Is the U.S. coalition loyalty’s Afghanistan? Overcoming the challenges of the U.S. market.

Afghanistan map with question mark.

Net: Coalition loyalty programs are among the most successful and fastest growing businesses created over the past 25 years, with flourishing coalition programs currently operating in many countries around the world. The one glaring exception – the U.S. market. Why? It certainly isn’t for lack of trying. Over $1 billion has been lost by companies and investors attempting to launch coalition loyalty programs in the U.S.


We believe the reasons no one has launched a successful U.S. coalition program are embedded in the five unique challenges of the U.S. market:


  1. Overcrowded loyalty space – the average U.S. household has joined 18.5 loyalty programs, but remains active in 8.
  2. Lack of nationwide or clearly defined regional businesses in major consumer spending categories – difficult to identify coalition partners with consistent presence across markets.
  3. Few unique rewards – lots of commodity-based, “me too” rewards.
  4. Rewards are expensive – economic value back has become only distinguishing feature; competitors continue to increase percent back to compete, raising overall costs.
  5. Lack of cooperation among U.S. companies – American companies have not historically “played well in the sandbox together” and few examples of long term coalition partnerships for anything exist in the U.S.

So what’s the solution – “cut and run”?  Not necessarily.  We believe there is a path to daylight to develop a coalition loyalty program in the challenging U.S. market. Doing so will require a breakthrough program model that not only incorporates the requisite 6 A’s of Coalition Loyalty Success, but contains the following  elements:


A. Truly breakthrough, motivating assets to cut through the current “clutter” of loyalty programs.
B. Better designed rewards inventory with a selection of rewards that appeal to consumers on both an emotional and rational basis.
C. Critical program elements and unique assets that cannot be duplicated by competitors.

D. A regional approach that makes sense in order to create a strong coalition of leading partners.

E. A technology platform that leverages the new user friendly opportunities for member engagement enabled by 21st century social, mobile and interactive digital media, and finally, most importantly

F. Bold, visionary, risk taking leaders who are willing to “play to win” instead of “playing not to lose” and will benefit most from being the first to champion the tremendous potential of  participating in a coalition loyalty program.

First developed in the late 1980’s, coalition loyalty programs are multi-company, shopper rewards programs. Consumers who participate in these programs are rewarded with a single points-based currency for shopping at exclusive (or co-exclusive) sponsors within each major retail / consumer category: e.g., one supermarket sponsor, one gas station sponsor, one department store sponsor, one credit / debit card sponsor etc. Points earned collectively at these sponsors can then be redeemed by consumers for a variety of rewards such as travel, merchandise and gift cards / discounts at the sponsors.

Coalition programs like AIR MILES (Canada), Nectar (U.K.), Payback (Germany), Fly Buys (Australia) and others have been extraordinarily successful around the world. Unlike stand-alone retailer loyalty programs –  like CVS ExtraCare and Best Buy Rewardzone in the U.S. – points add up much more quickly for members of a coalition program shopping at tens (and even hundreds) of sponsors. This greater “rewards attainability” increases members participation in the program and enables the program operator to include a broad selection of program rewards, including lower value items like free gas or groceries and higher value items such as plane tickets, electronics, computers and vacation packages.

There has been a lot of news in the coalition loyalty space over the past year. AIR MILES Canada, the company founded by Sir Keith Mills, Craig Underwood and an extraordinary team of entrepreneurs in 1991, celebrated its 20th anniversary in Toronto last March.  Last week, Nectar, the U.K. coalition loyalty program created by Sir Keith in 2002 celebrated their 10th anniversary.  Both programs continue to grow and thrive for one simple reason:  they continue to create extraordinary value for their partners. Earlier this year, Sainsbury’s (a leading U.K. supermarket chain) extended its contract with Nectar for seven years. Like many retailer executives participating in coalition programs, Sainsbury’s CEO Justin King – formerly an executive at Asda, the U.K. subsidiary of Wal-Mart, and initially a skeptic of coalition programs – has clearly recognized the measurable economic and strategic value that the coalition model has created for Sainsbury’s.

As companies like AIR MILES and Nectar have demonstrated over many years, the coalition model provides tremendous value and a sustainable long-term competitive advantage for its sponsors. Many of the top programs penetrate 60-70% of all households:

CLP's

If the coalition loyalty model has been so successful in other countries, why has it failed in the U.S. market?  It’s not for a lack of trying as over a billion dollars has been lost by companies attempting to develop a coalition model in the huge, but challenging US market.  So what are the problems with the loyalty “terrain” of the American market that make it the “Afghanistan” of the coalition loyalty space?

