CARD LOYALTY.

A NEW EMERGING ISSUE IN GROCERY RETAILING

Chiara Mauri (*) Abstract In the 1990s all the largest grocery retailers have introduced loyalty cards with the specific goal of acquiring consumer knowledge. The use of loyalty cards as a knowledge tool has become so critical that retailers offer customers rewards in return for card subscription and continuous use, because knowledge accumulates only if consumers keep on using the cards they have subscribed. These cards have opened a rich debate in marketing literature, which is still going on. All the analyses of card data have however assumed that consumers are card loyal, that is they use the card they have subscribed. Is card ownership and use tangible evidence of consumer loyalty? The paper offers a framework for testing the feasibility of this fundamental assumption. The framework is applied to the loyalty card database of an Italian supermarket to answer three questions: 1. Who are the heaviest users of the card? 2. Is their shopping behavior different from that of light users? 3. Who are the key cardholders? Answer Tree (SPSS package) is the technique used to operate the empirical analysis.

KEY WORDS: Carte fedelt, loyalty marketing, retailing customer profiling JEL Codes: M31

(*)

CHIARA MAURI Associate Professor in Marketing, Bocconi University.

Card loyalty. A new emerging issue in grocery retailing

1. LOYALTY CARDS. FROM DATA MANAGEMENT TO CUSTOMER MANAGEMENT All the largest grocery retailers introduced loyalty cards in the 1990s. A few of these card brands include: Tescos ClubCard (1995), Sainsburys Reward Card, and Safeways ABC Card in the United Kingdom; Casinos Club Avantages and Coras Cora Card in France; Esselungas Fidaty Card (1995) and GSs SpesAmica Club in Italy; Giant Eagles Giant Eagle Advantage Card Club and A&Ps Farmer Jack Bonus Savings Club in the USA. These small but smart plastic pieces are a tangible evidence of what some authors have called The Marketing Information Revolution (Blattberg, Glazer, Little 1994). They provide a clear signal of the great thirst for customer knowledge, a critical link between large global strategies and local marketing actions, and a strong support for customer relationship management (Deighton, Peppers and Rogers 1994). Retail managers should use the knowledge acquired through loyalty cards to strengthen store loyalty and to build stronger consumer relationships. The basic idea behind these efforts is that a firms performance in terms of revenue and profit is related more to the loyalty of existing customers than to the mere number of customers. If firms are able to build intimate relationships with customers, their performance is guaranteed. Building an intimate customer relationship means that a firm has to identify its customers, track their buying behavior, transform all the collected data into knowledge, and develop effective marketing actions. By continuously updating this knowledge through tracking consumers responses the firm is able to select the best actions for tying consumers to itself. As the customer database of customer responses to marketing stimuli grows, it becomes increasingly evident that the marginal effectiveness of each successive action decreases unless new actions take into account past responses. Since responses differ among consumers and stores, loyalty cards are the ideal tool for activating the one-to-one marketing approach, working as critical link between global strategies planned at the headquarters of the retail organization, and local marketing actions developed at the various micro levels of the organization: geographical area, distributive format, group of stores, single store and even single consumer. The technology of loyalty cards allows retailers to transform cold data on consumer behavior into warm relationships and eventually into genuine customer loyalty, founded on mutual understanding and trust. A warm relationship is also a learning relationship (Pine, Peppers and Rogers 1995). Firms learn from consumer behavior and, in turn, consumers allow the firm to shape their behavior. Researchers however question that loyalty schemes are indeed a manifestation of relationship marketing (Hart et al. 1999) and even come to say that loyalty card is a

Card loyalty. A new emerging issue in grocery retailing

misnomer (Worthington 2000). There is evidence that loyalty cards are running below their potential, the main reasons being limited use of consumer data, lack of the resources and of the competence to process efficiently and effectively huge amounts of data, mistakes in the data, increasing similarity among competitive schemes that make consumers transit from one scheme to another according to specific promotional campaigns. Big issues and small problems both seem to humble the knowledge potential embedded in loyalty cards. The exploitation of loyalty cards as a knowledge tool has followed a typical process, that is continuously redesigned and lengthened as knowledge accumulates. The first steps in the process relate to the application of basic statistical techniques and geomarketing tools to the customer database, which integrates scanner data and demographic household data. These steps have three goals, which can be considered the fundamental building blocks of consumer knowledge: I. II. III. Consumer identification and description (macro-segmentation) Geographical delimitation of the attraction area Identification of the best customers, the 20% who are responsible for 80% of revenue and an even greater percentage of profit. It is a widespread view that the highest profitability comes from the heaviest spending customers, who are also supposed to be the most loyal customers.

The knowledge acquired has immediate marketing implications in terms of all the classical retail mix variables, and can also significantly impact on store location decisions. Tesco was able, for example, thanks to data collected from the registration forms of their Clubcard, to identify six life-stage segments of customers: over 60 years old, 40-60 without families, families (two segments), 20-40 without families, and students (Rayner 1996). The six segments receive a differentiated version of the Clubcard magazine. While some basic features of the magazine remain the same, photos and coupons are tailored to the characteristics of each segment. Each segment is further divided into micro-segments on the basis of consumer shopping behavior, and card holders of different micro-segments receive tailor-made mailings that invite them to local events relevant to their specific needs (for example dietary requirements) or that suggest special deals. The addresses of the consumers help each store to define its attraction area. The total area con be further divided into smaller census zones, and each zone can then be profiled according to the demographic traits described above and shopping behavior in a never-ending micro-segmentation process which helps retailers to acquire a deeper knowledge of their consumer base and to develop meaningful customer-specific marketing.

