In the battle for our wallets, no single companies loom larger than those that control our two major supermarkets, Coles (owned by Wesfarmers) and Woolworths.
For the past few years, the two food dynamos have warred on prices, with most of the battles being won by Coles. Its CEO, Ian McLeod, has managed to steal billions worth of business from Woolworths, which has been fighting back by vigorously matching Coles’ hefty discounting.
But in his mid-year results briefing yesterday, newish CEO Grant O’Brien (he was appointed a year and a half ago) spruiked the results of his new strategy. He said the company’s move away from mass marketing to instead focus on squeezing more value out of its Everyday Rewards loyalty program was paying off.
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“We’re closer now to our customers than we’ve ever been before and these targeted offers have really worked for us in the first half,” he said. He said the company planned to amp this up, using “less of a traditional shotgun approach to marketing”. Woolworths’ Everyday Rewards program has 6.5 million active users.
Watching the two behemoths slogging it out begs a question for leading companies: given that loyalty programs and discounting are both expensive, which works best?
The key to understanding the value of loyalty programs is to stop thinking of them as such, says Steve Worthington, a professor of marketing at Monash University.
“Loyalty programs are not really about loyalty; they’re about gathering information,” he says.
“With someone who buys pet food, you can guess they have a pet, and so [you can] market pet products to them. With someone who buys nappies, you can market things for children and baby. You can use that customer knowledge to offer a far wider value proposition to the customer.”
Even if customers are happy to give you this information, it takes a bit of bother to get them to sign up to a program, which is why Jon Manning, of pricing consultancy Pricing Prophets, says you can think of loyalty programs as ‘bribery programs’.
“Companies buy that data from customers – through discounts or gifts. ‘We’ll give you this for free if you give us your information’. It’s often not that explicit, but that’s the idea.”
In this, Woolworths has an advantage over Coles, Worthington says. “Woolworth’s Everyday Rewards program has been out for much longer. They’ve got more data on their customers than Coles.” Coles relaunched its loyalty program, Flybuys, in 2012. Flybuys began as a joint venture between Shell, Coles and NAB, but Coles bought the company outright in 2011. In time, Worthington says Coles’ loyalty program, which has about five million active users, will be very valuable, but for now it’s still building its data on customers.
Loyalty programs can cost millions to implement and analyse. When Coles relaunched Flybuys last April, it sent 16 million Australian households new Flybuys cards in a bid to build its membership.
Lacking the deep expertise required to properly use all the customer data, many big companies, including Myer, Hoyts and JB Hi-Fi, outsource their loyalty programs to a range of specialist consultancies. This includes British grocery retailer Tesco, widely regarded as having one of the world’s most lucrative loyalty programs, Clubcard, which is administered by loyalty program specialists Dunnhumbly. In 2009 the company claimed a response rate of 25% to its monthly set of personalised discounts emailed to its 16 million members. Analysts estimate the program generates more than £100 million a year for the company.
Targeting discounts through loyalty programs can also help businesses maintain their margins, says Manning.
“Rather than everyone who walks in the store getting a discount, it becomes a discount at the cash register. That gives more control to the retailer – it’s more targeted and minimised. Lots of companies use loyalty programs to manage their discounting, to help them avoid fire-sales or an expectation that certain products are available cheaply.”
Loyalty programs aren’t for every business, Worthington says. It depends on the business model and strategy being employed.
He gives the example of no-frills grocer Aldi. “Their primary focus is on price, and that’s worked out for them, both here and internationally. They’d never have a loyalty program. Their whole business model is founded on low-cost operations and price sensitivity.
“Coles and Woolworths on the other hand have strategy of maximising their share of what consumers spend. Not just on groceries – on everything. They offer financial products, petrol, liquor, health and beauty products. So for them, that customer knowledge enables them to point customers in the direction of their other products.”
Manning says that companies would be foolish to focus exclusively on developing either a loyalty program or competitive pricing. In the case our two dominant supermarkets, one of them can’t start being more expensive than the other if it hopes to remain competitive. Or, as O’Brien put it yesterday, “we have a contract with our customers; we won’t be undersold when they walk into our stores”.
“Price matters,” says Worthington. “People perceive that supermarkets are less expensive than a local convenience store, and that does have its role.
“But the long run, customer knowledge leads to profitability.”
This article first appeared on LeadingCompany.