The organic movement has touched a variety of products, including clothing, cosmetics and home products. Possibly the most emotive area is organic food, because food products are directly taken into the body while other products have a limited and external contact. 

In a sense, before the appearance of industrial agriculture and the application of synthetic nutrients and pesticides, all farming was organic. In fact, the traditional Sanjeevan system of India dates back several millennia. 

Even the existing organic farming movement has been around since its founding in Europe in the early-1900s. This was initially treated as fad and its proponents were seen as eccentric (at best) or insane. However, as damage to the environment and to human health became a bigger concern, organic farming emerged as the healthier option. 

Organic farming is based on the following fundamental premises: 

• a farm that uses natural rather than synthetic inputs throughout, from seeding (or insemination in the case of animals) to post-harvest
• methods that are sustainable rather than exploitative or injurious to the farm and its surroundings, with an emphasis on conservation of soil and water resources

The aim is to drive a more healthy approach all around – for the environment, for people, as well as for the animals and plants. 

The organic trade (all products) is currently estimated at over US$ 40 billion globally, with an annual growth of approximately US$ 5 billion. Organic production is driven today more by demand than by supply – in many cases supply constraints of certified organic produce is more of a concern than the market demand. 

Every year, increasing numbers of consumers consciously buy organic products regularly or occasionally on the basis that it is good for them and good for the planet. Certainly, true organic farms do not use synthetic materials, avoiding damage to the environment and can help to retain the biodiversity. Whether measured by unit area or unit of yield, organic farms are more sustainable over time as they use less energy and produce less waste. 

It is not as if, after decades of individual enthusiasts pushing their ideas from the fringes, consumers have suddenly become more environmentally conscious. This mainstream awareness has possibly been pushed up in recent years by the involvement of large companies which have spotted the tremendous growth of a profitable niche. “Organic” is the new speciality or niche product line that can be priced at a premium due to the greater desirability amongst the target consumer group, with potentially higher profits than inorganic products or uncertified products. Today, at least in the two largest markets (the USA and Europe), large companies have the lion’s share. For instance, statistics from Germany show that in 2007 conventional retail chains sold over 53% of organic produce, while specialist organic food retailers and producers lost share during the year. Similarly in the US, after the development of the USDA National Organic Standard in 1997, significant merger and acquisition activity has been visible.

However, as the interest in organic products has grown, so have the noise levels in the market. With that the potential for confusion in customers’ minds has also grown.

In day-to-day conversations, we tend to treat organic as superior to inorganic. But the reality is a little bit more complex.

For instance, we expect organic products to contain more nutrition and be better for our bodies. While this may be true of organic animal products compared to their inorganic counterparts, it has not been demonstrated for plant products, other than anecdotal experience of taste and appearance.

There are studies that suggest that inorganic farming can produce more crop per acre and more meat per animal, and is, therefore, the better option for a planet bursting with overpopulation. (Some proponents extend that argument to genetically modified foods as well, but let’s stay away from that for the moment.) 

However, there are also other studies that counter this argument by suggesting that the organic farms can end up being more efficient and productive in direct costs, yield and long-term sustainability. 

Then, the big question is: if organic foods are no better nutritionally than inorganic and could be as productive for the farmer, are organic brands just skimming the gullible customer while the going is good?

We might expect certification and regulation to clear the air, but in many instances these leave out as many things as they include. Labelling is yet another concern. Countries where labelling is more stringently monitored allow logos such as “100% organic”, “organic” (more than 95% organic ingredients) and “made with organic ingredients” (over 70% organic ingredients). In other countries logos and where labelling may be less strictly monitored, the use of the term organic is far looser and even more confusing. What’s more, the usage of terms such as “Bio” or “Eco” can also mislead consumers into believing that there is something distinctly superior about the product they are about to buy when, in reality, it is often only a marketing gimmick.

Further, just because something is certified as organic does not mean it is a higher grade of product. Organic produce may end up having a shorter shelf-life, or may also be otherwise inferior to inorganic produce in the store. In fact, as the KRAV (Sweden) website states: “The KRAV logo is a clear signal that the product is organically produced but does not say anything about the quality. That must be guaranteed by the producer, i.e. yourself”. This is similar to saying that the fact that someone has a management certification from a certain institute means that he or she passed the tests of that institute in a particular year, but that does not automatically make him or her a good businessperson.

