Smartfuel innovation inside the AA Rewards coalition scheme

AA Rewards - New Zealand's number two coalition loyalty program behind Fly Buys - has struck a partnership deal with innovative loyalty start up Smartfuel. The deal means that AA Rewards points will disappear and the currency and rewards in the AA program will become accumulating fuel discounts.  AA Rewards members (and non-Members - see below) will now accumulate cents/litre discounts at AA Reward's participating retailers.  For instance a member might earn 3c/l at TelstraClear, 4c/l at Hammer Hardware and 10c/l at Take Note during the course of a week. This accumulates to a 17c/l discount when the member next fills up at BP or Caltex.

Non-members earn too

We first met Smartfuel early last year when they were building out a pilot of their program in Palmerston North.  The program launched on Monday of this week.  I spoke to Smartfuel's GM Ian Sutcliffe yesterday.  He said that not only was the current AA Rewards base going to benefit from this deal but those not paying an annual AA membership would also benefit (though at a lower rate).   This gives anyone the opportunity to participate.    

Ian Sutcliffe of Smartfuel 

Picture rights : MURRAY WILSON/Fairfax NZ

Richness, relevance

We know that members in the loyalty programs we operate improve their participation in the program in direct proportion to the increase in:

1. The richness of the rewards being offered  - the more you give back the more they'll spend with you, longer they'll stay a customer and more they'll recommend you
2. The relevance of those rewards  - the closer the rewards on offer are aligned with what they want, the harder they'll work to attain them.

Also - you have to have a match of both richness and relevance (one without the other will fail).  One criticism that's been leveled at Smartfuel is that the rewards are only fuel discounts and therefore will struggle on the relevance continuum.  That's possibly true but remember New Zealand has one of the highest rates of car ownership in the world so most people need to buy fuel regularly.  Looking at richness, Smartfuel seems to be offering more in some areas (not necessarily all) than comparable schemes.  For instance a WOF transaction at AA earns the member 30c/l discount.  With fuel at over $2.00, 30c/l off a $50 WOF is about a 30% discount.  Most retail programs offer less than 5% so this is pretty healthy.

Judging whether Smartfuel is rich enough or relevant enough may be missing the point though.  Their addition to AA Rewards program is a catalyst that makes the AA Rewards program far more valuable to their existing members and their existing retailers.

Education of the customer base

One of the big issues that Smartfuel is addressing is the education of customers into the accumulating portion of the program. Kiwis are used to collecting cents/litre offers from their supermarkets but not in rolling them together over 3 or 4 grocery visits into a single larger discount for their next petrol purchase.

Air New Zealand's Airpoints innovations (again)

Air New Zealand has recently delivered a comprehensive renewal of the Airpoints Dollars Frequent Flyer scheme. While it follows similar actions by Qantas Frequent Flyer in Australia it is a very Kiwi and innovative solution.

First mover - Qantas in Australia

Air New Zealand's new innovations follow moves in Australia by Qantas over the last 3 years. Qantas first signaled a partial listing of it's 5 million member Frequent Flyer Programme in 2008 which could have fetched it AU$1.5billion (for many airlines there's more money made in the frequent flyer scheme than in flying planes). The listing strategy was based in large part on Carlson Marketing's parent Groupe Aeroplan's success in Canada according to Simon Hickey - boss of Qantas Frequent Flyer in 2008. Qantas changed tack, held onto ownership of the Frequent Flyer programme, (which produces more profit than subsidiary Jetstar) and took it on an aggressive expansion drive.

Most frequent flyer programmes struggle with too many points being issued (typically by partners such as credit card companies and at a a compound annual growth rate of 10%) and not enough seats being available to redeem them (new planes add only 5% more seats to the global fleet per annum).

Qantas first addressed the redemption options from difficult-to-find-free-flights to include an online store stocked with merchandise and gift cards (full disclosure - we deliver this service for Qantas) and an any-seat, any-Qantas-flight redemption options. It then required all banks who were offering Qantas Frequent Flyer points on their credit cards along with other rewards to offer cards with Qantas Frequent Flyer points only (know as Direct Earn credit cards) - or not at all. Then last year it struck a deal with Woolworths Australia in which Woolies offered Qantas points to its shoppers and along the way added 700,000 new Qantas Frequent Flyer members.

