2010 COLLOQUY RetailTalk White Paper

7/27/2019 2010 COLLOQUY RetailTalk White Paper

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M A R C H 2 0

talk

RetailtalkWhat Price Loyalty?The 2010 COLLOQUY Retail Loyalty Index

by Kelly Hlavinka

Partner, COLLOQUY

T H E A R T A N D S C I E N C E O F B U I L D I N G C U S T O M E R V A L U E

Published by:


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COLLOQUYta lk /03.10 WWW.COLLOQUY.COM

T H E 2 0 1 0 C O L L O Q U Y R E T A I L L O Y A L T Y I N D E X

Introduction

What is the reality behind recession-era retail customer loyalty? One answer you probablyalready know: Its rough out there. With jobless rates holding steady at an uncomfortable9.7% (U.S. Dept. of Labor, February 2010) and consumer confidence losing ground inFebruary thanks to the still-soft job market (Conference Board February 2010), no retailCEO can sleep easy and assume that building and maintaining consumer loyalty will besimple in this economic environment.

Two years ago, when we introduced the first COLLOQUY Retail Loyalty Index, loyaltymarketers worked within a significantly different retail landscape. The bottom had not yetdropped out of the global economyand price was not king in terms of driving loyalty.

Instead, customer service held court as the most important factor in the minds ofconsumers. Other important factors included store environment and product selection. Buta willingness to recommend a store to others had the highest correlation to strong consumerloyalty ratings for retailers. So, for the consumers COLLOQUY surveyed in 2008, low pricesdrove frequencybut other factors inspired brand loyalty.

Then, of course, the Great Recession took hold. With it came fundamental shifts in consumerbehaviorsincluding spending, saving, and shopping habits. All retailers have faced severeobstacles in this new environment, and for some, the struggle of the past two years has beenparticularly ugly. Marketers who continued delivering the same message the same waythrough the same channels measured by the same metrics faltered badly. What worked intimes of plenty did not work in the worst economic downturn since the Great Depression.

It is within this new retail reality that the 2010 COLLOQUY Retail Loyalty Index reveals one

particularly profound change that has taken place among consumers since the recession hit:The effect of low prices on professed retail loyalty. In fact, low prices have stepped up tobecome retails strongest loyalty lure, cited by consumers as a primary reason they nowremain loyal to retailerssomething which was simply not true in 2008.

Through either serendipitous or shrewd timing, one major retailer known for consistentEveryday Low PricesWalmartrebranded itself just as the recession began to deepen,assuming the slogan: Save money. Live better. The resulting bloodbath in the retail spacehas proven that low prices can drive frequency and professed consumer loyalty. Every DayLow Prices has become Everywhere Low Prices. However, given that there can only be onelow-price leader, what can other retailers do to acquire, retain, and win back customers?

The Loyalty Marketing Mix


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It remains to be seen how the economy will fare as we move into a new decade. Will we see a double-dip recession, as cautioned by President Obama? Or will the improved sales numbers enjoyed byretailers in the fourth quarter of 2009 hold steady in 2010, paving the way to increased consumerconfidence and spending?

In the first COLLOQUY Retail Loyalty Index, published in 2008, we talked about a move from the

Age of Frequency to the Age of Loyalty. The question on loyalty marketers minds: Does that stillhold true for the post-recession generation beyond the price wars? However the economic recoveryplays out, we believe that the Age of Loyalty is still upon us. And, retailers that have the rightcustomer-centric focus, goals and strategies in place will be the beneficiaries. Aggressive pricingstrategies and deep discount competition are simply not sustainable over the long-termso eventhose retailers that are competing heavily on that level must put other efforts in place if they wantto keep customers loyal for the long haul.

The 2010 COLLOQUY Retail Loyalty Index provides detailed data from a survey of 3,500 U.S.consumers and 3,500 Canadian consumers. This white paper will detail the U.S. results from ourstudy in which we covered U.S. consumers across five key regional geographic segmentsNortheast,Southeast, Midwest, Southwest, and Northwest. All respondents were surveyed across four retailcategories: Grocery, Personal Care, Department Store, and Mass Merchant.

Ranking the top retailers in the country according to customer loyalty ratings, the COLLOQUYRetail Loyalty Index offers a revealing look at the retail brands to which consumers claim the mostloyalty. In addition, its findings determine which factors consumers say drive their store loyaltyand identify the subtle differences in consumer definitions of loyalty related to store brands, retailcategories, and consumer segments.

In addition to providing retailer rankings for 2010, this years COLLOQUY Retail Loyalty Index pointsto some possible solutions for retailers, including the smart use of customer data and enterpriseloyalty strategies. For retail brands not headquartered in Bentonville, Arkansas, gaining competitiveadvantage and improving their loyalty index ratings in this new post-recession economy requiresfresh approaches to engaging and interacting with customers. The Great Recession has become theGreat Equalizerand loyalty marketers in the retail category must become both sophisticated andsavvy strategists if they want to stand out.


Aggressive pricing strategies

and deep discount competition

are simply not sustainable

over the long-termso

even those retailers that are

competing heavily on that

level must put other efforts in

place if they want to keep

customers loyal for the long

haul.


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Part I: The Lay of the Loyalty Landscape

The 2010 COLLOQUY Retail Loyalty Index reveals the slightly battered retail landscape as it existstoday, as the severe recession slowly recedes. It exposes not only the way sales have shifted to Walmartand other retailers with an Every Day Low Price (EDLP) business model, but also the shift in howcustomers define loyalty, moving toward a distinctly value-oriented bent.

