Card Sharp

Years from now, the customer loyalty card debate willprobably be a lot more measured and less adversarial than it is today. For every report showing the success and commercial value of loyalty or reward cards, there is a counter one, suggesting a drain on money and resources.

Gauging the future of loyalty cards is extremely difficult. A significant number of retailers that use them are full of praise for them. Those unconvinced of their value – among them such big high street names as Waitrose and Safeway – claim their value is negligible. For each occasion that Tesco declares how its Clubcard has contributed to the success of its stores, rival Morrisons will point to its own burgeoning results, achieved without a loyalty scheme.

It would be a mistake to limit the debate to supermarkets. The airlines have been doing it for years, annoying thousands of passengers who lose apparently “privileged” membership of a loyalty club if their accumulated mileage dips below the required minimum. And now every coffee and bagel shop hands out the obligatory card to be stamped with each purchase.

This writer’s own experience of loyalty cards, together with anecdotal evidence, suggests that if all loyalty cards were banned tomorrow, they would not be greatly missed – but then marketing journalists make notably cynical consumers.

One reason it is not easy to dismiss loyalty cards is that their most vocal champion also happens to be the most successful retailer in its sector. Tesco was the first to launch a national loyalty card scheme in 1995. Since then, its Clubcard has been credited as a major contributor to the continuing success of the chain.

Against this, is the defiant stand taken by Safeway, which earlier this year ditched its own ABC Card after a five year experiment. Since then, Safeway chief executive Carlos Criado-Perez has repeatedly highlighted the &£50m saving made by scrapping the ABC Card, a result, he says, of shoppers no longer being enamoured of the concept. Instead, Safeway claims it has diverted the saved funds into reducing prices in store. Yet despite Safeway’s latest figures showing half-year profits up ten per cent and a slight growth in market share, it is still perceived as one of the weaker of the UK’s “big four” grocery retailers.

Waitrose is another high-profile retailer that has shunned loyalty cards – and events in the past few years seem to endorse its decision.

Waitrose marketing director Mark Price says withstanding the tide of loyalty cards was tough initially: “But these cards have to be paid for. If you are going to give people one per cent off their purchase, that has to come from somewhere. Quite simply, either the consumer or the shareholders or employees pay for it.”

Price points to reports that claim loyalty cards don’t drive sales.”Basically, cards are not on the radar for most customers,” he says.

Loyalty pays

Such opinions get short shrift from Grant Harrison, director of data consultancy DunnHumby, and more significantly ex-Tesco Clubcard controller.

“Mark Price is talking rubbish,” he says, dismissing Waitrose as a niche player in the supermarket sector. Harrison explains that running a loyalty programme effectively is not easy. For example, he says that one of Safeway’s main complaints was the sheer volume of data it had to deal with, and he points to Tesco, which from the very beginning worked in partnership with DunnHumby. The consultancy was given responsibility for the data mining and analysis of the Clubcard.

Tesco Clubcard is the only card where shoppers cannot redeem points for goods at the till – in other words reduce their shopping bill by using acquired points. By refusing customers this option, Tesco prevents its shoppers using the points tactically and forces them to remain in the information loop.

Price says he is not convinced that data mining can be effective with 10 million customers. Tesco on the other hand, claims to send out 100,000 variations of any given mailing, in order to target the right products at the right people.

But there are other reasons Tesco is doing so well and they have little to do with the loyalty card. It is well known that in the early Nineties, Tesco launched a customer service initiative that was led from the top management down. For the past eight years, the customer has been central to Tesco’s thinking. Although the Clubcard may have been a product of this new initiative, it is debatable whether its existence does anything to contribute to what happens on the shop floor – which, ultimately, is all that counts.

The concept of being loyal to any product or service has always been a contentious issue, yet in industries where customer purchasing is notoriously fickle, it can sometimes work.

Petrol retailer Jet launched its national Smile loyalty programme in February last year. It claims that some of its customers are now spending almost twice as much with Jet as they were prior to the programme.

The Smile initiative includes 12 million customer accounts, which represents about 40 per cent of Jet’s customers. Jet brand communications manager Roy Roley claims the programme recruits about 15,000 customers a week. Purchasers earn a penny for every litre of petrol bought; 2p for anything bought in a forecourt shop; and 15p for every car wash. When the total achieved has reached &£15, the customer is sent a personal cheque for that amount.

Preventing promiscuity

Roley says one of the reasons for the programme is the need to stem the notorious buying promiscuity of petrol consumers. Unusually for loyalty programmes, staff members are included in the scheme and those staff at the till when people are buying goods also gain points.

But Roley admits that very little data analysis is done beyond profiling how customers purchase at particular service stations.While this will have an effect on special offers to be run in the future, Jet’s enquiries into buyers’ spending habits stops there.

Jet success

The programme appears to be working very well for Jet, despite the fact that it operates relatively limited data gathering and analysis. However, there are others who believe comprehensive evaluation of customer data in future loyalty programmes will be crucial to their success.

Nick Norman is marketing manager at Gemplus, a provider of smart card-based solutions. It is his belief that those retailers who have ended their loyalty card schemes will regret it.

“Anyone choosing to drop a loyalty card scheme should be aware of how competitors may use the technology in the future, if they do not want to surrender a potential source of competitive advantage,” Norman says. He predicts the widespread use of smart cards, spurred by the introduction of the Europay/MasterCard/Visa (EMV) standard by financial institutions across Europe, which will be implemented by 2007. The advent of smart cards will enable each retailer’s loyalty programme to be stored securely and separately on an individual customer’s card. Smart cards will also make online and offline transactions possible on one payment or loyalty card.

By 2004, according to Forrester Research, there will be 295 million smart cards in use in Europe alone.

Smart cards may well revolutionise the concept of loyalty programmes – but no revolution will detract from the fact that people respond to good service and good products. No amount of enticements and encouragement will change that. During my own informal research on what people thought of loyalty cards, one consumer said: “I shop at Tesco and I pass two supermarkets to get there, because the staff are courteous and the products are good, not because of the Clubcard.”

By the same token, I don’t shop at my local supermarket because it is, I imagine, like shopping in Poland immediately after WWII. A loyalty card doesn’t compensate for a dismal experience.