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Part Two
As we said in this space last week, it was just a few years ago that “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?

The following is the second of several e-interviews that we’re doing with Rick Ferguson, editorial director for COLLOQUY and, over the next few weeks. COLLOQUY has been providing editorial, educational and research services to the global loyalty marketing industry since 1990, and is in an ideal position to put all these issues into perspective…to see where things are going, as well as where they have been.

MNB: Do you think that there is any indication that food retailers will allow loyalty marketing to evolve beyond being tech-based discounting programs?

Rick Ferguson: In my opinion, grocers have no choice—they’ll have to evolve these discount programs into true loyalty programs. They’re already facing consumer backlash, especially out west. They’re getting hammered by the hypermarkets that ridicule in their advertising the “gimmicks” and pricing games associated with the shopper cards. And they will continue to lose market share to the Super Wal-Marts and other hyper-retailers who differentiate on the ELP model. In order to compete, grocers will have to turn their focus outward—away from the stockroom and toward the customers walking in the front door.

The good news is that they’re halfway home already. As we’ve said, they’re already about as operationally efficient as they can get. They’re already sitting on a mountain of data—they just have to use it effectively. They need to analyze that data to within an inch of its life and really understand what their customers are buying, why they’re buying it and what their hopes, dreams and frustrations are. Then they will need to use that information to establish sustainable dialog. Ask them to volunteer information instead of forcing it out of them with price-discrimination tied to the Shopper Card.

So what we hope to see are a couple of trends continuing to expand. I think you’ll see more examples of affinity clubs, grocers using purchase data to segment customers into lifestage and lifestyle buckets and then appealing to them with very personal and specific soft benefits. The classic example is the Baby Club: the grocer takes every customer who’s buying Pampers and baby formula, and sends them an offer to join a Baby Club that gives them double points on selected infant care items, targets them with very specific discount offers, brings them in for special infant care classes. A couple of big grocers are already doing this.

You can extend the concept to any number of personal affinities: wine clubs, cooking clubs, cake-decorating clubs. You can go overboard, of course. But reallocating resources to target selected customer segments with soft benefits is a very effective way to build brand loyalty.

The other trend to watch is tying consumer packaged good (CPG) partnerships to the loyalty offering. Going back to the Mom who buys Pampers— the grocer has detailed transactional data on every customer cardholder who buys diapers and other infant care items. What’s that data worth to Procter and Gamble? By making their suppliers partners in the program, grocers can spread the operational cost and increase the value proposition without affecting their margins. As long as everything is opt-in and customers understand that their trading their purchase information in exchange for something that’s valuable to them, supplier partnerships can make the loyalty program a healthy, enriching experience. The program becomes a three-way partnership between the grocer, his customers and his suppliers.

MNB: Our feeling has always been that a true loyalty marketing program demonstrates to the consumer every day that the store is loyal to her...not the other way around. Do you agree with this assessment?

Rick Ferguson: That’s absolutely correct. The key to successful customer relationships is the value exchange. Forget about the loyalty program for a minute. In any transaction, there’s a value exchange going on. The customer is trading his hard-earned dollars for goods or services. Price is important to him, but it’s not his sole reason for shopping with you. Location, convenience, merchandise and good customer service all come into play.

But your best—meaning your most profitable—customers crave a deeper relationship. They want to know that they’re valuable to the enterprise. We like to quote Brian Woolf, who knows more about grocery loyalty than anybody: “Man is an economic animal in search of self-importance.”

To increase the value of the relationship, you have to increase the value of the exchange to the consumer. And you do that by simultaneously appealing to his wallet—“I’m getting my money’s worth”—and to his ego—“I’m an important person to this enterprise.” An enterprise demonstrates its loyalty to these customers by offering them both recognition and reward. The best loyalty programs not only demonstrate this loyalty to the consumer, but they transform the consumer into brand advocates. They create a natural barrier to attrition because the consumer has invested time, effort and money into the relationship, and perceives that the enterprise has done the same.

MNB: If you had to identify a couple of food retailers who have done loyalty marketing right, who would they be? And what have they done so well?

Rick Ferguson: Fresh Brands has done a great job of analyzing transactional data and using it to improve dialog with their high-value customers with a really nice array of soft benefits. They don’t run a points program, but they’ve moved way beyond discounting. They’re miles ahead of the competition in the realm of analytical CRM.

We’ve written a lot in COLLOQUY about Dorothy Lane Market, a little two-store grocer in Ohio. About five years ago they punted all of their newspaper and circular advertising and invested their entire marketing budget into their Club DLM program. They are absolute experts in their customer base, they lavish them with special events and targeted offers, and as a result they’ve more than held their own against their big chain competitors. They’re a prime example of something we preach all the time: implementing a loyalty program doesn’t have to mean increasing your marketing expenses. You can simply shift a percentage of your budget into something that provides measurable ROI.

But the absolute leader in this space right now has to be Winn Dixie. They’ve really made their Customer Reward Card into a point of differentiation; the program awards soft-benefit discounts in the form of electronic coupons and hard-benefit points when members purchase selected products. They’ve expanded the program to several additional states, and they’ve credited the program with their rising comp sales in 2002. In addition, they’ve launched a Baby Reward Club that rewards points for dollars spent on baby-care products, and lavishes the members with a club magazine, sweepstakes, special baby birthday events, you name it. They’ve partnered with Gerber, Heinz and Pampers to help spread the cost, illustrating the importance of enlisting the aid of your suppliers.

So they’ve really done it right, and the results have shown up in their bottom line. I’d bet that the members of the Baby Reward Club are very profitable to Winn Dixie, and I’ll bet that they aren’t buying infant care products at Wal-Mart. Winn Dixie has demonstrated loyalty to their best customers, and those customers are responding with profitable behavior.

We’ll have part three of this ongoing dialogue next week…
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