Certainly, value was already on the minds of U.S. consumers in mid-2008, but the overall shoppingexperience also clearly drove customer loyalty ratings. Take Costco, for instance, which rankednumber one in three of four COLLOQUY Retail Loyalty Index categories in 2008.

Costco is certainly a value-oriented merchant, but it also offers an experience of excitement anddiscovery for shoppers. Costcos CEO has even spoken of his companys business model as a littlebit of surprise and delighta place where shoppers never know the bargains that might await them.Impulse buying based on a splurge-and-save mentality is nurtured: Upon seeing deep discounts,especially for purchasing in bulk, customers figured they ought to buy now rather than risk losingout on a great deal. They might save on their basket overall, but they also might spend more pershopping expedition than at another retailer.

But as job losses mounted and household funds dwindled in late 2008 and in 2009, customers

became less willing or able to invest in big-ticket purchases, even when deeply discounted. Formany customers, buying large lots (in the literal meaning of the word lots) of such everyday itemsas cleaners, foods, and toilet tissueeven when sale-pricedis not affordable or desirable whenmanaging a tight household budget. Costcos membership numbers were relatively flat through therecession, growing less than 3,000 total members from 2008 to 2009. (In 2009, Walmart dominatedthe warehouse and buying clubs retail segment with its share of market at 71.8%, compared toCostcos 18.7%.)

In our 2008 COLLOQUY Retail Loyalty Index, the demarcation line between consumer shoppingfrequency and consumer brand loyalty was quite evident. Walmart might have dominated infrequency, but a host of other brands held the hearts of customers. Two years later, recession-wearycustomers view their sense of loyalty differently. Walmart dominates the 2010 COLLOQUY RetailLoyalty Index, leading customer loyalty ratings in virtually every category.

When viewed overall, Walmarts decision to rebrand itself and change its mass advertising strategy

seems to be paying off. Families see themselves in Walmarts ads, saving more and living better,rather than a bouncing yellow smiley-face character. Moreover, the message of low prices and valueresonates with customers and leaves behind a feeling that Walmart is partnering with its customersto get them through difficult times. That sentimentand the data behind itmay play a major rolein Walmarts consistently strong COLLOQUY Retail Loyalty Index rating in 2010.

But dont count Costco or other Grocery, Personal Care, Mass Merchant or Department Storecompetitors out just yet. There are signs thatas much as Walmart may be using price rollbacks tokeep its customers loyalshoppers may also be hankering for the convenience of their localsupermarket or the customer-service offerings of other retailers. And the 2010 COLLOQUY RetailLoyalty Indexs regional detail indicates that companies that are implementing other strategies,including digital coupon offers, shopper marketing efforts, leveraging customer intelligence dataand building enterprise loyalty programs are holding their own against Walmart and its EDLP-focus.


In our 2008 COLLOQUY Retail

Loyalty Index, the demarcation

line between consumer

shopping frequency and

consumer brand loyalty was

quite evident. Two years later,

recession-weary customers

view their sense of loyalty

differently.


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Northwestorthwest

Northwest

MidwestidwestMidwest

NortheastortheastNortheast

SoutheastoutheastSoutheastSouthwestouthwestSouthwest

Northwest

statistics include

Alaska and Hawaii

(not pictured).

Part II: Regional Loyalty Ratings

The COLLOQUY Retail Loyalty Index measures customer loyalty across five major geographicregions: Northeast, Southeast, Midwest, Southwest, and Northwest. (The Northwest regionincludes Alaska and Hawaii, which are not shown on maps featured in this report.)

Our survey walked respondents through an exploration of their attitudes and perceptions aboutretail brand loyalty. We took them through the following steps:

First, we asked respondents to think about their own personal experiences withthe retailers at which they shopped most often in the past three months.

Next, we asked them to rank, on a scale of 1 to 10, their loyalty to each retailer; arank of 1 meant not loyal and a rank of 10 meant very loyal.

We then tabulated a mean average for each retail category and the store formatswithin each category. We compared only those retailers with a meaningfulsample size and frequency, slicing the data into the five regions detailed above.


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Retail Index 1: Grocery Retailers

As we noted in 2008, the U.S. Grocery sector is highly fragmented, with neither conventional nordiscount Grocery retailers operating nationwide. The largest category players are effectively super-regional operators who market to large portions of the American population through a variety of

sub-brands. This fragmentation gives Walmart an advantage because its distribution network andadvertising spans the entire country, giving it potential access to every U.S. household.

However, it is notable that three of the five regions featured other large players in the Indexs toployalty spot, including those who say they are focusing on more than just price. For example,Midwest-leader Kroger has proven its ability to use loyalty programs to acquire and retaincustomers and focuses on customer-centric efforts through data analysis. In a recent speech,Krogers CEO insisted that Kroger offers a better overall shopping experience than Walmart orother price-focused discount competitors, saying the chain tries to make sure price is not adeterrent to shoppers but focuses on clean stores, speedy checkout lines, helpful employees and abetter assortment.

Exhibit 1Retailers Ranked by Purchase Frequency and Reported Loyalty, by Region

Most Frequent Index Leader Index Index Leader

Northeast

Grocery Walmart Walmart 9.1 Safeway

Personal Care Walmart Walmart 8.8 Costco

Department Store Walmart Walmart 8.3 Costco

Mass Merchant Walmart BJs Wholesale Club 8.5 Sams Club

Southeast

Grocery Walmart Publix 9.0 Costco

Personal Care Walmart tie->Walgreens/Walmart 8.5 Costco

Department Store Walmart Target 8.5 Walmart

Mass Merchant Walmart Costco 8.7 Meijer

Midwest

Grocery Walmart Kroger 8.8 Safeway

Personal Care Walmart Walgreens 8.7 Costco

Department Store Walmart Walmart 8.5 Costco

Mass Merchant Walmart Meijer 8.6 Big Lots

Southwest

Grocery Walmart H-E-B 9.1 Costco

Personal Care Walmart Walmart 8.6 Walmart

Department Store Walmart tie->Macys/Walmart 8.6 Walmart

Mass Merchant Walmart Costco 8.8 Costco

Northwest (Includes Alaska and Hawaii, not pictured.)