Over much of the past decade,  we have analyzed the reasons behind the inability of loyalty companies to create a successful U.S. coalition program. Our team at SLI believe the most significant challenges of the U.S. include:

  1. An overcrowded loyalty space resulting in consumer “loyalty program fatigue” or “supersaturation.”
  2. Ubiquitous discount, merchandise and travel rewards that offer no point of differentiation and therefore can’t break through the clutter.
  3. The costs of rewards are expensive to the companies paying for them which make the economics of their loyalty programs challenging.
  4. Lack of nationwide or clearly defined regional businesses in the major consumer shopping categories needed to create a motivating level of consumer attainability.
  5. Few or no examples of U.S. businesses working together in multi-year coalitions of any form.

Overcrowded loyalty space

Without any coalition loyalty programs currently operating in the U.S. market, many consumer-facing businesses have developed their own single company “stand alone” loyalty program. Others – notably many of the larger supermarket chains – have developed gas discount programs with their own, and in some cases another, branded gas station.  This has resulted in a highly fragmented, cluttered loyalty landscape that can be overwhelming to consumers. Here’s an example of some of the reward programs bombarding consumers in Columbus, Ohio – and these are selected from only the gas and grocery sectors.

Columbus market

According to the loyalty consulting firm Colloquy, a division of Alliance Data Systems’ LoyaltyOne, the average U.S. household has joined 18.5 loyalty programs, but remains active in only 8 programs. In other words, the average American shopper has dropped out of more programs than those they have found rewarding enough to remain active in.  Colloquy conducts the study about every two years.  Graphing the past three studies clearly shows the impact of adding more “me too” programs in an overcrowded marketplace: US households are not increasing the number of programs they remain active in as they try new ones.  Sitting behind the glass in focus groups across the country over the past two years, we’ve heard consumers continually complain about the huge number of low perceived value, undifferentiated loyalty programs.

Bar chats joined vs active

With this kind of fragmented landscape, we believe it will be very difficult for a new loyalty program – even one as well designed as a coalition program – to break through the clutter and capture consumers’ attention.  We believe this challenge will be exacerbated for any program built around a “generic” set of rewards like free travel and discounts on gas purchases.

Few unique rewards

With many consumer-facing businesses developing their own standalone or one-partner loyalty programs in the U.S. market, you would expect these businesses to develop unique rewards and truly differentiating value propositions in order to effectively compete. However, what we see currently in the U.S. marketplace are an overabundance of “me too” programs, typically based solely on discounts / cash back and commodity rewards, with very little differentiating features.

One example of this is the gas loyalty programs that have recently gained popularity in the supermarket space. Consumers participating in these programs can typically earn 1 point per dollar on spending at the sponsoring supermarket. These gas points can then be redeemed instantly at the sponsoring gas station for cents off gallons of gas (typically 100 points = $0.10 off per gallon).  These points are always subject to many restrictions: e.g., points expire after 30-60 days, 15-20 gallons max fill-up, etc.  The gas programs are facilitated by a patented technology that instantly “rolls back” consumers’ price per gallon right at the pump. But a commodity program like this can be duplicated – and in many markets has been duplicated – by competitors.  For example, in the Columbus market, both Kroger and Giant Eagle operate gas loyalty programs.

So what becomes the differentiating feature(s) of the two competing gas programs? Other than the convenience of where the participating supermarket stores and sponsor gas stations are located, it all comes down to the  economic value back to the consumer. Indeed, in recent months Giant Eagle increased its value back by offering 50 points = $0.10 off (vs.previous 100 points = $0.10, which Kroger still offers).  With no unique rewards offering, you can see how this can quickly become a “race to the bottom”.

S&H

It reminds us of the “trading stamps” phenomenon of the 1960’s. Most retailers offered S&H Green Stamps or the yellow TV or Top Value stamps, and at one time as many as sixty percent of Americans collected them.  But eventually, the businesses paying for the stamps realized they did not provide a differentiating competitive advantage and were therefore merely an added cost of doing business and they stopped operating these expensive programs.

Which leads to the next challenge in the U.S. market.

Rewards are expensive

When loyalty schemes such as cash back rewards and the gas programs become merely a simple economic value back proposition for consumers, they can become very expensive to operate. We’ve seen this in the gas programs, where the estimated average cost of sales is 100-150bps, but can be much higher, depending on – literally – the number of gallons your vehicle holds.  This cost would be substantially higher if not for the structural breakage of the program design: e.g., can only be used in $100 increments, points expire within a month or two,  etc.

