A looming conflict of loyalty schemes

Air Miles is getting its retaliation in first, launching a massive promotional giveaway ahead of the launch of the ambitious and big name-backed Nectar.

Air Miles, the British Airways-owned loyalty brand, is preparing for a dogfight with yet-to-be-launched loyalty card Nectar. Firing a pre-emptive salvo with the Great Air Miles Giveaway, backed by a &£20m marketing campaign, the company has also recruited new partners in House of Fraser and BT.

However, both analysts and industry experts say that the key to the future success of loyalty schemes will be in making consumers feel the rewards justify their investment. While the British public has embraced loyalty schemes, from Green Shield Stamps to the Tesco Clubcard, observers say that the original excitement has dwindled as the number of schemes has mushroomed and consumers have learnt that many “rewards” are of little real value.

Verdict analyst Sally Bain says: “The key for loyalty cards is that the rewards have to be perceived as well worth it.”

Michael Crompton, chairman of Landround, which operates travel loyalty programme Buyandfly!, agrees: “Value has got to show through to the consumer.”

Loyalty schemes are not now regarded as essential for the big supermarkets. Asda, for instance, withdrew its points card in 1999 after a trial covering 19 stores. The chain says customers preferred direct price reductions. Commentators have suggested that the &£100m annual cost of running the Sainsbury’s Reward Card could be better invested in discounting grocery prices.

Sainsbury’s is one of the founding partners of the Nectar scheme, which also includes BP, Barclaycard, Debenhams and – subject to official confirmation – McDonald’s and Argos. Both Sainsbury’s and BP will discontinue their own loyalty cards when Nectar launches.

Despite the waning of enthusiasm for loyalty schemes, Air Miles still carries plenty of weight with consumers, as witnessed by the effect on Sainsbury’s when Air Miles switched partners to Tesco in March this year. Sainsbury’s own first-quarter trading statement says: “We have experienced a short-term impact from our decision to terminate the Air Miles contract, which we estimate affected our like-for-like growth in the quarter by around one per cent.”

One analyst says that many customers had invested in long-term holiday planning with Air Miles and so had to start shopping at Tesco to continue accumulating points. The supermarket claims that it has seen its Clubcard holder-base boosted by 60,000 members since signing up Air Miles, and that 55 per cent of its 10 million active Clubcard holders collect Air Miles.

Air Miles has a head start of 6.5 million registered customers, but Nectar aims to sign up half of the UK’s households within a year of its launch. A battle royal between the two schemes for the hearts and minds of consumers is expected.

While at first sight the two schemes seem in direct competition, there are significant differences between them. For instance, Nectar is operated by facilitating company Loyalty Management International (LMI) rather than being owned by a travel or retail company. In addition, Air Miles’ rewards are traveland leisure-based, while Nectar is expected to offer price discounts across a range of products ranging from Blockbuster video rentals to McDonald’s products. Nectar will offer travel rewards, but they will form only a “small part” of the overall proposition.

Air Miles managing director Drew Thomson says that, as he sees it, Nectar is “looking at a mass market proposition” – a different positioning to Air Miles. He says: “We think this mass market concept is outdated and that the consumer market is now more sophisticated. There has been a move to more aspirational rewards, for which Air Miles caters.” He argues that travel and leisure options are what excite customers – a sentiment echoed by Crompton.

Not surprisingly, LMI chairman Keith Mills – who helped to found Air Miles in 1987 – has a different view: “Air Miles is a niche programme that appeals to a relatively small number of people who find flights and holidays attractive.”

He adds that Nectar is a “coalition programme”, the like of which has not existed in the UK before, although the concept has been successful in Canada and elsewhere. He believes that companies will be attracted to sign up to Nectar, as the scheme encourages consumers to shop with all participating partners.

Loyalty schemes have drawn flak for several reasons, including complicated and lengthy collection processes and drawn out redemption procedures.

Thomson says that the Great Air Miles Giveaway, which reduces the number of points required to earn flights, has been designed to excite existing customers and to show new customers how easy it is to collect Air Miles. However, the promotion will end when the 500,000 BA flights on offer have gone and the Air Miles scheme will revert to its standard collection levels.

Air Miles is also trying to shorten the amount of time it takes to redeem points and is overhauling its website to allow online booking.

Each of the various loyalty schemes operates in a different way. The Buyandfly! travel scheme has a tie-up with OK! magazine which involves clipping and mailing mastheads, in order to receive paper vouchers. Crompton says that customers appreciate a loyalty currency that is tangible, and that the rewards are well worth the effort of obtaining them.

Thomson says that Air Miles collection schemes can also be tailored to individual partners’ requirements. For instance, research has shown that Tesco Clubcard holders want their reward vouchers posted to them, before they decide whether to redeem them for Air Miles.

Mills will not be drawn on the details of his scheme, but says that redemption mechanics have been taken into account. He says: “Our experience is that when someone wants to go to the cinema, for instance, they want to do it soon after they have decided they want to. We will structure the scheme so customers get the rewards when they want them.”

Loyalty card schemes are not, of course, altruistic – companies use them to retain customers and maximise revenue. However, the loyalty element may not be the main incentive behind partners signing up. Bain points out that data collection and the subsequent transfer of data to customer relationship management programmes is the attraction for retail partners, and that Nectar will see a pooling of data from several different sources.

New loyalty schemes are never easy to launch, but Nectar has a head start: it will effectively replace current schemes at Sainsbury’s and BP. Air Miles, however, with its tried-and-tested formula of travel and holidays and its established partner network, will be a formidable opponent.

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