Grocery Safeway Walmart 8.5 Albertsons

Personal Care Walmart Walmart 8.5 CVS

Department Store Walmart Costco 9.1 Kohls

Mass Merchant Walmart Costco 9.3 Costco/Sams Club

Source:2010 COLLOQUY Retail Loyalty Index study vs. 2008 study; n = 3,500Questions:From which [category of retailer] do you purchase [products in category] most often? (Please select one only.)Thinking about the retailer [in each category] that you use most often; how "loyal" would you say you are to each?Please use a scale from 1 to 10 where 1 means "not at all loyal" and 10 means "very loyal".

2010 Results 2008 Results


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The Southwest loyalty leader was H-E-B, which, while it lacks a formal loyalty program for allof its stores, has continued a successful six-store membership-based loyalty pilot in the Waco,Texas area calledH-E-B Points Clubwhich provides useful data the retailer can take advantage ofthroughout the company. The Southeast was topped by Publixwhich, while vocal about its choicenot to collect transactional data on customers and does not offer a discount or club card, has usedits own internal research and shopper marketing tactics to continue to sharpen its focus on

customer service.

Most grocersnearly 50% of the major U.S. grocery chainscontinue to rely on two-tier pricingdiscount programs to collect customer data and cultivate customer loyalty. Because of the modelsubiquity, customers have become accustomed to itdespite their vocal distaste for the tactic.However, more and more grocers are shifting towards other value-based options, including fuel-based rewardssuch as Krogers Fuel Points program and the many grocers deployingfuelperks!,including Giant Eagle, Winn-Dixie, Bi-Lo and Ukropsas well as new online or mobile couponapplications, including Safeway, ShopRite, Pathmark and Food Lion.

Perhaps our favorite example of the loyalty-equals-value trend is the Top Connection loyaltyprogram tested in 2009 by a small grocery chain, Haggen, based in Bellingham, Washington.Instead of scanning a card to get discounts at the register, Haggens token, which carries an RFID-chip, keeps track of what shoppers buyand if a product goes on sale within a week, Haggen

refunds the difference to the shoppers reward card, along with a 1% reward.

Exhibit 2 shows regional ranking by purchase frequency and reported customer loyalty. (Statisticalties are listed in alphabetical order.)

Exhibit 2Grocers Ranked by Reported Loyalty, by Region

Rank Index Leader Index

Northeast

1. Walmart 9.1

2. (tie) ShopRite 8.9

2. (tie) Stop & Shop 8.9Southeast

1. Publix 9.0

2. Kroger 8.9

3. Walmart 8.7

Midwest

1. Kroger 8.8

2. ALDI 8.4

3. Walmart 8.3

Southwest

1. H-E-B 9.1

2. Frys 8.9

3. Walmart 8.8


1. Walmart 8.5

2. (tie) Albertsons 8.4

2. (tie) Safeway 8.4

Source:2010 COLLOQUY Retail Loyalty Index study; n = 3,500Questions:From which retailer do you purchase groceriesmost often? (Please select one only.)Thinking about the retailer that you use most often for groceries; how "loyal" would you say you are to each?Please use a scale from 1 to 10 where 1 means "not at all loyal" and 10 means "very loyal".

2010 Retail Index

Most grocersnearly 50%

of the major U.S. grocery

chainscontinue to rely on

two-tier pricing discount

programs to collect customer

data and cultivate customer

loyalty. Because of the

models ubiquity, customers

have become accustomed to

itdespite their vocal

distaste for the tactic.


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Walmarts dramatic siege on customer loyalty is less dominant in the Grocery category than it is inthe other categories, yet is clearly evident in its rise from fourth- or fifth-place finishes in allregions in 2008 to third- and first-place finishes in 2010. And the retailer looks set to improve onthose rankings with its recent move to drop grocery prices. When word of the new cuts went publicon March 19, 2010, the threat to other grocery retailers led Standard & Poor's Food Retail Sub-Industry Index to close down 2.2 percent.

Northeast: The top grocers in 2008 (Safeway, ALDI, Costco) slipped from the topthree this year. Walmart shot from a fifth-place tie (with Giant Eagle) to the top oflist in 2010, followed by two groceries in a dead heat for second place, Stop & Shopand ShopRite.

Southeast: Publix moved up to first place from its second-place showing in 2008.Walmart moved up to third place after a fifth-place tie (with ALDI) in the previousIndex.

Midwest: Kroger moved up three spots from its 2008 fourth-place finish, whileALDI finished in second place. Walmart advanced to the number-three spot from2008s fifth place.

Southwest: In this region, H-E-B ranked first in retail loyalty (up from third in2008) and replaced Costco in the top spot, while Frys ranked second. Walmart,

third in 2010, was fourth in 2008.

Northwest. Only slight shifts were seen here, with Walmart the loyalty leaderand Safeway and Albertsons (the 2008 leader) tied for second place.

Retail Index 2: Personal Care Retailers

The largest Personal Care retailers have continued to expand, saturating many regions, but anational loyalty strategy eludes most of these chains as of the date of this white paperwhich webelieve has opened the door for Walmart to make significant inroads in this sector. Walmart leadsin loyalty in four of five regions, while in 2008, the retailer barely made the top three ranking. Still,several retailers are holding steady in the top rankings, proving that Walmart still has to watch itsback in Personal Care.

