Steven Giovanny

Nectar : Making Loyalty Pay

In March 2004 Justin King had just taken over as Chief executive at Sainsburys,
the second largest supermarket chain in UK behind Tesco, and He immediately noticed
the significant amount of money was being spent on Nectar, a loyalty program designed
to boost Sainsburys sales amidst competition. Tesco Led the way in UK grocery
industry with 26% of share, while ASDA and Sainsbury each boasted 17% of the
domestic market, slightly behind them was Morrisons with its Safeway brand. Tesco
and ASDA occupied low cost positions and compete on price, Waitrose and Marks &
Spencer met the demand for premium-quality food. Sainsbury believed its product was
of better quality in comparison to Tesco and ASDA and believed that its slightly higher
price point was justified.
Nectar is a frequent shopper program designed by LMUK that was formed by
Mills, Gierkink and others. Similar to most its kinds, Loyalty program are commonly
designed to retain customers and increase the amount of individual customer spending
in the designated franchise, equipped with the ability to allow customer to redeem
selected prize based on points accrued over time. What distinguished Nectar card from
other UK frequent shopper program in 2000 was that they allowed customers to earn
points not only at Sainsbury but they also engaged several hand-picked sponsors
such as the gasoline retailer BP, the credit card issuer Barclaycard and Debenhams, a
department store retailer as the four founding sponsors. They were soon joined by
several notable merchants such as Thresher, Adams, Vodafone, Ford, All:Sports and eEnergy, creating a stable of influential market players in differing industry. Nectar
created a single all-encompassing loyalty card for these firms, allow customers, which
they referred to as collectors to earn points and also redeem prizes from and at any of
the sponsors.
What should Justin King do with the program?
Given its background, it was understandable that Justin King had some
reservation about the amount of marketing budget spent on Nectar, Sainsbury spent
eye-watering 120 million pound on a loyalty program, something that King certainly did
not accustomed to. He was part of senior management team in ASDA that managed to
turn the company around before being acquired by Walmart, the changes made then
were about cost cutting and value for money principles. ASDA did not have a loyalty
program. His reservation was supported by ASDA and Morrison reluctance to continue
their respective loyalty card. ASDA discontinued its loyalty card because they believed
price cutting was the way to operate, while Safeway believed that loyalty cards do not
give any value to customers, but great deal does.

Tesco, the dominant market player did concede that loyalty card bring a lot of
value, however its Tesco Club card took a very different approach from Nectar to
coalitions, citing its indifferent opinion to how a coalition loyalty card program could
generate loyalty to issuer. The issue in question is not only whether loyalty programs
bring value to firms, but also how a firm, in this case, Sainsbury would go about
establishing the right loyalty card structure, would a coalition approach such as Nectar
would work better than Tesco traditional single-firm loyalty card would.
All factors considered, King should continue the program. A year after it was
launched, Nectars collector was already larger than Tesco. Nectar was also rated better
by 59% than others loyalty programs by collectors survey. From the survey it was
apparent that spending at Sainsburys was greater among collectors earning points from
multiple sources than from Sainsburys on its own. The weekly spending at Sainsburys
was 40% greater among customer collecting from Sainsburys and two other sponsors
than if they earned points solely from Sainsbury, and with each new sponsor, the
amount spent at Sainsbury had also increased, so that for someone who earned points
from 5 sponsors, their Sainsburys weekly spending was typically 100% greater. It was
also apparent that collectors who earned points from multiple sponsors were less likely
to defect. In addition to that LMUK covers the cost of the program administration and
manages the day to day details, while Nectar programs would also mean an increase in
catchment area/coverage and would enable Sainsbury to cross-marketing to others
sponsors coverage/market, important perks of coalition program that often overlooked.
These considerations justified the approach of coalition loyalty card program and the
value it brings as opposed to stand-alone loyalty program or no loyalty program.
What should Rob Gierkink do with the program to keep Sainsburys happy?
The initial reservation from Justin King and Sainsbury was regarding the
significant investment it undertook to take Nectar on Board. Half of the Sainsbury
marketing budget was committed to Nectar, while operation-wise, Sainsbury
commitment to Nectar meant that it took 1% of its revenue and returned it to the
customers, meaning that at 25% gross margin, customers have to spend 4% more to
break even or the loyalty program would have been a failure. To keep Sainsbury
commitment in the program, Nectar needs to ensure that it brings enough additional
revenue not only to break even(4% increase in revenue), but also enough to cover the
additional marketing expenses associated with Nectar.
What should he do to keep the other sponsors happy?
Nectar was adamant that the sponsors benefitted in four ways from participating
in the program. Lift, where Nectar collectors would spend more per transaction and
more frequently. Acquisition, the features that allow sponsors to identify those who were

not customers and offer incentives to convert them into customers. Retention,
Customers of the sponsor who were Nectar collectors would churn at lower rates than
non collectors. Up Sell, Nectar collectors could be offered incentives to purchase higher
margin products and services. More than 50% of points are earned in Sainsbury,
indicating a significant concentration risk, LMUK should seek to encourage collection
and therefore spending from multiple sponsors, not only because it pleased them, but
because data showed that the likelihood of a collector becoming dormant declined as
the number of sponsors patronized increased. Nectar enabled BP to gain 1% of growth
in market share, while it was also responsible for 9% increase in Barclaycard turnover.
Should Nectar contribute as it has been, there is no reason for the sponsors to not be
happy about.
What should he do to keep the collectors collect?
Sending regular update via email or other method of communication to remind
collectors about how much points they have accrued and the potential rewards they
might be able to redeemed. Encourage redemption of the prize, when collectors are
aiming to redeem a particular reward, they would likely to increase consumption and
spending to obtain the selected rewards immediately. Nectar should also provide
incentives in the form of points for new members to sign up and to inactive customers to
return.