Card loyalty. A new emerging issue in grocery retailing

2. THE NEW CHALLENGE: CONSUMER LOYALTY.TO THE LOYALTY CARD Once consumers have subscribed to a store loyalty card, one may think that they use it every time they shop at the store. Only if this happens the card can be an effective tool for knowledge development and information-driven customer relationship management. Instead results of some empirical research give a different picture: according to the research done by Wright and Sparks (1999) 23% of the cards are not used every time a purchase is made, 13% of cards have not been used in the last three months, and consumers tend not to use the card when they pay cash small amounts. Being aware of the laziness of consumers, retailers reward them in return for their continuous use of the card. These rewards usually take the form of promotional incentives tied to specific behaviors. Consumers who want to receive the rewards not only have to use the card, but also have to follow the retailers suggestions about spending a certain amount, buying specific product categories, choosing certain brands, visiting the store with a certain frequency, and sometimes at specific hours of specific days. The higher is the cardholders compliance with retailers demand the higher her/his rewards. To maintain alive consumers interest in their supermarket offering most reward plans have come to last for years. Retailers, however, while keeping the scheme going, must continuously renovate the promotional incentives targeted at cardholders both to maintain their involvement in card use and to educate their shopping behavior. By enriching the customer database with consumer responses to promotional rewards, retailers learn to develop the most effective stimuli for bringing customer behavior in line with strategic marketing goals. The loyalty card has thus become an icon around which retailers formulate marketing activities that continually regenerate consumer loyalty (Worthington 1996) through a better knowledge of consumer behavior. The most important goals of this knowledge accumulation are: IV. Segmentation of the consumer base into clusters of purchase behavior in terms of shopping frequency, average shopping basket, total amount spent, areas of store visited, product categories purchased, deal proneness (micro-segmentation) Development of marketing models which explain the shopping behavior of different consumer segments.

V.

Basic statistical techniques are not sufficient by themselves for building this kind of knowledge. What is required is the integration of many different kinds of data, the measurement of complex constructs, the application of consumer behavior theory, and also creative thinking.

Card loyalty. A new emerging issue in grocery retailing

As before, the ambitious effort to develop meaningful and sound consumer behavior models built on loyalty card databases is based on the premise that consumers are card loyal. The goal of this paper is to examine this fundamental assumption. When is card ownership and use a tangible evidence of card loyalty and eventually of store loyalty? The framework that we use to analyze card loyalty covers fully the first and the third building blocks of consumer knowledge and offers some insights into the fourth. This framework is applied to the loyalty card database of an Italian supermarket which started the Clubcard program in 1996. After a brief overview of the time schedule of the scheme, cardholders are segmented in terms of card user status (Kotler 1997) and attention focuses on card users to analyze their shopping behavior. The main questions that need answering are: Among the cardholders, who are the consumers loyal to the card? Among them, who are the heaviest shoppers? Is their shopping behavior different from that of light shoppers?. The answers should be a step forward in understanding how Loyalty Schemes are set up to nurture and build on these qualities and attitudes (those of affection, fidelity, commitment) (Hart et al. 1999, p.546). The paper ends with the implications for retail marketing and with the indication of new avenues for future research. Many lines of research have contributed to the discussion: The literature on consumer loyalty. Academic literature has concentrated on the definition and measurement of loyalty (Jacoby and Kyner 1973, Jacoby and Chestnut 1978). The general conclusion is that loyalty is both a cognitive construct and a shopping behavior. There is also a widely cited literature written by consultants, who have concentrated on the empirical evidence of the economic benefits of customer loyalty and on the related issue of loyalty management (Busacca 1998). This literature leaves open a critical question: loyalty to what? While many have debated brand and store loyalty, mostly as independent constructs, loyalty cards add a third object, the card itself, thus multiplying the relationships among the constructs 1 The literature on customer database management (Hughes 1996), marketing information management (Blattberg et al. 1994), measured marketing (Woolf 1994) and many other analogous terms to denote the same field The literature on customer-specific marketing (Woolf 1966) and on customer relationship management

There is also a loyalty to the distributive format which interferes (Castaldo and Costabile 1995)

Card loyalty. A new emerging issue in grocery retailing

The literature on continuity promotion. While the literature on sales promotion is abundant in relation to price promotion in all its forms, it is much more scarce on loyalty promotions. Some exceptions are Castaldo and Mauri (1994 and 1996), Uncles (1994), Dowling and Uncles (1995 and 1997), OBrien and Jones (1995), Hart, Smith, Sparks and Tzokas (1999), all related to retailers continuity programs.

3. RESEARCH METHODOLOGY The empirical research was carried out at a typical Italian supermarket (1800 square meters) located in a working area not far from Milan. The supermarket, which is a member of a big retail organization, started the loyalty card at the end of 1996 but complete data are available only from April 1997. By complete here we mean that for each card memorized in the supermarket database we know at least: The card code The name of the cardholder His/her address His/her household size The date of subscription The number of all shopping visits The total amount spent since subscription2 . We track the dynamics related to card use for one year from April 1997 to April 1998 separating the twelve months into two semesters April/October and October/April (see Figure 1). The reason for the separation into two periods is that we want to examine consumer behavior towards the card by following the cardholders stream of actions. The first six months are a good period for appreciating the effects of card introduction on card use behavior, and hopefully on shopping behavior. The following six months, while new cards are still subscribed almost every day but at a much lower rate, are useful for checking whether new cardholders behave the same or differently from the pioneers.

For reasons related to the supermarket information system, consumers baskets are not available for each shopping trip

Card loyalty. A new emerging issue in grocery retailing

Figure 1. CHART OF THE CLUBCARD SCHEME TIME SCHEDULE

Nov. 96 April 97 October 97 April 98

8357 cards
Information system adaptation First cards issued New cards

Start of clubcard loyalty program

Complete data availability

First 6 months

First year of the schemes life

The smallest unit of analysis is the card, and the purchases for each card are aggregated over a six month period. Given our goal, we decided to take a step-by-step approach to customer-specific marketing in order to appreciate its potential fully. Before moving on to details about the individual consumer or the individual basket there are many important aspects to look at. Once we have a clear picture of the dynamics related to card use and of the related shopping behavior, basket analysis aimed at loyalty management is the most immediate next step. At the end of the first semester the database registers 7,510 cards, whose purchases cover 70% of our supermarkets revenue. It is worth noting that even this simple empirical evidence says that our customer base includes two segments: the first of these are cardholders, and the second are consumers who are not interested in subscribing to the supermarkets Clubcard. Assuming for the sake of simplicity that each card is owned by a different card holder 3 , these 7,510 cards can be further segmented in terms of card user status (Kotler 1997) as illustrated in figure 2.

