Nectar: were encouraged to transfer to the
Nectar: Making Loyalty Pay Case Study Background and Problem Definition Sainsbury’s is a medium-sized UK supermarket and gas station chain. It is also the largest participant of Nectar, UK’s most extensive rewards program. When Justin King took over as Sainsbury’s CEO in 2004, he was faced with the decision of whether Sainsbury’s participation in the Nectar loyalty program was worth its annual $120,000,000+ budget.King came over from ASDA, Sainsbury’s lower-cost competitor, where there was no loyalty program and the savings were applied directly to lower the product prices.
King had 6 months to review the Sainsbury’s marketing strategy and to decide whether the company was going to maintain its 18-month- old participation in the Nectar loyalty program. This case analysis is going to argue that Sainsbury’s should maintain its participation in the Nectar program. The Nectar loyalty program was launched in 2002.The scheme was backed by ? 50 million pounds worth of advertising and direct marketing spend to support the launch. A number of organizations or sponsors joined forces to launch this coalition loyalty program; Sainsbury’s, Barclaycard, Debenhams, and BP, all merged their existing loyalty programs under one umbrella brand called Nectar. Their existing rewards programs were phased out within a year of the launch of Nectar and their members were encouraged to transfer to the new Nectar scheme.
Consumers who used their Nectar card at participating outlets collected points, typically 2 points per each pound spent, which then could be redeemed directly at Sainsbury’s at checkout as credit towards the grocery bill or through Nectar for free flights, vacations, or Argos Catalogue purchases. Nectar was operated by Loyalty Management UK (LMUK), which covered the loyalty program’s administrative costs, customer data collection, point redemption, and other day-to-day operations for all participating sponsors. Points were sold to the sponsors for $0. 05 each and bought back upon redemption for $0. 005 from Sainsbury’s and for smaller amounts from other sponsors. This difference, or spread, was Nectar’s main form of revenue. Each sponsor paid a flat program support fee for participation and Nectar earned interest on the earned but not yet redeemed points.
By leveraging several big brands rather than one single supermarket, like Tesco, Nectar’s loyalty program had a much broader appeal, as rewards were more attainable due to number of different participating partners available, where points could be built up more quickly.In addition to this, Nectar frequently sent their members coupon books with which they could obtain discounts, earn bonus points and even double points on certain purchases. SWOT Analysis Strengths * 2nd Largest Grocery Retailer * Strong Brand Name * Nectar Participation Weaknesses * Poor Product Availability * Prices higher than 43% of other stores * High Cost of Nectar Program Opportunities * Better and More Targeted Marketing * Higher Customer Loyalty * Lower Churn Rate * New customer acquisition * Better product stockingThreats * Loosing market share to other grocers * Nectar participant cannibalization * Negative Nectar PR When Sainsbury’s joined Nectar loyalty program, it was positioned 2nd behind Tesco in market share size. Tesco, a low-cost grocer with a strong, extensive loyalty program of its own, maintained a 26% share of the market. Sainsbury’s and ASDA, another low-cost grocer, both had a 17% share of the market. Sainsbury’s had a competitive advantage above both of those competitors of having a better, more premium lines of product, priced accordingly.
Sainsbury’s had a well-known, respected brand and over 50% of the store’s revenue was generated through the store brand sales. Nectar participation meant that 13. 5 million or half of all UK households would receive reward points and possible discounts for shopping at Sainsbury’s. As no other grocery chain participated in Nectar, Sainsbury’s was the only food outlet destination for Nectar card holders. Loyalty program participation also meant that Sainsbury’s was getting invaluable data on its own customers as well as the customers of other program participants.
Additionally, to offset inter-Nectar cannibalization, it has to be noted that Sainsbury’s was benefiting considerably from the multi-sponsor rewards program. Those customers who collected points from two additional sponsors besides Sainsbury’s spent 40% more a week than those customers that earned points only at Sainsbury’s. Issues with supply chain infrastructure have left Sainsbury’s with the reputation of having poor product availability.Also, its two largest competitors, Tesco and ASDA both had lower price points and together amounted for 43% of all market share, so that almost half of all UK consumers were buying their groceries at cheaper prices than Sainsbury’s was charging. However, Sainsbury’s had plenty of exciting opportunities available.
As mentioned before, its participation in the Nectar program provided Sainsbury’s with extensive and precise data regarding its customer base.As noted by the new CEO, It allowed the grocery chain to have better, more precise marketing and the company’s issue of poor stocking would surely improve with the new knowledge of consumer preferences and frequency of purchase. These improvements would eventually translate into better customer experiences in their interaction with the chain and therefore stronger customer loyalty. Nectar program participation also proved to lower customer churn rate and to increase overall customer loyalty because of perks consumers received from Nectar.
