FOOL'S EYE VIEW
Loyalty Cards -- Are They Worth It?

By David Kuo (TMFDragon)
November 8, 2001

Carburton Street, London -- Tesco (LSE: TSCO) swears by them. Sainsbury (LSE: SBRY) shunned them then later embraced them with great enthusiasm. Safeway (LSE: SFW) and Somerfield (LSE: SOF) both welcomed them at first then gave them the boot and William Morrison (LSE: MRW) never took to them at all.

What on earth can we be talking about?

Loyalty cards of course -- those bits of seemingly worthless bits of plastic that we carry around in our wallets and purses. These loyalty cards are designed to entice us back to our favourite shops by rewarding us with discounts and little tit-bits in the form of vouchers not to mention those glossy magazines. But does the mere possession of those cards make us more loyal to any particular grocer?

William Morrison, the Bradford-based supermarket that operates predominantly in the north of England, dismissed the idea of loyalty cards. The food retailer said that it preferred to offer its customers "outstanding value for money" by giving them instant rewards at the checkout through consistently low prices. The company also said it would rather stick to its tried and tested policy of low prices and outstanding value for money week after week. The interesting point of Morrison's no-fuss marketing strategy is that it does work. The UK's fifth biggest supermarket was ranked highest in terms of customer loyalty in a survey of shoppers conducted by Verdict Research last year. And it achieved this without the help of loyalty cards.

Safeway and Somerfield both took to the idea of loyalty cards and then ditched it in favour of price cuts instead. Safeway's found that its loyalty card just wasn't working and the company scrapped it in favour of investing the money in discounts and advertising. Safeway expected to save up to £50m by dropping the loyalty card programme and the market, at that time, welcomed the change in marketing strategy with open arms.

Meanwhile, Tesco and Sainsbury have both stuck rigidly with their loyalty programme. Sainsbury has the Reward Card programme and Tesco refers to their loyalty scheme as the ClubCard. In essence, the two systems are similar. In return for shopping at their supermarkets, shoppers are rewarded for their loyalty with points for every pound spent. Sainsbury shoppers get 2 points for every £1 spent and 500 points translates into a discount £2.50. Tesco offers 1 point for every £1 but every 500 points entitles the cardholder to discount vouchers worth £5. Both supermarkets, in effect, offer a 1% discount on your shopping bill -- or a saving of just £30 on the average annual shopping bill of £3,000. Hardly earth shattering but no one is ever going to look a gift horse in the mouth.

Tesco and Sainsbury differ slightly in the way that discounts are rebated to customers. Sainsbury shoppers can redeem their discounts against purchases when they present their Reward card at the checkout. Tesco, however, goes through a convoluted process of mailing its customers vouchers accompanied by a statement. But you need to have accumulated at least 150 points to get the vouchers. In addition to the ClubCard vouchers, customers can also look forward to a collection of other coupons, which have apparently been specially selected. These additional vouchers promote special offers in Tesco stores that the company feels might be of interest to the target patron.

Tesco clearly incurs additional costs by directly mailing each customer with selected vouchers. But this also reveals how the supermarket differs from Sainsbury in the use of the information that it collects from these ClubCards. The vouchers that land on you doormat can, at times, be uncannily appropriate giving the impression that Big Brother has a better handle on your shopping habits than you might have yourself.

Tesco is interested in building up a profile of each of its customers. Most organisations would ideally like to offer its customers a one-to-one service but the demands of mass retailing and mass marketing makes this almost impossible. However through demographic profiling Tesco can better identify the needs and wants of its customer base. It has probably built up more information on its database about you and your family than you could ever imagine -- down to how many cans of beer you drink and how many cigarettes you smoke in a week. On a wider focus, the data from the ClubCard can also offer valuable information about shopping habits and patterns that can be important from an operational perspective. To know what to stock at what time of day can clearly help improve efficiency.

It is unclear whether loyalty cards do breed more loyal customers and the measly 1% discount is hardly going to tempt shoppers to travel miles out of their way. But from the business perspective, it can be vital to help improve profitability if the company can know, with some degree of accuracy, who is likely to buy what and when -- this is the basis of marketing and a market-oriented business. So by being loyal, and getting paid for it, we are providing the company with more information about our requirements that will in turn improve the service that we get from the company, which then fosters greater loyalty -- how bizarre is that.