House of cards

MORE THAN 50 million loyalty cards were issued last year - almost one for every man, woman and child in Britain - promising discounts, special prizes and exotic holidays for points collected.

Eighteen million households include someone with Boots Advantage Card, twelve million contain a Nectar card, and another eleven have a Tesco Clubcard: this means a substantial number of households have all three. So much for loyalty.

With bulging wallets containing a plastic card for every High Street brand name, have we become bored of loyalty schemes? And do we really need them?

In late July two major partners - Vodafone and Barclaycard - abandoned the ailing Nectar scheme, prompting speculation that consumers have finally lost interest in remembering to accumulate points. Do loyalty schemes have a future?

The explanation for the popularity of such cards can be found in their early incarnations, most notably the legendary Green Shield Stamps. The mint-coloured stickers were handed back to shoppers with their change as a reward for purchasing groceries or petrol, and subsequently fixed to giant collection books in anticipation of exciting prizes such as folding garden furniture or floral-patterned toasters. For a generation of shoppers who had learned to live by ration books, the collection ritual was a cornerstone of housekeeping: the twin virtues of making the every penny go as far as possible and the Presbyterian postponement of gratification. Similar rewards were paid by the Co-op, whose "divi" scheme of payouts was one of the longest-running and most successful loyalty programs in the world. Smaller schemes grew from the same acorn: by the late 1980s, few households in Britain were without at least some glassware courtesy of their local Esso garage and a handful of Tiger Tokens.

Richard Tompkins, the brains behind Green Shield Stamps, went on to found the catalogue chain, Argos, in 1973. That Green Shield Stamps should wane as Argos grew is no coincidence: the falling price of groceries relative to other costs of living, coupled with increasingly affordable electrical goods in discount stores, meant the rewards offered by Green Shield Stamps lacked the lustre the make it worth collection. Kitchen drawers and car gloveboxes were littered with orphaned stamps; the psychological link between the carrot of free goods and the stick of stamp-books had been lost. Consumers spotted that their loyalty wasn't rewarded without considerable effort. In 1977, Tesco abandoned the scheme in favour of a simple value-for-money approach and other retailers followed suit.

"Supermarkets are always telling us that consumers are focused exclusively on price and yet some of them spend millions on loyalty schemes," says Richard Perks, senior European retail analyst at Mintel. "They are very expensive to run. At the value end of the market, shoppers aren't really that loyal - they just go for a bargain. Loyalty schemes occasionally have useful bargains, but so do supermarkets.

"Essentially loyalty cards are a clumsy form of price promotion. They say 'buy this now and perhaps get something else later' rather than 'buy this and get a second one free right now'. It is a very blunt instrument."

So why did loyalty schemes make a comeback? Early signs of a revival were evident in 1988 with the creation of AirMiles. Unlike frequent flyer miles, which reward regular travellers with future travel perks, AirMiles returned to the basic principle of promising ordinary consumers something glamorous in return for the regular purchase of necessities such as fuel, cat food and toilet rolls.

Advances in technology allowed credit-card style plastic membership cards with a magnetic strip. These removed the need for consumers to collect yellowing documentary evidence of loyalty, and gave retailers vast amounts of new data about the spending habits of their shoppers. It marked the birth of "customer relationship management" - the Orwellian process by supermarkets can predict exactly what brand of coffee a shopper is likely to buy in one of its stores tomorrow based on exactly what brand of olive oil they bought in a branch at the other end of the country last week. Tesco spotted the potential value of this information and created its Clubcard in 1995, since followed by a rash of rivals including Sainsbury's, WHSmith, Boots, Safeway, and McDonalds. The Co-op has even pledged to reintroduce the divi.

"They do provide lots of data for retailers, but it comes at an enormous cost," says Perks. "Safeway scrapped its card in 2000 and Asda decided to concentrate on its reputation for low price. They don't seem to be suffering any ill-effects." The reluctance of retailers to discuss the cost of this new wave of schemes would suggest he is right. Membership of Nectar is understood to set Sainsbury's back 120 million a year.

