Visible Results News - Article

IS LOYALTY IN MY FUTURE? - November 2002 - National Petroleum News - www.petroretail.net

A variety of must-have technologies and marketing approaches have been offered to the industry Loyalty programs promise retailers salvation, but the choices are hardly crystal clear By Keith Reid This first installment in a two-part series on loyalty programs takes a look at some of the in-store card-based programs currently being explored in the industry. Next month, NPN will take a look at the technologies being developed to provide a loyalty component focused at the dispenser. A variety of must-have technologies and marketing approaches have been offered to the industry in recent years. From video advertising at the pump to robotic fueling to Web marketplaces. Some approaches, and players, have found more success than others. The current buzzword is loyalty. Born out of well-founded fears among traditional petroleum and convenience-store retailers fighting supermarkets and other high-volume competitors, loyalty is seen as an answer to a threat focused primarily on price at the pump. The loyalty industry is currently estimated at $5 billion and rising. Total Research, in a study conducted for the Carlson Marketing Group, found that 60 percent of customers spend 27 percent more at a company after it offers a loyalty program. Other estimates show between 5 percent and 20 percent. Adding a loyalty program comes with both tangible and intangible costs that the retailer has to consider. Of course, a poorly researched, modeled and implemented program decision can result in losses instead of gains. Loyalty is not a new concept to the petroleum/convenience retail industry. Simple punch card promotions and the branded gasoline credit card have been around for decades. But, compared to competitive retail channels and cutting-edge loyalty concepts, loyalty is in its infancy. Operating under a community approach, Kick Back customers can take advantage of discounts and promotions ranging from c-store offerings to lawyer fees. "The first attempts in the supermarkets were failures, but they kept trying until they found models that worked," said Gene Gerke, president of the industry consulting firm Gerke and Associates, Inc. "The overall concept is good, but the big issue is economics. How do you get the network to grow both sales and gross margin dollars, without giving away the store? So much revolves around fuel, which already has low margins. I applaud those that are trying it, but the industry has to find an answer that works within its economic realities." Nor can a direct comparison be made to how loyalty is used in one retail channel vs. another. With a supermarket, you can get a transaction amount of several hundred dollars, which leaves a lot of room open for a significant and notable loyalty reward or discount. That is not the case with a c-store. "In the c-store environment, with inside sales, you typically have a low transaction amount," Gerke said. "With outside sales, you have a higher transaction amount but much lower margins. If you're working with a gasoline model, then you were going to have to set the street price higher to offer a substantial reward. The average c-store has a high number of transactions. Can I leverage that with other retailers? That begins to make sense, but how do you work out the logistics?" Jim Fisher, CEO, IMST Corporation, a Houston-based retail locations analysis company, is bullish on loyalty but notes that it is not a turnkey path to instant success. "We have been promoting loyalty for over 12 years," he said. "A punch card, a milk reward or car wash promotion -- you have to have something that increases the stickiness factor with customers. In Canada and Europe, loyalty is light years ahead. The average adult in Canada carries five to seven loyalty cards. We're playing catch-up." The sheer number of offerings is also confusing. "Loyalty faces an educational process in the industry," said Fisher. "There are a lot of programs being offered, and questions arise like, do I do it in-house -- which is very demanding -- or do I look for a third party solution? I think loyalty is a great additional strategic action, but I don't think it's a universal solution for every organization or every site. Right now there is a lot of interest, but not much action. The main problem is that nobody wants to be the first person to get on board. All of the historical data is from places like Canada, Europe and New Zealand with few U.S. models for comparison. It's coming down to those companies on the aggressive edge of marketing and merchandising to make the move." There are a variety of loyalty approaches for the retailer to consider. A rewards program allows users to earn points for conducting business with the retailer. These points accumulate and allow the customer to receive an award, whether a store product or service, or prize offered by a third party such as a free family pass to the local amusement park. With effective database utilization, point accumulation and reward models can be used to shift customer habits, such as encouraging a fuel customer to enter the store to redeem a foodservice prize. It is generally acknowledged in retail that a customer should receive a significant but realistic reward (based on the channel's general margin structure) within five months, though smaller awards and promotions can keep the program interesting while the points build. Retailers can also benefit from