Across Europe, in both mature and developing retail markets, the grocery sector has been marked by the onset of a marketing culture. Faced with low growth rates and heightened competition, retailers have increasingly turned their sights towards retention and loyalty marketing issues - hence the success enjoyed by loyalty cards and schemes almost everywhere.
In the early years of loyalty cards, around 1993-1995, typically there was one pioneer retailer in each country – in the UK it was Tesco, in Italy it was Esselunga – while others displayed a wait-and-see attitude. It took approximately five years, depending on the country, for a phase of rapid imitation to follow, leaving consumers with many schemes to compare and choose from.
In some markets, having grown by 25-30 per cent a year during the 1990s, card penetration is now approaching saturation. However, in other less developed countries, it is still advancing at a steady pace. In Germany, following the abolition of the Rabattgesetz and Zugabeverordnung laws (that had restricted discount activity) in July 2001, some 200 discount schemes emerged.
The Payback coalition scheme for example, launched by the Metro Group in co-operation with a number of other businesses (such as Lufthansa and AOL) in March 2000, had 15 million cardholders by 2002 (although this has now increased to 24.5 million), making it the largest of its kind in Europe.
In reaction to this more competitive environment, retailers have taken steps to upgrade and innovate their schemes through various means. As with their wider product offering, they have sought to find a distinctive positioning for their schemes, which are now closely integrated with their wider communication strategies.
Elementary two-tier reward models (cardholders versus non cardholders) have now given way to more subtle approaches, with retailers targeting groups of consumers within defined demographic clusters with ad hoc marketing activities, and elements such as gift catalogues, which still very popular in countries such as Italy and Ireland, are being substituted by more versatile 'discount points'.
Furthermore, elements of 'mass customisation' are being added to the schemes, so that each consumer can tailor the benefits to his/her needs (i.e. pre-selection of coupons on the web, special clubs for vegetarians, senior citizens, families with small children, wine lovers etc.)
Finally, companies are now looking to see what additional use they can put to the vast databases accumulated over 10 years of loyalty schemes.
As differentiation efforts drain an increasing amount of resources - the scheme costs €0.5 million per year to an Italian medium-sized retailer - retailers are striving for ways to reduce costs, investigate early adopters' mistakes and evaluate the benefits of adding partners to the scheme.
Disillusionment over the retention power of what were in effect mass promotions on a large scale, emerging database marketers and the need for return on IT investment are forcing retailers to tackle data analysis and information extraction from their own loyalty databases. Attention is shifting from programmes to data, from the visible side of micro-marketing to the invisible one.
20 major schemes
In 2002, the Observatory identified 20 loyalty schemes in Europe with a customer database in excess of one million. Eight retailers had five million or more customers profiled in their databases, with data comprising details on demographics and behaviour, often enhanced with lifestyle information from external sources.
As far as data analysis is concerned, a few best-in-class retailers are emerging throughout Europe; micro-marketing champions act as barometers, closely monitored by competitors. Not only are their micro-marketing strategies copied, but their attitude towards information sharing and co-operation with suppliers on marketing activities is scanned.
As data analysis turns from occasional to systematic activity, the micro-marketing champions set out to leverage the new insight and create value. There are examples of information-based value creation in all areas of retail marketing, from range to layout, from service to format.
However, it is the area of promotional activity where retailers seem to concentrate their resources with the micro-marketing approach. Tesco mails 10 million households four times a year with a direct mail package that is printed in one million different versions. The message and the coupons are tailored to a customer's past buying behaviour to increase the likelihood of them buying a product to suit their needs and taste.
Such an impressive micro-marketing effort cannot be dismissed as an exception: the Ticket Leclerc programme in France, Dia discount stores in Spain, Boots Advantage kiosks and their likes at Edah stores in the Netherlands can target the smallest portion of the customer base with relevant offers at little incremental cost.
In December 2002 researchers at the University of Parma conducted a questionnaire-based survey of 22 large and medium-sized Italian retailers to investigate the strategic relevance and track record of micro-marketing activities in the Italian grocery industry.