For now, CVS is the only major Personal Care store operator with a successful national loyaltyprogramthe sophisticatedExtraCare programand it has made significant inroads in terms ofloyalty leadership. Walgreens, too, has a strong loyalty ranking in several regions, perhaps thanks toits significant expansionover 7,000 stores and countingas well as an overhaul of its disparateregional efforts in early 2009. Walgreens CEO also recently announced the development of a newnational loyalty strategy and a rollout of new open and colorful customer-centric store formats,slated to roll out to 2,500-3,000 stores from around 700 now. In late 2009, Rite Aid announcedits wellness+ rewards program in four markets: Buffalo, New York; Greensboro, North Carolina;Harrisburg, Pennsylvania: and San Diego, California. Rite Aid also has an RX savings card program

with more than 4.3 million members.

One top scoring surprise is H-E-B, which propelled itself into the Southwest top three in terms ofloyalty ranking even though it wasnt even in the top five in 2008. As we mentioned in the Grocerycategory, H-E-Bs strong focus on value and customer serviceas well as a loyalty program pilot

from which the retailer gleans important datahas helped it maintain a loyal following in the Texasregion.

Walmart leads in loyalty in

four of five regions, while in

2008, the retailer barely made

the top three ranking. Still,

several retailers are holding

steady in the top rankings,

proving that Walmart still has

to watch its back in Personal

Care.


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Exhibit 3Personal Care Retailers Ranked by Reported Loyalty, by Region


Northeast

1. Walmart 8.8

2. CVS 8.6

3. Rite Aid 8.3

Southeast

1. (tie) Walgreens 8.5

1. (tie) Walmart 8.5

2. (tie) CVS 8.2

2. (tie) Publix 8.2

3. Kroger 8.1

Midwest

1. Walgreens 8.7

2. CVS 8.6

3. Walmart 8.5

Southwest

1. Walmart 8.6

2. H-E-B 8.4

3. CVS 8.3


1. Walmart 8.5

Source:2010 COLLOQUY Retail Loyalty Index study; n = 3,500Questions:From which retailer do you purchase personal careitems most often? (Please select one only.)Thinking about the retailer that you use most often for groceries; how "loyal" would you say you are to each?Please use a scale from 1 to 10 where 1 means "not at all loyal" and 10 means "very loyal".

2010 Retail Index

Northeast:Walmart, CVS, and Rite Aid take the top three slotswith CVS being newto the list in this region. The 2008 leader, Costco, failed to make it into the top three.

Southeast: In the highly competitive Southeast region, Walmart is in a dead heatwith Walgreens, which in 2009 also narrowly edged out CVS in total marketshare (27% to 26%, respectively). CVS and Publix are tied for the second-placeranking. Customer-centric Kroger finishes the pack, ranked third. Again, the2008 leader, Costco, failed to make it into the top three.

Midwest: In the Midwest, three leaders are in a tight race for the top loyaltyranking. Walgreens claimed the best ranking, moving up two spots from 2008and displacing the former number-one loyalty ranked company, Costco. CVS

wasnt even in the top five in 2008, but advanced to a second-place ranking incustomer loyalty. Walmart received the third-place ranking, but only by two-tenths of a percentage point.

Southwest: In this region, the big news is H-E-B making the top three. Theregional retailer wasnt in the top five in 2008. Walmart maintained its number-one ranking, and CVS moved up one spot into third place.

Northwest: Here, Walmart stands alone as the COLLOQUY 2010 Retail LoyaltyIndex Leader. No competitor even came close enough to rank in leadershipstandings. Thats quite a move from fifth in 2008.


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Retail Index 3: Department Stores

The increasingly blurred distinction between Department Store and Mass Merchantwe allowedconsumers to rank retailers in the category they deemed most appropriate based on their shoppinghabitshas resulted in Walmarts domination in both categories as a 2010 COLLOQUY Retail LoyaltyIndex Leader. Traditional department stores have been particularly hard hit by the recession: Macys

and Kohls are the only traditional department stores to make the top three rankings in any regionin 2010, while JCPenney and Dillards dropped off after appearing on our list in 2008.

So what is a traditional department store to do? First of all, from a loyalty program standpoint, moststill rely on programs using only a private-label credit card (PLCC) and/or a co-brand card. That meansthe stores value proposition is reaching only a fraction of their best customerseven for a programlike Macys, which has been very active in evolving its efforts over the past two years. JCPenney didlaunch theJCP Rewards program in August 2008, which allows customers to possibly earn rewardseach month, but then their point balances reset to zero at the end of the monthhardly an equationthat will please customers long term. And the program has not stemmed JCPenney's slide out of thetop three in the Northeast and Southeast in 2008.

It may be time for traditional department stores to learn from other retail categories: should theyexpand their efforts to a multi-tender loyalty solution, making their PLCC or co-brand the acceler-

ator to earn even more?; should they harness partnerships to create a more robust value proposition, asSaks has begun to do with their assortment of soft benefit partner benefits?; and, perhaps, is now isthe right time for them to take advantage of customer-specific data to create more relevant pricing andmerchandising mix optionsjust as Woolworths in South Africa and Shoppers Stop in India have done?

