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Food Supermarkets Loyalty

Food retail firms such as supermarkets spend and invest significantly in loyalty programs such as club cards. This research project is meant to determine the impact of loyalty programs on the consumers’ perceptions and attitudes of consumers on food retail brands. With supermarkets increasingly finding ways to match or beat competition, the use of loyalty programs is one of the initiatives that some food retail firms do well (e.g. Tesco) which the other firms would need to try and match.

Background

Among food retail firms in the United Kingdom, Tesco is the envy of its competitors. It has continued to extend its lead versus competitors by building its share and market capitalisation (Financial Times 2007). One of the competitive advantages that has been cited as helping Tesco keep its lead in the food retail sector is its Tesco Club Card (Garry 2007). Because of this acknowledgment and general acceptance of competitors of this advantage, competitors have been trying to emulate Tesco in its loyalty program in the hope of mitigating this Tesco advantage. Nevertheless, managing and having a loyalty program such as a club card for food retail firms can entail considerable investments and is effort intensive (Marketing Direct 2006).

Rationale of Project

There is a strong rationale for pursuing this project. The food retail sector is becoming increasingly competitive and the pressure to perform and do well is greater particularly with more challenging trading conditions. For example, Marks and Spencer reported poor trading performance over the Christmas holiday season and the worst quarterly performance in over two years (Flanagan 2008) while Tesco reported sales that were below the forecasts expected by the market (AFX International Focus 2008).

The focus of the project is on the UK food retail sector, particularly the supermarkets, and on the loyalty programs such as club cards. This focus for the project is underpinned by the following factors:

With the key factors mentioned above, the focus on UK food retail sector and on loyalty programs seems to make a good rationale for the project as it could lead to very interesting insights on the impact of loyalty programs on consumer perceptions in a highly competitive sector where every marketing initiative could make a large impact on the performance of the businesses.

Another supporting reason for pursuing the project is that there does not seem to be as extensive a research that exists for this particular topic as with other management issues. The review of related literature on this issue has provided early indications that results from this project could be relevant contribution to the existing knowledge in the subject matter. Because of the limited research work seen directly tackling the issue of loyalty card programs for the food retail sector and supermarkets in particular, the academic journals considered for the literature review were those that focused on building of customer loyalty and related programs (e.g. club cards).

Literature Review

There are two obvious schools of thought that are contrasts of each other in the impact of loyalty programs on consumer perceptions and attitudes towards food retail stores. The first school of thought is that loyalty programs such as club cards do wonders for the retail firms and are able to ensure the loyalty of consumers to the retail food firms. The second, and opposite, school of thought is that loyalty programs are not worth a dime that are spent on it by food retail firms, and do not significantly impact the consumer perceptions and attitudes towards food retail firms.

POSITIVE impact on consumer perceptions

Loyalty programs have been used by retailers to build loyalty among consumers. Indeed, loyalty cards are thought to be able to create a close interaction between retailers and consumers through these programs, and provide a good complement to other initiatives that build consumer loyalty for retailers such as excellent customer service (Gallagher 2004, Hosking 2007). Thus, loyalty programs are not only giving food retailers a good return on investment on their initiatives, the loyalty programs are also driving store traffic and building differentiation between the firms using loyalty programs properly and those that don’t utilise the program properly or don’t have one (Mulholland 2002).

The potential positive impact of loyalty programs can be assessed based on the concepts defined by Pfeifer et al (2005) in their research journal report on customer lifetime value, customer profitability, and acquisition spending to capture the wallets of consumers. The journal does an excellent work in describing concepts and bringing clarity to the understanding of how the impact of loyalty programs could possibly be assessed. The main issue with the research journal report is that it actually does not go beyond defining the concepts and thus does not give any indication as to which marketing initiatives typically have positive influences on the consumers of organisations.

Another research journal report fully supporting the importance of customer relationship management is by Ashton (2005) which focused on the trends impacting business organisations. The impact of customer relationship management was one of the key factors identified as impacting positively on the performance of organisations. The approach and efforts of the researcher are laudable in that a strong case study is developed to build the arguments supporting the development of the organisation’s competitive advantages which included customer capital and how this was built up. The key limitation of the research journal report’s results is the possible general applicability of the findings given the limited examples supporting the arguments espoused by the researcher.

While direct research has been limited on loyalty programs for the food retail sector, there has been ‘reported’ success of utilising loyalty programs in marketing initiatives. This has led a large number of businesses, not only in the food retail sector and not only in the UK, to begin their own loyalty programs which, when done properly, arguably leads to increased consumers visiting stores, and increased business (Werb 2007). It remains to be seen whether the positive impact that the loyalty program apparently has had on some key retailers will also positively impact these businesses that have recently adopted loyalty programs in the hopes of building a loyal consumer base.

One theory which supports the loyalty program initiative as a means of developing consumer loyalty is the model of relationship drivers of commitment, which follows the principles of commitment-trust theory of relationship marketing and is presented in the research journal report by Lacey (2007). The key construct of the framework is that the initiatives that deliver economic, social and resource benefits to the consumers are the ones that impact on customer commitment. Loyalty programs when based on these considerations could deliver all three benefits depending on how the programs are designed by the food retail firms. Nevertheless, while the research journal report of Lacey indicates support for the concepts of loyalty programs to build a strong customer commitment, the research journal report is fairly high level in the arguments that are presented and does not go into detail into some of the possible marketing initiatives that organisations can pursue in order to develop their customer relationships.