breakage, the percentage of customers that earn a reward yet never redeem the prize. A discount program allows the member customer a discount over non-member customers on goods or services, such as a set discount on a gallon of gasoline regardless of other customer actions. A discount program can also be linked to specific customer purchases so that the discount scales relative to what and how much the consumer purchases. This allows the retailer better profitability than just offering a straight membership discount, and generates less potential resentment among consumers, who may adopt an "us vs. them" attitude with a membership program, since the discount is earned. In addition to the basic financial incentive, several approaches can enhance the value of a program. An appreciation approach can be added, where the retailer thanks the best customers, using database analysis to leverage the 80-20 rule, where 80 percent of a retailer's business comes from 20 percent of the customers. This keeps these valuable customers from moving elsewhere, and it can also be used to shift good customers into great customers. Oasis Stop 'N Go's management needed a loyalty program but had a hard time finding the right fit, so they decided to create their own. A partnership approach can create a community of retail partners who cross-merchandise goods and services and allow mutual point accumulation. This will potentially drive new customers to a site, in addition to offering enhanced value to existing customers. Of course, the right retail mix is required, as is a low-impact mechanism to bring these partners on board. Nearly all programs offer the retailer some degree of sophistication at establishing customer demographics and tracking customer actions. Beyond that, it comes down to the actual reward mechanism that is used to keep the customers active in the program. Which programs are the best? That question will likely be answered after a few more years' worth of results on the ground, but some interesting observations have already been made. Some companies have already made the move into loyalty, using a variety of models. While the anticipated return on investment may vary widely, from retailer to retailer and program to program, the impact can be rewarding. It takes a village One way to add value to a loyalty program is to include a variety of local businesses in the program. This approach encourages new business from customers that frequent the other retail establishments, while allowing the petroleum retailer fewer individual pressures at the reward end. That approach is the cornerstone of KickBack Points, headquartered in Twin Falls, Idaho. KickBack Points offers the customer one to five points for each dollar spent at a variety of retail establishments, with each point being worth one cent. The petroleum/c-store site falls in the one-cent category, while a higher-margin operation like a restaurant could fit in the five-cent range. Realtors and lawyers have even shown interest in participating with points in the 10 percent range. The merchants are brought on board by KickBack sales staff in regional markets, currently centered primarily around Idaho. The participating merchants donate the various prizes, as do the various vendors and manufacturers. Each time the card is swiped there is a potential winner for a 1,000-point giveaway and other instant prizes, and the customer gets one entry in an annual sweepstakes. For the first two years this has been a recreational Quadcycle. KickBack Points was the brainchild of Patrick Lewis, CEO of Oasis Stop'n Go, which operates 10 sites in Twin Falls, Idaho. He developed the program and uses it at his retail sites. "We pride ourselves on looking long term," Lewis said. "The writing was on the wall with motor fuels, and we just wanted to retain the business we already had in the face of high-volume competitors. Our goal at the time was not to increase business -- but that happened." Lewis looked for a turnkey loyalty solution, but was unable to find one that fit his needs, so he spent well over $100,000 developing one. He then decided to market the program to other retailers in the same boat, being careful to avoid overlapping competitive territories. Discounting gasoline is only a small part of the loyalty reward model in the Rennie's program. A charity concept and a variety of milestone rewards keep customers loyalty without excessive burdens to the retailer. While the program brings in new customers, it really shines at rewarding the best customers. "On average, 18 percent of our customers are card members who account for 40 percent of our sales," said Lewis. "We can tell the top customer for every location, the number of visits, how much the customer spends -- we can even do a lost-customer report which tells the merchant if he has a frequent customer that has stopped shopping. The merchant can take that phone number and give the customer call and see if there is a problem that can be easily resolved. A couple of months ago I wanted to know the names of every customer who spent a thousand dollars since the program began. If we have customers with $500 or less, they're not buying fuel. I'm going to entice them to buy fuel." So far, Lewis notes that the program has paid off for Oasis and its partners. Visible Results uses enhanced technology to make the card more of an active player in the loyalty program. "We've had double-digit growth in our chain this year compared to the prior year, and I can only assume