Exhibit 4Department Stores Ranked by Reported Loyalty, by Region


Northeast

1. Walmart 8.3

2. (tie) Kohls 8.1

2. (tie) Target 8.1

3. Macys 8.0

Southeast

1. Target 8.5

2. Walmart 8.3

Midwest

1. Walmart 8.5

2. Meijer 8.3

3. Target 8.1

Southwest

1. (tie) Macys 8.6

1. (tie) Walmart 8.6

2. Target 8.2

3. Costco 8.0


1. Costco 9.1

2. Walmart 8.1

3. Target 7.9

Source:2010 COLLOQUY Retail Loyalty Index study; n = 3,500Questions:From which department store do you purchase from most often? (Please select one only.)Thinking about the department store that you use most often; how "loyal" would you say you are to each?Please use a scale from 1 to 10 where 1 means "not at all loyal" and 10 means "very loyal".

2010 Retail Index


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Traditional department stores have been battered by Walmart and Target as the recession has takenhold. Those two retail giants claimed the largest market share in the category in 2009. JCPenney,Kohls, Dillards, and Macys were in the top rankings in COLLOQUYs 2008 Retail Loyalty Indexstudy, but of those traditional department store brands, only Macys and Kohls are in the top threerankings this yearand then in only two regions.

Northeast:Walmart came in first in the rankings, while Kohls and Target tiedfor second and Macys came in third. In 2008, Costco led, followed by Macysand JCPenney in a tie.

Southeast: Target leads here, while Walmart came in second place. JCPenneyand Dillards lost their previous ranking. Costco is new to the list in this region.

Midwest:Walmart took the top ranking in frequency and loyalty. Meijer and Targetwere second and third in both categories, respectively.

Southwest:Walmart is tied with Macys for the number-one spot in the Southwest,where both also racked up a 47% rating for frequency. The only change herefrom 2008 is Macys moving up to a tie.

Northwest: Costco, Walmart and Target finished in first, second, and third place,respectively. Previously ranked Kohls and Dollar General didnt make this

years cut.

Retail Index 4: Mass Merchant Retailers

It comes as no surprise that Walmart crushes the competition in frequency for this category. But interms of the loyalty index ratings, the landscape is more competitive, including strong showings fromTarget, BJs Wholesale Club, Meijer, Costco and Sams Club. Some familiar names, such as Searsand Big Lots, have fallen from the top three spots.

Of course, the membership clubssuch as BJs Wholesale Club and Costcorely on a fee-based modelthat hooks customers into coming back with a small rebate layered on top. Target offers multiple

versions of itsREDCard rewards program: a Target Visa usable wherever Visa is accepted, and twointernalREDCardsa Target PLCC and a Target check card. These cards are usable in both the TargetRewards andPharmacy Rewards programs. The retailer recently took technology to a value-based level,

debuting a scannable mobile coupon program that allows customers to receive exclusive offers ontheir mobile phones and redeem them by scanning a barcode on the phone at the checkout counter.

However, theres no significant evidence of any of these retailers using the data from theircustomers to enhance their customer relationships, something we believe is a missed opportunity.In the long term, mass market retailers who want to compete against Walmarts low-price modelmust emerge as leaders in some other area that encourages customers to return again and again.

We think customer-centric retailingusing what you find out about your customers to target themmore personally and appropriatelywill be the key to long-term success in this category.

Traditional department stores

have been battered by

Walmart and Target as the

recession has taken hold

those two retail giants

claimed the largest market

share in the category in 2009.


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Northeast: BJs Wholesale Club wins the top loyalty ranking while Walmart andTarget follow behind. In 2008, the top three were Sams Club, Big Lots andDollar Tree.

Southeast: In this region, Costco tops the list in loyalty ranking, with Target andWalmart ranking second and third. Again, last years top three slipped backMeijer, Dollar Tree and Sears.

Midwest: Here, consumers ranked Meijer, Walmart and Target in the first,second and third place in loyalty. Target is the only repeater, maintaining itsthird position.

Southwest: In terms of loyalty measurement, Costco is first, Walmart second,

and Target third. Costco repeats at the top loyalty position, while Walmart andTarget displace Sears and Dollar Tree.

Northwest: Though Walmart leads in frequency in this region, Costco takes firstplace in loyalty rankings, followed by Walmart and Target. In 2008, Costco andSams Club tied for the top slot, and Big Lots rounded out the list.

Exhibit 5Mass Merchant Retailers Ranked by Reported Loyalty, by Region


Northeast

1. BJs Wholesale Club 8.5

2. Walmart 8.2

3. Target 7.8

Southeast

1. Costco 8.7

2. Target 8.6

3. Walmart 8.4

Midwest

1. Meijer 8.6

2. Walmart 8.4

3. Target 8.2

Southwest

1. Costco 8.8

2. Walmart 8.5

3. Target 8.3


1. Costco 9.3

2. Walmart 7.9

3. Target 7.4

Source:2010 COLLOQUY Retail Loyalty Index study; n = 3,500Questions: From which mass merchandiserdo you purchase from most often? (Please select one only.) Thinking about the mass merchant that you use most often; how "loyal" would you say you are to each?

Please use a scale from 1 to 10 where 1 means "not at all loyal" and 10 means "very loyal".

2010 Retail Index


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III: A Recession-Era Shift in Retail Loyalty

For years, small independent and mom-and-pop retailers have complained that when Walmart strodeinto their towns, their businesses crumbled due to competition they couldnt overcome. Larger,established retailers have been battling Walmart for the past decade or so at the sales register, buthave managed to hold on to customers loyal to their brands. However, with the recession acting like

a second-stage booster rocket, Walmart has upended the status quo among its national retail peersby chewing into their last remaining frontier customer-professed loyaltyat least for now.

Exhibit 6 illustrates the dramatic shifts in what were previously longstanding factors cited bycustomers to describe why they were loyal to one retailer over another.

