Tesco will spend at least 60m this year buying the loyalty of customers through its Clubcard. Last week, the scheme took the credit for results showing a 15 per cent leap in pre-tax profits (MW September 22). And while it has brought short-term benefits to the chain, many feel that when the novelty wears off, Tesco could be stuck with an expensive white elephant.
Six million shoppers have already put pen to plastic. But signing on the dotted line is a long way from total commitment.
Loyalty needs careful nurturing and is fought for fiercely by supermarkets. Tesco may be in for a surprise if it thinks loyalty can be bought with a strip of plastic and a one per cent discount on its goods.
Clubcard has been roundly dismissed by Tesco’s rivals. David Sainsbury calls it “electronic Green Shield stamps”, and Asda trading director Tony Campbell says consumers prefer consistently low prices to lavishly-funded loyalty schemes.
Tesco scored a big short-term advantage by being the first of the supermarket multiples to launch a card nationally. However, Henderson Crosthwaite analyst David Stoddart says: “You have to ask how efficient loyalty cards are against other marketing campaigns. It restricts other movement.”
The launch followed a concerted effort by all the big chains to combat the threat posed by discounters with cut-price groceries. Perhaps the supermarkets weren’t going to beat the discounters on price. But they could easily better the likes of Kwik Save, Aldi and Netto on service.
They launched an array of service initiatives such as Tesco’s “One in Front” pledge to open vacant checkouts. Clubcard was yet another area in which the discounters could not compete: the warehouse outlets, basic technology and pared down costs would not permit such an expensive move.
The launch of Clubcard shifted the focus of supermarket competition away from prices at the checkout. Analysts believe Tesco is allowing prices to drift up as customers stop focusing on prices and concentrate instead on the loyalty benefits they get from Clubcard.
The launch has cost Tesco 10m in operating costs alone. Add to that the 50m in money-off vouchers the chain is offering cardholders in the first year, and it appears to be an expensive way of holding interest.
The chain revealed at its results presentation that the cost of launching the card would require a rise in like-for-like sales of between 1.5 and two per cent to pay for itself. This, it says, has been easily achieved. The company says: “We are satisfied, at the moment, with the return on our investment.”
So, for the first six months of the year, one-third of the chain’s volume increase in sales could be attributed to Clubcard. This works out at about 25m.
Tesco reported a four per cent increase in inflation for the period – because of increases in paper and packaging prices and commodity prices of goods such as potatoes. But analysts believe Sainsbury’s and Safeway are likely to announce inflation figures of about three per cent.
Much is made of how Tesco will move closer to customers through all the data it gleans from the Clubcard – it will be able to target different categories of customers, and give them tailor-made promotions.
But it seems like an expensive way of gathering information. The whole point of developments in market research over the past 50 years has been in the use of sample groups. You don’t need to interview the whole country to find out what people think of Tony Blair – a sample of just a few thousand is usually deemed sufficient.
Once Tesco has got all that information, what are they going to do with it? Six million separate items of data to analyse must be the market researcher’s ultimate nightmare.
If rivals Sainsbury’s and Safeway launch their own loyalty cards nationally, the game could be up for Tesco. Shoppers’ wallets and purses will bulge with the cards, and a loyalty war will break out. One store will offer a special double points weekend, the rivals will be forced to compete and the whole thing will turn into a “zero sum game”.
But some observers believe Sainsbury’s and Safeway are by no means compelled to launch their schemes nationally. If they do, it will be little more than a defensive move against Tesco, a bid to neutralise the effects of the Clubcard. As such, it offers few advantages to the chains.
Sainsbury’s is believed to be undecided about the direction it should take with its own loyalty scheme. The Saver Card expires in December, and the chain is looking for a below-the-line agency to develop a new loyalty scheme.
While Clubcard remains the only national loyalty card in food retailing Tesco has an advantage. But if rival chains launch cards, or if they move low prices back up the shoppers’ agenda, the glamour of the card could wane.
Somerfield’s relaunch of its Price Check initiative is forcing price back up the agenda. Asda, too, is reinforcing a hard stance on price. When the reply to Clubcard comes, Tesco’s advantage could become a distant memory.v