This assumption is not so obvious as it may seem. For many reasons (cards are lost, left at home, or stolen) some consumers subscribe to the same cards more than once, and since they rarely alert the supermarket the database does not clean their old card code. Given that they nearly always fill in the new application forms with modified data, it is not easy to immediately recognize the same consumer under a relatively different profile

Card loyalty. A new emerging issue in grocery retailing

Figure 2. SEGMENTATION OF CARDHOLDERS

April 15-October 15, 1997 7510 CARDS ISSUED

2358 (31%) NON-USERS Cards never used Just subscribed

5752 (69%) USERS Cards used at least once "Activated"

1668 (23%) EX-USERS Cards not used in the last month: Lost? 11.6% of card revenues

3353 (45%) ACTIVE CARDS - REGULAR USERS 88% of card revenues

131 (2%) FIRST-TIME USERS Cards issued in the last month 0.4% of card revenues

In the second semester there were only 805 new card subscriptions, to make a total of 8,315 different card codes. We will briefly look at the dynamics of the card portfolio: cards used, dead, dead and reborn, and so on. Analysis then focuses only on cardholders who are also users of the Clubcard. In terms of segmentation schemes, this means crossing the card user status base with the purchase rate to answer the above questions: Who are our key customers in terms of knowledge creation, the ones that are both regular card users and heavy shoppers? Is the profile of these A customers different from other customers, the Bs and the Cs? Through an ABC analysis of cardholders the supermarket knows the names of its A, B and C customers, but what is interesting from a knowledge management perspective is to profile their different behavior in terms of discriminating variables. The card database is enriched by adding all the variables necessary for analysis. Some of them must be normalized to allow for meaningful comparisons among numbers 4 , while others require a temporal adjustment to refer all data to the same period of analysis. Finally, the database has to be cleaned of: (i) data with obvious mistakes (i.e. Cardholders age more than 95), (ii) duplicated cards, (iii) cards whose holders are firms. The demographic profile of each cardholder is built up by integrating the data included on the application form with data bought from an external source 5 . Data collected through the application forms give the basic demographic profile of cardholders

Card purchases have been normalized as per capita purchases by dividing total purchases by household size, and discounts have been normalized as percentage of discount on sales 5 The source in question is a direct marketing agency that can classify any consumer in a country into his/her socio-economic cluster. The matching key for classification is the address of the consumer

Card loyalty. A new emerging issue in grocery retailing

families, while external data give their general demographic profile indexed to the national average. For each card, the following shopping behavior variables were included in the analysis: per capita aggregate expenditure over the period, total visits, days since last visit, promotion purchases in absolute value and as a percentage of aggregate expenditure, discounts both in absolute value and as a percentage of total purchases. Table 1 shows how these variables were measured for a single card. Table 1. Baskets and shopping variables (base: one card, two trips)

BASKET OF TRIP 1, JANUARY 3, 2000 Cheese A. Apples B. Toothpaste Colgate Toilet tissue Scottex Discount 20% A. Discount 20% B. Discount Total Amount Accumulated points (rewards) 30 Bonus points on basket 3 Total points accrued 33 5 5 5 5 1 1 1.5 16.5

BASKET OF TRIP 2, JANUARY 10, 2000 A. Apple jam Hero Ham Laundry detergent Dash Scottex Toilet tissue A. Discount 20% Total Amount Accumulated points (rewards) 33 Bonus points on basket 3 Total points accrued 36 5 3 5 5 1 17

Legend: Products: Products with a before are discounted 20% A. B. Products: Products with an A., B. or C. before are discounted 20, 30, and 40% respectively. These discounts are however targeted only to cardholders Consumers receive 1 bonus point for each 5 of their basket. Some products offer extra points Variables used in the analysis: Total Amount spent in the period: (16.5+17) = 33.5 Purchases on promotion: (15+5) = 20 (all kinds of promotions on specific products) Purchases on promotion/Total Amount Spent: 20/33.5 = 59.7% Total discounts (cumulated): 4.5 (all kinds of discounts) % of discounts on Total Amount Spent: 4.5/ 33.5 = 13.4% Number of baskets (trips): 2 Average basket: 33.5/2 = 16.75 Purchases per capita (of the household) = 33.5/3 = 11.1 (this household/card has three components) Days since last trips: 13 (assuming today is January 23, 2000)

Card loyalty. A new emerging issue in grocery retailing

After the addition of these data, each cardholder is described in terms of 114 variables pertaining to three domains: identification data taken from the application form, demographic profile bought from an external source, and shopping behavior from the store scanner system (store scanner panel). On all these data we run two Answer Tree Analyses (SPSS package). The goal of the first Answer Tree Analysis is to profile the regular users of the Clubcard using the cards that are still in use at the end of the period as the target variable. We call these consumers loyal cardholders. The goal of the second Answer Tree Analysis is to profile the heaviest shoppers among the loyal cardholders using Total Amount Spent (per card, per capita) as the target variable. In other words, we want to profile both the cardholders who are most loyal to the card itself, and the heaviest spending loyal cardholders. There is increasing evidence that consumers are open to the idea of joining schemes that reward loyalty (Uncles and Laurent 1997). A few of them, however, quit the game well before its end while others keep on playing for a long time. When customers abandon the card, aside from the possibility of their being still highly loyal, they blind the firms knowledge creation process, biasing the virtuous cycle of data acquisition data analysis comprehension decision.

