What's the future for coalition programs?

Fly Buys in Australia is going through some changes as leading tenant Coles looks to take on its competitor's Woolworths tie up with Qantas Frequent Flyer.  Woolworths now has 2.7 million customers in its Everyday Rewards program while Qantas Frequent Flyer has 5.4 million members.  Their tie up is expected to come to market in the middle of 2009.

Woolworths customers will be able to earn points in the Qantas Frequent Flyer program.  The revamped Qantas Frequent Flyer program now offers more than just flights.  Since the middle of 2008, it has become a one stop shop offering merchandise, gift cards and experiences.for redemption.

 

In New Zealand, long time tenants of the Fly Buys coalition program Telecom and Ezibuy (who were part of the program when it launched in 1996) left the program in 2008.  Now Shell, which owns 25% of the Fly Buys company, is looking to sell it's stake along with 230 petrol stations and it's investment in the New Zealand refining Company at Marsden Point.  There are 4 shareholders of Fly Buys New Zealand; Shell, Foodstuffs (operator of New World), IAG (State Insurance and others) and BNZ. 

Arguably, Fly Buys customers spend more on food (Foodstuffs - New World) and more often than they spend on credit cards (BNZ) and insurance (IAG).  Even allowing for the host of other places customers might earn Fly Buys points, food purchases at New World must be a significant source of most customer's accrued points balances. 

New Zealand's other major supermarket group (about 50% market share) Progressive Enterprises has grown the chains at which it's competing OneCard earns discounts and points from Foodtown in the early days to incorporate Woolworths and now Countdown.   One of the potential buyers of Shell's quarter share in Fly Buys is none other than the owner of Progressive Enterprises - Woolworths Australia (according to ABN Amro Craigs broker Peter McIntyre on 14th May).

To keep this interesting, Shell New Zealand has the fuel discount offer (earn cents off per litre) with the Progressive Group.  

With such a lot happening to Fly Buys on both sides of the ditch, it's difficult to find any precedent globally that might be instructive for us.  The best I've been able to find is the long running battle between Tesco in the UK and it's rival Sainsburys.   

The Tesco Clubcard (the Grand Daddy of all grocery loyalty programs) might be likened to Progressive's Onecard program.  Points and discounts are earned by shopping in the store and convert to vouchers and coupons which the customer spends in the store.  New World's use of Fly Buys might be likened to Sainsbury's use of the Nectar loyalty program - a coalition program like Fly Buys. Points earned by shopping at any Nectar outlet convert to benefits like those in Fly Buys - gift vouchers, goods and other rewards.

Verdict Research in the UK believes that the Sainsbury's Nectar card has not worked well.  However their senior analyst Malcolm Pinkerton reckons with Tesco upping the stakes "That should change now"

Loyalty programs an imperative at the centre of Retailer's marketing

Retail loyalty programs have been around for a long time and to be quite honest - haven't advanced or developed much.  That's changing with players like Myer in Australia treating theirs as an asset that needs to be (a) sweated and (b) produce a return.

Its always been true that retail loyalty programs are the price you pay to get the customer data - it's what you do with the data that makes you money.   Unfortunately - too many retailers do very little with the data.  For some of them in New Zealand this may be because the competitive bar has been set relatively low.  For others - the strictures of belonging to one of the two major coalition programs in New Zealand (Fly Buys, AA Rewards) means they can't do as they wish with the data.

The bar has been raised in our region by Myer's relaunch of their Myer One card (and their much discussed move into financial services) and Woolworths Australia's Everyday Rewards and Qantas tie up.  Myer's scheme is more sophisticated than your average retail loyalty program and the results are impressive.  The Age reported that the 2.6 million members of the Myer One program account for 60% of Myer's sales.  In 2006 it was only 43%.  These are people it can promote offers to knowing with a high degree of confidence that they are (a) relevant and (b) going to be taken up at good margin.  Remember "Death before discounting".  For example - one retail loyalty program we operate in is 76% accurate in predicting when a shopper will return and spend again. Priceline in Australia is following Myer's lead and relaunched its program in November last year lifting members (now at 2.7 million).  It's still not at Myer's level with only 40% of sales through the program customers and program members having a basket size 30% above ordinary customers.

Are they an imperative?  According to Steve Ogden-Barnes of Monash University in Australia, retail loyalty programs are not only an imperative but "the bar's been raised in terms of expectations and industry practice".  

But there's also casualties.  With the bar having been raised and the retailers of Australia moving to catch up,  the reasons for not using the data (the program's the price you pay to get it) need to be addressed.  A new battle has begun with Coles looking to exit the FlyBuys program in Australia and replace the program with its own offering in-store discounts and benefits.  This is a classic closed loop program as pioneered and perfected by Tesco (Tesco set the bar for retailers globally many years ago and is about to lift it again).  

