Playing the loyalty card

There might not be a single solution to the issue of maintaining customer loyalty in an economic downturn, but Matthew Valentine learns that brands must act quickly to meet changing demands

Customer loyalty takes on a new and pressing significance during a recession. When money is tight, both consumers and corporate customers have an added interest in seeking out better deals and keener prices. Their loyalty is to themselves, not their suppliers.

The classic rule of thumb claims that a company’s most active consumers – about 20% of the total – will account for 80% of its sales. But if the reality is far more complicated, it has never been better documented.

Dunnhumby, the company behind Tesco’s Clubcard loyalty programme, can monitor the real life shopping habits of about 200 million households around the world and has no doubt that the falling economy has had a direct impact on buying patterns.

“The shifts have been quite dramatic,” says Dunnhumby’s director of strategy and futures Martin Hayward. “We’ve had a pretty benign decade in terms of consumer behaviour. People have been convincing themselves that they’re better off, especially in the US and the UK. But that has come to an end very quickly and the change came almost instantaneously. Everyone realised that this was the end of the party.”

The grocery sector can provide the most responsive data for those measuring changing trends. There is significant evidence of consumers trading down a level in terms of the brands they purchase, says Hayward. This is leading to widespread promotional activity as brands seek to hold on to customers, or gain new ones.

“The amount of promotional noise has increased several fold over the past few months,” says Hayward. “Even before Christmas many stores were offering discounts of 70%.”

Some consumer brands are lucky enough to have an especially loyal customer base, but even they cannot afford to remain complacent. Chocolate brand Green & Black’s is weathering the storm well, according to its head of global marketing, Kellie Fernandes.

“Our most loyal customers haven’t strayed away from the brand,” she says.

A chocolate with strong ethical and organic values, Green & Black’s has to work hard to make sure its credentials don’t slip in order to maintain customer loyalty. “We have to show we’re investing in it. The reality is that retaining customer loyalty is about staying true to your principles,” says Fernandes. “Anything we bring to the market will be true to that. The foundations we were built on still remain.”

Recent innovations include removing all plastic from the brand’s packaging, a change that fits well with its overall values about corporate responsibility.

Bird in the hand

But why try to maintain loyalty rather than focus on bringing in new customers? Iain Lovatt, executive chairman of customer retention specialist Blue Sheep, explains: “A bird in the hand is worth two in the bush.”

Working with business-to-business clients, the consultancy uses specialist software to analyse data, aiming to help companies communicate more effectively with their clients. The data gleaned from sales and web visits, for example, is aggregated with information from up to 14 other databases held by Blue Sheep to give more accurate understanding to what is taking place in their customers’ businesses and markets.

“As with business-to-consumer companies, customers can be transient,” says Lovatt. “And in a business-to-business environment, it is more difficult to look after them. Information changes more rapidly as people change roles.”

On a very basic level, the knowledge accumulated by such exercises can be used to more accurately target sales efforts – more attention will be given to large corporations that could be repeat customers, and less time will be spent selling additional products to a small company that has no need.

Valuable lessons

This is the first “proper” recession since the birth of the modern retail loyalty card, points out retail consultant Mark Dickens, of creative agency Wanda. This will enable retailers to learn valuable lessons, as well as to react more quickly to changes, he says.

But some trends may remain constant. He explains: “The value segment demonstrates the most consistent loyalty. The more affluent the consumer, the less loyal.”

For brands that represent entirely discretionary purchases, now is the time to think more laterally about how to increase their profile and drive increased customer loyalty. Music and entertainment retailer HMV is under fire from illegal downloads as well as recessionary pressures. While rivals such as Zavvi are falling by the wayside, HMV is aiming to make itself central to the enjoyment of music by taking a hand in the running of live music venues.

A joint venture with MAMA Group has enabled HMV take a direct stake in the running of 11 high-profile venues, including the Hammersmith Apollo in London – to be renamed HMV Apollo – The Picture House in Edinburgh, the Institute in Birmingham and Moshulu in Aberdeen.

HMV chief executive Simon Fox says the move into live music is a sign of the company going beyond its “current three-year transformation plan”.

Live music

Fox adds: “Music is very much part of our DNA, and by extending the HMV brand into the growing live music and entertainment market, our customers will be able to access and experience music in all of its forms via HMV.”

Just as there is no single cause of the current recession, there is no one solution to the challenge of boosting customer loyalty during a downturn. But taking heed of rapidly changing customer demands and acting as quickly as possible is certainly a good place to start.

If companies fail to do this, their survival may rely entirely on the size of their assets. “People will get tired of being frugal,” says Hayward at Dunnhumby. “But there’s nothing to suggest that anybody will be better off in a year’s time.”

Case study: Poundland

Poundland chief executive Jim McCarthy claims: “Customer promiscuity thrives during a recession. As people have less money to spend, they are moving away from their traditional shopping haunts and through the doors of Poundland.” It isn’t just that sales are rising at Poundland. The company reckons it has seen a 22% increase in shoppers belonging to the AB socio-economic categories. “We’re seeing a different kind of people shopping here,” says McCarthy. “A different kind of people are now worrying about money.” The chain is thought to be the biggest fixed price retailer in Europe, with 205 stores. It opened 37 last year, and plans to repeat that pace of expansion in 2009 – with negotiations under way to acquire a number of former Woolworths sites. Dunnhumby director of strategy and futures Martin Hayward says adapting fast is key to business survival: “You don’t have six months to examine strategies. The big thing is to keep listening and responding to customers.” But even deep discounting cannot ensure customer loyalty by itself. Poundland has recently been supporting its low price policy with additional promotions. “Even Poundland needs to stimulate and reward value-conscious customers, and we use a variety of mechanisms,” says McCarthy.

The retailer has just run an in-store campaign – Explosive Value – that sought to drive its low-price message even further. Home cleaning products such as bleach and washing powder were sold in outsize packs or on a buy-one-get-one-free basis, and new product lines included the store’s first foray into Weight Watchers ranges.

The process will be repeated another two or three times this year, while the company has also redoubled its efforts in seeking to respond quickly to customer demand.

“Customer feedback tells us they want more food and drink. A fortnight ago we engineered getting sugar in 1.5kg bags instead of 1kg bags,” says McCarthy.

Constant introduction of such initiatives is seen as a key method of encouraging repeat visits. McCarthy claims: “New is only three letters, but to us it’s the biggest word in retail.”

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