Countries and regions that have a poor record of environmental consciousness, poor transparency norms, are also not seen as the best source for organic produce even if it is apparently from a certified producer. In some cases, certification may be carried out second-hand and unverified, leading to instances such as the one in 2008 where the US retailer Whole Foods pulled out pesticides-laden “organic-certified” ginger that was shipped from China. The mixing of inorganic ingredients of uncertain origin, especially in blended products such as juices or snacks, can also make a mockery of the organic labelling.

Another visible concern today is the carbon footprint, and some people raise the question whether buying local (whether inorganic or organic) may be less environmentally damaging than importing produce from distant countries. In such instances, the evidence of lax certification, such as the Chinese case mentioned earlier, takes support away from the cause of organic imports.

Arguments have also been raised about whether the larger “organic” factory farms merely follow the letter of the law rather than the principles behind the organic movement? Small organic farmers allege that large organic-certified factory farms – especially those selling animal products – do not really follow the core principles of “natural” growth, and confine their animals in unnatural surroundings. 

With all these arguments and counter-arguments flying about, some organic (or nearly organic) producers elect not to be certified, letting their customers vote with their wallets. Some of these smaller farmers may be driven by economic necessity since certification could be costly and cumbersome, while others may just find it more feasible to stick with a local sales strategy where the customers are able to physically see the organic nature of the farm. 

It’s clear that all of these questions will take years to sort out – through debate, research, legislation, as well as social and commercial pressure. Meanwhile, most conscientious retailers and concerned consumers will need to do their own studies to educate themselves, and will need to examine each product for genuineness of the organic promise.

And, if you are not quite that savvy, the final message would be: “caveat emptor” (“let the buyer beware”).

The Indian consumer market remains one of the most attractive and sustainable markets for international companies. It has even been described as a market of a lifetime by some, meaning that a brand can live through a whole lifecycle of decades if it launches in the market today. The last decade has made the Indian consumer even more visible and desirable to consumer goods companies from around the world.

So it is hardly surprising that many international food and beverage brands have entered the market in the last few years, either by appointing wholesalers as their distributors in the market or, occasionally, establishing a more direct presence through joint ventures or subsidiaries. 

These companies have been helped along by the growth of modern retail chains. These offer a familiar sales environment to most of these companies who sell through supermarket and hypermarket chains in other countries. 

However, the market presents international brands and their distributors with two challenges. 

First, the question whether they should stick to only selling through the more “organised” retail chains. If they do so, they could focus commercially on a limited number of larger business accounts, and service them efficiently as they do the large retailers in other markets. It would also provide them – in the Indian context – an upmarket environment where the display and promotional means allow a more premium positioning.

However, even the largest store chain has a limited footprint, while India’s vibrant mom-and-pop retailers form a much larger platform and continue to reach out to a much larger market than the modern traders. So by focussing on the chain-stores alone, international brands would miss out on the majority of the Indian consumers who do not have a chain store near them, or choose to continue shopping at the traditional stores. 

On the one hand you might think that it is logical to reach out to as many customers as quickly as possible. On the other hand, “foreign” equals “exotic” in the dictionary, which equals mysterious, interesting, glamorous and so on. So some of these brands actually benefit from maintaining an aura of exclusivity, and it helps if their distribution is limited. 

This challenge, therefore, needs to be addressed by each company specifically, keeping its brand and business objectives in mind.  

The second concern is more widespread and includes both the branded supplier as well as the retailer, whether chain-store or traditional mom-and-pop. It is a given that the international brand will share a store environment with local brands. Unless, of course, an international brand creates a separate exclusive branded store (easier to do in fashion and lifestyle products than in food and grocery), or it is only sold in stores which sell only foreign merchandise (of which there are very few).

So the second question is: in the shared retail environment, should the international brands be mingled with local brands and products, or should they be displayed apart from local brands? This question is relevant even if a brand is only present in the modern Indian supermarkets.

Prices of imported merchandise of international brands tend to be high, because the base price can be high to start with, and import duties and other costs push the price up further. So a popular option so far has been to bunch imported brands together at the retail store on one or a few shelves. The reasoning is that these are speciality products, expensive and with a limited consumer base. Shoppers who know about these brands will seek them out, and they are likely to also shop for other imported brands at the same time, so it makes sense to display them together. 