4. EMPIRICAL FINDINGS FROM THE ANALYSIS OF LOYALTY CARD DATABASES Analysis of our card database follows three steps. First, we present an overall view of the dynamics of the card portfolio in the one-year period. This gives a rough picture of consumer behavior related to the cards. Second, we find the variables that best discriminate regular users from ex-users of the card. Third, we find the variables that best describe the supermarkets heaviest shoppers-cardholders. These two last steps are performed with the Answer Tree technique. Of the 8,315 cards issued from April 15, 1997 to April 14, 1998 only 6,299 were activated and only 3,267 were still in use in the last month (Figure 3). The supermarket loses sight of more than 60% of the cards issued in one year. Since this loss is not accompanied by any decrease in sales revenue and the supermarket has been on the market for some years before the launch of the Clubcard program, suitable explanations are: (i) In the introduction phase cards have been given to anyone, customers and noncustomers, in the hope not only to increase the store franchise of existing customers but also to attract new customers. Maybe it is for this reason that 2,016 consumers (8,315-6,299) subscribed to the card filling up the application form but never activated it: most of them were more likely to be non-customers;

Card loyalty. A new emerging issue in grocery retailing

(ii) (iii)

(iv)

cardholders keep on coming for their shopping but forget to bring the card which is left at home; cardholders have lost their cards. Some of these, and of the ones of the (ii) segment, subscribe to a new card, maybe modifying some data of the application form or even making out the new card to another member of the (same) household, thereby making it difficult to detect the duplication; cardholders come for shopping but do not use their card because they do not have strong enough reasons to play the game. This is more likely to happen when the promotional incentives tied to the card are of the type on-off. In the off-periods consumers may forget to use their cards because of the lack of any incentive; on the other end consumers may forget or even deliberately decide not to use their cards when promotions are on if they are not interested in the specific rewards. In both circumstances the Clubcard stays lazy in consumers pockets.

Figure 3. THE DYNAMICS OF CARD LOYALTY (April 1997-April 1998)

Cards issued

- 24,6%

Cards activated - 48,1% Cards still in use - 60,9%

8357 6299 3267

If we look at the dynamics of the card portfolio, the most significant evidence is the continuous reshuffling of cards. Let us follow what happened in the second semester of the first 7,510 subscribers. Only 5,021 of them used the card at least once in the first semester, while 2,358 never used it. We can divide the track of these two segments of cardholders into the three steps (a), (b) and (c) shown in Figure 4.

10

Card loyalty. A new emerging issue in grocery retailing

Figure 4. WHAT HAPPENED IN THE 2nd SEMESTER OF THE CARDS ISSUED IN THE 1st (a) SEMESTER Cards issued.
7510 Never used 2358 (31%) New 131 Ex users 1668 + 425

(b)
Cards for which purchases >0: 5636 131 -1 1667 -1

(c)
Cards still active in the last month - Loyal: 2924
119 76 370

- 306 - 55 - 1297 - 993

Regular users 3358

3352 2359

October 1997

Nov.97-April 98

April 98

Of the 2,358 cards who had never been used during the first six months 425 show up in the second semester (part b of the figure), but eventually only 119 of them keep on being used (part c). The 5,021 cards used at least once in the first semester can be segmented into three groups (part a of the figure): 3,353 active cards those that, after being issued, are still in use in the last month. Their holders can be considered regular users 1,668 ex-users cardholders who have abandoned the card in the sixth month 131 new cards cards issued in the sixth month.

At the end of the year the supermarket has only 2,924 loyal cards (part c of the figure): 2,359 are regular users, 370 are occasional users who give up card use for some time and then come back, 119 are cardholders who have been sleeping for quite a long time, 76 are the newer acquired cardholders. At the end of the year there is a total of 3,267 regularly used cards. This means that of the 805 cards subscribed in the second semester only 343 are still alive (3,267-2,924).

11

Card loyalty. A new emerging issue in grocery retailing

Our supermarket has lost 4,586 cards (61% of the 7,510 cards issued in the first semester) during the first year of life of the program that has been ironically called loyalty marketing Clubcard. Table 2 shows the five different tanks to which they can be assigned.

Table 2. Tanks of the lost cards Lost card segments N. OF CARDS Never-used tank Used in the first five months, disappeared in the sixth month, and definitively lost tank Loyal in the first semester but not used in the second semester tank Never used in the first semester, used in the second but then lost tank Issued in the sixth month of the first semester (new cards), used in the second but then lost tank Cards lost (total) 2358 425 = 1933 cards 1668 370 = 1298 cards 3353 2359 = 994 cards 425 119 = 306 cards 131 76 = 55 cards 4,586 cards

These results leave no doubt as the conclusion. As presently used by holders, the Clubcard will never allow the supermarket to acquire the desired consumer knowledge. The information it does acquire may even be biased if the card database contains a lot of undetectable card duplications. The main finding of this analysis is that some consumers have good reasons to keep using their card, other consumers are very disloyal to the card, and a few abandon it while still remaining customers 6 . Given these results, the goal of the next step is to find the variables that best discriminate regular users from ex-users of the card. In October 15 there were 3,353 cards regularly used (see Figure 2). 920 of these cards had very incomplete records and/or were duplicated, so that the useable database contains 2,433

Sharp and Sharp (1997) note that only a few people participating in the Fly Buy scheme in Australia knew the mechanism exactly. Only 23% of the Fly Buy members correctly identified the points barriers of the scheme, and only 15% were able to state correctly how many points they were receiving for a given amount spent. The authors concluded that lack of consumer knowledge may inhibit the effect of a loyalty program

12

Card loyalty. A new emerging issue in grocery retailing

records. In April of the following year 30% of them do not show up anymore as customers. What variables explain the different behavior of these two segments of cardholders? An Answer Tree Analysis is applied using card loyalty as the target variable. Card loyalty was measured by a cardinal variable of the yes/no type with yes = the card shows up in the last months transactions. This technique, derived from CHAID and widely used in customer profiling for direct marketing purposes, allows the most effective predictors of a given target variable to be chosen. In our case the target variable is card use a proxy for card loyalty and the predictors are the 114 variables included in the customer database. The results of the analysis are presented in Figures 5, 6 and 7 and then commented.

