Strategic Direction

Emerald Article: Tesco leads the way in the loyalty program stakes: UK supermarket succeeds where so many others fall foul

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To cite this document: (2007),"Tesco leads the way in the loyalty program stakes: UK supermarket succeeds where so many others fall foul", Strategic Direction, Vol. 23 Iss: 2 pp. 18 - 21 Permanent link to this document: http://dx.doi.org/10.1108/02580540710724456 Downloaded on: 26-04-2012 References: This document contains references to 3 other documents To copy this document: [email protected] This document has been downloaded 6869 times.

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Tesco leads the way in the loyalty program stakes

UK supermarket succeeds where so many others fall foul

hat would you think if you entered your local supermarket one Friday night and encounter a display of disposable nappies directly next to the four-packs of lager? That someone had been sabotaging the store layout? The backroom staff had made an error?

The power of customer information

In fact, this was an intentional strategy carried out by UK supermarket giant Tesco, based on the ndings from store card data that a large proportion of males purchased lager and nappies on a Friday evening when, presumably, their spouse was having an evening out. This is just one of many examples of how Tesco has been able to leverage the vast amounts of data gained from its customers as a result of its loyalty Clubcard scheme in order to build relationships with customers and ensure that their shopping experience is as effort-free as possible. With 1,800 stores and 27 billion sales across the UK in 2005, Tesco generates a huge amount of information a month which it expertly manipulates in order to gain an understanding of its market that is truly unique.

Competitive advantage
Tescos scheme gives it an immediate advantage over competitors in 11 areas: 1. consumer trends; 2. targeted communications (in fact, it was claimed in 2004 that Tesco printed over four million variations of its quarterly customer mailing to ensure that its discounts and offers are tailored specically for the recipient); 3. accurately measured promotions; 4. basket building; 5. defence against competitor activity; 6. right product in right place; 7. negotiation power; 8. cross-selling; 9. site locations; 10. seasonal peaks; and 11. global growth.

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STRATEGIC DIRECTION

VOL. 23 NO. 2 2007, pp. 18-21, Q Emerald Group Publishing Limited, ISSN 0258-0543

DOI 10.1108/02580540710724456

 With 1,800 stores and 27 billion sales across the UK in 2005, Tesco generates a huge amount of information a month which it expertly manipulates in order to gain an understanding of its market that is truly unique.

This impressive use of information demonstrates how powerful a loyalty scheme can be when effectively executed and, although supermarket rival ASDA dismisses Tescos Clubcard as a marketing trick that costs an estimated 60 million to operate, Tesco is repeatedly cited as one of the leading companies in this area. Not to mention the fact that it is the fastest-growing supermarket in the UK and has already started moving into new markets.

Dying loyalty
Companies that have not fared so well include Subway, who recently withdrew its Sub Club card that offered a free sandwich after buying your eighth subway. EBay stopped its points program for US customers in the last 12 months and Coles, the Australian supermarket, no longer offers discounts to its stock owners. In addition, other schemes are no faring so well. AirMiles, for example, suffered a blow of late when the bank NatWest announced that it was reviewing its policy of offering AirMiles as incentives for new customers. AirMiles, one of the most well-known loyalty programs, was launched back in 1989 by Sir Keith Mills (who also went on to set up Nectar in 2002). At that time, when ying was still seen as a novelty, this scheme was extremely popular and companies were eager to partner up. However, the advent of low cost air travel and the number of competitor incentive schemes has signaled a decline in interest. While Scottish and Southern Energy (another AirMiles partner) asserts that it is happy with this relationship and has no plans to leave the scheme, Tesco and Shell remained quiet when asked recently by a major marketing publication if they would be likely to stay. It remains to be seen whether NatWests defection is the start of something more serious for AirMiles.

Components of a good scheme

So what makes a good loyalty scheme? And why do so many fail where Tesco has succeeded? According to Nunes and Dreze (academics who have spent the past several years researching such programs), a good loyalty scheme should:
B

Stop customers from jumping ship. Sprint offers long distance callers an airmile (redeemable with ve airlines) for every dollar they spend. This will encourage customers to stay with them even if they are dissatised for a small amount of time. The thought of losing all their air miles is far less appealing than moving to a company that may seem to offer better service. Grow market share. Amazon has introduced a Visa card that gives shoppers a point (worth one penny) which they can claim in the form of $25 gift vouchers. Encourage more sales from existing customers. For example, research into an incentive scheme at a car wash showed that customers washed their car more often when they were offered a free wash after eight visits. Provide insights into customer behaviors. This is where Tesco is often cited as having superior expertise as it regularly turns the huge amount of data gained from its Clubcard into useful information that then allows for the targeted mailings, and other personalized communications.