Some brands are happy with this display strategy, because it makes a clear statement that their brand is a premium “exclusive” brand, and it prevents a one-to-one comparison with lower priced local competitors.

However, brands that want to be visible to a wider set of consumers would be unhappy with this arrangement.  Their take would be that by bunching high priced merchandise together, the retailer is creating an area which becomes a dead zone that is avoided by most shoppers. Thus, a brand that could be otherwise sold to more consumers is forced to become a niche product due to the limited visibility.

Regular readers would know that our approach to creating or judging strategy is dogmatic only in one aspect: “to avoid the cookie cutter”. Whether you’re selling meat snacks, exotic meal packs, kettle chips or iceberg lettuce, multiple factors determine whether a particular international product should be segregated or displayed alongside local brands. And that strategy needs to be dynamic.

The first factor to consider is how familiar is the product itself to the customer frequenting the store. Let’s take an imported salsa as an example. In a location where the customers may not be familiar with Mexican cooking, it makes sense to not just display tortillas, salsa, sour cream and beans together, but also to offer samplers and give away recipes. While the salsa may be of an imported brand, the beans may be of an Indian brand, and the tortillas and cream may be from a local supplier. 

In this case, where each component of the meal originated is less important than the fact that the complete meal needs to be presented together to the customer. Putting the imported salsa with other imported products when most of them may not be sure how to use it does not encourage customers to buy it. 

In any case, as familiarity increases with time, the product may become more widely available, other international and national brands may also appear on the shelves, and segregation becomes a non-issue.

The tendency of the store’s consumer to compare and decide on the basis of price – as mentioned earlier – can also be an important factor. In some cases, the product may need to be insulated from this comparison, and placed in a defined area with other high-priced imported brands. In other cases, if the brand is strong enough to stand on its own, it could be placed in high-traffic locations with higher-volume lower-priced brands.

The overall store positioning and product mix have a very large role to play in the decision about segregation. If a supermarket has an upmarket catchment, and carries a higher proportion of premium products, intermingling may be the norm rather than an exception. The customer who is serving herself would probably find it most convenient to have the local and imported baked beans or olive oils displayed together. The price premium may even play to the imported brand’s advantage in such upmarket environments and catchments, conveying some form of qualitative superiority. 

If a store has a wide enough assortment of imported products which are significantly higher priced than local variants, then it may make sense to do an “international corner”. But for this to work, the customer base must already be reasonably aware of the individual products being sold. The international corner also needs to be kept fresh, with new brands and new varieties of product to keep the foot traffic alive and the products moving. Even then, “packaged solutions” and demonstrations are needed to maintain visibility.

Let’s understand one fact – people adapt exotica into their consumption culture so deeply until it you can’t differentiate between the local and the international. Indian cuisine would be incomplete without potatoes, chillies and mangoes. However, the varieties of all three crops available in India today are reported to have been brought from the Americas and west Asia a few hundred years ago. Among companies, Colgate, Vicks, Horlicks and Bata are all international brands that Indian consumers commonly accept as their own. 

Most international companies want to target the millions of Indian middle class households, but their pricing, distribution and retail strategy is too exclusive, conservative and totally contrary to this objective. 

Our suggestion would be: go out as wide as you believe is appropriate, because being invisible does no good to the brand. Put your exotica within the reach of the consumer, alongside competing local products. 

As long as you’re prepared to support the brand, and sustain efforts to encourage consumers to try the product, there would be a time when your brand is no longer treated as exotic. And that would be a good thing, if you’re looking for large numbers.

Delhaize and Unilever may not yet have felt the need to visit a relationship counseler, and of course, the jury’s still out on who (if anyone) will actually win in their battle.

For now, Unilever has lost shelf-space for around 300 of its brands at Delhaize stores.

Delhaize may potentially lose some of the sales that those brands got for it, in case consumers want a specific brand rather than a private label or a substitute brand.

The consumers lose not just in terms of their choice being reduced, but perhaps also in becoming confused about the specific value / benefits of competing products when the certainty of their customary brands is removed. Remember, brand loyalty is built on the predictability of a repeated experience over a period of time. If  you remove that factor from the purchase, each purchase becomes an experiment again, until a similar predictability is found.