The result? Depending on who you talk to either Qantas or FlyBuys is now the biggest and best loyalty programme in Australia. Either way - FlyBuys has a new attacker. And for Qantas it's a big earner : in the year to June 30, it generated underlying EBIT of A$328 million and now has a base of 7 million members.

Air New Zealand's strategy here

Air New Zealand didn't face the issues of limited seats being available for redemption in its Airpoints programme. In fact it could be argued that anything that got passengers onto it's planes was positive with the Centre For Aviation describing them as a "small airline getting smaller". The world first Airpoints Dollars innovation introduced a few years ago means any seat on any Air New Zealand flight could be bought with Airpoints (rather than the roughly 3%-5% of seats reserved per plane in other classic frequent flyer schemes).

Air New Zealand's advance in 6 steps

1. Flying on Air New Zealand flights had always gave customers Airpoints Dollars which could be redeemed for..
2. ...more Air New Zealand flights.
3. BNZ had long issued the GlobalPlus credit card on which customers earned even more Airpoints Dollars. ANZ (our client), Kiwibank and American Express have all issued new Airpoints Dollars credit cards over the last year.
4. Then recently - Air New Zealand enabled Fly Buys customers too to convert their Fly Buys points to Air New Zealand flights.
5. The really interesting piece has been the issuing of a new Airpoints membership card last month which is co-branded with Fly Buys by Air New Zealand. With this Airpoints card customers can now earn even more Airpoints Dollars (earned instead of Fly Buys points) at any of the Fly Buys merchants. This is a significant innovation and not one we've seen elsewhere. It's a collaborative local solution which is in contrast to the development of Qantas's programme in Australia.
6. The unexpected piece has been last week's release of an online Airpoints gift store. Airpoints Dollars can be used to buy goods and gifts from a $50 digital camera up to a $1,670 high end camera. Some goods are delivered in the same fashion as Fly Buys such as the new iPod Nano which must be picked up in store from Noel Leeming.

There are strong arguments in Australia to support the primacy of either Qantas Frequent Flyer or FlyBuys. In New Zealand - it looks like Air New Zealand's trumped them all.

There are no average customers

The Sydney Morning Herald carried an article entitiled "Consumers paying high price for loyalty card rewards". The article was based on research from Choice (most likely similar to New Zealand's Consumer magazine). Their research argued that shopper loyalty cards offer "little benefit to shoppers" and profiled the value the key grocery retail programs offered .

An average Australian shopper (according to Roy Morgan Research) spends a mere $156 per week.

To earn a $50 gift card in Fly Buys requires spend of $15,000 at Coles (or think New World in New Zealand). At an average shopper's purchase rate of $156 per week that would take 2 years.

It would be faster at Woolworths Everyday Rewards program (think Progressive Enterprises Onecard in New Zealand) with customers earning the same $50 gift card after $11,000 or 1 year and 4 months.

One could indeed argue that for the average customer a $50 gift card in return for either 1.3 (Woolworths) or 2 years (Fly Buys) worth of dedicated shopping may not be enough return. That's debatable and some of our data would say otherwise.

However the real issue here is the use of "Average". There are no average customers and loyalty programs serve to enhance differences, especially financial ones, between them.

The figure shows an extract from an actual retail program. The customer base is ranked from best (buys the most) to worst customer along the x axis. The y axis then shows total sales from these customers. It's clear that the first few customers produce significant sales and the bottom customers very little.

For instance - the customer base once laid out from best to worst - is then cut into 10 deciles of equal turnover. In this case total turnover is $44m and each of those deciles is worth $4.4m. The first $4.4m of sales (or Decile 1) comes from only 91 customers. Each spends $49,000.

The last $4.4m of sales (or Decile 10) comes from over 42,000 customers. Each of them spends only $104.

Looking at this distribution, different customers are treated differently and top customers get inordinate amounts of value. In return they provide inordinate amounts of sales.

Don Peppers responds

From Don Peppers: Just to clarify, what I said was that Coles (or any other retailer) should use a loyalty program primarily to bujild and maintain ongoing, one-to-one relationships with individual customers. Data is indispensable for this. Coles could continue with FlyBuys, but only IF the supplier were to make available to Coles all of the shopper data - and this is something I've been told either isn't possible or wouldn't be considered.

