Loyalty Programs!?! We Don’t Need No Stinkin’ Loyalty Programs!!!

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Without fear of (much) argument, it’s a fair statement that all companies want, and try to generate and achieve, optimum loyalty from their customer base. They should want this because study after study shows the financial rewards of having loyal customers. Some companies reach this goal through superior value delivery, built on quality products and services and positive, consistent customer experiences. For the past several decades, many companies have relied on customer loyalty cards or programs, by which they can track purchase behavior and give rewards for repeat and volume buying activity.

Customer loyalty programs are especially popular among retailers. Over the years, retailers have found these programs to be powerful business tools within their highly competitive markets. But, some retailers have completely disavowed loyalty programs, either never initiating them in the first place or canceling them, in favor of reduced pricing. In fact, this has become something of a trend. What’s behind it?.

Let’s start with the biggest retailer – Walmart. The company has long claimed that a loyalty program isn’t needed because their prices are so low. Walmart believes that loyalty programs can, indeed, provide excellent information about customers who participate; however, as one Walmart executive put it: “…some of the loyalty programs are very expensive, and we don’t think that serves everyday low cost and everyday low price.” Lower-than-competition everyday prices has been Walmart’s merchandising and marketing mantra since its inception. But, at least for groceries and sundry products, that often isn’t the case. Supermarket chains like Save-A-Lot and Aldi’s, neither of which has a loyalty program, will often beat Walmart’s item-for-item pricing by a significant margin. And, other competitors can use their loyalty programs to selectively pick products, and individual customers, to offer pricing which undercuts Walmart.

As for generating customer purchase data, Walmart has a ‘scan & go’ app for mobile devices, which allows customers to scan their own items as they shop; and this provides the company with valuable information on what customers are purchasing, the length of time they’re shopping in the store, and what offers and coupons might drive future purchase. Walmart uses additional methods of understanding individual customer purchases. One of these is Walmart credit cards. Another is reloadable MasterCard and Visa debit cards. A third is “Bluebird”, a prepaid debit card which functions as a Walmart customer’s alternative to having a checking account, with which they can make deposits, pay bills – – and shop at Walmart. Like Tesco is already doing in the U.K, Walmart, has been considering development of its own ‘house’ bank, which would provide even more customer data.

Asda, a Walmart-owned supermarket chain in the U.K, also has no loyalty program. It’s the second largest supermarket company behind Tesco; and, similar to the U.S., newer low-priced chains such as Aldi are actively competing with Asda. In place of a loyalty program, Asda believes it provides customers with what they want most, a “great multichannel retail experience”. The chain, according to executives, focuses on delivering the key fundamentals: prices, quality, convenience and service. Alex Chrusczcz, Asda’s Head of Insights and Pricing, offers explanations of how the organization is endeavoring to build customer loyalty behavior (http://blogs.terrapinn.com/total-customer/2013/07/25/asda-share-build-loyalty-programme/):

• “Aspire to treat customers equally or you’ll create a fractured brand and shopping experience. If you have someone paying one price and another customer with a coupon paying a different price, the perception of the brand is becoming fractured. Make sure it’s consistent.”

• “Be pragmatic in terms of technology and analytics. They aren’t a silver bullet. Use these tools and combine them with the experience of your team.”

From my perspective, the second explanation is good common sense; however, the first statement is really questionable, even counterintuitive if a subordinating goal of loyalty behavior is to help drive customer-centricity. Simply put, all customers are not equal in value; and marketing strategies which treat them so often create lower revenue.

In the U.S., regional supermarket chain Publix has no loyalty program. The company doesn’t have, as a result, the ability to track, at household level, what customers are and aren’t purchasing in their stores. What Publix does, instead of loyalty cards, is try different alternative approaches to build sales. One of these, for example, was to test a program where shoppers could set up an online account where they could digitally clip coupons; and then, in the Publix store, the discounts they’d set up online could be automatically applied by typing in their phone number. Publix also has a BOGO program for their own brands, and accepts competitors’ coupons in their stores.

Some retailers do more than emphasize the sales and service fundamentals. They build genuine passion for, and bonding with, the brand by creating a more human, emotional connection. And, though there are few organizations like this, retailers such as Trader Joe’s are the exception that proves the rule. Trader Joe’s does not have a customer loyalty program. What they have is an enthusiastic base, achieved and sustained through differentiated, ever-changing customer experiences, enhanced by upbeat, engaged, and helpful employees who are ambassadors for the brand. This has enabled Trader Joe’s to generate sales per square foot that are double the sales per square foot of Whole Foods. So, another way of stating that Trader Joe’s creates loyalty behavior without a program is to say: The holistic shopping experience is, defacto, the loyalty program.

Airlines, as well, are doing their part to diminish the perceived value of their customer loyalty programs. There has been so much reduced benefit for elite customers of late that, in reviewing the new higher miles redemption rates imposed by Delta and United, especially on international flights, it feels like these companies may regret they ever introduced their programs in the first place. Certainly, frequent flyers have been bitterly complaining about these airlines, and the “quite shameful” and “blow to the solar plexus” moves, on social media and online forums. And, none of this has helped the airline industry’s image and reputation. United’s score on the American Customer Satisfaction Index is a full 15 points below the U.S. Postal Service, and Delta’s isn’t much higher.

Now, we come to retailers which had customer loyalty programs, usually of long-standing, and elected to discontinue them. Actually, much of this pullback has been done by one organization, Cerberus Capital Group, the early 2013 purchaser of multiple regional retail supermarket chains from Supervalu (Shaw’s, Acme, Star, Albertson’s, and Jewel-Osco). Calling the new positioning ‘card-free savings’, and reflective of the first strategy stated above by Asda, each of the chains issued statements with themes like “We want buying to be simple for all, so that every (name of company) customer gets the same price whether a loyalty card has been used or not”.

Additionally, and again like Asda, these chains have said they will go back to the basics: clean stores, well-stocked shelves, reduced checkout time, clearly marked sale items, and creation of a more customer-focused culture. Some of their executives have also theorized that the chains will now adopt a more local level approach, rather than customer level, to their decision-making, and that individual store managers will now be more actively involved in driving successful performance.

So, the chains acquired by Cerberus appear to believe that ‘sunsetting’, or eliminating, these programs is a reasonable risk and that they would still find good ways of providing value to retain the more loyal customers, as well as incentives for those with the potential to move from purchase infrequency. Most analysts, however, felt that Cerberus eliminated the programs largely because the chains they purchased were either not mining card data, or not effectively analyzing and applying this material for better marketing and merchandising, thus making the loyalty systems too expensive to maintain.

Personal Note: Geographically, Acme is the closest supermarket to my home. Insofar as post-elimination of their loyalty program, my visits have dramatically reduced; and, when stopping at the store for odd items outside of regular supermarket trips, there is no evidence of a difference in pricing, product variety, operations, or culture.

Cerberus has entered into takeover discussions with California-based Safeway, which also owns Vons and Pavilion. If this sale takes place, it’s a good bet that these chains will also drop their reward cards, because Cerberus-owned supermarkets clearly don’t need, or want, no stinkin’ loyalty programs – nor, apparently, do they see benefit to a more customer-centric enterprise philosophy.

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