(For those who missed the previous post, you can read it here.)

Referencing this battle, reactions to a discussion in at least one online poll on www.retailwire.com seem to favour retailers, or equally blame both retailers and suppliers. Only about a quarter of the respondents felt that retailers were not being fair. Considering that the respondent universe comprised of professionals from retail companies, suppliers as well as service providers, this seems to be a surprising result. Or perhaps not? Perhaps brands are no longer delivering a significant value to be able to command a premium over private label?

Some of the reactions from that discussion are reproduced below with permission from Retailwire.

 

• It’s hard for me to feel for both retailers and vendors when they obviously do what’s best for themselves, regardless of the long-term impact. In this case though, I would tell Unilever to go aggressive and pull all their lines from Delhaize. Then up the marketing of these lines with a cooperative marketing program involving the other retailers. Let Delhaize try to survive with shelves full of private label products and see how long they last. (Marc Gordon, President, Fourword Marketing)

• First, you seem to be talking more about Europe than the U.S. and that’s a different animal. However, given the universality of the question, I’d say first that the best and worst of people and companies come out during hard times. The best redouble their efforts to build meaningful long-term relationships with their trading partners. Unfortunately, it seems that most are simply trying to squeeze an extra penny or two out of the other. To your specific question–No! CPG companies are only starting to rationalize their portfolios. There are still way too many products out there simply for the sake of putting their name out there–not because the product moves. Some manufacturers are starting to cut back on their lines, but I suspect much more is needed. As to developing private label, what do you expect? Retailers have been copycating for years. But I think consumers have gotten wise to the fact that just because it looks like a brand doesn’t mean it has the same quality. And to any retailer who can’t do any more than copy, shame on them! (Len Lewis, President, Lewis Communications, Inc.)

• Fast moving consumer goods companies still need to rationalize brand portfolios in many cases, as so many retailers are finding higher profits in reduced SKU counts, without losing shopper loyalty. Depending on how this shakes out with specific retailer strategies over time, this may or may not make room for more local brands and niche players in some instances. Private label is a whole different animal today than it was even four or five years ago. The top tiers are not just inferior substitutes for national brands; they are national brand equivalents (or better) and widely recognized as such by consumers who are switching, and are not likely to come back. As for retailers copycatting, that’s always been a factor. Sometimes retailer behavior is outrageous, but there are laws protecting trade dress, etc., and branded manufacturers frequently litigate, and win. (Warren Thayer, Editor, Refrigerated & Frozen Foods Retailer, BNP Media)

• There is significant brand proliferation in FMCG. Think about cereal, ketchup, salad dressing or the myriad of other categories that have duplication on top of duplication. I led an industry-wide study that proved retailers could remove 12 – 18 percent of the actual SKUs from a given category (almost across the board) and not lose sales–in fact retailers will grow their sales (by unit volume and revenue). Consumers want true variety and differentiation – not the same thing in the same size. How many red ketchups in the 24oz bottle do you really need on the shelf? In many cases, there should be a couple of national brands and the store brands.
  The study also showed that the very large marketing dollars thrown at retailers to help promote products are in many cases not enough to cover all of the downstream costs and activities retailers engage in to accommodate duplication of brands. The inventory carrying costs alone are staggering. The FMCG companies will not want to hear this, but without fail, we found that there is too much duplication and with careful consumers, retailers should make sure they are offering the very best solutions for their customers while maximizing profits and opportunities. (Kevin Sterneckert, Research Director, Retail, AMR Research)

• How many shoppers (in the US, anyway) would drive out of their way to get Unilever soap? Probably not too many. Price, proximity and shopping habits are stronger than most CPG loyalty. Higher ticket items, like durables, and higher involvement categories like skin care, have more resilience. Retailers are understandably using the recession as a catalyst to drive sales of private label. Are they playing fair? Well, no.  Manufacturers are over a barrel, giving as much information as they can in order to stay in good standing with retailers. Further, some retailers have even used promotions that pull on national brand strength to promote private label. Publix Supermarkets ran a Buy-One-Get-One, where shoppers could buy a national brand (Thomas’s English Muffins) and get the Publix private label brand free. This drove trial – and presumably–conversion to their brand. No, they aren’t playing fair. The question for national brands is how to stay relevant and on shelf. (Liz Crawford, President, Crawford Consulting)