But do these cards actually benefit shoppers as well as retailers? Evidence abounds of loyalty fatigue, particularly among customers tied of being asked "do you have a loyalty card?" every time they pay at the till. One man who took out classified adverts selling home-printed T-shirts with the slogan "No, I don't have a f****** loyalty card" reportedly made himself a fortune.

The biggest casualty has been store cards, which have suffered a sharp decline - not surprising, since credit-savvy consumers are unimpressed by punitive interest rates of more than 20 per cent APR and rewards or discounts that cannot be used elsewhere in the High Street.

And then there are the recent reports that Nectar is in trouble. Its two biggest sponsors after Sainsburys, Barclaycard and Vodafone, both pulled the plug on the scheme last month. Their replacements, TalkTalk and Dolland & Aitchison, are hardly in the same league - although a forthcoming Nectar credit card in conjunction with American Express could prove successful.

"Vodafone were only ever going to be with us for a fixed period," insists Richard Campbell, director of marketing at Nectar. "They wanted to reduce the amount of customer turnover, or 'churn', by creating incentives. We expect to replace them with a similar partner in due course."

So do these schemes have a future, or will we tire of the cards as we did of stamps in the 1970s? The answer lies again in technology, and increasingly sophisticated customer relationship management. "Our success will lie in using the information we have to make sure both collectors and sponsors are getting the most out of Nectar", says Campbell. Nectar already sends out targeted vouchers, such as coupons that encourage shoppers who use only Sainsburys to try other partners such as Debenhams or BP. But will we bow to these attempts to change our lifestyle habits? "The scheme has got to be useful in order to work. We can't force people buy petrol at BP garage but we can make it worth their while with achievable goals such as bonus offers."

Tesco employs similar methods with its Clubcard vouchers, sending members quarterly coupons which encourage them to try its increasingly diverse stock of everything from dog biscuits to barbecues. Clubcard members can even use a barcode attached to a key fob rather than yet another plastic card in their wallet. Both schemes have advanced systems to reduce the effects of "cherry-picking" - where obsessive collectors visit shops only to maximise their loyalty points through bonus offers. One boy from south Wales earned so many bonus Tesco Clubcard points from a special offer on biscuits that he was able to fly Concorde with Clubcard's travel partner, British Airways. How he managed to store 900 packets of digestives at home remains unclear.

"We need active users who earn and redeem regularly," explains Campbell. "It is sometimes said that we benefit from those who never spend their points without spending them. That's not true: we need to have members engage with our various sponsors regularly rather than set them huge goals they will take forever to achieve."

This is a crucial difference from the era of Green Shield Stamps, and indicates the extent to which the concept of saving for a rainy day is absent from the current generation of consumers. "Our customers mostly use their vouchers to make more savings in the store," said a spokeswoman for Tesco. "They want to use what they've earned straight away." Campbell agrees, adding that previous 'big goals' such as free holidays are not as relevant when a flight to in Spain can cost less than a week's groceries. "Most people don't save up for big rewards," says Campbell, adding "We find they spend a few points at a time on little things, such as renting a DVD for free or a day out at Alton Towers. It is the small savings that give pleasure, it seems."

So the major loyalty schemes have a strong future because their sheer size and range of uses makes them essential additions to the wallet. On the other hand, the smaller programs are set to disappear as consumers concentrate on one or two cards. Increasingly, smaller retailers are embracing the concept of "massclusivity" - abandoning complex points schemes in favour of targeted offers that acknowledge loyalty without putting any burden on the customer. Departments stores such as John Lewis, M&S and Harvey Nichols are developing branded credit cards alongside or instead of their own schemes.

"We might send out an invitation to an exclusive in-store event," says one department store manager in Glasgow. "It's arguably a classier way of thanking customers and avoids the sort of painting-by-numbers you get with points schemes.

"We don't want to be yet another plastic card competing for space in someone's wallet. We want to be a bit warmer than that."

Back to the top of the page