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Customer Loyalty and Discounting in Retailing - UK - August 2009

The recession provides the ultimate test of customer loyalty to those stores where shoppers spend the bulk of their money. But are shoppers altering their spending behaviour in favour of cheaper goods and cheaper retailers, or are people simply saving money by buying differently from the retailers they always use?

This report quantifies how shopper behaviour is changing in response to rising unemployment and worsening economic conditions. It identifies aspects of marketing strategy and proposition development that need to be addressed to ensure that companies are doing enough to retain and develop business throughout the recession.

The influence of loyalty card schemes on shopper behaviour is also researched. Participation in loyalty card schemes is at an all time high, so does this mean that people are more loyal to the stores that have schemes? The report considers the role and influence of loyalty cards on customer retention and assesses whether retailers are extracting enough value from the transactional data generated.

Key themes

  • The recession is beginning to affect more and more people, but who is feeling the pinch enough to trade down to cheaper goods such as budget brands or switch to cheaper retailers such as grocery discounters and value clothing retailers?

  • People can save money by altering what they buy. To what extent have people cut back on treats and luxuries?

  • Loyalty schemes are popular, but why do people participate in loyalty card schemes? Do schemes really influence where people shop and how much they spend? Would people spend less at a store if it closed its scheme?

  • Loyalty card schemes aid customer retention but also drive incremental sales. How receptive are customers to upselling and cross-selling activity contained in regular mailings?

  • Are retailers fully utilising the relationship marketing opportunities that card schemes give them? How might the transactional data generated be better interrogated to improve engagement with customers?

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Table of contents

  1. Issues in the Market

      • Key themes
        • Definitions
          • Abbreviations
          • Future Opportunities

            • Something for nothing?
              • Invasion of the data snatchers (from Mintel Inspire)
                • Alternative data capture methods needed to avoid card fatigue
                  • Premium and cut-throat (from Mintel Inspire)
                    • Helping shoppers to be savvy
                    • Market in Brief

                      • Discounting
                        • Consumers saving money on food by trading down and cutting back
                          • Expansion by discounters to extend share gains
                            • Discount and value non-food retailers also benefiting
                              • Discounters set for major expansion post Woolworths collapse
                                • Loyalty
                                  • Loyalty card participation at record levels
                                    • Not all shoppers participate
                                      • Loyalty schemes have little influence on where people shop
                                        • Need to reappraise reward structure
                                          • Loyalty schemes drive incremental sales but receptivity to offers waning
                                            • Driving value from data generated
                                              • Loyalty schemes have an important role in future
                                              • Internal Market Environment

                                                • Key points
                                                  • Food
                                                    • Food price inflation
                                                      • Figure 1: Food price inflation, annual rate, 2004-09
                                                    • Price war: Real or imagined?
                                                      • Figure 2: Leading grocers’ and discounters’ net operating margins, 2006/07 and 2007/08
                                                    • Tesco wants to be known as Britain’s biggest discounter
                                                      • Increased use of comparative pricing in advertising
                                                        • Changing promotional messages reflect the impact of the recession
                                                          • Money-off deals more attractive
                                                            • Emphasising value, not price
                                                              • Only discounters fully committed to EDLP
                                                                • Budget own-brands proving an attractive option
                                                                  • Figure 3: Budget own-label brands, 2009
                                                                • Co-operative Group retains Simply Value
                                                                  • Premium retailers also adopting BOBs
                                                                    • Tesco emulates discounters with “house brands”
                                                                      • Discounters – share gains due to more than just expansion
                                                                        • Aldi could overtake Lidl as the UK’s biggest discounter in 2009
                                                                          • Figure 4: Grocery discounters’ sales, 2003/04-2007/08
                                                                        • Aldi and Lidl driving growth through new openings
                                                                          • Figure 5: Grocery discounters, store numbers, 2003/04-2008/09
                                                                        • Kwik Save failings helped competitors
                                                                          • Discounters – what’s on offer?
                                                                            • Non-food
                                                                              • Looming deflation making consumers ultra price sensitive
                                                                                • Figure 6: Non-food price inflation, annual rate, 2004-09
                                                                              • Company failures leaves plenty of business up for grabs
                                                                                • Departure of Woolworths changing the high street
                                                                                    • Figure 7: Value of sales of major companies entering administration, 2008-09
                                                                                  • Value mixed goods retailers set for expansion
                                                                                    • Figure 8: Value mixed goods retailers’ sales 2003/04-2007/08
                                                                                    • Figure 9: Value mixed goods retailers, store numbers, 2003/04-2008/09
                                                                                  • Accelerated expansion plans under way among emerging multiples
                                                                                    • Grocers squeezing non-food specialists
                                                                                      • Figure 10: Retail sales growth, by category, 2004-08
                                                                                    • Multi-format, multi-channel offer improving access
                                                                                      • Value clothing retailers continuing to prosper
                                                                                        • Figure 11: Value clothing retailers’ sales, 2003/04-2007/08
                                                                                      • Outlet growth slowing
                                                                                        • Figure 12: Value clothing retailers, store numbers, 2003/04-2008/09
                                                                                      • Growth in competition from online
                                                                                        • Dressing up discounting – it’s not all about price
                                                                                          • Recession-busting formats delivering new opportunities
                                                                                            • Pawnbrokers reinvented
                                                                                              • Rent to buy
                                                                                                • Proliferation of online deals and cashbacks
                                                                                                  • Price comparison sites
                                                                                                    • Online voucher code sites
                                                                                                      • Online cashback schemes
                                                                                                      • Broader Market Environment