• Technology and collaboration should be helping to solve this problem, and it is a problem that existed before the current downturn and will continue when the recovery comes (hopefully very soon!!). If the retailer can show empirically that the new product lines do nothing to add to the profit mix, or worse do something to harm it, at the store, the supplier should yield and remove or not introduce the items. If the manufacturer can show empirically that the new product lines work to bolster the profit mix at the store level, the retailer should yield and add the items. This may be over-simplifying the situation, and there will always be exceptions, but without collaboration both retailers and suppliers are going to lose and the shopper will suffer as well. (Ron Margulis, Managing Director, RAM Communications)

• “SKU Rationalization” is a dangerous game…as the volume of sales per item does not necessarily reflect the impact to the brand as a whole. The push-pull of private label vs. branded product has been going on a long time and it’s not stopping any time soon. While it’s possible to create an apparel store built solely on private label merchandise, I don’t believe it’s possible in FMCG. All those advertising dollars have, in fact, made a difference. It’s also true that not all private label merchandise is create equal. I might be okay with generic canned food, but there are other products that have a distinct difference in quality. Q-Tips, Band-aids, some cheeses come immediately to mind. There’s a reason why book sellers carry slow movers. There’s a reason why apparel retailers buy a full compliment of colors, even if the percent contribution isn’t the same across all of them. Similarly, there’s a reason why FMCG retailers need to carry brands. It adds to their own brand credibility. (Paula Rosenblum, Managing Partner, RSR Research)

• I’ll take on whether retailers are “playing fair” by copy-catting national brands/morphing them into private labels: 8-10 years ago, I would have cried foul; these days, it’s par for the course. Yet another reason why vendors have to keep their innovation pipelines full or risk being one private label switch away from extinction. Think of your retailer knocking you off as the sincerest form of flattery (if you can bear it)! (Carol Spieckerman, President, newmarketbuilders)

• As indicated in the poll questions, there is sufficient blame on both sides. Retailers are dealing with manufacturers who force impractical line extensions through financial influence (incentives) detracting from a balanced category. Private Label is skimming the cream of category sales and threatening to take a disproportionate amount of shelf space. Private Label also can trade down category average pricing through poorly thought-out pricing schemes that do not reflect the market place. The extreme in either direction reduces the optimization of the consumer-centric effort we are all chasing. Manufacturers are the Mecca of product innovation. Private Label merely mimics. When we deviate from true innovation and the goal is to reduce the shelf space of competitors, everyone loses. The leap to Private Label is a result of cash-pinched consumers looking for a bargain. Private Label has a place in retailer strategy, but it should not be the entire strategy. Nor should the overwhelming ownership of space by a single brand. The premium or angel customers will continue to buy brands that exhibit the features and benefits of quality and consistency. Which customers do we want to develop as our base? Angel customers or bargain hunters? By lowering standards, quality and differentiation, we move into a downward spiral into Heck. Manufacturers must put forth innovation and quality as the model. Retailers need to maintain the balance in the categories that maintains a profitable mix of customers. It is about strategy and thinking beyond next week. Ask John Galt. (‘GMROI’)

• There were several reports on just-food.com last week out of the Consumer Analyst Group of New York (CAGNY) conference in Florida about what some of the bigger brands plan to do about rationalizing their portfolios. Some were particularly interesting and relevant to this discussion. As for the sub-debate about differences between the US and the ROW (rest of the world)–also very interesting and relevant especially when looked at in the context of globalization vs consumer preferences for locally produced food (a subject on which there is still much to be said as it cannot possibly be, in my view, an either or proposition). ( Bernice Hurst, Managing Director, Fine Food Network)

• For FMCG, a CPG firm must ensure they have a brand strategy to address the intended audience. Most will say they have that, but the truth is that they try to “cover the Earth” with a wide assortment to capture any and all consumers they can. In these economic times, there will tend to be even less “rationalization,” so to speak, since CPG firms will try to grab any demographic who is spending money.  Of course, regions vary in their propensity to embrace things like private label, however there are great examples across the globe of deep penetration of P/L, some of which have already been mentioned, and also Trade Joe’s in the US. P/L success has more to do with intentions of the retailer, rather than the line of products, specifically. (Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM)

• Where’s the data? Which consumers are buying which products? Which ones are not selling so well? Where’s the demand? Both sides can play the win-lose drama as long as they like and both will lose. (Camille Schuster, President, Global Collaborations, Inc.)