Figure 5. CARD LOYALTY AND PURCHASES WITH PROMOTION (October 1997-April 1998)

April 1998 Non-loyal cards 29,2 % Loyal cards 70,8 % N. 2.433

Promo purchases zero N. 542

Promo purchases less than Euro 2.6 N. 246

Promo purchases Euro 2.6- 5.0 N. 244

Promo purchases Euro 5.0 - 7.7 N. 244

Promo purchases Euro 7.7 - 11.3 N. 244

Promo purchases Euro 11.3 - 16.0 N. 244

Promo purchases Euro 16.0 - 22.6 N. 244

Promo purchases more than Euro 22.6 N. 425

30,81

32,93

29,51

26,23

17,62

12,70

8,61

5,41

69,19

70,49 67,07

73,77

82,38

87,30

91,39

94,59

Figure 6. CARD LOYALTY AND SHOPPING F R E Q U E N C Y ( October 1 9 9 7 April 1 9 9 8 )

April 1998 Non-loyal cards 29,2 % Loyal cards 70,8 % N. 2.433

N. of baskets less than 7 N. 639

26,60

N. of baskets 8-14 N. 355

32,41

N. of baskets 15-21 N. 970

17,75

N. of baskets more than 21 N. 970

2,68

73,40

67,59 82,25 97,32

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Card loyalty. A new emerging issue in grocery retailing

Figure 7. CARD LOYALTY, PURCHASES WITH PROMOTIONS AND SHOPPING FREQUENCY (October 1997-April 1998)
April 1998 Non-loyal cards 29,2 % Loyal cards 70,8 % N. 2.433
69,19 30,81 17,72

Promo purchases No N. 542

Promo purchases Yes N. 1.891

82,28

N. of baskets less than 5 N. 154

N. of baskets 6-9 N. 202

N. of baskets 10- 13 N. 225

N. of baskets 14-24 N. 504

26,22

N. of baskets more than 24 N. 806

15,08 2,23

33,77 60,40

39,60 66,23

73,78

84,92

97,77

a) The more consumers buy on promotion the higher their card loyalty (Figure 5). Almost 70% of the 542 cardholders who are not attracted by any promotional incentive abandon the card, while almost 95% of the 425 cardholders who buy at least 22.7 (44,000 Italian lira) on promotion remain loyal to the card. Even a very small amount bought on promotion works as a powerful incentive. Card use jumps from 30.8% to 67.1% only because cardholders find something to buy on promotion. These promotional inducements are really very small 7 , but they appear to be the engine which gives power to the card scheme, and thus to the generation of consumer knowledge. b) The absolute amount of promotional incentives seems much more important than percentages. Since the percentage of promotion on the shopping basket does not appear in any branch of the segmentation tree, either this variable is highly correlated with the corresponding absolute values or Webers law of cognitive psychology is not at work here. As applied to sales promotion this law postulates that in order for a stimulus change to be noticed, it must be kept proportional to the absolute magnitude of the original stimulus. In other words, the higher the basket amount, the higher should be the
7

Before jumping to conclusions about the psychological meanings of promotional rewards, there is another explanation for these findings. Our supermarket could be saving on promotions just because of the card. Management may think that once consumers become cardholders they are locked in, at least for the duration of the promotion. After the launch of the card they may therefore progressively reduce promotional investments targeted at cardholders

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Card loyalty. A new emerging issue in grocery retailing

absolute value of the promotional incentive to get a given response. Making the incidence of promotion on basket amount as the first branch of the tree gives the results represented in Figures 8 and 9. These are clearly not in accordance with Webers law. Below the threshold incidence of 0.02% the supermarket keeps only 24% of the cards. Above this percentage most cardholders stay loyal, but if the incidence of promotion exceeds 7.1% the situation reverses again. Card loyalty increases with the incidence of promotion, reaches a maximum at an incidence of 1.2-1.4%, and then decreases. The theoretical explanation that best matches these findings can be found in price perception and encoding theories, and more generally in all cognitive psychology that has to do with the psychological elaboration of numbers. As applied to these results, it would mean first of all that consumers only use the card if the promotional advantages reach a just noticeable difference compared to what they see as normal shopping conditions (something similar to a reference price). The lower threshold could therefore be interpreted as the bargain point for the card. It is as if the consumer reasons: After .. (the threshold) its a bargain, what a deal!. However, if promotional inducements are very high consumers seem to discount the card, diminishing the probability of its use. The upper threshold works as a sort of promotion saturation point (a resistance point) above which the effect of promotional stimuli on consumer behavior is minimal, and may even be negative (Gupta and Cooper 1992, Kalyanaram and Little 1994).

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Card loyalty. A new emerging issue in grocery retailing

Figure 8. CARD LOYALTY AND PROMOTION INCIDENCE (October 1997-April 1998)

April 1998 Non-loyal cards 29,2 % Loyal cards 70,8 % N. 2.433

Promotion incidence less/equal 0.02% N.199 Non-loyal cards 76% Loyal cards 24%

Promotion incidence more than 0.02% N. 2234

Promotion incidence less/equal 7.1% N. 2152 (88.4%) Non-loyal cards 23.6% N. 508 Loyal cards 76.4% N. 1644

Promotion incidence more than 7.1% N. 82 (3.4%) Non-loyal cards 61.0% N. 50 Loyal cards 39.0% N. 32

Figure 9. DISTRIBUTION OF CARD LOYALTY (10 segments of cards)

90
% of loyal cards

70

50

30
0 5 10 15 20

%of Promotion incidence on Total amount spent

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Card loyalty. A new emerging issue in grocery retailing

c) The more consumers visit the store, the higher their card loyalty (Figure 6). In other words, the probability of losing a cardholder is closely related to his/her purchase frequency (Figure 10). The second branch of the segmentation tree is the number of baskets. Of the 639 cardholders who come to the supermarket less than 8 times in the six month period, that is nearly once a month, 73% abandon the card. Against this, almost all the 970 consumers who visit the store more than 3.5 times a month stay loyal to the card. This means that weekly shopping frequency is a sort of guarantee for card loyalty.