                                                                                                        • Key points
                                                                                                          • Deep recession plunges consumer finances into chaos
                                                                                                            • Figure 13: Trends in GDP, PDI and consumer expenditure, 2004-14
                                                                                                          • Rising unemployment undermining confidence and spending
                                                                                                            • Retail sales growth slowing
                                                                                                              • Figure 14: Volume of retail sales (seasonally adjusted), January 2008-March 2009
                                                                                                            • Credit drying up and limiting spending
                                                                                                              • Income from savings drying up
                                                                                                                • Figure 15: Trends in savings ratio and interest rates, 2004-14
                                                                                                              • Weakness of sterling makes imports dearer
                                                                                                                • Population growth is positive and more poor pensioners driving value sector
                                                                                                                  • Figure 16: UK population forecasts, by age group, 2004-14
                                                                                                              • Strengths and Weaknesses in the Market

                                                                                                                • Strengths
                                                                                                                  • Weaknesses
                                                                                                                  • Who’s Innovating?

                                                                                                                    • Key points
                                                                                                                      • Loyalty card schemes – new technology
                                                                                                                        • Contactless cards offer dual benefit
                                                                                                                          • Costa Coffee Club offers a digital rewards scheme
                                                                                                                            • Identifying consumers and capturing data without cards
                                                                                                                              • Real-time online gives added functionality
                                                                                                                                • Using communications devices and RFID to deliver personalised communications
                                                                                                                                  • Greener thinking
                                                                                                                                    • Loyalty card schemes – more benefits for high spenders
                                                                                                                                      • Best Buy adds Premier Black top tier for high-spending customers
                                                                                                                                        • US online clothing company gives Preferred Customer status
                                                                                                                                          • Online retailers developing rewards programmes
                                                                                                                                            • Loyalty cards in fashion online
                                                                                                                                              • eBay Bucks
                                                                                                                                                • Schemes trying to be different
                                                                                                                                                  • Offering a little TLC
                                                                                                                                                    • JoJo Maman Bébé gives generous discount
                                                                                                                                                      • Local flexibility for Costcutter store owners
                                                                                                                                                        • Promoting local loyalty
                                                                                                                                                        • Loyalty Card Schemes

                                                                                                                                                          • Key points
                                                                                                                                                            • Tesco Clubcard
                                                                                                                                                              • Nectar
                                                                                                                                                                • Boots Advantage Card
                                                                                                                                                                  • Co-operative membership
                                                                                                                                                                    • Other retailer standalone schemes
                                                                                                                                                                      • New arrivals
                                                                                                                                                                        • Recent departures
                                                                                                                                                                          • Retailer payment card schemes issuing loyalty points
                                                                                                                                                                            • Rewarding regular shoppers with points
                                                                                                                                                                              • Other variations
                                                                                                                                                                                • Customer or brand clubs and discount schemes
                                                                                                                                                                                  • Loyalty without the points
                                                                                                                                                                                  • Consumers and the Recession