We asked customers the following: Many consumers such as yourself talk about being loyal to aretailer. Think about a specific [retail category] you purchase from that you might describe yourselfloyal to. What made you loyal to that retailer?

Responses to this question were strikingly dissimilar from those given just two years ago. Acrossthe board, we see that low prices currently drive loyalty to retailers in all categories, followed byrather than led bycustomer service and product quality. This is a huge distinction and a fundamental

change in customer beliefs. Moreover, many retailersnot just Walmartare redefining the meaningof low price. They have redefined their brand accordingly, and emphasize in marketing messagingthat low prices arent about being cheap. Rather, the message is that seeking low prices is aboutbeing smart and getting more for your family.

This shift in messaging resonates with customers, and is likely to continue to be meaningful andhighly effective as both a sales driver as well as a loyalty builder. As we discussed in a recent COLLOQUYarticle, Dear Prudence [Vol. 18 Issue 1], its clear that at the beginning of a new decade, restraintrules for todays consumer.

However, based on the 2010 COLLOQUY Retail Loyalty Index, we must also note that cheap is nota term most associated with the new economy. Instead, consumers seek significantly more value forthe dollar spent and preferably a value-added experience. In all studied verticals, Quality Productsrose in consumer loyalty-factor rankings. Embracing an age of new frugality is viewed by many

customers as a positive change. It may be that when customers say they value low prices over customerservice, perhaps they also mean they have adopted value as a new synonym for low prices.

Source:2010 COLLOQUY Retail Loyalty Index study; n = 3,500

Question:Many consumers such as yourself talk about being loyal to a retailer. Think about a specific [retail category]

you purchase from that you might describe yourself loyal to. What made you loyal to that retailer?(Coded, open-ended response. Frequency of response was used to determine the rank order.)

Rank

1

2

3

4

5

2010

Low Prices

Customer Service

Quality Products

Wide Selection

Location

2008

Customer Service

Low Prices

Wide Selection

Location

Quality Products

Grocery & Personal Care

Rank

1

2

3

4

5

2010

Low Prices

Customer Service

Quality Products

Wide Selection

Location

2008

Low Prices

Wide Selection

Customer Service

Quality Products

Not Loyal

Department & Mass Merchant

Rank

1

2

3

4

5

2010

Low Prices

Customer Service

Quality Products

Wide Selection

Location

2008

Customer Service

Low Prices

Wide Selection

Quality Products

Not Loyal

Specialty Retail

Exhibit 6Consumer-Reported Factors of Loyalty to a Retailer, by Retail Category

With the recession acting like

a second-stage booster rocket,

Walmart has upended the

status quo among its national

retail peers by chewing into

their last remaining frontiercustomer-professed loyalty

at least for now.


14/20


Walmarts advertising was ahead of this trend and its messaging is spot on. The retailers television

commercials are replete with happy families of all socio-economic walks of life, all experiencingthe happy times enabled by their relationship with Walmart. Thats a vastly different message froma yellow ball bouncing through a Wal-Mart store back in the days when the chain name washyphenated.

Study after study, including the 2010 COLLOQUY Retail Loyalty Index, shows that all consumers aremore cautious and anxious as a result of the recession. They are making significant changes in theirhouseholds, many of which they view as positive and worthwhile. Unlike previousand much shorterand shallowerrecessions, virtually every customer segment has been touched by the severe economicdownturn we have experienced over the past two years. In fact, the only customer segment thatdiverges from the new frugal mentality is, not surprisingly, the Affluent segment (male and femalerespondents who are heads of households with annual household incomes of $125,000 or greater).This group holds fast to the former paradigm of customer service over low prices. According to the2010 COLLOQUY Retail Loyalty Index, the Affluent is the only segment that does not rank low

prices as the number-one factor of loyalty to retailer types; rather, this segment continues to rankcustomer service as the primary driver of their loyalty.

How the New Loyalty View Affects Retail Marketers

Interestingly, our survey found that other than the issue of price, most of the factors customers citeas demonstrating loyalty to a given retailer remained virtually unchanged from the 2008 Index. Theseinclude years with the retailer, staff quality, store familiarity and location. In describing thesequalities, respondents were not asked to consider their own behavior or to think about a particularretailer. Instead, we asked them to consider a hypothetical retailer and react to various vignettes thatdescribed eight ways a consumer might demonstrate loyalty.

Exhibits 8 and 9 detail respondent rankings from both the 2008 and 2010 Indexes.

Exhibit 7Consumer Attitudes About the EconomyU.S. General Population

Source:2010 COLLOQUY Retail Loyalty Index studyQuestion:Considering the state of the U.S. and Global economy, please indicate how much you agree or disagree with

each of the following statements.Scale of 1 to 5. Top box (Strongly Agree) shown; n = 3,500

Having a household budget is more important than ever

52.7%

I am doing things like clipping coupons to save money46.6%

My household is forced to do more with less

36.6%

I am anxious about my familys financial future

34.6%

I think the economy will get worse before it gets better

30.7%

Interestingly, our survey

found that other than the

issue of price, most of the

factors customers cite as

demonstrating loyalty to a

given retailer remained

virtually unchanged from the

2008 Index. These include

years with the retailer, staff

quality, store familiarity and

location.


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Exhibit 8Consumers Ranking of What Demonstrates Loyalty to a Retailer (Choice-Directed)Grocery & Personal Care

Source:2010 COLLOQUY Retail Loyalty Index study vs. 2008 studyQuestion:Please read all eight customer experiences below and indicate for each how loyal you think that the

customer is to Total Shoppinga retailer of groceries, personal care items and medications.Please use a scale from 1 to 25 where 1 means not at all loyal and 25 means very loyal.

