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Remember “loyalty marketing?”

Just a few years ago, “loyalty marketing” was the strategy that was going to save the supermarket industry, that was going to mine the massive amounts of customer data so that supermarket retailers actually could get to know and better serve their shoppers.
It didn’t work out that way…even though, on the face of it, gathering and using customer information would seem to be a no-brainer.

So, what went wrong? And is “loyalty marketing” a dead issue for the supermarket industry? To find out, we’re going to engage in a dialogue with Rick Ferguson, editorial director for COLLOQUY, which has been providing editorial, educational and research services to the global loyalty marketing industry since 1990.

The following is the first of several e-interviews that we’ll do with Rick over the next few weeks. And it seemed to make sense to start at what seems to be the beginning of the end…

The bloom may be off the rose when it comes to loyalty marketing programs in the food industry, because they never revolutionized the business to the extent that some people thought it would. Having said that, we think that people’s expectations were way out of line. Would you agree?

Rick Ferguson: I’m not sure that the bloom is off the rose, for the simple reason that very few grocers have actually tried true loyalty marketing or CRM. Grocers talk publicly about being “customer-centric,” but their mindset is operational. Grocers are very, very good at squeezing a lot of profit out of the razor-thin margins they have to work with. They’ve traditionally done this by focusing on operational efficiency: maximizing supply-chain efficiency, squeezing their suppliers, stocking the shelves with the products their customers want. Grocers operate the most cost-efficient retail enterprises in the country, and they’re justly proud of it. They’ll tell you that they’re customer-focused because they’re keeping their prices low. That’s how they think.

But the definition of loyalty marketing is “identifying, maintaining and increasing the yield of best customers through interactive, value-added relationships.” I see very little evidence that U.S. grocers have adopted this mantra. Force-feeding a discount card to your entire customer base that relies on a two-tiered pricing model is not catering to your most profitable customers. There’s no segmenting or tiering of the customer base going on. There are no targeted offers designed to cross-sell, up-sell or increase frequency of purchase based on past transactional behavior. They’re using the data from these programs to further improve operational efficiency, which is fine. But there’s no effort to give the customer value or make her feel special or privileged in exchange for using the card. The grocer is focused on the back of the store, not on the customer coming in the front door.

Customers end up resenting these programs, because they feel like they’re being blackmailed into using a card to get prices they should already be getting. They can see that these programs are a sham. There’s a big movement afoot out West protesting frequent shopper cards as an invasion of privacy, and they’re specifically targeting grocery store chains. Why? Because the cards are obviously not delivering value to the customer. T-bone steaks are $7.99 a pound without the card, $5.99 a pound with the card. This is a value exchange? Why not just sell me the steaks for $5.99 a pound in the first place? Why make me jump through a hoop?

So if expectations were way out of line, then that’s because their strategy was out of line with true customer relationship management. Grocers haven’t really stepped up to the plate. But a select few have really shown over the years that they understand customer loyalty, and others are showing signs of life.

Part of the problem that loyalty marketing seemed to encounter was that people let the technology dictate the strategy, and then let technologists run the systems, as opposed to allowing marketing people to run the operations. Do you agree? is it too late for this to change?

Ferguson: This is true of all businesses, not just the grocery business. It goes back to the fact that grocers are operationally focused. They rely on discount cards because it’s easy for them from a technology standpoint. They can read UPCs, and they can apply discounts at the point-of-sale. So, that’s what they do. But there’s evidence that this mindset is changing. Some of the surveys that were conducted in 2002 revealed that grocers are very aware that their CRM strategies aren’t up to snuff, and that the first step toward revamping them was revamping their POS systems. Both of these problems will be a key point of focus for grocers in the next few years, and the two problems really go hand-in-hand. We may see a little more innovation coming from the grocery sector than we’ve seen in the past.

We have a saying at COLLOQUY: “Technology enables, but imagination wins.” The best and most expensive technology in the world won’t help you manage your customers if your strategy is out of whack. Honestly, a “buy six subs, get one free” punch card is a better loyalty strategy than some of these discount card programs.

In addition, it always has been our perception that food retailers allowed loyalty marketing programs to be disconnected from other marketing strategies, from Internet initiatives, and from other programs that might have heightened loyalty marketing’s influence and impact. Why do you think this has happened?

Ferguson: That’s not as big an issue for grocers because they aren’t really multi-channel retailers. All of their customers enter and leave through the same doors. It’s a little different in Europe; Sainsbury’s in the U.K. does a pretty brisk business selling groceries through their Web site. But there’s none of that going on in the U.S. But as a rule, yes, it’s very common to see loyalty programs that aren’t plugged into multiple channels or connected to a larger enterprise-wide CRM strategy.

A bigger problem for grocers is that their discount cards are disconnected from the brand. They don’t use the program to enhance or support my relationship with the brand. Let me give you an example. I frequent a particular location of a large grocery chain here in Cincinnati. It’s in an urban area; most of their customers are low-income urbanites, and the cashiers live in the neighborhood, so everyone knows everyone. If you ring up your purchases and you don’t have your Shopper Card with you, the cashier more often than not will simply swipe a card she keeps by the register in order to give you the Shopper Card price. You get a receipt that says your Shopper Card saved you $2,000 that day.
So, you feel pretty good about it when you walk out the door. But then you think— those so-and-sos, why do they make me jump through this hoop to get good prices when its obvious that they don’t care about me or what I buy? Why make me sign up for a card at all? So the card has actually damaged my relationship with the brand. I think less of them because it’s obvious that they think I’m a chump.

We’ll have more of this ongoing dialogue next week…
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