The findings, compared with those of two previous surveys conducted in 2001 (22 respondents) and 1999 (36 respondents), shed light on the development of a micro-marketing mindset in retailing over time.
Italians have been familiar with loyalty marketing for more that 30 years: indeed few people know that Bollini Végé - introduced about 20 years ago by Italian voluntary group Végé - were the equivalent of the UK’s Greenshield Stamps, with customers collecting paper stamps that could be exchanged for gifts and discounts at its grocery stores.
It was only in the early 1990s that Italian retailers started substituting paper stamps with plastic cards. Today, the top 20 retailers all have a card scheme in place, with pure loyalty cards being the most common, although it is interesting to note that whileexperiments with payment cards (debit as well as credit cards linked to major suppliers such as Visa) started as early as the mid 1980s - when customers were still unfamiliar with plastic money – they are just now beginning to take off.
According to the survey, on average, loyalty cards are sported by 63 per cent of a retailer's customers, with a minimum of 40 per cent and a maximum coverage of 88 per cent of the customer base. Some 75 per cent of sales go through the cards, a percentage that reaches 90 per cent in some cases and can be as low as 50 per cent in others.
Despite their small size, Italian retailers are among the best at analysing their databases (some 86 per cent of respondents to the survey said they did), and are also good at setting up direct communication media such as direct mail (77 per cent) and cardholder magazines (45 per cent).
Many have also successfully experimented with kiosks (23 per cent) and email (23 per cent), and a large number are planning to introduce checkout couponing (45 per cent) and SMS marketing (32 per cent).
In fact, micro-targeting, made feasible by segmentation techniques, is also economically viable thanks to new media. Checkout coupon networks such as Catalina's Magic Market, kiosks, email, coupon printing from websites, even SMS can be leveraged to draw the customer segment of interest to the point of sale and to encourage purchases of the desired category, brand or item.
Questioned over the use of customer database information and the destination of the micro-marketing budget in general, 43 per cent of Italian retailers responded that the main goal was retention, 43 per cent favoured extension (of value of existing basket) whereas only 14 per cent said they would employ it for the acquisition of new cardholders.
Italian manufacturers are not mere spectators: they regard micro-marketing as both a threat - in that it boosts retailers' ability to influence customer preferences - and an opportunity to learn more about the consumers who are purchasing their brands, refine their targeting and communicate directly with the relevant customer base. It is hardly surprising, then, that suppliers are investing in database-building promotions and activities, and shifting their trade-marketing budget to micro-marketing partnerships with retailers.
Micro-marketing partnerships require openness and willingness to share information on both sides. Retailers, however, have long been secretive about their data in an effort to preserve an 'information-asymmetry' advantage in negotiation.
In the University’s 1999 and 2001 surveys, the researchers investigated the existence of areas for possible co-operation by asking Italian suppliers and retailers to rate their interest and willingness to share several categories of information. The survey found that suppliers were most interested in sell-out and brand share data, whereas retailers would rather share loyalty card data because it is neutral in terms of negotiation and it provides some return on loyalty scheme investment.
Despite this general divergence, however, information sharing has increased between 1999 and 2002. Today, not only POS-scanner data is exchanged (82 per cent of respondents), but also loyalty card data (63 per cent) and scanner/loyalty compound information (55 per cent).
Moreover, the number of retailers expecting monetary compensation from manufacturers in return for data has decreased (from 88 per cent in 1999 to 65 per cent in 2002): more and more retailers believe that co-operation in the micro-marketing area creates value for both parties.
Loyalty cards and related technologies make individual purchasing history information accessible, enabling sophisticated segmentation that can lead to very precise targeting. This, coupled with the secrecy and viability of new direct media, make an information-rich approach efficient, effective and potentially aggressive.
Adopting a micro-marketing approach, however, requires a retailer to have the right organisation in place plus the right marketing culture, analytical skills and the ability and momentum to develop partnerships with manufacturers. It is not a strategy for everyone, and Italian retailers are aware of it: according to the survey, only 18 per cent of them are planning to adopt a micro-marketing strategy on an ongoing basis.