                                                                                                                                                                                    • Key points
                                                                                                                                                                                      • Buying on promotion and down-trading in evidence
                                                                                                                                                                                        • Some switching away from c-stores but not between major grocers
                                                                                                                                                                                            • Figure 17: What is being done to save money when shopping, April 2009
                                                                                                                                                                                          • High promotional awareness
                                                                                                                                                                                            • Strong evidence of trading down to BOBs
                                                                                                                                                                                              • Extensive cuts on treats and luxuries
                                                                                                                                                                                                • Significant switching to discounters
                                                                                                                                                                                                    • Figure 18: What is being done to save money when shopping, by main grocery store used, April 2009
                                                                                                                                                                                                  • ABC1 families show strong down trading reaction
                                                                                                                                                                                                      • Figure 19: What is being done to save money when shopping, by ABC1 Special Groups, April 2009
                                                                                                                                                                                                    • Price comparison activity muted
                                                                                                                                                                                                      • Eating in is the new eating out
                                                                                                                                                                                                        • Trading down on clothing evident among young affluents
                                                                                                                                                                                                          • No compromise on quality or on immediacy
                                                                                                                                                                                                          • Customer Loyalty Scheme Participation

                                                                                                                                                                                                            • Key points
                                                                                                                                                                                                              • Loyalty scheme participation reaches new peak
                                                                                                                                                                                                                • Loyalty points help usage of store cards
                                                                                                                                                                                                                  • Figure 20: Regular users of loyalty cards, by named schemes, 2002-09
                                                                                                                                                                                                                • Tesco Clubcard attracting more participants and winning share from ABC1 shoppers
                                                                                                                                                                                                                  • Figure 21: Regular users of loyalty cards, by named schemes, by lifestage and special groups, April 2009
                                                                                                                                                                                                                • Tesco converts highest proportion of regular shoppers into scheme participants
                                                                                                                                                                                                                  • Figure 22: Regular users of loyalty cards, by named schemes, by main store used for grocery shiopping, April 2009
                                                                                                                                                                                                                • Gender divide needs to be bridged
                                                                                                                                                                                                                  • Figure 23: Regular users of loyalty cards, by named schemes, by gender, April 2009
                                                                                                                                                                                                                • Schemes failing to engage younger people
                                                                                                                                                                                                                  • Figure 24: Regular users of loyalty cards, by named schemes, by 15-24-year-olds, April 2009
                                                                                                                                                                                                              • Consumer Attitudes and Typologies

                                                                                                                                                                                                                • Key points
                                                                                                                                                                                                                  • Principal interest is in discount
                                                                                                                                                                                                                    • Consumers split on lower prices versus points
                                                                                                                                                                                                                      • Effectiveness of schemes at creating loyalty called into question
                                                                                                                                                                                                                        • Figure 25: Attitudes towards loyalty schemes, April 2009
                                                                                                                                                                                                                      • More people taking rewards as cash
                                                                                                                                                                                                                        • Fewer people taking an interest in coupons mailed to them
                                                                                                                                                                                                                            • Figure 26: Trends in attitudes towards loyalty schemes, 2000-09
                                                                                                                                                                                                                          • Families under pressure take money-off option
                                                                                                                                                                                                                              • Figure 27: Preference for discounts and redeeming points for money off, by lifestage and special groups, April 2009
                                                                                                                                                                                                                            • ABs lead as collectors
                                                                                                                                                                                                                                • Figure 28: Those not influenced where to shop, by loyalty cards but who collect the points, April 2009
                                                                                                                                                                                                                              • Falling levels of engagement require retailers to rethink direct marketing
                                                                                                                                                                                                                                  • Figure 29: Use of coupons and interest in personalised coupons, April 2009
                                                                                                                                                                                                                                • Attitudes by participants in named schemes
                                                                                                                                                                                                                                  • Co-op membership and M&S payment cards most effective at focusing spend
                                                                                                                                                                                                                                      • Figure 30: Participants maximisng spend, by loyalty card used, April 2009
                                                                                                                                                                                                                                    • Major schemes’ brochures have low appeal
                                                                                                                                                                                                                                      • Boots Advantage Card users value rewards most
                                                                                                                                                                                                                                        • Smaller schemes need to do more with the data generated
                                                                                                                                                                                                                                          • Consumer typologies and target groups
                                                                                                                                                                                                                                            • Only a small minority are loyalty card enthusiasts
                                                                                                                                                                                                                                              • Apathy rules
                                                                                                                                                                                                                                                • Give me the points, give me the cash discount
                                                                                                                                                                                                                                                  • Keep it simple, I’m not prepared to wait
                                                                                                                                                                                                                                                  • Appendix – Consumers and the Recession