Other stand-alone retail loyalty programs can cost as much as 5-10% of affected sales.  CVS ExtraCare is 2% on most everything, but routinely offers as much as a 25% discount for a $25 purchase. Target’s in-store credit or debit card program offers 5% off all purchases. We recently met with a leading regional enterprise who was considering offering their best customers a 10% discount on one of their highest margin, most frequent and therefore largest sources of revenue.

Lack of nationwide or clearly defined regional businesses in major coalition categories

Horizontal AIR MILES & Nectar cards

One of the most important differences between countries that have successful coalition loyalty programs, such as Canada and the U.K., and the U.S. is the lack of either: (i) nationwide companies that operate in the critical consumer spending categories of supermarkets, retail gas and banking/credit card or (ii) businesses within each of the key categories that all operate in the same clearly identified regional markets. The development of AIR MILES in Canada was greatly enabled by the fact that in almost every small town and large city in Canada you can buy gas from Shell, Petro Canada or Esso or find Bank of Montreal, The Royal Bank of CIBC branches.  The one major exception is grocery, but one of the first things we learned when starting business development for AIR MILES in Canada was businesses were comfortable defining “Western Canada” as the four western provinces plus Thunder Bay, which is actually located in Ontario.  In the U.K., Nectar was similarly enabled by the presence of nationwide chains in all major consumer spending categories and a similar “mutually agreed upon” regional segmentation facilitated the development of Travel Club in Spain. There is no agreement with U.S. businesses on the geographical boundaries of defined regions, so trying to build a nationwide coalition that will offer sufficient number of households reasonable reward attainability becomes challenging, unless a program developer can get the request number of businesses to operate in a defined region.

As the chart below demonstrates for the retail gas station sector, no one gas chain will give you adequate coverage in multiple regions.  This graph shows the regional market share of one of the largest nationwide retail gas chains in the U.S. While the company has sufficient share in areas like Chicago, it is weak or non-existent in other markets such as Philadelphia, Minneapolis and Upstate New York.  This analysis helps explain why one supermarket chain that offers customers points good for gas discounts told us the percent of their shoppers redeeming for gas discounts ranges from 10% to 70% depending on the region. Additionally, while regional coalition models in the U.S. make more sense, it’s not obvious what regions should be chosen, as the potential coalition partners in each category all typically have different geographic footprints.

Updated disguised gas chain data

Few examples of true multi-company coalitions in the US market

U.S. companies are not accustomed to cooperating with each other to form larger long term coalitions. One reason could be that U.S. business leaders are more likely to employ a “go it alone” strategy where they are implementing something they perceive as uniquely theirs, or as it appears to be the case in many loyalty programs, attempt to “differentiate” with a higher cost version of what someone else is doing.

We also believe a psychological phenomenon we call the “leader joiner” challenge may add to the difficulty of developing a truly effective coalition loyalty program in the US.  Clearly no one has developed an effective coalition loyalty program in the US market; therefore, doing so requires at least one senior executive in each major consumer spending category to take a bold leadership leap.  But at the same time, by definition, joining a coalition program requires just that – joining and collaborating with other companies.  By doing so, no one C-level executive will get all the credit for the breakthrough program and the extraordinary results that thousands of hours of US consumer research demonstrate would accrue to the companies forming the coalition.  Finding “leader joiners” is hard in any culture, and likely even more so in the U.S.

Leader Joiner Matrix

Additionally, with many U.S. consumer businesses operating in slightly different geographies, it’s not always obvious what partners to work with. Few companies have perfectly congruent geographic footprints. Many of the large consumer businesses have nationwide strategies, and if the same partner is not present in all of the companies’ markets nationwide, forming a partnership may be less appealing.

So what are the potential solutions – what is needed to break into the U.S. market?

While the challenges of the U.S. market could lead many to favor a “cut and run” strategy for coalition program operators, we don’t believe these challenges are insurmountable. A well designed program will need to have the following five features:

A. Truly breakthrough, motivating assets

The program brand and value proposition must be truly unique to break through the current “clutter” of loyalty programs.  Consumers need to instantly “get it” and realize the program offers a unique and superior consumer value proposition.  As one head of a Detroit household put it recently when reviewing breakthrough, motivating rewards that resonated with her: “the rewards seem very attainable and they seem not like stupid rewards… these actually seem like they have value to the rewards.”