that's related to the loyalty program," said Lewis. "We have four non-traditional competitors selling gasoline in a town of 35,000 people. We have a Wal-Mart right next door to one location. They were 8-cents-per-gallon lower and we couldn't compete on price. The store manager pushed the KickBack program, and this year it was up 22 percent in fuel sales and 15 percent inside the store. I feel strongly that this is a direct result of working the program. I don't want to diminish customer service and a clean store, but I honestly believed we couldn't have done this without loyalty. I couldn't tell you how many times the customer stated they drove past the competition to make sure they got their KickBack points." Hi-tech Also using the village approach is Auckland, New Zealand-based Visible Results, which offers both sophisticated loyalty and gift card solutions for a wide range of retailers including restaurants, clothing, petroleum and convenience stores, hotels and supermarkets. A core Visible Results component is the GraphiCard -- a thermal read/write card that has the unique feature of changing the message on the actual card with every transaction. It can update points earned; provide "instant winner" prizes; promote special offers; provide media space for extra advertising revenue or to trade for rewards; or show almost anything the retailer feels is appropriate. With a strong installed base overseas, Visible Results is now entering the U.S. market, and Corner Pantry, which operates 30 stores in South Carolina, just launched with the program. David Tucker, president and owner of Corner Pantry, feels loyalty is a key component for his future operations. "I see loyalty as a trick to combat the big box retailers," he said. "We're facing stiff competition in the marketplace and I hope to build a company-wide recognition in the state in order to build our customer base." Promotion is a key component of any program, particularly those taking a community approach. Tucker is sold on both the thermal card and the overall design of the program. "The equipment is the best we found," he said. "The message on the card can be changed each time it is used. Visible Results works with all of our vendors, and we are very involved in the process. The loyal rewards range from trips and cruises, to six-pack promotions and gasoline discounts -- but it is not a discount program." Point-of-sale information collected during transactions involving program members is downloaded nightly to Visible Results Data Center, which maintains customer data bases and issues reports customized specifically for each client that may subsequently be used in target marketing efforts to specific customers. After its first week in use at Corner Pantry, Tucker has seen some encouraging results. Program enrollments have exceeded targets by over 26 percent, with almost 3,000 members joining in the first week of the program -- each spending an average of $17.70. He noted that vendors and local businesses have been extremely supportive of the Corner Pantry Rewards program and are providing thousands of prizes for the program, including tickets to the Carowind Amusement Park, Coke products, Beanhead Coffee, tickets to Carolina Panthers games and the USC/Arkansas game, discounts for admission to the Putt Putt Family Fun Center, Snickers bars, cookies, Pepsi products and large stuffed tigers from Carolina Distributors. Tucker also said that customers were very happy with the earned rewards component of the program, where members accumulate points to earn rewards such as two-liter Coke or Pepsi products and $2.00-off coupons for gas and convenience-store goods. Charity helps Rennie's Connected Rewards offers a card-based loyalty program that features any combination of both immediate discounts, long-term discounts, coupons, promotions and milestone rewards. A giftcard option is also available. A key component, and an effective twist, is the linking of local charities and schools, etc., with the program who can have their own Rennies Card with a percent of the purchases going to the organization. This encourages the spread of the card (charities will typically help distribute the card) and a high rate of utilization without significant price sensitivity. "I absolutely love it," said Robert Cooper II, vice president of Cooper Petroleum Inc., Laurinburg, N.C. "The reason we looked to add a loyalty program is that we had a Wal-Mart coming in with gasoline. We were looking around for a while and couldn't find anything, or least anything we could afford until we came across Rennies. We installed the program in mid-December, in three stores within a 1.5-mile radius of the Wal-Mart," said Cooper. "We pushed the program hard with our original customers, and then we went out to the nonprofits and charities to set up deals with them. We generally give 1 percent to the charities and people have responded well. Someone couldn't come in and give me a million dollars for it." Not only has Cooper's operation seen no volume loss, even in the stores directly adjacent to the Wal-Mart, but inside sales have increased as have sales of mid-grade and premium. "The card actually brings in a different clientele," said Cooper. "It's not just those people coming in to save a penny. I feel this is driven by our affiliation with non-profits. Customers might save a couple of cents across the street, but they still get a reward for shopping at my sites plus they end up helping the local school, etc. The customer gets no