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Make a prot. The best type of scheme is where the program itself turns a prot. For example, American Airlines Advantage program sells points to many major companies (such as Kelloggs, USA Today and Citibank), which they in turn offer as incentives to their customers. In total, the US airline industry sells over $2 billion worth of miles to 22,000 businesses.

Critical success factors

The authors believe that in essence, a loyalty program should have two main aims it should be both cheap as well as attractive to customers. However, whilst the theory is simple, this is far more difcult in practice. They offer the following advice:
B B B B B

make sure there is an even/attractive divisibility of rewards; a sense of momentum is essential; make sure rewards are pleasurable rather than everyday; programs should always build a relationship; and introduce a combination of currency-points exibility.

Pitfalls to avoid
You should also make sure that you:
B

Do not create a new commodity. It the rewards on your program are essentially just discounting then you are not going to encourage loyalty. In addition, you may also end up in a bidding war with your competitors. This is what happened in the US Airline industry when carriers started to undercut its rivals by offering incentives such as double or treble airmiles. Because there were so many good offers, customers started shopping around for every ight they made, and loyalty was the last thing on their mind. Do not reward disloyal customers. Supermarkets are prime offenders in this area. Rather than stick to one store, customers will often just keep two or three loyalty cards and use the shop most convenient to them. While Tesco has managed to buck the trend in this respect, many other grocery stores have been unsuccessful in their attempts to gain value from their reward schemes. Do not reward volume over protability. Iin other words, recognize who your most valuable customers are and reward them accordingly. Someone who has purchased from you 50 times but spent just $10 a go should not be rewarded more than a customer who may have only made 3 transactions but spent $1,500 each time. Do not give away too much of what you already produce. For example, United Airlines offers its top cardholder their choice of entree before anyone else on the ight. This does not cost any extra for the company (there are still the same number of meals available) but it bestows an additional status onto that customer. Do not make promises you cannot keep. Again, this is often about perception. If you have been told that, as a loyalty cardholder, that your bags will come off the plane as priority you will feel let down if you see many other non-priority bags come off the carousel ahead of yours. Even though the majority of priority bags will have arrived rst, from an individual perspective you will feel as though the company has not delivered on its customer promise. This can be most damaging of all. Not only does it discourage loyalty, but also it creates dissatisfaction.

In total, the US airline industry sells over $2 billion worth of miles to 22,000 businesses.

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As Tesco demonstrates, an effective reward scheme can prove invaluable. However, every company needs to recognize the need for upfront investment and continued support in order to make sure that their loyalty program is more than just a PR stunt or passing gimmick.

Comment
This review is based on Tesco playing its trump card by David Benady, Your loyalty ` programme is betraying you by Joseph Nunes & Xavier Dreze and Test of loyalty by James Quilter. Benadys article describes how Tescos Clubcard program has given the supermarket a distinct competitive advantage over its rivals. It provides ten key areas in which Tesco has been able to leverage the amount of data gained to its advantage. These include being able to offer suppliers valuable information about how their product is consumed, delivering highly Targeted communications and being able to identify consumer trends well in advance of its competitors. Your loyalty programme is betraying you offers fascinating insights based on a number of years research into customer loyalty schemes. As well as an analysis of a number of schemes that have both succeeded and failed, the authors give their opinions on the components of a successful program. A must-read article for anyone involved in this area of business. Quilters article is a short commentary on the fortunes of the AirMiles incentive scheme. It also gives some information about the relative newcomer on the scene, the Nectar Card.

Keywords: Loyalty schemes, Customer relations, Customer service management

References
Benady, D. (2006), Tesco playing its trump card, Precision Marketing, Vol. 18 No. 26, ISSN: 0955-0836. Nunes, J.C. and Dreze, X. (2006), Your loyalty programme is betraying you, Harvard Business Review, Vol. 84 No. 4, ISSN: 0017-8012. Quilter, J. (2006), Test of loyalty, Marketing, May 17, ISSN: 0025-3650.

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