Figure 10. PROBABILITY OF LOSING THE CARD AS A FUNCTION OF SHOPPING FREQUENCY

80

PROBABILITY OF LOSING THE CARD (%)

70 60 50 40 30 20 10 0 0 1 2 3 4 5 6

R = 0,9989

N. OF BASKETS / MONTH

One of the challenging questions posed in the recent literature is the relationship between shopping frequency and basket amount. Does the same cardholder engage in fill-in trips and major trips, or are there large basket shoppers and small basket shoppers (Bell and Lattin 1998)? In other words: is consumer behavior consistent a structural trait or contingent? Since in our case we know that cardholders live within a distance of three km. from the supermarket, this is actually a proximity store where people go sometimes for major trips and sometimes for fill-in trips. If, however, some consumers systematically demonstrated the typical behavior of the small basket shopper small

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Card loyalty. A new emerging issue in grocery retailing

basket and low shopping frequency they would have a divided loyalty. In this case it would be worth looking in more depth at their basket to find out if their behavior is also consistent in relation to the products bought. We are not able to answer this question because we do not have data on single shopping baskets, but only on the total amount spent. Is shopping frequency distributed differently in the two segments of consumers? How does a households distribution of grocery expenditure vary across trips? The relationships between trip purpose, shopping frequency, amount spent, products bought, and consumers demographic profile, are an interesting avenue for future research. The lesson is that consumers who decide to be loyal cardholders are firstly intrigued by the absolute value of the rewards targeted at them, and secondly have to find good reasons to be frequent shoppers (Figure 7). Even a very low promotion threshold is enough to keep the card alive. This means that retail promotions, which are usually seen as tactical actions to boost short-term sales, when tied to the card scheme are in reality central to the strategic issue of customer relationship management. Interestingly enough, the absolute value of purchases on promotion is the variable which also best explains the behavior of the heaviest shoppers among the loyal cardholders. d) The real key customers are the ones who, while always using their card when they shop, show the highest per capita spending together with the highest purchases on promotion (Figure 11). This finding raises a critical question. At first sight it would appear that the Clubcard scheme, while conceived to strengthen customer loyalty, is in fact attracting deal prone consumers. In marketing literature the deal prone consumer is depicted as a brand and store switcher because when she/he goes shopping she/he always hunts for bargains. It is a fact that what keeps alive all loyalty schemes are rewards, which are offered not only on the basket count, but also on specific brands. Incentives tied to the loyalty schemes move from one brand to the next throughout the years according to promotional calendars which embrace almost 100% of the assortment. Arent these bargain offers? They are hidden under different forms, but their intent is the same and their effectiveness may be even greater than the well-known deals. The consumer can thus stay store loyal bargaining all the time for the products that give the highest rewards, and consumers who let their purchases be shaped by the rules of the scheme are our best customers.

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Card loyalty. A new emerging issue in grocery retailing

Figure 11. TOTAL AMOUNT SPENT AND PURCHASES ON PROMOTION (October 1997-April 1998)
Average Total Amount Spent: Euro 878.8 N. 2.433

Promo purchases zero Total Amount Spent: Euro 194.0 N. 542

Promo purchases Euro 0-7.7 Total Amount Spent: Euro 497.4 N. 734

Promo purchases Euro 7.8-22.7 Total Amount Spent: Euro 724.5 N. 732

Promo purchases more than Euro 22.7 Total Amount Spent: Euro 1776.1 N. 425

e) Socio-demographic variables do not explain card use. None of the ten demographic variables entered in the Answer Tree analysis shows up in the segmentation tree. There are at least two possible explanations for this finding, which is in line with recent advances in segmentation research (Collesei 1999). The first and most obvious is that demographic variables are not in fact related to card loyalty, which is a psychological attitude independent of consumers demographic profile. Our results may, however, be due to the homogeneous demographic profile of the people living in the supermarkets trading area. Most of the households belong to only three psychographic segments, and these three also share some common traits of the typical small Italian family living in a very busy industrial area.

5. IMPLICATIONS FOR RETAIL MARKETING The main conclusions from the above analysis are: a) a very high percentage of the consumers who subscribe to a loyalty card are not in fact card loyal b) sales promotions exclusive of cardholders are the engine of loyalty card schemes c) it could be more effective and efficient to tie a card scheme to consumers shopping frequency and to new card acquisition than to increasing consumers baskets d) loyalty cards need dedicated marketing management. Retailers must track card use by cardholders both to maintain and to increase it.

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Card loyalty. A new emerging issue in grocery retailing

