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The price of loyalty
As some marketers sit on the fence, others dive
headfirst into loyalty
By Mark Warren
“We’re starting to get our hands on the definition of a loyalty program.” In addressing that question, store automation director Shannon Ramsey of the Valero Energy Corporation has a lot of company. Valero, a San Antonio-based operator of 1,080 Corner Store locations, is joined today by scores of retailers who are assessing newly available technology and asking: How would they use it? And would the return justify the significant investment required?
One definition of a loyalty program “is a program that, quite simply, rewards your customers for their loyalty,” ventured Alex Fassas, president of Red Hed Oil Company, Richmond, Ky. The chain covers central and eastern Kentucky with 17 convenience stores, about half of which are direct-operated and the remainder by dealers. “We’ve had coffee clubs and car wash clubs using punch cards to earn free products and services,” he explained, “and though we haven’t had a formal membership-type loyalty program, we’re looking into it.”
At Valero, whose stores are primarily in the Southwest, Ramsey defined loyalty programs as “something that changes customers’ behavior so that they’ll buy from you more often.” As an example, Ramsey cited a recent promotion that Valero conducted in South Texas. Every Tuesday, customers who used the chain’s credit card received a 10-cent-a-gallon discount on premium gasoline. “We sold a lot of premium gas,” he observed.
Yet advances in technology are also making it possible — at a price — for retailers to launch membership-based loyalty programs that combine automated operation with virtually infinite opportunities to capture and utilize customer data. Over the past year, Fas Mart has piloted a new computer-based loyalty program at 17 of its Virginia stores. “We have three goals: to increase customers’ frequency of visits, increase the average transaction and increase their market basket (total spending),” noted Brad Chivington, senior vice president of sales and marketing for GPM Investments LLC.
Based in Mechanicsville, Va., GPM operates 100 Fas Mart and 55 Shore Stop locations in six mid-Atlantic and New England states. “Fas Back Rewards” permit customers to register for the program and, with their purchases, automatically earn points toward rewards and monthly giveaways. Along the way, Chivington and his team capture data so that promotional offers can be tailored to customer buying histories.
All told, retailers agreed that loyalty programs can help boost their stores’ brand identity and differentiate their chains from competitors. They concurred that an ideal loyalty program would fit seamlessly into existing POS and back-office automation systems, without requiring cashiers to handle an additional piece of equipment on the sales counter.
But with the substantial costs involved — hardware and software, training, supplies, signage, product discounts — Chivington advised retailers to “know what you want to get out of a loyalty program, so you can judge whether the return-on-investment is worth it.”
Loyalty Program Rewards Retailer
A case in point is Red Eagle Oil of Cody, Wyo., which operates 16 Red Eagle Food Stores throughout its state. “Our markets are small and so the competition with the big-box retailers and deep-discount chains is pretty intense,” noted Chief Operating Officer Brad Christiansen. In 2000 Red Eagle launched a four-year effort to re-image its stores and install upgraded technology such as scanning equipment and improved back-office computer support.
A loyalty program seemed like the next step in building the Red Eagle brand against its competitors. But because the company serves markets with high tourist traffic, Christiansen said, “We need to keep our Shell, Exxon and Cenex fuel brands. When people travel away from home, they tend to buy gasoline brands they know.” Stores that might sell 25,000 gallons a month in the winter often sell 180,000 gallons in the summer. Company research suggests that nearly three-quarters of these fuel transactions are driven by brand identity.
As a multi-branded fuel retailer, Red Eagle required a loyalty program that would work across all of its point-of-sale platforms. Though the company may sell different fuel products, it desired to build a higher profile for its stores. After surveying its options, Red Eagle decided in July 2004 to launch “Red Eagle Rewards” using a system provided by Outsite Networks of Norfolk, Va.
The system could be integrated with Red Eagle’s own computer network, which allowed the company to capitalize on its existing technology investment. “We didn’t want our clerks to handle and support a separate POS device just for a loyalty program. Also, we planned to take our network online and wanted a loyalty program that could generate real-time information,” Christiansen said.
Even more important, the company determined what it hoped to achieve. “We don’t view a customer loyalty program as simply a discount program,” Christiansen continued, “but as a way to increase our margins and throughput.” When Red Eagle rolled out its program last year, he was pleasantly surprised that “because the vendor assisted us with installation and training, we actually finished the equipment development before the graphic design work.”