Coles is in a loyalty program race against Woowlorths who have tied up with the leader in the Australian market - Qantas Frequent Flyer points. Qantas have effectively trumped Fly Buys in Australia and even shareholder Coles will stop using Fly Buys.  (In New Zealand terms - Coles might be likened to New Zealand's New World currently offering Fly Buys who compete with Progressive Enterprise's supermarkets in Woolworths and Foodtown offering OneCard.).  

The race is on for customer data. 

Retailers - the difference between good and bad programs

Aberdeen Group has just published (with support from Carlson Marketing) a report that discusses the differentiation between a good retail loyalty program and a bad one (called Laggards in the report). 

This is a great yardstick to understand whether your program is doing all it should or whether your investment is being squandered.  

The headlines: if you have a retail loyalty program and you're not achieving, year on year increases of:

• 19%  - average basket value increase (the dollars spent by each customer on each shopping trip) 
• 16% - YOY lift in customer retention rate
• 5% - YOY decrease in customer attrition rate
  

...then you're not getting value for your investment (or more bluntly - you have a cost centre, not an investment).  Many of the retailer programs we analyse in New Zealand fall below these metrics and seem to have operated at this level for some time.

However - there's a number of simple steps to radically improving performance.  All of them flow from better using the data that already exists.   Start with financial requirements and make these aggressive.   How much do you want to grow sales by and how much do you want to improve your revenues over your costs?  Loyalty programs are there to grow profits; they're measurable investments that can compete on the P&L with any other investment.  They don't belong to the same family of marketing as brand building or advertising which have returns but not ones you can see in the financial statements.  

Once you know your financial targets  - roll down to the customer value proposition - what do you have to give customers to achieve the financial goals.  Be relentlessly mercenary - incentivise ONLY profitable behaviour.  

If a customer is already giving your business - don't incentivise them for that business.  Incentivise them to bring the next shopping trip to you - the one that they would normally have given to your competitor.  Offer points for uplift and points for growth. And offer points only for these if you're able to. This also suits a good financial model as the cost of the incentive comes out of the new margin earned and isn't a flat cost on the sales you already have.

Once you have these two factors nailed - its a simple matter to design the required business processes that will deliver the customer value proposition.  And once you know those - you know whether you have the assets internally to achieve your goals or whether you need an outsource partner to deliver.

Australia Round 3 - Direct Earn Credit Cards On Steroids - Singapore Airlines

Qantas's recently required that all the bank credit card loyalty program in Australia remove redemption to Qantas Frequent Flyer points as one of the redemption options in those programs.  Now - customers at Aussie banks can either redeem all of their credit card loyalty points into Qantas's Frequent Flyer program - or none.   Now - if Aussies want to earn Qantas Frequent Flyer points on their credit cards  - they have to sign up to do so exclusively and can't have any of the other rewards that the bank might offer.

NAB for instance no offers only airline co-brand cards (Direct Earn) with Virgin and Qantas. Singapore Airlines and Westpac Australia though have raised the stakes (and surely the costs)  with the new Platinum Westpac Singapore Airlines card.   

This has some seriously strong offers including including 10,000 points for the first transaction.  It has an Amex companion card (the de rigeur interchange defence strategy) that offers 3 points per dollar.  According to a posting on FrequentFlyer.com.au - "Certainly a decent card to get if you're a Singapore Airlines flyer anyway!"

 

Round 2 Australia - Credit Card vs Airline Loyalty Programs

In Australia - Qantas is the victor.  Qantas has seen a lot of press in the last 2 years with much of it focused on its Qantas Frequent Flyer program and the possibility of that being spun off.

Qantas has embraced a whole host of competitively priced non-air rewards options for its customers.  Most importantly though - it's engineered a showdown with the Aussie banks who were previously transferring points out of their credit cards programs into it's Frequent Flyer program.  Qantas no longer permit the transfer.  

Customers in these banks had to make an all or nothing choice which each of the banks had to enable.  For both choices customers are able to carry on earning points on their credit cards.  The difference is in the rewards - 

• Choice 1 - lose the option to convert credit card loyalty program points to Qantas's Frequent Flyer Program
  
• Choice 2 - retain the option to convert credit card loyalty points to Qantas's Frequent Flyer Program - but this is your only reward choice (a so called Direct Earn option) - so no more gift cards, merchandise and the like from the bank (you can now get them from the airline)
  

The difference in approach to this challenge from the Aussie banks has been interesting.  None have gone the Capital One route and completely eschewed an airline co-brand card (or Direct earn card). Most now have portfolios that offer Qantas Direct Earn (co-brand) cards and other cards on which they offer their own loyalty program. Some also offer Virgin Blue co-brands as well.  National Australia Bank (the owners of Bank of New Zealand) seems to have invented a new strategy that we didn't see played out in the American market.  Their's might be characteristed as teh opposite of Capital One - they're closing their own credit card loyalty program and going forward will only issue co-brand airline cards.

