Has the traditional loyalty scheme passed its sell-by date?

Supermarkets need to up their game in the loyalty stakes or new entrants will destroy them, is the message from a new report by management consultants Oliver Wyman.

The report, The Future of Customer Loyalty, claims loyalty schemes based on transactional rewards are ‘undifferentiated, underutilised loss-makers’. It estimates that schemes such as Sainsbury’s and Tesco’s, where a customer is rewarded with a 1% return on the value of their shop, can cost a £10bn retailer between £30m to £60m in reduced margin every year. Add the costs of running the scheme and the loss are not going to be recouped.

Retailers justify the cost of these loyalty programmes by the data they yield, which they say is used to inform business decisions, sell to suppliers and develop targeted campaigns.

“The hope and aspiration for most companies is that you get the money back when you start to use the data in your business,” says Nick Harrison, European retail practice co-leader at Oliver Wyman. “But our overall observation is that basically loyalty schemes fail or have failed to deliver. And the real point is that they are nowhere near where they need to be for the future.”

The report argues that reinventing loyalty is not a “passing trend”, it is fundamental for survival with increased competition from online retailers, manufacturers selling direct to the consumer, and given technological changes such as smartphone purchases.

Harrison also highlights the threat of the discounters. “If you look at discount competitors it is a simple offer. The customer knows what they are paying and there is no complication to it,” says Harrison. “When you measure the value perception customers give different parts of the retail offer, loyalty schemes are valued rather low down the list. What people value most is base prices, then promotions and special offers, and then after that loyalty schemes.”

However, he still believes there is value in loyalty schemes and using data to drive a closer relationship with the consumer. He points out that internet-based retailers have a better data-driven relationship with customers and warns of the onslaught of new operators.

“If Amazon Fresh launches, that is the classic example. It has the skill to deal with customer data and can come up with all sorts of smart apps, including manage your menus and manage your diet,” says Harrison. “On the one hand we are saying long-term it is a real threat in that space and established retailers need to learn how to do more with the one-to-one connections they have with customers. Then we are also saying the internet and apps are changing customer expectations of what they want.”

Customers are prepared to allow more access to their data as long as they get useful products and services in return, the report points out. Many loyalty schemes are already looking at alternatives to points promotions - the report citing Waitrose’s free coffee.

Customers traditionally have a plastic card scanned on payment and will then be sent coupons and offers via email or post. Customer expectations around smartphones are changing this. Moving to more smartphone-oriented systems could mean increased pick-up of the rewards, which could cost retailers, says Harrison. But he argues this would deal with customer frustration about their failure to use loyalty points. It can be irritating for customers if they don’t use them,” says Harrison. “It would be worth paying the extra cost to have the customers happy.”

The report suggests replacing loyalty cards with apps; distributing coupons direct to mobiles; and IT flexibility to adapt to tablets and smart watches.

With Amazon Fresh about to target the UK, the question for supermarket retailers is: can they really afford not to?