The program also made it easier for Sainsbury’s to acquire new customers by allowing them to directly market to those consumers that collected Nectar points but bought their groceries elsewhere. Some of the threats Sainsbury’s faced as the Nectar sponsor, included loosing market share to other grocery chains as well as the internal cannibalization by the other Nectar participants. For example, BP and Sainsbury’s both sold gas, and each company lost some of their customers to the other one.Also it had to be considered, that any negative publicity surrounding Nectar, if it encountered any, would reflect negatively on Sainsbury’s as it happens in any business partnership. Quantitative Analysis However, strength is always found in numbers, so naturally the most important argument for Sainsbury’s continuing participation in the Nectar program can be derived from the actual points value. More than 50% of all Nectar points were earned at Sainsbury’s.
Nectar’s redemption rate was around 67%, out of those 80%, or 53. 6% of total points, were redeemed at Sainsbury’s.Based on this information, it can be argued that Sainsbury’s saw a 3.
6% return on the points it bought from Nectar. To make it clear the actual point consumption has to be considered. On average, a collector earned 300 points a month, so after 18 months of the program an active collector would have earned 5400 points. Out of 13.
5 million collectors, only 88% or 11. 88 million collected actively, meaning that about 64,152,000,000 total points were collected during the program’s operation. Out of those, half or 32,076,000,000 were earned at Sainsbury’s and 53. % or 34,385,472,000 were redeemed there. Since Nectar bought Sainsbury’s points back at their face value of $0.
005, the positive difference between the points Sainsbury’s bought from Nectar and the points it sold back, amounted to $11,547,360. So, whereas other sponsors were paying for using Nectar, Sainsbury’s was actually making some money back. This single argument is substantial enough alone to make sticking with Nectar a no-brainer for Sainsbury’s. Alternatives Let’s consider Sainsbury’s alternative options.Being that Sainsbury’s was the largest Nectar sponsor, leaving the program would undoubtedly take time, staff, budgetary maneuvering, and a whole lot of PR work. If Sainsbury’s decided to revert back to their own rewards program, they would loose access to all those Nectar points their clients already accumulated as well as the other points accumulated elsewhere, but redeemed at Sainsbury’s. The grocery chain would have to either create a whole new department dedicated to running their own rewards program or to outsource it to another company, in which case what would be the difference between that and staying at Nectar?Also, Sainsbury’s had already tried their hands at running their own rewards program and it proved to be largely unsuccessful with low participation rates and low customer satisfaction scores, whereas the Nectar program had an astounding satisfaction rate of 98%.
Additionally, Sainsbury’s would potentially see a decline in their sales, since those consumers that actively collected points at multiple Nectar sponsors spent a considerably higher amount per week at Sainsbury’s than other consumers. Another option would be to discontinue the rewards program altogether and to apply the associated budget elsewhere.True, lowering the prices would allow Sainsbury’s to compete with Tesco and ASDA, but how much can Sainsbury’s lower their prices without damaging its brand image? Sainsbury’s customers perceived the grocer’s products to be of higher quality than the products of its lower-priced competitors and so meeting Tesco and ASDA at their bottom line could tarnish the value perceived by customers. Also, Sainsbury’s would have to create an entirely new way to collect the data on their customers as well as having to pay for the collection and analysis, the costs absorbed by Nectar.And it cannot be discounted, that point collection and redemption resulted in consumers spending more per each visit at Sainsbury’s as well as in the increase of the frequency of shopping visits immediately following point redemption. Conclusion To sum up, the benefits derived by Sainsbury’s from its 18-month participation in the Nectar loyalty program and the future value of the benefits to come if Sainsbury’s maintains this relationship, far outweigh the risks and possible benefits of leaving the coalition.Sainsbury’s should continue to participate in Nectar and aggressively pursue the opportunities of growing its customer base through Nectar, improving its marketing, streamlining its supply chain, and anticipating customer demand.
Furthermore, Sainsbury’s should look for new ways to increase Nectar point redemption at its locations to offset the program costs and expand the margin between earned and redeemed points.Finally, Justin King’s suggestion that the marketing cost of participating in the Nectar program could be better spent on increasing store staff seems far-fetched. Increasing store staff is an operational issue, not marketing one. The existing staff training policies can be reviewed or amended to better customer service.
Consumer shopping information obtained from Nectar can be reviewed for possible changes in staffing stores based on traffic or shopping patterns. Overall, staying with the Nectar loyalty program would be the best course of action for Sainsbury’s.