Of the 8,315 cards memorized in the database in the first year of the Clubcard scheme, our supermarket loses sight of 61% of them, and almost 2,000 cards have never been used. How many customers do shop in this supermarket? How many of them are loyal? The only way to answer even these two basic questions is to make estimates after a lot of subtractions, additions and assumptions. Our supermarket has collected a lot of names, but without careful customer database management these are just names, not customers. Some of the customers who have subscribed to the card but have abandoned it could be among our best customers, but we do not know because we do not see their behavior as shoppers. They could be highly store loyal, but since they are not card loyal the supermarket is not able to appreciate their franchise and eventually to reward their behavior adequately. If loyalty cards are intended to be a tool for acquiring customer knowledge, it is important that holders are card loyal. The inducement for consumers to keep using the card appears to be the promotional reward, the discounts, points, and bonuses that are exclusively targeted at them. Card loyalty, however, is not related to the size of promotional advantages but to their simple existence. There is also some evidence that over-large advantages are detrimental to loyalty. At first all the supermarket chain card systems were similar in terms of promotional mechanics, and very often even in terms of card name and logo. Given the growing number of supermarkets that launch their own cards, and the spread of loyalty schemes in many other domains of the retail industry, it is likely that those who still believe in loyalty cards as a knowledge management tool will become much more sophisticated in shaping their reward system. Working on the soft aspects of promotional mechanics and rewards appears to give retailers a stronger competitive advantage than pushing on deal size and, by analogy, on big prizes. There are two ways in which the supermarket can increase active cardholders: acquiring new subscribers and stimulating existing subscribers to use their cards every time they visit the store, and in general more often. Obviously, loyalty marketing is not the solution to acquire new customers, but it is the most effective tool for increasing card use frequency. Again, the key question goes back to the mechanics of promotional rewards, because regular card users are those who listen to supermarkets suggestions and follow its promotional offers. Finally, loyalty cards need dedicated marketing management. After the launch of the card, the main responsibility of card managers has to be the tracking of card use, both to prevent a decline in consumer interest and to increase the card usage rate. The best indicators of consumer interest in the card are the presence of promotional purchases in

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Card loyalty. A new emerging issue in grocery retailing

their basket and a weekly shopping frequency. The cards that need to be won back are those that: do not follow the promotions, independently of their shopping frequency show up as shoppers less than once a week, notwithstanding their purchase of promotional items. The card database system must show the card manager both the cards which have been staying below the promotional threshold for a given time period and the cards which have not shown up as shoppers for the same time period. On the first segment retailers need to analyze in detail cardholders shopping basket to discover their habits and to ascertain if the loyalty scheme covers their needs. The scheme can be enlarged to accommodate these needs, and side tailor-made promotions can be targeted at these cardholders alone. Considering that a) consumers are card loyal only if they total a certain deal amount and b) they come to the supermarket to buy different categories (Julander 1989), promotional incentives related to the loyalty scheme must be spread over a large assortment. A critical issue is the trade-off between promotional frequency and depth or, more suitable to our situation, between many small deals over many items and a few big deals on a small number of items which however rotate weekly or longer. Woolf (1994, p.21) suggests that having fewer, more popular items with deep discounts for card members is better than having many items with small discounts, if you want customers not only to present their card willingly but also to recognize the value of the program. Empirical evidence, however, shows that depth elasticity is only greater than frequency elasticity in the short term, and that the situation reverses when long-term effects are considered (Jedidi, Mela, Gupta 1998). Bundling promotional incentives into a loyalty scheme makes some difference. What appears to be a tactical short-term action to boost sales - a price cut - can be a very strategic action that builds customer loyalty when related to a loyalty scheme. The trade-off between frequency and depth is another interesting area for future research. Analysis of the relationship between the probability of losing the card and the days since the last visit shows that after 90 days the customer is practically lost for ever. Since the risk of losing the card increases with the time span, retailers must contact cardholders at home if they have not shopped for one month. Obviously promotional incentives should be strong enough to stimulate a visit to the store. To be an instrument of customer knowledge for supermarkets, loyalty cards must have value for their holders. Consumers will use the card every time they shop if they perceive it as having value to do so. Although this seems obvious, it is not actually the case for many cardholders. Do loyalty programs increase loyalty? (Sharp and Sharp 1997, p.1), or Do customer loyalty programs really work? (Dowling and Uncles 1997): the question remains open.

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Card loyalty. A new emerging issue in grocery retailing

Hart et al. (1999) observe that the technologies of loyalty schemes suggest that supermarkets pursue what has been defined as spurious loyalty (low preference, high repeat purchase). Our data show, however, that such schemes fail to achieve even spurious loyalty, because card involvement is a requisite for card use. It is one thing is to subscribe to a card, which is free anyway. It is another thing to appreciate its benefits, which are not as free as the subscription. Consumers have to follow the supermarkets suggestions to buy specific products if they are to benefit from the card. These recommended products may not be the consumers first preferences. Further, consumers have to let themselves become involved in the card scheme. We know from the literature that the psychological costs are a powerful deterrent to participation in promotional initiatives. These are increased if the initiatives are all contained in involving schemes as loyalty card programs. It is only if the benefits that are offered overcome these psychological barriers that consumers will come to love the card and keep using it. Card use thus becomes the visible side of a highly involving experience. For retail marketing the card opens a new challenge: the transformation of a simple card name into a brand. Besides brand loyalty and store loyalty a new issue will emerge in grocery retailing: card loyalty.

6. NEW AVENUES FOR FUTURE RESEARCH The process of exploitation of loyalty cards as a knowledge tool is continuously redesigned as a result of the accumulation of that same knowledge. We have analyzed some basic data related to cardholders and to their shopping behavior, but without going into the details of their purchases. However, as customer loyalty management becomes a question of competitive advantage, supermarkets must exploit much more the information content of the card data in order to know their customers better and strengthen the relationship with them. The next step in this process of knowledge development is to look at the details of consumers shopping baskets. Loyalty card programs add a new perspective to basket analysis (Julander 1989, Persson 1992, Mauri 1998). The purchases of the same consumers can now be observed for quite a long time not only to discover typical bundles, but also to pinpoint obvious bundles which do not occur in our store. Is consumer behavior consistent a structural trait or contingent? Since our supermarket has determined that Clubcard holders live within a distance of three km., it is actually a proximity store where people go sometimes for major trips and sometimes for fill-in trips. If, however, some consumers systematically show the typical behavior of the small basket shopper small basket and low shopping frequency they would

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Card loyalty. A new emerging issue in grocery retailing

have a divided loyalty. In this case it would be worth looking in more depth at their basket to find out if their behavior is also consistent in relation to the products bought. We are not able to answer this question because we do not have data on single shopping baskets, but only on total amount spent. Is shopping frequency distributed differently in the two segments of consumers? How does a households distribution of grocery expenditures vary across trips? The relationships between trip purpose, shopping frequency, amount spent, products bought, and consumers demographic profile, are an interesting avenue for future research. While supermarkets learn from consumer behavior, consumers who choose to stay learn to play with the loyalty scheme. Hopefully, one of the first things they will learn is to use the card every time they shop: it is likely that this alone would encourage them to buy more. Thus, an increase in card use could translate into a sales increase even if the customer base remains the same. The more general question, which is our last suggestion for future research, is: Does the impact of a loyalty scheme become more effective as the consumer builds equity in the program? Does shopping behavior change after the consumer redeems the points? And after two-three-n redemptions?

