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Loyalty Cards: A Competitive Weakness for World’s Largest Grocer?

By Jundong Song, songj@89degrees.com

Wal-Mart, the largest grocer in the world, does not run any traditional loyalty programs to enroll and reward customers for their loyalty. Will this prove to be a costly mistake?

Giving competitors an edge
Looking at Wal-Mart’s missteps in culling out non-performing grocery items and its fruitless struggle up- and cross-selling high-margin items beyond food, the answer is yes. Meanwhile, retail rivals can exploit this weakness by using their loyalty programs to enrich and mine their big data for targeted customer communications with accuracy, relevancy, and profitability, thus encroaching on Wal-Mart’s territory by stealing customers by one relationship at a time.

In the middle of 2009, Wal-Mart removed 10,000 slow-moving, “unprofitable” grocery items, roughly 20% of that category. Following that, its same-store sales dropped for nine consecutive quarters. Wal-Mart knew the drop was not a coincidence. The grocery clean-up was purely product-centric -- customer-blind -- ignoring individual items’ role in customer profitability. When profitable customers could no longer count on Wal-Mart for their favorite, trip-driving items, they came less or went to competitors for good.

But that misstep could have been avoided if Wal-Mart had the data offered by a loyalty card program. Wal-Mart does not lack customer data, but cannot tell who bought what and where, when, and how they bought. A loyalty card program would have collected those data elements and made them available for linking product items with individual customers. As such, items moving slow, but delivering customer profitability would have been easily identified and retained. Without the right data and customer intelligence, Wal-Mart ended up bringing back 85% of the removed items, only after all the damage was done. Unfortunately, the re-stocking was a “guesstimate” with no customer intelligence.

Looking for needles in the data haystack
Wal-Mart sells food cheap to draw footsteps. The plan backfires if shoppers buy food, but little else. And that’s what’s been happening. While the grocery contribution to Wal-Mart’s net sales rose to 55% in 2012 from 49% in 2009, high-margin apparel and entertainment’s shares have dropped to 7% from 10% and 12% from 13%, respectively. The dominant share of low-margin grocery in Wal-Mart’s revenue structure has led to erosion of Wal-Mart’s overall gross margin year-over-year decrease for all of the most recent eight quarters.

Wal-Mart recognizes the problem and has been working hard on up- and cross-selling. Among its hundreds and millions of shoppers, those with real shopping intention for high-margin non-grocery items at Wal-Mart are a small portion. Wal-Mart needs to sort out the right ones and give them a reason to shop there for clothing, as well as food. But that would require the kinds of data and marketing mechanisms that drive loyalty card programs – and Wal-Mart does not have the data, or a similar platform to collect and connect the data. 

Though Wal-Mart is housing a volume of customer data more than double worldwide Internet traffic and has earned a reputation for using customer data to perfect its supply chain operation, its sales transaction data has no memory of customers, those positively identified individuals linked to their Wal-Mart interactions for both purchases and other communications history. Transaction receipts, plus properly sampled customer panels are good enough if Wal-Mart cares only about baskets, inventory, assortment, merchandizing, supplier bargain, etc., the sort of backdoor and in-store operations calling for aggregated intelligence without differentiating individual customers. But, that’s far from enough if Wal-Mart seeks customer profitability through targeted customer communications.

Paying the price for off-target marketing
Wal-Mart has been slicing and dicing its customers, but has never been able to talk to individual shoppers with direct relevancy and addressability. Lacking data for targeted communications, Wal-Mart has been broadcasting promotions widely, though its true target has been up-selling and cross-selling to “price-sensitive affluents.” These indiscriminate promotions not only confused consumers, it undermined their low-price perception of Wal-Mart. This has proved to be such a critical error that Wal-Mart just launched a $2 billion price reinvestment to repair the damage.

So it seems clear that Wal-Mart needs to embark on a plan to institute a loyalty card or similar program for a targeted audience with relevancy and differentiation beyond EDLP. But it’s unlikely to happen.

Hurdles and clashes ahead
The hurdles facing Wal-Mart may be insurmountable. It has to collect, link, and accumulate a lot of correct data about customer profiles and behavior across channels and touch points at personal levels. Even putting the intrinsic conflict with Every Day Low Price (EDLP) and potential erosion of brand equity aside, the magnitude and potential risk of managing consumer privacy for hundreds and millions of shoppers will be enough to restrain Wal-Mart at least until the U.S. privacy legislations picture become clear.

Wal-Mart also has to deal with its low-cost culture. Envisioned by its founder and reflected in its history, Wal-Mart operates by offering one value for one customer – EDLP for the value seeker. The only value is price. Anything else – product, place, and promotion are costs to be cut for low price. Targeted marketing, coupon distribution, and message personalization all just add extra cost that is a burden to low price.

That strategy needs to evolve. Increasingly squeezed by dollar stores like Dollar General and eTailers like Amazon, as well as other retailers smart-marketing through loyalty card programs, Wal-Mart needs marketing innovation to capitalize on its huge EDLP-driven store traffic. So far, the giant retailer’s every move toward higher-margin categories has collapsed into pricing low price lower.

Wal-Mart’s inability to launch a loyalty card program represents a huge opportunity for rival retailers, in particular those who have survived Wal-Mart’s intrusion and have been running loyalty card programs. These rivals can leverage their programs as a data platform to capture and integrate multi-channel inbound and outbound communications and influence consumer decisions with customer intelligence relevant to individuals’ wants and their purchase cycles, shifting the battling focus from back door to front door to poach Wal-Mart customers whose only loyalty has been to price.

Jundong Song, Ph.D., is a partner VP of marketing intelligence and technology at 89 Degrees http://www.89Degrees.com, a next-generation marketing solutions provider that uses advanced analytics to drive better results for data-intensive marketers. He can be reached at songj@89degrees.com.

© 2014