The system begins with an in-pump audio box that is activated when customers dispense gasoline. An “acquisition message” plays that invites patrons to sign up for Red Eagle Rewards. Those who sign up are issued a key fob with radio-frequency identification. Later, when enrolled members buy gasoline the audio message highlights specific promotions.
Customers earn points toward rewards, can receive random rewards, may participate in coffee clubs and other clubs (“but without the punch cards,” Christiansen said), and are entered in a monthly sweepstakes drawing for a major prize. The marketing slogan for Red Eagle Rewards is “Earn Free Stuff!”
In the first month of the loyalty program, average customer frequency rose from 1.2 store visits per month to 1.7 visits; today the figure is 2.7 visits. After eight months, in-store profit margins are up 2.44 percent. Where customers once spent an average of $4.80 per visit, today the figures are $8.92 for Red Eagle Rewards members and $7.88 for non-members. Fuel purchases that formerly averaged 18 gallons have now risen to 24 gallons for members and 22 gallons for non-members.
Christiansen characterized his company’s investment in its loyalty program as “capital-intensive” so that payback was initially estimated at 38 months. Today that projection has been rolled back to 20 months — and includes some attractive spinoff benefits.
“Since we track all purchases,” Christiansen pointed out, “we know that if someone buys Crispy M&Ms, there’s a 21-percent chance they’ll also buy a bottle of Aquafina water. So I can take that kind of data to our food vendors and show them — with real statistics — that our discounts work. That way, we can get more from our vendor relationships.”
Similarly, Christiansen can approach local grocery chains and establish cooperative loyalty programs. “It can help them compete against Wal-Mart,” he explained, “and it can help us increase customer loyalty by offering more rewards.” In the future, he plans to use his system’s capabilities to do e-mail marketing to customers based on their buying patterns. “That would really let us maximize our partnerships with other local companies,” he said.
Moreover, the technology that Red Eagle has mastered — scanning, back-office systems and loyalty programs — makes the company more attractive wholesale fuel supplier. Dealers can tap into Red Eagle’s expertise so that, in the past two years, Christiansen’s dealer network has tripled to 19 locations.
A Learning Experience
Flash Foods of Waycross, Ga., which operates 182 c-stores across Georgia and Florida’s panhandle, also decided in July 2004 to launch a membership-based loyalty program. In conducting a pilot program at its 16 Florida locations, “we decided on several goals we wanted to achieve,” confirmed Jenny Bullard, chief information officer.
“We wanted a way not only to reward customers but also to keep customers,” she said. “That meant we needed a way to track purchases and see if a customer hadn’t visited our stores lately — which also means we needed a way to communicate with customers and to gather information to create promos based on their buying activity. A loyalty program is basically a way of ‘paying’ customers to capture information we can use for marketing purposes.”
Another key motivator for Flash Foods, Bullard added, “has been to stay on the cutting edge and stay ahead of competitors.” Because some 75 percent of Flash Food stores sell the chain’s private fuel brand, the “Rewards in a Flash” program was viewed as another means to bolster the company’s own private-brand identity.
As the executive in charge of information systems, Bullard also approached Flash Foods’ loyalty program trial with an eye on logistical considerations. The company had worked with Pinnacle Corporation of Arlington, Texas, since the late 1990s to help supply its POS and back-office automation needs. “After looking around at different loyalty programs, we saw that the software cost was a big factor,” she noted, “and so it made the most sense to go with Pinnacle’s loyalty program.” Called “Loyalink,” the Pinnacle software could interface with Flash Foods’ existing POS system and avoid the need to purchase new equipment.
“When we decided to beta-test the loyalty program,” Bullard continued, “we had just installed a wide-area network. So our new loyalty program could be done on a real-time basis.” Simplicity of operation also meant simplicity for customers, a key criterion for Flash Foods. “We wanted it to be simple for customers to sign up,” she said. “They just fill out a form and the membership card is right in the application. When they sign up, customers get a free coffee or fountain drink when they turn in their applications.”
Customers’ earn points toward discounts and rewards with their purchases, and may participate in monthly promotions. Through a coffee club and soft drink club, patrons who buy 10 drinks get one free. Customers can redeem their points in real-time as sales clerks scan their cards or key fobs at the point of sale.
The pilot period was a learning experience for Flash Foods. “When we started, we didn’t offer key fobs,” explained Bullard, “but we found customers like key fobs. Also, in the beginning we didn’t give points for gasoline purchases. But now we offer points when you buy gas. Getting the right mix of rewards is a learning process.”