                                                                                                                                                                                                                                                      • Figure 31: What is being done to save money when shopping, by detailed demographics, April 2009
                                                                                                                                                                                                                                                      • Figure 32: What is being done to save money when shopping, by detailed demographics, April 2009
                                                                                                                                                                                                                                                  • Appendix – Customer Loyalty Scheme Participation

                                                                                                                                                                                                                                                      • Figure 33: Regular users of loyalty cards, by named schemes, by detailed demographics, April 2009
                                                                                                                                                                                                                                                  • Appendix – Consumer Attitudes and Typologies

                                                                                                                                                                                                                                                      • Figure 34: Attitudes towards loyalty schemes, by detailed demographics, April 2009
                                                                                                                                                                                                                                                      • Figure 35: Attitudes towards loyalty schemes, by detailed demographics, April 2009
                                                                                                                                                                                                                                                      • Figure 36: Attitudes towards loyalty schemes, by loyalty schemes used regularly, April 2009
                                                                                                                                                                                                                                                      • Figure 37: Attitudes towards loyalty schemes, by loyalty schemes used regularly, April 2009
                                                                                                                                                                                                                                                      • Figure 38: Target groups, by detailed demographics, April 2009
                                                                                                                                                                                                                                                      • Figure 39: Attitudes towards loyalty schemes, by target groups, April 2009
                                                                                                                                                                                                                                                      • Figure 40: Loyalty schemes use regularly, by target groups, April 2009

                                                                                                                                                                                                                                                  Companies Covered

                                                                                                                                                                                                                                                  • Aldi Stores Ltd (UK & Ireland)
                                                                                                                                                                                                                                                  • Alliance Boots
                                                                                                                                                                                                                                                  • Argos
                                                                                                                                                                                                                                                  • Asda Group Ltd
                                                                                                                                                                                                                                                  • Bank of England
                                                                                                                                                                                                                                                  • Barclaycard
                                                                                                                                                                                                                                                  • Brewers Fayre
                                                                                                                                                                                                                                                  • Chartered Institute of Personnel and Development [CIPD]
                                                                                                                                                                                                                                                  • Co-operative Group
                                                                                                                                                                                                                                                  • Costa
                                                                                                                                                                                                                                                  • Costcutter Supermarkets Group
                                                                                                                                                                                                                                                  • Daily Express
                                                                                                                                                                                                                                                  • Daily Mirror (The)
                                                                                                                                                                                                                                                  • Evans old
                                                                                                                                                                                                                                                  • Harrods Group Total
                                                                                                                                                                                                                                                  • HMV Retail Ltd
                                                                                                                                                                                                                                                  • Homebase Ltd
                                                                                                                                                                                                                                                  • House of Fraser Plc
                                                                                                                                                                                                                                                  • IKEA
                                                                                                                                                                                                                                                  • J. Sainsbury
                                                                                                                                                                                                                                                  • John Lewis Plc (department store)
                                                                                                                                                                                                                                                  • Lidl (UK)
                                                                                                                                                                                                                                                  • Marks & Spencer
                                                                                                                                                                                                                                                  • Nectar
                                                                                                                                                                                                                                                  • Ocado Ltd
                                                                                                                                                                                                                                                  • Peacocks
                                                                                                                                                                                                                                                  • Poundland Ltd
                                                                                                                                                                                                                                                  • Primark Stores Ltd
                                                                                                                                                                                                                                                  • Somerfield
                                                                                                                                                                                                                                                  • Tesco Plc
                                                                                                                                                                                                                                                  • The Body Shop - Retail Sales
                                                                                                                                                                                                                                                  • The Original Factory Shop Ltd
                                                                                                                                                                                                                                                  • The TJX Companies
                                                                                                                                                                                                                                                  • TJ Morris Ltd
                                                                                                                                                                                                                                                  • Waitrose
                                                                                                                                                                                                                                                  • Waterstones Booksellers
                                                                                                                                                                                                                                                  • WH Smith PLC
                                                                                                                                                                                                                                                  • Wm Morrison Supermarkets
                                                                                                                                                                                                                                                  • Woolworths Group plc

                                                                                                                                                                                                                                                  Customer Loyalty and Discounting in Retailing - UK - August 2009

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