And yes, I was hired by Woolworths for a series of appearances this week and last. But I gave them the exact same advice more than two years ago. Whether my advice was influential or not, the fact is that they have now implemented a very good program. - @DonPeppers

"Coles Should Ditch FlyBuys" Loyalty marketing Guru Don Peppers

Loyalty marketing and customer strategy guru Don Peppers of the Peppers & Rogers Group described FlyBuys as ''trinkets and trash'' program that offers little value to the merchants or the shoppers. Peppers recommend that Coles Supermarkets in Australia exit FlyBuys and "get their own program".

Peppers & Rogers Group, which used to be a Carlson Marketing group company, introduced the marketing strategy of 1to1 10 years ago with their book "The One to One Future".

The Sydney Morning Herald reports on "Supermarket Sleuth" Peppers, who helped Coles competitor Woolworths with their new Qantas loyalty program partnership in Australia. Peppers readily admits that he is biased.

As we've discussed before - Peppers likens the supermarket and loyalty program battle that FlyBuys finds itself in to the experience of the UK market. Sainsbury's, who use a scheme similar to FlyBuys called Nectar, was overtaken as the leading supermarket chain in Britain by Tesco less than three years after Tesco launched its Clubcard scheme in the mid '90s.

Peppers said Coles should ditch FlyBuys and find a program that gives it control over customer purchasing data, otherwise it risks losing more market share to Woolworths.

''FlyBuys isn't the right program as they [Coles and teh other partners in FlyBuys] don't own the data,'' said Mr Peppers. ''It's just a trinkets and trash program. We pay you for loyalty and you know what, we don't pay you too much.''

The Sydney Morning Herald also reports [which we've discussed here] that Coles dumped the frequent flyer mechanism of FlyBuys this year so shoppers could accrue points and get discounts on their shopping.

Consumers told - don't let your shopping rewards program change your behaviour

A news item on Australia's 9 Network titled "Free Shopping Rewards Programs in Australia" (http://www.youtube.com/watch?v=bcXux06jNBQ) carried some comment from industry watcher Cannex.

The item reviewed Myer 1, Woolworths Everyday Rewards (and their Qantas partnership) and the Fly Buys programs. Cannex was interviewed and advised viewers not to let the various programs they participate in change their shopping habits. Specifically Cannex was talking about not shopping for more than you needed or paying more than you should. Sound advice.

But the fact that these programs do indeed change shopper's habits, albeit it in slightly subtler ways. Clearly none of these program providers would want their customers to buy more than they need or pay over the odds.

They do though want customers buy what they need from their own stores (rather than a competitor's) and also they'd appreciate customers paying full price on as many items in the basket as possible. The more successful the program - the more frequently these two things will be happening.

A new 800lb gorilla in Australian Loyalty gets into grocery

For many years Fly Buys in Australia was held up as a shining example of a coalition loyalty program. Along with Aeroplan in Canada and Nectar in the UK, Fly Buys was the top of the coalition program foodchain in Australia.

Now it seems Qantas Frequent Flyer is challenging that position. This month Qantas has tied up a deal with Woolworths' Everyday Rewards Program. Customers who spend more than $30 can earn a Qantas point for every dollar they spend in store over the initial $30. Shoppers at Woolworths who are not Qantas members today can get membership free through Woolworths Everyday Rewards (an $80 saving). Going forward the Qantas points for spend offer will also be available at other Woolworths group stores.

Richard Umbers of Woolworths told The Australian Financial Review that 300,000 new customers had joined Woolworths Everday Rewards program in the first month - a 10% growth of their registered customer base.

Coles have run a gift card promotion recently which garnered them 78,000 new Fly Buys customers to their base of some 8 million - a 1% growth.

Interestingly - the May Coles gift card promotion cleverly delivered an "on us" shopping reward. Customers earned Coles gift cards whcih of course turn into more transactions in Coles rather than Fly Buys points which turn into rewards transactions across the network of Fly Buys participants.

Australian Food News observed "the Woolworths-Qantas announcement does raise the interesting prospect of a winged EveryDay Rewards offer versus a flightless FlyBuys".

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.