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Card loyalty. A new emerging issue in grocery retailing

BIBLIOGRAPHY Bell D.R., Lattin J.N. (1998), Shopping Behavior and Consumer Preference for Store Price Format. Why Large Basket Shoppers Prefer EDLP, Working Paper MSI, Report No.98-114, August [published with the same title in Marketing Science, N.1, 1998] Blattberg R.C., Glazer R., Little J.D.C. (ed.) (1994), The Marketing Information Revolution, Harvard Business School Press, Boston, Mass. Blattberg R.C., Neslin S.A. (1990), Sales Promotion, Concepts, Methods, and Strategies, Prentice-Hall, New Jersey Busacca A.G. (1998), Costruire la fedelt. Disegnare e realizzare unefficace strategia di customer loyalty, Il Sole 24 ore Libri, Milano Castaldo S., Costabile M. (1995), The Poli-Dimensional Customer Loyalty. An Empirical Study on the Groceries Buying Processes in Italy, Paper presented at the 8th International Conference on Research in the Distributive Trades, Conference Proceedings, CESCOM, Milan, 1-2 September Castaldo S., Mauri C. (1994), Supermarket loyalty promotions. An empirical study, Egea, Milano Castaldo S., Mauri C. (1996), Supermarket loyalty promotions. 1993-1995, Egea, Milano Collesei U. (1999), La segmentazione del mercato dei beni durevoli, Micro & Macro Marketing, N.3, Dicembre Deighton J., Peppers J., Rogers M. (1994), Consumer Transactions Databases: Present Status and Prospects, in Blattberg, Glazer and Little Dowling G.R., Uncles M. (1995), Customer Loyalty Programs: Should Every Firm Have One?, Working Paper Dowling G.R., Uncles Mark (1997), Do Customer Loyalty Programs Really Work?, Sloan Management Review, Summer

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Card loyalty. A new emerging issue in grocery retailing

Gupta S., Cooper L.G. (1992), The Discounting of Discounts and Promotion Thresholds, Journal of Consumer Research, December Hart S., Smith A., Sparks L., Tzokas N. (1999), Are Loyalty Schemes a Manifestation of Relationship Marketing?, Journal of Marketing Management , n.15. Paper presented at The Academy of Marketing Conference 1999 with the title Retail Loyalty Schemes: The Providers View Hughes A.M. (1996), The Complete Database Marketer. Second-Generation Strategies and Techniques for Tapping the Power of Your Customer Database, Irwin, Chicago Jacoby J., Kyner D.B. (1973), Brand loyalty vs. Repeat purchase behavior, Journal of Marketing Research, February Jacoby J., Chestnut R.W. (1978), Brand Loyalty: Measurement and Management , Wiley and Sons, New York Jedidi K., Mela C.F., Gupta S. (1998), Managing Advertising and Promotion for Longrun Profitability, MSI Working Paper, Report N. 98-132, December [The Working Paper has been published with the same title in Marketing Science, N.1/1999] Julander (1989), Whats in the basket? Receipt analysis for marketing decisions: An exploratory study, Foundation for Distribution Research, Stockholm School of Economics Kalyanaram G., Little J.D.C. (1994), An Empirical Analysis of Latitude of Price Acceptance in Consumer Package Goods, Journal of Consumer Research, December Kotler P. (1997), Marketing Management. Analysis, Planning, Implementation, and Control, Prentice Hall, New Jersey, 9th edition (International Edition) Mauri C. (1998), Nuovi sviluppi del category management. Analisi degli scontrini e criticit delle categorie, Economia & Management , Maggio, n.3 OBrien L., Jones C. (1995), Do Rewards Really Create Loyalty?, Harvard Business Review, May-June Peppers D., Rogers M. (1993), The One to One Future. Building Relationships One Customer at a Time, Currency Doubleday, New York

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Persson P.-G. (1992), Basket Analysis. A New Way of Studying Short Term Effects of Promotions in Grocery Retailing, EFI Research Report , Stockholm School of Economics, November Pine B.J., Peppers D., Rogers M. (1995), Do You Want to Keep Your Customers Forever? Harvard Business Review, March-April Rayner S. (1996), Customer Loyalty Schemes. Effective implementation and management , FT Management Report, FT Retail & Consumer Publishing Pearson Professional, London Sharp B., Sharp A. (1997), Loyalty programs and their impact on repeat-purchase loyalty patterns, International Journal of Research in Marketing, n.14 Uncles M. (1994), The Seven Perils of Loyalty Programmes, The Marketing Society Review, Autumn Uncles M., Laurent G. (1997), Editorial, International Journal of Research in Marketing, n.14 Woolf B.P. (1994), Measured Marketing. A Tool to Shape Food Store Strategy, Study conducted for The Coca Cola Retailing Research Council Woolf B.P. (1996), Customer Specific Marketing. The New Power in Retailing, Teal Books, Greenville,SC, US Worthington S. (1996), Smart cards and retailers who stands to benefit?, International Journal of Retail & Distribution Management , n.9 Wright C., Sparks L. (1999), Loyalty saturation in retailing: exploring the end of retail loyalty cards?, International Journal of Retail & Distribution Management , n.10

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