• Brands are the initiators of product and package innovation.
  • Until Private Label companies or a collaboration with retailers can fund research and development and spend back big dollars back against the brand, the brands will always have customers looking for their new products.
  • Retailers cannot give up the slotting fees that brands pay for shelf space. That is why many stores get more branded skus then they probably need.
  • I am not sold that manufactures can’t execute with creative accounting, “Brand partnership stores.” Retailers work on slim margins but as more retailers self manufacture there is AN opportunity to sell to yourself.
    (‘YOURBOYS’ )

About 7 months ago a spat occurred between the leading retail company in India Future Group and branded supplier Cadbury’s, with respect to margins offered to the Future Group. (A friend described it as a Bollywood saga.) Future Group had also previously had run-ins with other suppliers including the likes of Pepsi. (The previous post is here.)

Now there’s a European film noire sequel in the making, in a battle between the Belgian retailer Delhaize and European FMCG big daddy Unilever. Delhaize has suspended purchases from Unilever as, according to Delhaize, Unilever is making “unacceptable demands” that the chain stock more Unilever brands.

Like other branded suppliers, Unilever has obviously been impacted across Europe and the US as retailers have become more sophisticated in their approach to private label and squeezed out brands that they have been able to replace with their own products.

Given further weakening of the economic scenario, it is likely that consumers would switch to cheaper private labels offered by retailers, and retailers would be tempted to give over even more shelf space to their own labels where they get higher margins than branded products – a continually losing spiral for the branded FMCG companies.

According to a consumer survey carried out by an agency in Flanders in northern Belgium, apparently 31 per cent of shoppers polled were choosing to shop at chains other than Delhaize, and another 19 per cent were not happy with Delhaize decision (but there doesn’t seem to be indication yet that they would switch). Most of the customers who said they were remaining with Delhaize are either switching to other brands or to Delhaize’s own label products.

However this brawl ends, and whether it turns out to be a win-lose or a lose-lose situation, even this survey demonstrates that the retail store has the upper hand – less than one-third of the surveyed customers displayed their hard-core brand loyalty by switching to other stores.

That is obviously a worrying sign for branded suppliers who have invested humongous sums of money and decades of effort in developing their brands. But it also raises questions about whether the consumer is really perceiving any value out of the billions in advertising and millions of man-hours spent by the FMCG companies in developing the nth variation of toothpaste or detergent.

Tough times raise tough questions, and the ones that comes to mind are these:

• In recent years FMCG companies have rationalized their brand portfolios, but have they done enough?
• Are they really clear about the value the remaining brands are delivering?
• Are the retailers really playing fair when they build up so-called partnerships with suppliers, only to take on board the product learnings and then develop own-label copycat products (sometimes down to package colouring and graphics)?

What do you think?

A keystone of a retailer’s business is the loyalty that customers show in shopping at his or her store.

Loyal customers help to sustain a basic level of sales and reduce the need for expensive broadcast-style marketing spending that the store may otherwise have to do in order to keep the traffic and business flowing. This is as true for chain-stores as it is for independent mom-and-pop stores.

Therefore, as competition increases along with the number of stores selling the same products within a common catchment, retaining the loyalty of the customer becomes crucial, both in terms of strength of relationship (which is reflected in how much of the total spend the customer spends at the specific store) as well as the duration of the relationship.

In some parts of the more developed markets regulation may prevent the overcrowding of grocery stores and supermarkets. However, in markets such as India, one can see as many as four or five mini-supermarkets coming up on barely a kilometre along a busy street, before you even count the numerous kiranawalas. How can a store ensure a continued loyal custom from a certain share of that catchment?

Managers at modern chain stores may draw some comfort from studies which suggest that customers with higher incomes tend to be more “loyal” than customers with lower incomes. Since Indian chain stores tend to be targeted on high-income customers when compared to the traditional kiranawala, they may benefit from an intrinsically more loyal base of customers.