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NULL or negative impact on consumer perceptions

Loyalty cards and programs have had their share of criticism. As a marketing initiative, loyalty card programs are considered to require significant investment just to operate the program. For example, in 2005, Sainsbury’s costs in running their loyalty card program were estimated to be around ten to fifteen million Pounds Sterling, with an additional one hundred million Pounds Sterling to fund the prizes that consumers claim as part of the loyalty program (Butler and Henery 2005). This is certainly a large cost and an amount that could potentially be used for other initiatives, or even just given back to shareholders.

The investments needed in building a proper loyalty program put into question the worthiness of the approach as a tool to ensure customers become loyal. In a research journal report which discusses the buyer-seller relationship, the arguments presented a difficult challenge to overcome in keeping the relationship ‘loyal’ (Moon & Bonney 2007). The authors presented three constructs critical in the buyer-seller relationship: satisfaction, investments in the relationship, and existing alternative suppliers. Thus, placed in light of the large investments to establish a loyalty program, the resulting impact is then put into question. A key limitation of the research journal report is the very limited specific examples given to support the arguments. On the positive side, the research journal report relied on referencing other research works in discussing their key points and providing validity to their statements.

The other criticism on the loyalty program is the actual impact on loyalty that the program is able to build. Despite the large investment placed by retail food firms in the loyalty programs and the related prizes that consumers can claim, a significant number of consumers do not claim the awards or benefits that they are due (Butler and Henery 2005). This raises the issue of how much loyalty is generated by these loyalty programs and how much impact it has on the retail food brands, if any, given that a large number of consumers do not seem to be interested in the loyalty program points that they generate.

Yet another drawback linked to the loyalty programs is the requirement for consumers to be carrying their loyalty cards at all times in order to be able to benefit from the points that accrue to the use of the loyalty card (Guilfoil 2002). With the increase in loyalty card programs, consumers would be forced to choose which loyalty programs they deem best at the expense of others lest they be keen on carrying all the loyalty cards that they are members or a part of.

A final point is the use of loyalty programs by food retail firms. Some consumers are wary of the loyalty programs as it seemingly provides food retails firms, or other firms, a way of being able to track their purchases and other information (Kadet 2001). In the research report journal by Dolnicar & Jordaan (2007), an argument presented was the potential of marketing communications to be very intrusive which then affects the perception of consumers on the marketing initiative being pursued. The research journal report goes into detail into the possible consumer concerns relating to privacy particularly related to the information that consumers end up giving to organisations. This perception is certainly a significant challenge for food retail firms seeking to establish a strong loyalty program as this would rely on having a good understanding of customers. Though the research journal report presents several consumer concerns on privacy and use of information, there are limitations o the data set utilised impacting on the results and recommendations of the authors. The key drawback of the research journal report is the applicability to different markets as privacy and information concerns would seem to be varying based on the culture and market focused on.

The arguments in this section showed that loyalty programs not only potentially cost firms significant investments but loyalty programs also do not seem to have the impact on consumers that they are reported to have.

Aims

The main aims and objectives for the research project are the following:

Objectives

The research objectives for the project are meant to define the tasks to be followed to accomplish the research aims stated. The research objectives are as follows:

Research Method

The research for this project will rely extensively on both primary and secondary research. It will be difficult to tap into the data and information that food retail firms may have on their consumers as a result of the loyalty programs. Food retail stores are known to hardly ever open their data and information databases to researchers (Perloff and Denbaly 2007). Thus, with the challenge of using existing quantitative data on consumers, the research will rely instead on a qualitative approach. The focus will be on an explanatory approach as it is expected that the insights resulting from the research project will relate to market-related behaviours, and this is considered to be the proper approach to get these results (Mariampolski 2001). The in-depth interview approach was decided on given the constraints on existing quantitative data, and also the requirement to have a deep understanding of the impact of loyalty programs on consumer perceptions on the food retail brands.

Secondary Research

The research project will rely on secondary research for a preliminary understanding of the impact of loyalty programs on consumer perceptions of food retail brands. While initial indications show that formal research on this issue seem relatively limited, the use of secondary research is still important as there will certainly be important research and information that already exists that can be utilised for the research (Hester 1996). At the very least, there are anecdotes already seen that can form part of the discussions in the in-depth interviews which will prove valuable in its input for the research project.

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Primary Research

With the focus on interviews as a key input to the research, one factor to consider is the type of interview to utilise, as there are a number of interview types that researchers have used in building their research findings. After a review of the various types of research available, it was decided that in-depth interviews would best serve the requirements of the research for the following reasons: (1) a long insightful discussion is needed, (2) probing questions will be asked of the interviewees in order to fully understand the issues being researched, and (3) regular summarising is needed to ensure that the interviewees’ thoughts are properly captured and articulated. These three factors are key characteristics of in-depth interviews (Baker 1991).

The structure of the in-depth interviews will be defined initially from the results of the secondary research. As the interviews progress, it will be possible to revise the structure and questions in the in-depth interviews in order to satisfy the requirements of the research and address the issues defined in this proposal, particularly as new findings and insights come to fore.

Research sampling

A critical part of the research is the sampling to ensure that the list of interviewees provides a good and rationale sample of the consumers being considered as part of the loyalty programs. However, it is evident that there are significant limitations in the sampling that could be achieved in this project given the nature of the research and the background and situation of the researcher. In order to achieve the requirements of the research, the plan is to pursue a quota sampling approach to ensure that there are enough interviewees considered by the research for the project, even if there are questions on the sampling at a later stage. Quota sampling will allow this research to be conducted with limited challenges related to effort and cost as these will be significantly reduced in this approach (Wright and Crimp 2000).

Bibliography

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