Nectar-Making-Loyalty-Pay

9-505-031REV:DECEMBER5,2005________________________________________________________________________________________________________________ProfessorJohnDeightonpreparedthiscase.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2004PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.JOHNDEIGHTONNectar:MakingLoyaltyPayPersuadingBritishhouseholdstodoanythingwasnoteasy,yet,inthe18monthsleadinguptoMarch2004,LoyaltyManagementUK(LMUK)hadinducedover54%ofthemtotrycollectingNectarpointsand40%topersist,makingNectarBritain’slargestrewardsprogram.Eachweekitadded50,000newmembers(whomNectarcalledcollectors).RobGierkink,CEOofLMUK,waspleasedwithhisteam’saccomplishment.InMarch2004JustinKinghadjusttakenoverasgroupchiefexecutiveatSainsbury’s,thesupermarketchainthatwasNectar’slargestissuerofpoints.HesawthatmorethanhalfofSainsbury’s240millionpound(₤)annualmarketingbudgetwenttoNectarandsaid:“NectarrepresentsasignificantinvestmentforSainsbury’s,andIcan’thelpbutfeelthatifweputtheinvestmentintomorestaffinourstoreswe’dseeabetterreturn.IwaspartoftheseniormanagementteamthatturnedaroundtheASDAsupermarketchainbeforeitwassoldtoWal-Mart,andthechangeswemadeatASDAwereallaboutpriceandvalueformoney.ASDAdidn’thavealoyaltyprogram.”Hecontinued:ButIdounderstandthevalueofknowingmoreaboutwhatourcustomersaredoingday-to-dayandthisispartofthevaluewegetfromNectar.WeusetheNectardataonourcustomerstohelpusdeterminewhichstocktocarryinwhichstores.TheNectardataalsoallowsustodomuchbetterandmoretargetedmarketingtoourcustomers.InsixmonthstimeI’llbepresentingthenewstrategyforSainsbury’stoCityanalysts[areferencetoLondon’sinvestmentbankingcommunity]includingmyviewonNectar.JoiningNectar18monthsagowasoneofthebiggestdecisionsofSainsbury’spreviousmanagementteam,andnowIhavetodecidewhetherI’mbehinditornot.TheFoundingofNectarBythetimetheylaunchedNectar,LMUK’smanagementteamhadbuiltupawealthofexperiencewithmultisponsorloyaltyprogramsaroundtheworld.In1988KeithMills,themanwhowouldbecomeNectar’schairman,hadcreatedaloyaltyprogrambrandedAirMilesintheUnitedKingdom.Consumerswhoboughtproductsfromparticipatingcompaniesweregivenbanknote-likescripthattheycouldredeemforflightsonBritishAirways.HetooktheideatotheUnitedStatesandCanadain1991.IntheU.S.versionofAirMiles,animpressivearrayofairlines(AmericanAirlines,UnitedAirlines,andU.S.Airways)weresigneduptoofferflightsasrewards,andsomewell-known,fast-movingconsumerDoNotCopyorPostThisdocumentisauthorizedforeducatorreviewuseonlybylinyanliu,HEOTHERuntilJan[e-mail]617.783.7860505-031Nectar:MakingLoyaltyPay2goodscompanies(suchasCoors,Clorox,andCoca-Cola)weresecuredasissuersofpoints.However,intheAmericanprogramcollectorswererequiredtodotheequivalentof“couponclipping”toearntheirpoints.Toearnpointsfromsupermarkets,collectorshadtoremovetheUPCbarcodesfromproductsandmailthemin.Thissystemprovedcumbersome,andtheprogramstumbledandwassoonclosed.TheCanadianeffortwasfrontedbythreeMBAs,Gierkink,CraigUnderwood,andSamDuboc,whotookadifferentapproach.Theydecidedtofocusonretailersasissuersofpointsratherthanproductmanufacturers.Thisallowedforin-storecustomersign-upandallowedconsumerstoearntheirpointsbypresentingaplasticcardwhenmakingapurchase.Pointswerethencreditedviatheretailer’spoint-of-saleequipment.Thisretailfocusgreatlyreducedtheeffortrequiredofthecustomertoearnpoints.TheysecuredtheparticipationofSearsCanada,CanadaSafeway,andseveralotherretailers,andtheprogramflourished.In1994Gierkinktookthisretail-drivenconcepttotheNetherlands,wherehesignedseverallargeretailers.Twelveyearslater,in2003,about65%ofCanadianhouseholdsandover53%ofDutchhouseholdswerecollectingAirMilespoints.Ratherthanholdaportfolioofloyaltyprograms,Mills,Gierkink,andothermembersoftheteampreferredtoselltheirstakesintheventuresoncetheywereestablished.Thus,AirMilesUKwassoldtoBritishAirways.Thefounders’shareintheDutchbusinesswassoldtootherexistingshareholders.TheCanadianoperationwassoldtoAllianceDataSystems.Inlate2000Mills,Gierkink,andothersbegantolookagainattheUnitedKingdom.Theybelievedthatwhattheyhadlearnedoverthepastdecadecouldbeusedtodesignanother,betterprogram,andLMUKwasformed.Theydecidedtoseekascoresponsorsagroupofretailersthathadtheirownrewardsprogramsbutwerenothappywiththeirperformanceandthat,byjoiningforceswithothercompanies,couldenhancetheirimpact.TheyfirstapproachedSainsbury’s,thesecond-largestsupermarketchainintheU.K.Sainsbury’shadbeenlosinggroundtotheU.K.’slargestchain,Tesco,andtoASDA,andSainsbury’swaspersuadedthatavigorousandattention-g