Numbers shown are the median scores on a scale of 125 2008 n = 2,951; 2010 n = 3,308

2008 (n = 2,951)

2010 (n = 3,308 )

Years With Retailer

Staff Quality

Non-Price Conscious

Willingness to Recommend

Store Familiarity

Share of Customer

Sales Shopper

Location

21.4

21.6

20.0

20.4

19.9

20.3

19.6

19.9

17.4

18.5

15.0

16.2

12.914.5

8.4

10.5

up 12.4%

up 25.0%

Exhibit 9Consumers Ranking of What Demonstrates Loyalty to a Retailer (Choice-Directed)Department Store & Mass Merchant

Source:2010 COLLOQUY Retail Loyalty Index study vs. 2008 studyQuestion:Please read all eight customer experiences below and indicate for each how loyal you think that the

customer is to Everything You Needa retailer that competes with department stores and mass merchants.Please use a scale from 1 to 25 where 1 means not at all loyal and 25 means very loyal.

Numbers shown are the median scores on a scale of 1252008 n = 2,891; 2010 n = 3,241

2008 (n = 2,891)

2010 (n = 3,241)

Years With Retailer

Staff Quality

Non-Price Conscious

Willingness to Recommend

Store Familiarity

Share of Customer

Sales Shopper

Location

21.5

21.6

19.8

20.3

19.9

20.3

19.6

19.9

17.4

18.5

15.116.1

12.7

14.6

8.8

10.8

up 15.0%

up 22.7%


16/20

On the surface, the results appear to be somewhat contradictory with other study findings thatfound customers becoming ever more loyal to discount-oriented retailers. For example, beliefssuch as how long a consumer has shopped with a retailer as a measure of loyalty; brand choiceresulting from the quality of staff and by extension customer service; and the idea that a customeris not all that conscious about pricing were consistent with traditionally loyal behavior.

But returning to the concept of the Great Recession being the great equalizer in retail today, onefactor shows a notable shift: the Sales Shopper. Even though this quality is still dead last in termsof the ranking of loyal behavior, it is the only one where we see a marked difference in 2010 data

versus 2008. How shoppers depict loyalty via this single factor has gone up by 25%, furtherevidence that the recession has had a fundamental impact on how customers feel and think, andhow their perceptions and attitudes have changed.

As mentioned earlier, how significant these factors are and how they will evolve and change overtime remains to be seen. Some experts have suggested the impact of the recession may alterconsumer behaviors and beliefs for the next decade, if not longer. This, of course, begs thequestion: How long will this recession impact retailers? No one knowsbut one thing is forcertain: Marketers who rely on traditional brand- and product-centric methods to solve todaysmarketing problemsrather than re-orienting their organizations to be more customer-centric

will likely be unsuccessful in this changing marketplace.

Essentially, what consumers feel constitutes loyal behavior isnt far off from how retailers defineloyalty behavior. This offers a significant glimmer of hope to retailers, in our opinion: As joblessrates go down and consumer confidence returns, retailers may very well regain their footingifthey continue to work towards customer-centric solutions and strategies.


Marketers who rely on

traditional brand- and product-

centric methods to solve

todays marketing problems

rather than re-orienting their

organizations to be more

customer-centricwill likely

be unsuccessful in this

changing marketplace.


17/20

Part IV: Post-Recession Prescription for Retailer Prosperity

In any competition, you must do something to stand outwhether that something is different, betteror just bigger. Certainly, it is clear that Walmart is beating other retailers at the price game. Butgoing head-to-head with an identical strategy would be foolhardy. So, what can retailers do to eitherhold on to current customers or regain customers theyve lost during the recession? The following

are four essential elements for retailers who understand that they will win the long-term war with astrategy that emphasizes something other than price:

1. Get wise about where you can win. Its essential that you strive to be numberone at what you can. After all, few retailers have the scale to combat Walmart attheir EDLP approach, when their business models are so well-honed at wringingevery penny out of operational efficiencies. However, can you win with the bestselection? The best in-store service? Oreven bettercan you win by being thebest at really knowing your most profitable customers and what it is that they

want?

2. Adapt your value proposition to deliver more value.You may not be able to beatWalmart in hand-to-hand combat on the lowest prices, but while the recessionhangs on, consider promotional elements in your offering to your best customers.For example, the convenience of automated couponing or guaranteed sales prices

can bolster the value customers derive from your program. Also, consider therole of partnershipswhether that be partnerships with your merchants or non-competitive companiesin augmenting the value customers receive in return fortheir loyal shopping behavior.

3. Collect the customer data you need to succeed. To drive enterprise loyaltysuccess, make sure you cast a wide net and collect the customer data you need.The enterprise loyalty vision, as COLLOQUY has laid out, is built on the foundationof customer-specific data and leveraging insights that can fuel greatercommunications relevance, pricing relevance and product selection relevance for

your most profitable customer segments. We see the fruits of this labor within thegrocery and personal care categories, as those retailers that have started down thispathincluding Kroger and CVSheld their own during the recession.

4.Get intimate with customer insights. The days of using customer-specific data tosimply drive targeted offers are now relics of a simpler time. The global economy

and one that is struggling to right itselfdemands a more comprehensive approachto win at customer intimacy. With analytical insights about your most profitablecustomers in hand, you must work to adapt your product mix to keep them happyand coming back. Think about how you can adapt your pricing strategy to lead withlow prices on the right products for those customers without eroding overall profitmargins.

