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Competition In Our Loyalty Systems

Consumers simultaneously hold loyalty cards from competing retailers and often shop regularly at more than one competing store. Hence the belief that loyalty cards are ineffective because shoppers subscribe to multiple programs from competing retailers. This is particularly true of grocery retailing where consumers regularly shop in more than one, and often quite a few, grocery stores.

However, it is a myth to believe that loyalty programs are ineffective when consumers hold loyalty cards from competing stores. First, although consumers shop in a number of stores, the dominant spend is in the favorite store—typically, more than two-thirds of the total grocery spend occurs in the favorite store. For the shopper, the dominant store will have an informational advantage over less patronized stores.

As a result, this favorite store will be able to make far more appealing and targeted propositions to that shopper, reinforcing that customer’s spending there. Of course, that shopper will continue to visit other stores for specific reasons, on the way to work, for example. One hundred percent loyalty to one store is rare and would be uneconomical for the retailer to aspire to.

Actually, loyalty systems are unique in the sense that copying of a loyalty system by direct competitors reinforces the strength of the loyalty generating capabilities of all participating retailers. In this case, each retailer will focus on its customers for whom it has an informational advantage rather than trying to attract shoppers who are loyal to another retailer. For the latter, the focal retailer has an informational disadvantage that makes it uneconomical to try to attract those shoppers. Furthermore, such a competitive move would probably trigger retaliation from the attacked retailer, who would subsequently try to steal the focal retailer’s loyal shoppers. It can easily be seen that such a strategy would punish all players, except the shopper.