The variety of factors behind this “loyalty” may essentially boil down to the fact that with rising incomes the perceived benefit – lower prices, potentially better products or service – from comparing alternative stores may be outweighed by the perceived cost (time) of seeking these options and the personal adjustment involved in shopping in an unfamiliar environment. (Or, perhaps, to put it more bluntly: “rich customers couldn’t be bothered”?)

However, as the number of competing offers increases, promotional noise draws the consumer’s attention to benefits they might be missing out on, whether this is through flyers in the mailbox, kiosks set up near the consumer’s primary store, or even a full-blown ad campaign across multiple media. With every new offer or promotion, there is a temptation to try out an unfamiliar retailer.

This is more acute during recessionary times, when just about every competitor is shouting out deals to lure the customer to at least step into their store. And don’t think that high income customers are immune from the “toothpaste-discount” bait. During such times, whether they acknowledge it or not, everyone is down-shifting. It is at such times that loyalty is truly called upon. And it is also at such times when retailers start to think of loyalty schemes.

Most loyalty schemes are focussed on the objective of retaining existing customers through the use of incentives that are available only to loyalty programme members. They will ask a customer to provide some personal and contact information, and will provide some reference – a set of coupons to be redeemed during future purchases, or a card (index, swipe or smart) – that must be presented during subsequent transactions. In almost all cases, there is an attempt at getting the customer to return to the store because, as we all know, when we step into a store to redeem anything, almost without exception we end up shelling out more money than the redemption is worth. Since the value of the cash-back equivalent can be anywhere between 1 and 10 per cent (sometimes higher) customers are happy with the bribe, while the store is happy to ring up the additional sales.

However, it is surprising – or perhaps not – how many loyalty schemes turn into shams. In many such cases, the true benefits and the liabilities during the life cycle of the loyalty programme or of the customer’s relationship with the store have not been considered deeply enough. We all have multiple examples from our personal lives, which offer valuable lessons on such shambolic “loyalty schemes”. For instance:

• An oil company’s “membership card” that you pay for, whose points can never be redeemed because you never get the points statement nor a list of rewards, and the last time you see the card is when the petrol pump attendant takes it with the promise to check the status with the company.
• “Reward points” which offer a customer a second-rate bag or an uncertain brand of electrical gadget for points PLUS a cash amount that would be the equivalent of what you might spend with a pavement retailer buying a similar item.
• A credit card that looks attractive with discounts at certain merchant establishments, until you discover that someone who doesn’t hold that card is getting the same benefit even on cash payment.

Very often we find that a loyalty scheme has been conceived by an executive in charge of advertising to get the message out more cheaply (?) and focussed on a set of frequent customers. There is little link with the other parts of the operation, such as merchandising, store planning, or even promotion management, and certainly no influence. Thus, a second and potentially more powerful objective – using customer shopping data to tighten merchandising and improve the targeting of promotions – is virtually ignored.

Some companies have decided that managing a loyalty programme would offer lower benefits than the cost of maintaining the scheme, and decide to pass on the amount to the consumer directly in the form of lower prices. However, given the times, and the prospective goldmine of consumer purchase information that consumers willingly provide through such transactions (despite all vocal concerns about privacy) I would expect loyalty schemes to mushroom in the next few years.

The fact is, whatever our income levels, evolution has deemed that we become creatures of habit. Once a certain path has been followed successfully, a berry has been eaten safely, a transaction has been made satisfactorily, we are inclined to return to it again and again.

Trust, predictability and precedence are huge factors in developing loyalty, and when translated into the modern life of shopping (especially for food and groceries), this translates into the phenomenon that has been called first store (or primary store) loyalty. This can lead to as much as almost 70 per cent of grocery shopping being carried out at one store. Typically consumers will have a strong secondary store, and the balance grocery shopping would be split between multiple stores based on product availability, convenience and opportunity, deals and other factors.

But just because customers are genetically wired for loyalty to the familiar, the retailer should not treat this loyalty with contempt. Or even laziness. Because that can tip over the loyalty scheme into being a loyalty sham. And that is it only one letter away from “scam” – a dangerous label in these times of the consumer-activist.