Only time will tell how well they fare.

Credit card programs take on Frequent Flyer programs

Its been some time coming but we seem to have a winner.  In the USA it's the credit cards companies, in Australia it's Qantas and in New Zealand the jury's still out.

The USA - credit card companies beat the airlines to have the best rewards offerings

In the USA, credit card providers have slowly but surely trumped the Frequent Flyer programs offered by the airlines.  The holy grail of rewards is the concurrent offering of travel (always a winner), merchandise, experiences, cash-back and gift cards.  

Airlines started owning the travel category and credit card programs transferred points into the Frequent Flyer programs.  But the airlines got lazy.  Customer's couldn't use the points when they wanted to and the points (over 7 years and according to Bain)  halved in value.  Only recently have airlines been forced to offer a valve to vent this accumulated Frequent Flyer points pressure (note the national carrier in New Zealand innovatively and transparently solved this problem a few years ago with Airpoints Dollars - a world first).  Many airlines now offer gift cards and merchandise along with enhanced "any seat" redemptions but only on their airline.

But in the background,  credit card companies have grown their offerings to include all the usual rewards suspects AND the capacity to redeem for Any Seat, on Any Airline at Any Time.  AND they still issue airline co-branded cards.  The figure below from Scott Hornick at last year's Frequent Flyer Conference tells the global credit card airline co-brand story.

Capital One doesn't do airlines co-brands and the value proposition comes out very clearly in it's excellent advertising campaign of 4 years ago.

More points being issued, each worth less

Analysis by consulting company Bain shows that average airline or airpoint has devalued significantly in the last few years.

The availability of seats on the airline for redemption, the increasing points required for each of these seats and then the reverse good news of reduced prices for each ticket means that thepoints accrued in 2000 and worth less than half their value today.   

And airfares are still coming down.  We have a host of airlines now crossing the Tasman to choose from (7 at last count including Aerolineas Argentinas, LAN, Jetstar, Pacific Blue, Qantas, Air New Zealand and Emirates) and trips to Aus account for 45%- 50% of our international travel. And, according to the Dominion Post – today’s international airfares are 65% of what they were last year (now $1,599 to London compared to $2,300 last year). And that’s 45% of what the same fare was in 1989 (20 years ago).

More and more – it makes better sense to buy your travel with cash rather than redeeming your points.

 

Frequent Flyers accumulate points for travel - but have to settle for merchandise and gift cards

Unhappy Frequent Flyers

Frequent Flyers are unhappy.  With the notable exception of the New Zealand carrier, they can't use the points for flights - the reason they were accumulating them in the first place.   Many airlines have addressed the problem by offering a release value for the pressue of points buildup - online shopping malls where points can be used to buy merchandise and vouchers.  Qantas is the biggest in our region doing this. 

Forget flights - give us something we can get

So customers are telling us that they want to use these Frequent Flyer points on something else as the Freddie Award analysis below shows.  51% of Frequent Flyers in this survey said that non-air (so, merchandise, gift cards etc) were very important or important as rewards in theprogram.

With this as the industry backdrop - Air New Zealand have become the global innovator.  They've opened up the whole of the plane on every flight to their Frequent Flyers in the Airpoints Dollars program.   That hasn't protected them from the global downturn though and their profit dropped 80% in the first half of 2009.

Frequent flyer points are now being issued 10 times faster than the capacity to service them.

Too many points - the redemption dilema.

Airline's Frequent Flyer programs have run up against a wall.  For the last few years, they have been issuing more miles or Frequent Flyer points than they have the capacity to service.  Craig Landry of Canada's Aeroplan (the Canadian equivalent of Fly Buys) called it the Redemption Dillema at last year's Frequent Flyer Program in Istanbul (at which Carlson were presenting as well). The figure below shows airlines points sitting in the accounts of travellers around the world (grey line) against the current numbers of seats and flights globally (orange line).  And airlines purposefully resrtict the number of seats on each flight that their Frequent Flyer customers can use their points on.With this as the industry backdrop - Air New Zealand have become the global innovator.  They've opened up the whole of the plane on every flight to their Frequent Flyers in theAirpoints Dollars program.   That hasn't protected them from the global downturn though and their profit dropped 80% in the first half of 2009.

That can't be a recipe for success.