TRADE UNIONS

Retailers, utility companies and financial services organisations are building power blocks that will shape consumer marketing. But will they be able to hold the alliances together, and what happens to the players who can’t get into the game?

After a long period of innocent flirtation and one-night stands in the affinity market, companies are rejecting promiscuity for more stable long-term relationships.

But the marriages consummated this year have the look of convenience about them. While alliances and partnerships are replacing short-term affinity and loyalty programmes in the marketing lexicon, they still have a brittle appearance.

The new-style deals are creating wide-ranging alliances to share marketing resources, distribution channels and customer information. For instance, if you look at the collaboration between the supermarkets and petrol retailers, which have been in a constant state of dispute since supermarkets started selling petrol, you can see that previous grievances are being suppressed to achieve, in their eyes, a greater good. The collaboration could spell the end of the independent petrol retail sector and that means more to both parties than their own sectoral interests.

What we are seeing is the creation of a small number of ultra-powerful blocks.

The new world of cooperation could mean Asda selling gas, supplied by its new partner British Gas. Supermarket chain Safeway, which has already announced a tie-up with BP to supply 100 mini-stores on BP sites, is now trying to muscle into a deal that will link it with the Argos Premier Points scheme.

Meanwhile, Sainsbury’s could sell BA leisure and holiday services, while in return, the airline may offer Sainsbury’s meals on its flights (MW June 21). And its stores could make an appearance on Shell forecourts, while the oil company could provide Sainsbury’s with petrol.

The Smart Card consortium, the most developed of the new-style alliances, has six members: Sainsbury’s, Next, Shell, Ford, Cellnet, and Allied Domecq. All will have the option of separately branding a smart loyalty card offering discount points which consumers will be able to use to redeem against purchases in all of the member outlets. A separate company, Smart, has been created to manage the scheme.

Logically the deals could extend using Sainsbury’s closer working relationships with brand owners like Procter & Gamble and Mars (MW July 7). They might not become full consortium members, but could in theory develop relationships with some of Sainsbury’s partners.

It has emerged that while Shell is the pivotal player in the scheme, M&C Saatchi partner Maurice Saatchi has been the catalyst for the creation of the consortium. It is unclear whether Saatchi is having a continuing role in the development of the card – Shell has had talks with up to 40 potential partners including regional gas and electricity suppliers. But the M&C agency, of which Shell is a client, would be a strong favourite to handle any advertising.

Last week, the latest building block in what could be the most significant consortium fell into place with confirmation that Asda is joining the Goldbrand loyalty scheme with British Gas (MW October 18). It is the first partner British Gas has secured but could act as the trigger for other companies to sign up in the coming weeks.

In the first instance it will mean Asda selling gas through its stores in the South-east and West next year before rolling out sales nationally. But more importantly, by joining the consortium, Asda has given British Gas a retail outlet – crucial to recruiting other members.

The reason for these alliances is simple. “The primary motivation is to recruit new customers,” says Mike Harle, Shell’s marketing manager for retail downstream oil.

But Bruce Rayner, the consultant who worked on the Goldbrand redemption scheme and was previously involved in the launch of the GM Card from Vauxhall, argues that the alliances can be seen as defensive measures. “Alliances are also about blocking out competitors and channelling customers through your outlets,” says Rayner.

But the main pressures now forcing people together are structural changes in the big supermarkets, utility companies, petrol retailers and financial service organisations combined with the rising costs of loyalty programmes.

Deregulation in the utilities market is a strong catalyst, with all the utilities companies preparing for extra competition in 1998. Regional electricity companies are desperately trying to gain national distribution, while their equivalents in the gas business are also racing to tie up deals with the big six supermarkets.

Ad’Ventures International director Mike Lees, who works with a number of utility companies, says the gas and electricity markets are likely to be run by just five national players in the next century. “All of the regional electricity and gas companies are racing to make sure they are among the five,” he says. “That is why they are merging with each other at such a furious rate.”

The main players are United Utilities (created by the merger of Norweb and North West Water), British Gas, Sweb, PowerGen and National Power. They all need a credible national brand to support their move out of their restricted regional markets.

An added bonus for the utility companies will be the opportunity to reduce costs if they can develop integrated billing systems to allow people to pay bills through any of their alliance partners.

In that scenario, companies such as Norweb and the Hanson-owned Eastern Gas could become own-label suppliers of electricity and gas for the supermarkets – providing such brands as Tesco gas and Sainsbury’s electricity to customers.

Financial services is the second area driving these alliances. And again, deregulation and added competition are contributory factors. The banks are struggling to replace old distribution systems such as the branch networks, with new ones based on telecoms technology. Alliances are seen as a means to recruit and retain new clients.

One of the most active and successful “alliance-formers” has been Barclaycard, which has developed schemes with both Cellnet and Ford. NatWest has also made forays into the market launching an own-label payment card with Tesco (MW April 19) called Tesco Clubcard Plus and a credit card with mobile phone operator Orange.

However, both of these schemes and most of the others, focus on using existing credit and debit cards rather than creating savings, investments and loan products. They look increasingly dated, although the Orange card has just launched, in comparison to the ambitions of the new consortia.

The banks are highly vulnerable to brands entering the market because they have failed to differentiate their brands in the past. Instead they have allowed banking to become a commodity product. But some observers believe it is unlikely retailers will go down the co-branding route with banks because the retailers want to produce own-label financial service products in cahoots with the banks. Sainsbury’s, for instance, announced last week that it plans to launch Sainsbury’s Bank using the name to brand services supplied by Bank of Scotland.