pat on the back with the other programs." Once a customer spends $50, he or she receives a reward, such as a free pizza or a car wash. Cooper noted that store sales have increased, as have sales to commercial clients. Given a choice, a commercial client will stop to fill the company truck at his sites to get the free pizza or car wash coupon for personal use. Sales of diesel have doubled since the program was initiated, and it can be hard to get in the lot sometimes with all the commercial trucks parked outside. "Our vendors like it," Cooper said. "Our fountain drinks have tripled, and the food program has seen a 30-percent increase in pizza. Our pizza program provides a quality product, but many people just assume it's an ordinary gas station pizza. When they hit $50, they get a free pizza and once they try it, they realize it's something they want to eat on a regular basis. And of course, they need to buy fountain drinks and chips to go along with those pizzas. It also helps that if the customer is at $40, he or she is tempted to spend the extra $10 to reach the free reward level." Do the homework Loyalty has arrived in a big way, and has shown some dramatic but specific results. However, current loyalty programs have yet to pass the test of time. There are reasonable speculations, based on foreign experience and some early field results, that loyalty will pay off long-term. However, what will happen when loyalty becomes commonplace in the industry? Will the programs that are successful today be just as successful when they face direct competition for other loyalty approaches? Retailers need to carefully evaluate any program before pulling the trigger. Needs have to be carefully analyzed, goals projected and the right program found to meet those goals without causing more harm than good. At the same time, retailers who get on board early with a successful loyalty program will have a definite advantage over their competitors. Loyalty programs can be expensive, both up front and in management and maintenance costs. Extra staffing may be required to fully utilize a program. Could a simpler loyalty program suffice? Some programs, such as this one offered to Transport Nation, help generate new business by providing employers with coupons to reward their employees. Jeff Miller, president, of Miller Oil in Norfolk, Va., got on board with an electronic loyalty program but found that a changing marketplace forced a change in plans. "We looked at several technology-assisted programs, and we eventually rolled out with Visible Results. Unfortunately, at the same time our market-margin was hit hard by local oil company competition and we found ourselves not in a position to continue. We shifted back to traditional coffee programs and such, with an emphasis on our core categories. We've tried to replace the glitz of an electronic system with a focus on the basics and our employees. I'm not against them (electronic loyalty programs), in fact, I was very high on the one we tried and if the market hadn't turned sour we would still be with them today. But, they take a lot of work and require a lot of resources." Of course, the cost of a program, and its benefits, can be relative. "Loyalty does have a cost, but I don't know where I would have been without it," Cooper said. "The Wal-Mart did 200,000-plus gallons last month, with probably only a million gallons worth of demand in the entire county. I don't know how much business we would have lost without the program in place, but we've held our own and even enjoyed some success without matching their prices." Retailers should also be aware of just how sophisticated they are prepared to become where marketing and merchandising are concerned. These programs typically provide the retailer with a wealth of purchasing data on their customers, but if a retailer is not likely to devote the time required to fully utilize that data then does it make sense to prioritize that capability? Perhaps it's time to look at becoming more sophisticated since today's "non-traditional" competitors are already ahead of the game by comparison. With the right effort, traditional retail operations have the potential to leapfrog beyond what their supermarket and mass-merchandiser competitors are doing. "Supermarkets are not that advanced," said Fisher. "They have the systems in place, and collect all the purchase data, but they don't do much with the data. If they did, then we would constantly be receiving promotional offers. If they know I'm buying a 12-pack of Bud Light weekly, then why wouldn't they go to the vendor and organize a promotion from Anheuser-Busch for a free six-pack?" Retailers also need to take a close look at the companies providing the loyalty programs. Will they be here tomorrow? "The one thing we don't want to do is get a loyalty program going and then just drop it," said Fisher. "If that happens, the result can be the exact opposite of what you were trying to accomplish with a loyalty program, and you can actually end up driving customers away. You better know the history and financial foundation of the loyalty company and how they're 'banking' those points if you need an exit strategy." Most importantly, loyalty requires a full commitment to the process. The program has to be pushed, and pushed hard, to succeed. "You can't just get the equipment, and put it in and expect it to work miracles," Cooper said. "You have to get every manager and employee to explain and push the program or else it's going to fail."