Aces high over loyalty schemes

Let the battle of Britain commence. As the mighty Nectar behemoth lumbers up to the loyalty scheme launch pad, Air Miles has got in first with the Great Air Miles Giveaway, a pre-emptive strike backed by a £20m marketing campaign.

At a superficial level, this is a proxy war between the UK’s two largest supermarket chains. Sainsbury’s is the preeminent partner in the Nectar coalition, which also features BP, Barclaycard and Debenhams, with McDonald’s and Argos in the offing as further allies. Tesco, meanwhile, has “stolen” the Air Miles contract from Sainsbury’s, which adds piquancy to the forthcoming trial of strength. Just how valuable Air Miles was to Sainsbury’s may be judged by the revelation that like-for-like sales at the supermarket chain fell by one per cent after discontinuation of the incentive contract.

That fact alone might seem to give the lie to those who claim that loyalty schemes are now a busted flush. However, while it would be foolish to read the last rites, care should be taken in forecasting the health of the loyalty scheme market.

Consumers have definitely grown cynical. What they see are schemes that offer nugatory returns, in the form of discounts and prizes, after a great deal of arduous point collection. The process of redemption, moreover, is often clumsy and fraught with frustration.

Air Miles and Nectar, using very different models, have striven to find a solution to this problem. Air Miles – narrowly based in the leisure sector – attempts to take the consumer high ground by claiming to be highly aspirational. The aim of the Great Air Miles Giveaway is to demonstrate to consumers how quickly their point collection can lead to significant rewards. What happens when the high promotional exchange rate reverts to its standard rate remains to be seen.

Nectar, on other hand, has a mass-market approach, which relies upon the big-brand buying power of its coalition partners to deliver discounts on everyday products. The fact that they have spread their costs by operating through a specialist company (run by Keith Mills, founder of Air Miles – a further irony in this saga), means they should be able to pass extra benefits on to consumers.

The scale of Nectar’s ambitions – it hopes to have signed up about 12 million people within a year – as well as elements of its structure suggest a parallel with a scheme called Payback, which has performed well in Germany. Owing to the size and quality of its subscriber base, Payback has been able to provide its participating marketers with an extremely attractive three-dimensional consumer database.

And yet, as Alan Mitchell points out, there is a bigger issue. It’s not a question of whether Tesco or Sainsbury’s will come out top; or even whether Air Miles or Nectar has the better scheme. What matters in the longer term is consumer collaboration. The balance of benefits between company and consumer are asymmetrical. Sooner or later, consumers will wake up to this fact and attempt to drive a more aggressive bargain before parting with what is, after all, personal information.

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