The bottom line for any retailers bottom line in todays economic environment: You must find away to become number one in something that affects consumers hearts and walletsjust as Walmarthas done through pricing and value. Being second or third in share-of-mind is no longer enough.Otherwise, when times get tough and household cuts take hold, you may be the first to be let go. If

you can hold onto the number-one spot in what you are best at, COLLOQUY knows you will benefitfrom increased consumer loyaltywhich will only become an even more essential marketingbarometer as retail competition continues to heat up.


The days of using customer-

specific data to simplydrive targeted offers are now

relics of a simpler time. The

global economyand one

that is struggling to right

itselfdemands a more

comprehensive approach to

win at customer intimacy.


18/20


The COLLOQUY Retail Loyalty Index, introduced in 2008, asks consumers to name the brands towhich they feel the strongest loyalty, and seeks to learn more about the drivers of that loyalty, regardlessof the presence or structure of a formal customer loyalty program.

The 2010 Index surveyed 3,500 U.S. consumers and 3,500 Canadian consumers. (Watch forCanadian results in future COLLOQUY research papers.) Respondents received email invitations tocomplete an online survey regarding their definition of retail store loyalty and their opinions aboutand reasons for professing loyalty to their favorite retailers. Respondents received a series ofquestions in two categories:

Open-ended questions designed to understand and create a consumer-drivendefinition of retail loyalty. These questions asked respondents to think aboutretailers to which they felt loyal and then to elaborate on the fundamentalreasons behind that loyalty.

Response-driven questions designed to understand from which retailersrespondents purchased most often, what behavior they exhibited in their loyaltyto those retailers, and what influencers they most closely related to their loyalty.

We designed the research questionnaire to specifically explore standard retail archetypes in fourcategories: Grocery, Personal Care, Department Store and Mass Merchant. We also included selectmass merchandisers and membership clubs that sell grocery products. The Department Store andMass Merchant categories include durable goods retailers with longer purchase frequency, such asdepartment stores (e.g., Macys, Nordstrom, Kohls, etc.) and large discount retailers (e.g., Walmart,Dollar General, etc.).

We then took the survey data and analyzed it to answer the following questions: How do consumers define the concept of retail loyalty? At which retailers do consumers shop most often? To which specific retailers are consumers most loyal? How do these retailers

compare to those at which consumers shop most frequently? What are the fundamental elements of the retail experience that drive store

loyalty? (In other words, why are consumers most loyal to specific retailers?

selecting from 11 possible attributes.) What specific consumer behaviors are most illustrative of loyal customers? Which defined drivers are most closely correlated with brand loyalty?

Appendix: Notes on Survey Design


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The Author

As COLLOQUY Partner, Kelly Hlavinkadirects all publishing, education and research projects atCOLLOQUY, where she draws on her broad experience as a loyalty strategy practitioner in developing

articles, white papers and educational initiatives. An acknowledged expert in the theory and practiceof loyalty marketing, she also regularly contributes to DM News, The DMA Insider,DIRECTandBrandWeek,and is often cited by publications such as Newsweek,Advertising Age andSmart Money. Kelly is a featuredpresenter at many industry conferences and has taught loyalty workshops and webinars around theworld. She previously launched and managed COLLOQUYs strategic consultancy, working with clientssuch as Lennar Homes, MGM MIRAGE, Eddie Bauer, Best Buy, HP Software and Visa International.Prior to joining COLLOQUY in 1996, she held marketing positions with Buyers Choice (now The PolkCompany), database marketer ACS, and Equifax Consumer Direct.

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For more COLLOQUY white papers and studies, visit www.colloquy.com/whitepapers

The Publisher

COLLOQUY comprises a collection of publishing, education and research resources devoted to theglobal loyalty-marketing industry. COLLOQUY has served the loyalty-marketing industry since

1990 with over 30,000 global subscribers to its magazine and www.colloquy.com is the mostcomprehensive loyalty web site in the world. COLLOQUYs research division develops consumerand B2B research studies and white papers including industry-specific reports, sizing studiesand insights into the drivers of consumer behavior. COLLOQUY also provides educational servicesthrough workshops, webinars and speeches at events throughout the world and is the official loyalty-marketing partner of both the Direct Marketing Association and the Canadian Marketing Association.COLLOQUY also operates The COLLOQUY Network, a global consortium of practitioners certifiedin COLLOQUYs proprietary methodology. COLLOQUYmagazine subscriptions are available at nocost to qualified persons at www.colloquy.com or by calling 513.248.9184.

COLLOQUY is owned by LoyaltyOne (formerly Alliance Data Loyalty Services), which works withmore than 100 of North Americas leading brands in the retail, financial services, grocery, petroleumretail, travel, and hospitality industries to profitably change customer behavior. Through a teamof businesses, each specializing in a loyalty discipline, LoyaltyOne designs, delivers, and manages

a suite of loyalty marketing servicesconsumer data, customer-centric retail strategies, direct-to-consumer marketing, loyalty consulting, and more. In addition to COLLOQUY, the companies include:

LoyaltyOne Consultingis comprised of a group of internationally-recognized practitioners who designand implement loyalty-marketing strategies for Fortune 1000 clients.

The AIR MILES Reward Program is Canadas premier coalition loyalty program. More than 10 millionactive Collector accounts, representing approximately two-thirds of all Canadian households, activelyparticipate in the Program.

Direct Antidote is a loyalty-marketing agency specializing in data-driven creative campaigns thattransform customer behavior to deliver on short-term return on investment, while building profitablerelationships for life.

Precimais an advanced analytics firm that translates retail customer data into critical insights tobetter align marketing, merchandising and operations strategies with shopper needs.

4445 Lake Forest Dr., Cincinnati OH 45242Telephone: +1.513.248.9184Fax: +1.513.248.9184Email: [email protected]

Documents

2010 COLLOQUY RetailTalk White Paper