FEW BENEFITS ON THE CARDS

Loyalty is the late 20th century marketer’s Holy Grail. A thing that many pursue but which few will ever find. Yet the reward for the finder is so great that there is no shortage of corporate knights willing to risk all to uncover the secret of how to keep consumers faithful.

However, there are growing signs that the knights may be looking in the wrong place. That the loyalty bubble is, if not ready to burst, certainly showing signs of deflating. And that the central plank of many loyalty schemes – the card – represents a long-term financial commitment that far outweighs any short- or long-term benefit.

The ostensible commercial logic is simple and compelling. If you get the consumer early, provide the quality of service and product they want, then you get them for life. A theory fatally flawed by growing evidence that consumers remain promiscuous and cynical about the offers – not surprising when faced with such a plethora of offers.

In the past two years the list of companies launching loyalty cards reads like a Who’s Who of retailers, manufacturers and utility companies ranging from Tesco, Sainsbury’s, Safeway, Budgens, and Bhs, to General Motors and British Gas. Others including Marks & Spencer, Esso and Shell have been in the market much longer.

Boots is testing a card called Advantage in East Anglia but delaying a full launch to assess the success of the Tesco and Sainsbury’s ventures. Even Asda, which has resisted the temptation to launch a scheme without any apparent damage being done to its profits, is about to launch its own loyalty card and a co-branded payment card with the Midland Bank (MW June 28).

The grocery retailers’ entry into financial loyalty is a blatant attempt to attract promiscuous customers. Many are having to improve their offers by moving into financial services to tie-up consumer’s cash.

Last year Procter & Gamble conducted research into retail buying habits which showed that the trend toward “repertoire” buying – buying a number of brands in the same product category, rather than a single brand – has moved into grocery retail. It could be argued that shoppers are now becoming as disloyal to the stores they shop in, as the brands they buy.

But the theory behind loyalty cards suggests that they enable brand owners to get closer to, and better understand, their customers via the detailed information identifying shoppers and their needs. They can then be targeted with tailored promotions. But in practice this is expensive and difficult to organise.

The opportunities for retailers to use the information to target customers is enormous. They can track individual customers’ buying habits and encourage them to spend more on certain lines. But this is not happening. In many cases, it has taken longer than expected to develop the necessary technology. And card issuers have yet to decide whether to motivate those who are not buying certain products to buy them, or to encourage those who are already buying to buy more.

The loyalty card is essential to the process. It provides the psychological reassurance of being tangible – something consumers can put in their wallet. But the oversupply of cards threatens to neutralise the benefit for all but a few.

From day one there has been an almost blind acceptance that loyalty equals customer retention, equals cost effectiveness, equals a good idea. But there is a growing sense that things are getting dangerously out of control.

“The supermarkets have rushed into these schemes without thinking through all the implications,” says one marketing director, involved in a major loyalty programme. “If they start a discounting war and begin adding on costs in order to compete it will all backfire.

“I do not think that many have thought through what will happen when their competitors have the same schemes running. Everything is far too short term and tactical. Some haven’t even thought through how they can quit the programme.

“Major supermarkets’ loyalty card schemes are a short-term tactical gimmick, they are not part of a strategic vision. They have become too obsessed by their performance in the City rather than by thinking through how they can fully service customer needs.

“The financial (loyalty) schemes are another example of this, they have not been done because the supermarkets want to add services for customers, they are simply short-term bribes aimed at restricting consumer choice by holding their cash. It cannot last as a long-term loyalty proposition.”

This assessment echoes the views of many others who see the frenetic attempts of the past two years to resolve one problem – growing competition – simply creating another, a potential financial timebomb.

Sainsbury’s is said to be demanding a four per cent increase in sales from its stores to pay for the running of its Reward Card, launched three weeks ago. For Tesco, the Clubcard cost 10m to launch, with another 50m in money-off vouchers for the seven million cardholders. The chain said that the cost of launching the card would re-quire a rise in like-for-like sales of between 1.5 and two per cent, which works out at about 50m a year.

This is despite the fact that Tesco scored a notable success by being the first major supermarket to break into what David Sainsbury disparagingly called “electronic Green Shield Stamps,” in February 1995. Others, later into the market, including Sainsbury’s and Safeway with its Added Bonus Card, will have to pay more to catch up.

Tesco’s advantage appears to have been erased. The launch of a financial services version, Clubcard Plus, was an attempt to keep ahead of the crowd. With most of the other grocery retailers launching their own schemes, Tesco’s one per cent discount was not enough to keep consumers loyal. The aim now is to lock in consumer’s cash as well.

But the rush into financial loyalty opens up a whole fresh raft of problems. What happens when they have to turn down half the applications for credit, which the banks do? What does this do for loyalty?

Many store chains also appear to be less aware of the risks associated with bad debt and fraud than the banks. Tesco carries the liability for Clubcard Plus, not its financial partner NatWest. The average high-street bank loses between 200m and 300m each year on bad debt.