This highlights one of the principal tensions already affecting these consortia. They will get worse as more members join.

The struggle between retailers and banks to control customer’s purses is a behind-the-scenes irritant to any more permanent relationship. “The supermarkets are of the view that the millions of pounds they pay to the banks and payment systems in charges each year may be better kept with them,” says one supermarket source.

Sainsbury’s decision to launch a bank and issue credit cards indicates its desire to circumvent other card issuers. It is understood to want to change the Smart Card into a form of a stored-value Mondex-type card. The possibility that supermarkets will own and control their own stored value smart cards is fuelling tension between banks, who want to foist their existing brands and products on to retailers, while retailers are seeking own-label suppliers.

The Shell consortium is talking to four banks about developing a payment system underpinning the card and is understood to be considering a Mondex-style scheme, though Sainsbury’s Bank could now be the supplier. Esso is already testing such a card in the Netherlands (MW October 18) with C&A and a Dutch grocery chain.

Just as important as the structural changes driving these alliances is the fact that they offer cost savings on loyalty schemes. According to one analyst, the schemes are costing supermarkets about 0.7 per cent of sales. For Tesco this could represent a 90m fall in profits. In the US, where loyalty schemes ate into profit margins, alliances were formed to spread the financial burden.

The loyalty schemes that supermarkets have plunged into over the past two years, often quite blindly, provide opportunities but have also created headaches. They want to encourage customer loyalty but not at the expense of their profits which are being severely hit.

“One per cent is a lot of money on a low margin,” says Bob Hands, managing director of Affinity Solutions, who worked on the launch of Safeway’s ABC card. “If the supermarkets can offload a large portion of the costs with partners, the scheme becomes more cost-effective as well as adding more value.”

It is a policy Asda appears to be employing. To follow the pack by offering money-off loyalty cards would undermine its everyday low price position in the market. Asda, having watched its rivals, is trying to get around the problem by forming alliances before establishing a loyalty scheme.

But these alliances are not without problems. They exacerbate the problem of exclusivity and will force companies to make choices and ditch previous partners. At Safeway, there has already been some embarrassing problems coming from the BP/Mobil and Argos deal (MW October 18).

Safeway is trying to muscle in on the cosy relationship between rival supermarket Somerfield and Argos Premier Points. The latter was linked with Mobil before Mobil merged its marketing operations with BP. Safeway has an existing deal to run petrol stations with BP and opened its first site last month. But it now hopes to combine its ABC card with Argos’ Premier Points card.

Another significant loyalty scheme, Air Miles, has already created exclusivity difficulties for members of the Shell consortium.

Air Miles has sector exclusivity with Sainsbury’s in groceries and Shell in petrol retailing. A potential row between Sainsbury’s and Shell arose when the supermarket extended its Reward Card scheme – including Air Miles – to its own petrol forecourts. Shell bit its lip and waived its objections in order to make the consortium work.

Other potential sources of friction are Ford and Cellnet’s exclusive deals with Barclaycard. If Smart Card takes on a payment system other than Barclaycard, the bank might insist on its exclusivity deal being enforced, although insiders suggest that such threats are posturing to win a place in one of the competing consortia.

But big strategic alliances demand sector exclusivity. For them to work, other schemes have to be disengaged. What we are seeing is the creation of elite power blocks and, the suggestion is, if you are not a player now then you are going to be out of the game.

“The companies will be forced to compromise if they really want to make it work,” says one source close to the Shell consortium. “The stakes are much higher now. Companies are having to make a decision about whether they will commit to grow, or honour commitments to a short-term deal.”

Other companies may feel they have little choice but to join a consortium. But each time another member is added, the danger of conflict increases disproportionately. This is leading to a difference in strategy, especially between supermarkets. Sainsbury’s is emerging as one of the biggest deal makers in the business, having formed alliances this year. Tesco, on the other hand, has a different approach.

Tesco is happy to go it, more or less, alone. The chain believes its brand is strong enough not to need an alternative currency to tempt customers – offering Tesco products alone will suffice.

While it has tied up with B&Q – allowing customers to use their DIY purchases to get money off their Tesco groceries – there is little that is “strategic” about the link-up. It appears to be a defensive move against Sainsbury’s DIY subsidiary Homebase. “Schemes such as the Sainsbury’s link-up with Air Miles mean loyalty points are earned at Sainsbury’s and spent in the air,” says a Tesco spokesman. “They are going from the end product out. With us you spend at B&Q and redeem at Tesco. The end result is better for the customer.” He might also add that it is better for Tesco.

“In the eyes of the Tesco management, the brand is the consumer champion and is on the customer’s side. Too much affinity with other brands could dilute that,” says Mike Sommers, director of marketing consultancy the Paradigm Agency. But others believe Tesco will have to bite the bullet to save costs.

The keenest interest at the moment is focusing on where the likes of BA, the newly-enlarged Cable & Wireless and BT will jump. BT, which part-owns Cellnet, a member of the Shell consortium, is seen as the biggest player yet to align itself with any of the power blocks. It is understood to have opened talks with a number of companies but can afford to bide its time.

Tesco, on the other hand, needs to go to other parties. It may have benefited from being the first into the world of loyalty programmes with Club card but it needs to recoup some of its investment. “Tesco has given Sainsbury’s such a hammering in the City with Clubcard. Now it desperately needs to get in first on the Smart Card consortium,” says one City analyst

The problem is that if Tesco stays faithful to its own-label proposition, it could be left behind. As Shell’s Harle points out: “Once the big players start to form alliances, the rest will be compelled to follow. The important thing for us is to get in first.”

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