In April, Flash Foods rolled out the Rewards in a Flash program to its entire chain. To keep things under control, the company budgets its discounts and giveaways as a percentage of gross annual sales. In addition, Flash Foods has appointed a category manager for the loyalty program who coordinates promotions and follows through on implementation. The follow-through continues as Flash Foods tracks customer buying activity, uses the data to tailor its promotions, and sends e-mails to those who have not recently visited a store.
“It’s only been in the last couple of years that loyalty programs are really emerging in the c-store business,” Bullard believed. “Only recently are a lot of retailers getting the technology in place, like POS scanning and wide-area networks, that you need. But the trend now, even if you sell a major fuel brand, is to build your own brand identity for your stores. Loyalty programs help you do that and, with the technology we have now, I think they’re going to grow.”
A Step at a Time
Brad Chivington reported that Fas Mart is still in pilot stage with its Fas Back Rewards program. Since April 2004 the chain has used a system from Outsite Networks to offer rewards at its 17 stores in Fredericksburg, Va. In meeting its three goals — increased frequency, higher average transactions and more total spending — he puts the challenge in simple terms.
“Customers often have between three and four c-stores they visit,” Chivington explained. “It might be one store near their home, one near work and one near their weekend activities. If we can get them to change their behavior — instead of Fas Mart being one of their three regular stores, maybe we become two out of three — then we can really generate some meaningful numbers. In a competitive marketplace, having a superior loyalty program gives us a point of differentiation.”
The Fas Mart loyalty program starts with an audio box at the fuel pump, which invites customers to enroll. Patrons then enter the store to sign up, get an immediate reward and receive a key fob with RF identification. Purchases earn points toward rewards. Customers can also participate in coffee, soda and milk clubs, win random awards and are entered in a monthly major-prize drawing.
In deciding to give its loyalty program a try, a key factor was that “the software interfaces with our existing pump and POS automation,” stated Chivington. “The associate doesn’t have to do anything, and we still can capture all of the demographic data.” In turn, the data allows Fas Mart to tailor offers to individual customers’ behavior — or, he said, “to their desired behavior.”
Fas Mart can see what types of in-store products a fuel customer buys most frequently, then offer promotions on those products as a means to induce more in-store visits. Fas Mart can conduct awareness campaigns and trials for new products, then have statistics to strengthen its position with vendors. “We could even work with a manufacturer — let’s say a soft drink company — and see if we can get customers who buy other brands to convert,” Chivington pointed out.
As GPM ponders the prospects of rolling out its loyalty program to all 155 company-operated outlets, Chivington is studying his Virginia test very closely. Numbers from the 17 stores involved in the pilot are being compared to their pre-loyalty averages and to a control group of stores in the same region, which do not offer Fas Back Rewards.
“A loyalty program is definitely not a low-cost investment,” Chivington stated. “We’ve got to see enough of a ‘sales lift’ to provide a sufficient return on investment. So far it’s been adequate. If our loyalty program continues to grow, we’re just at the beginning of what we could do — things like e-mail marketing or creating an online interface where customers can check their point totals and choose their own rewards over the Internet.”
The reality of cost is prompting other retailers to adopt an incremental approach. Bryan Reed is president of Reed Inc. of Ely, Nev., operators of seven c-stores in rural eastern Nevada. Three years ago his R Place stores opted for a loyalty program from Kickback Points LLC, Twin Falls, Idaho. Now in 2005, R Place is upgrading from dial-up to broadband loyalty-card processing.
“The loyalty program differentiates our stores and gives added value to customers so they’ll choose us over competitors,” Reed explained. By contrast, he pointed out, “If you lower your gas prices as a way to differentiate yourself, your competitors will just match your price. But with a loyalty program we’ve been able to increase sales and customer visits, even though some Native American stores have been coming to our area with below-market pricing.”
Reed does not do any joint promotions with other local businesses, though R Place customers can redeem points at a flower shop owned by Reed Inc. “We’re held back in what we can do, as far as a loyalty program,” he observed, “because we’re a major-oil-branded marketer and so there are limits on what we can do with our POS equipment.” But he is watching trends closely, since customer reward programs “seem to be the trend, not only with c-stores and gasoline, but in everything from grocery stores to airline frequent-flier programs.”
Chivington agreed that customer loyalty programs will expand across the industry, but he sounded a note of caution. “Right now, the differentiator is that I have a loyalty program and my competitor doesn’t,” he suggested. “But someday when everybody has a loyalty program, will the value of it go down? At that point, I think the differentiator will be how you conduct your loyalty program. Then, once everyone masters that, we’ll all have to go on to the next big thing.”
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