Then too, the rush to get customer money also provides a longer term strategic problem. Mike Leys, director of loyalty marketing consultancy Ad’Ventures International, says: “Everybody is competing for wallet space. Storecards, budget cards, debit cards, credit cards are all in competition. It means that Mastercard is not only competing against Visa and Amex but also against Tesco’s Clubcard Plus, Marks & Spencer’s Charge Card, Dixons, British Gas and the bank debit cards for share of wallet space.”

The consequence, says Leys, is that consumers will select a primary card for everyday use and one other card which builds in greater loyalty. The store or company offering the greatest incentive for use, which carry points and added benefits rather than simply a cheaper annual percentage rate (APR) will win out.

The main problem is that financial loyalty will go down the same route as the discount loyalty schemes, and everyone will run their own financial banking operations to lock in consumer cash. Each will offer better and better terms which again makes the process very expensive.

But as one insider says: “It’s not so much a question of looking at the advantages of having a card, but looking at the disadvantages of not having one.” Company finance chiefs will also have been wise to calculate the cost of getting out of a scheme both in financial and loss of loyalty terms.

“The problem is that if all of the retailers are offering cards with simple discount schemes, the stores will enter into a discount spiral,” says Leys. If a card issuer offers a one per cent discount then a rival offers two per cent it will very quickly become difficult to withdraw from the market yet very expensive to stay in.

At the same time industry figures have started to question the contribution the Clubcard has made in propelling Tesco into the number one market share position in UK grocery retailing.

Sainsbury marketing director Kevin McCarten, accepting his bias, says: “Clubcard has been given a bit more credibility than it has deserved, not because we are negative about it, but most people underestimate the causes of Tesco’s performance. Many factors contribute to its relative success and our relatively disappointing results. The issue is more complex. Asda has not had a card and has done very well.”

Indeed, last week Asda announced a 24 per cent increase in its annual profits to 305m. This in a year when its major rivals have all been eulogising the benefits of loyalty cards.

Archie Norman, chief executive of the chain, says: “This has been the year of the loyalty card. But we would rather give customers value for money today than the opportunity to get a one per cent discount in three months time if they spend enough.

“We believe these cards represent one of a variety of options available to market the brand. The cost effectiveness of database marketing remains unproven, although its time will come.”

But some industry insiders claim that Norman is being economical with the truth and that Asda will launch its Club Card, which is now being tested in 18 stores, next month. The chain is also on the verge of signing a deal with Midland Bank for a co-branded payment card.

This discloses how Asda is being pressured into launching a card – apparently reluctantly – in an attempt to keep up with its rivals. If Asda follows the pack it will seriously undermine the chain’s public view that keeping prices low is better than launching a costly loyalty device.

Ironically, one advantage for the supermarkets is that by shifting shoppers’ attention away from prices – the number one concern in grocery retailing in the early Nineties – they can allow prices to drift up.

As one analyst says: “Loyalty desensitises the price issue.” With food price inflation at Tesco running at double the Retail Price Index, this could be the case. But the chain insists that the higher prices are made up of rapidly increasing raw material costs on paper and – oddly – potatoes.

It would be ironic if the running of a loyalty scheme were added to that list of rising raw material costs. But it is conceivable. There are undoubtedly opportunities in having your own loyalty card and access to consumer data but many companies appear to have gone down the road without investigating all the eventualities. The number of “me-too” cards make the introduction of more a waste of time.

It will only be the companies with the deepest pockets that can survive in this environment and inevitably they will have to ask themselves whether knowing that somebody buys more of brand x, over own-label y, justifies the colossal spend.

Three steps to loyalty

There are three types of financial loyalty scheme. The already well established charge/storecard; the own-branded credit card and most recently, the budget scheme.

Charge cards such as Marks & Spencer’s have been on the market for a long time. But suffer from having high interest rates, no discount or point scheme and being useless outside the relevant store. Because M&S refused to allow use of credit and debit cards, inconvenience turned thousands of customers away. Last year M&S allowed in Visa, Delta and Switch, removing the charge card’s raison d’être.

Along with others M&S has been forced into looking at another option – a credit card (MW May 3). Tesco is also believed to be researching a credit card which can be used elsewhere rather than simply in store. It represents little financial risk for the retailer.

The only example of a credit card launch in the supermarket sector, Budgens, appears to be a lucrative deal for the customer. For every one pound spent on groceries at Budgens you get 5p back. Even products bought at other stores recoup 2p in every pound. The deal was conceived by a US bank, The Associates – established by Henry Ford in the first half of the century to offer credit to people buying Model T Fords. Believed to be The Associates’ first foray into the UK credit card market. Companies may also extend into the debit card market.

The idea of a budget scheme is not new. It runs along similar lines to old-fashioned Christmas clubs, though rather than running for a year, it runs on a monthly basis. The customer puts money aside each month and earns interest on it. Tesco offers five per cent – better than the high-street banks – and a credit facility with an interest rate of nine per cent. Holiday and leisure companies are understood to be investigating this option.