers who actually use your loyalty cards, rather than those who you'd like to sign up for a card. You may not be able to get the hypothetical benefits that loyalty programs seduced retailers with initially, but you'll be able to buck the downward trend of retailers who rely too much on programs that can't deliver.