Retailing in South Africa: Do customer loyalty programs really work? - CNBC Africa

Retailing in South Africa: Do customer loyalty programs really work?

Southern Africa

by Girland Chibaya, Opinion 0

Photo : en.wikipedia.org

The use of loyalty programs is fast becoming popular in a variety of South African industries. Sectors where they are currently being applied within retail range from pharmaceutical stores and FMCG retailers, to clothing and department stores.But why the sudden interest?

Retailers are realizing more and more that it pays off to invest in customer relationships.Notably, over the last two decades, loyalty programs have become one of the most popular marketing tools that companies use to collect information, increase customer loyalty, and intensify relationships. South African retailers suffer from increasingly undifferentiated offerings and low switching costs between retailers. Loyalty programmes hence have emerged as an important tool for customer retention and building sustainable customer loyalty through enhanced relationships.

Customer loyalty has suddenly become a key to success in today’s highly competitive South African retail industry. To that end, many retail companies are offering loyalty cards to customers. Research has however shown that reward programs are not enough to induce loyalty, in the absence of an emotional bond with the brand. Instead, affective commitment—that emotional bond—is needed to ensure repeat patronage.

According to the South African Loyalty and Rewards Survey, they identified a total of 101 rewards programs in South Africa operating today. This figure has experienced significant growth over the last two decades, however the last eight years have seen the largest annual growth of loyalty programmes. In 1986 there were only 9 loyalty programs in South Africa, with the number rising to 38 in 1996 just after independence. Most of these programmes are well-structured and well-managed with millions of consumers enjoying benefits, earning points and taking up offers that these plans afford them.

Surveys into the loyalty industry point out that on average South African consumers have an average of ten loyalty programmes that they are signed up to per household.  Does this mean that households in South Africa have over-subscribed to these programs? Considering the rate at which retailers are expanding and building new stores in previously under-represented areas, this might seem to be a logical number. In comparison to the United States, it is very interesting to note that families there are signed up to an average of 18 loyalty programmes.

According to recent surveys, Pick n Pay Smart Shopper is the biggest supermarket rewards programmes in South Africa. The giant supermarket chain which operates in most malls and towns in South Africa’s nine provinces, runs one of the country’s most well-used loyalty programmes: the Pick n Pay Smart Shopper card. The card gives consumers a way to gain points for their purchases, which can later be turned into spending vouchers to be used in store or cash to be donated to charity. There program has over 8.9 million members in the country, which makes it the biggest rewards programmes in terms of supermarkets by number of users.

Interestingly, the Food Marketing Institute in the United States reports that about 60% of the American retailers do not have loyalty programs, and 70% of these non-adopters have no plans to introduce them in the future. They consider them not suitable for their specific firms or for the market in which they operate in. Considering that South African market is still considered to be a developing market, could this be the direction that our grocery retailing in South Africa will eventually go? Are we going to continue experiencing these phenomenal growths in loyalty program adopters?

 It has been very noticeable however that almost all the loyalty programmes seem to be similar to each other. From an independent point of view, it seems like South African retailers are practicing one of marketing’s most familiar strategies – “if you see a good idea then copy it”.  The question is: Do these loyalty programs really create extra loyalty beyond that which is derived from the relative value of merchandise sold? Do they encourage customers to dig deeper into their pockets? Or do they merely bribe the consumers to buy again? In the competitive South African market, is it really feasible for every retailer too increase customer loyalty through a loyalty program that offers points?

Evidence shows that some of these programmes have been working for some retailers, especially those that can be converted to cash. Research asserts that measuring customers' loyalty strictly on the basis of their purchase behavior is misleading, because behavioral loyalty may be driven by short-term incentives rather than loyalty to the brand or firm.

For example, customers might be dissatisfied with a store but shop there for convenience, which indicates behavioral but not necessarily attitudinal loyalty. Further research also suggests that truly loyal customer’s exhibit repeat purchase behavior, supported by a strong internal disposition toward the brand, whereas customers who make repeat purchases without any emotional bond are susceptible to defecting to competitors at any point in time. Thus focusing solely on repeat or frequent shoppers creates the risk that retailers neglect the truly loyal customers.

South African retailers need to start understanding that loyalty programs are just a way of providing positive reinforcement to customer buying behavior. Such conditionally loyal customers do not necessarily develop a favorable association with the brand. When program incentives fail to reinforce the customers' association with brands their purchases are likely to stem from their program participation.

In such cases customer loyalty focuses on the program rather than the brand. Attractive programmes only lead customers to build relationships with the program rather than the brand. When the reward factor is removed the positive effects of the loyalty programmes disappear and this sometimes has calamitous effects on the retailer’s sales.

 Girland Chibaya is a retail professional with vast experience in retail management, supply chain management, strategic planning and general management spanning over 18 years. He has also worked for some big companies in South Africa such as Woolworths, NIKE SA and Edcon. He is studying for his MBA with GIBS.

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