B. Better designed rewards inventory

A well designed coalition loyalty program will need a selection of rewards that appeal to consumers on both a rational and emotional basis.  A diverse rewards inventory that includes appealing options for “moms, dads and kids” will drive enrollment and increased engagement. As the loyalty marketing experts at COLLOQUY point out, currently in the U.S. market there is an over-abundance of rational deals, discounts and cash back rewards, when it’s really unique emotional loyalty hooks that can be much more powerful in creating lasting bonds with consumers.

Colloquy quote on emotional awards

Rewards that have high perceived value vs. their cost will be most effective, while consumers continue to prefer flexible rewards wherever possible. Rewards that can promote or enhance current charitable, community and employee initiatives will also be well received by key businesses.

Finally, coalition partners will benefit from rewards that can capture the opportunity to use social, mobile and digital media to help all stakeholders enhance their current initiatives and achieve their economic and strategic goals.

C. Unique, exclusive assets that cannot be duplicated by competitors

A breakthrough program will need to have exclusive rewards that competitors cannot duplicate. Although AIR MILES now offers consumers the opportunity to redeem their points for something in excess of 800 different rewards, when we launched the program in 1992, we offered only free air travel, hotels and rental cars.  What some have forgotten, as the program has expanded over the years, is that our initial sustainable competitive advantage came from the fact that we had secured exclusive contracts from four of the largest North American airlines.  No competitor could have duplicated our initial reward offering.  Although in many ways harder to do in 2012 than it was in 1992, we believe a program can be designed with exclusive assets that will drive a sustainable long-term competitive advantage for participating sponsors.

D. A regional approach that makes sense

A regional U.S. coalition program has the greatest probability of creating a strong coalition of leading partners.  The challenge will be getting the major partners to agree to develop a program or programs in the same region.  We believe the opportunity exists to capitalize on the few places where leading regional companies and a limited number of enlightened national players have already recognized the powerful opportunity to join together and tap into local and regional pride that is present in communities across the U.S.

E. A technology platform that leverages the new user friendly opportunities for member engagement enabled by 21st century social, mobile and interactive digital media

During the mid 1990’s SLI’s founder developed over 20 database marketing programs that leveraged the assets of a coalition loyalty program, including the motivational currency, the database and ability to develop micro-coalitions of sponsors targeting collector segments including movers, new parents and farmers.  In 1995, AIR MILES became one of the first loyalty programs on the internet.  In 2008, Underwood Partners assembled an extraordinary consulting team whose members included Nicco Mele, Pamela Rosenthal and Ken Dec to develop a strategy for one of the worlds leading coalition loyalty programs to leverage the capabilities of the internet and social media to increase collector engagement and sponsor profitability.  Our team identified over 50 initial new ideas and initiatives and our final report included 25 specific recommendations.  Since then, the capabilities of the iPhone and Android mobile platforms exponentially increased the ability to connect members to other members and prospective members, sponsors and program operators.  We also believe these platforms hold the potential to enhance the traditonal currency earning possibilities beyond those available to loyalty programs only a few years ago, which can broaden the historical view of “must have” categories and sponsors.

Mobile apps

and finally, most importantly

F. Bold, visionary leadership

Coalition operators must identify and win-over business leaders that will benefit most from being the first to champion the tremendous potential of participating in a coalition loyalty program.

In short, coalition operators need to find the U.S. equivalent of the business leaders at Safeway and Bank of Montreal who we identified in Canada back in 1992 when developing AIR MILES:

“Twenty minutes into the presentation I knew it was the biggest thing ever…It’s a leap of faith but … we have to go in big … You snooze–you lose.”

–          Gerry Geoffrey, Chief Financial Officer, Canada Safeway

(Two weeks later his AIR MILES customers had doubled their average spend at Safeway.)

“About an hour into the meeting, I stopped them and went to talk to our Vice Chairman. I told him, ‘I’d like to hang onto these guys. We need to set up a standstill arrangement so they won’t go talk to another bank’. That’s how excited we were about the program.”

–          Jim Brophy, VP Electronic Banking, Bank of Montreal

Clearly, without these visionary leaders, AIR MILES Canada would have never gotten off the ground and become the tremendous success that it has over the past 20 years.

Based on our findings from over ten thousand in-depth  interviews with U.S. consumers we have invested in over the past two years, we are confident the potential exists for a similar, sustainable coalition loyalty program to be developed in the U.S. market in the years ahead. But doing so will require a few bold visionary leaders who are willing to challenge the status quo and not follow the crowd by launching yet another stand alone loyalty program.

Craig Underwood, Lauren Creedon, Ian Drummond & James Ray

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