School of Management Blekinge Institute of Technology The accuracy of customer reward program as loyalty marketing tool Philip Law Supervisor: Anders Hederstierna Thesis for the Master’s degree in Business Administration Fall/Spring 2008 Abstract ABSTRACT Relationship marketing is perceived as a leading trend in marketing and twenty‐first century consumers have evolved into becoming ‘increasingly promotion‐literate’ (Harlow, 1997 cited in Egan 2001, pg 381). The knock on effect of this is a decrease in reliance on traditional and most frequently used methods for building customer relationships. For over a decade, supermarkets have transformed the shopping experience through the creation of out of town locations which can accommodate the development of considerable sized outlets, extensive product ranges expanding beyond food. Offering a wide range of services one would not normally associate with a supermarket such as telecommunications, finance and insurance, and with this the additional incentive of customers collecting and redeeming points through customer loyalty programs. Categorically today Tesco is not only the UK’s largest grocer, but also the world’s most successful internet supermarket (Humby and Hunt, 2004, pg 1). The Tesco Clubcard is widely considered to be a pioneer and success story in loyalty marketing, helping to propel Tesco to be the number one supermarket retailer in the UK (Tapp, 2005, pg 176). By carrying out a literature review on previously published materials and the use of a quantitative survey, this study aims to uncover and identify the value of the Clubcard scheme and how significant it is it in creating true customer loyalty to Tesco. The findings of the study revealed consumers place greater importance upon store location, value for money and product range rather than loyalty card schemes, in‐ store magazines and vouchers. The results revealed that although respondents aspired to gain points and redeem the rewards offer by the Tesco Clubcard, they also showed that today’s consumer is more in touch and has a greater knowledge of the schemes and as such consumers tastes, perceptions, attitudes and demands have 1 Abstract evolved. Furthermore, it was revealed that consumers are effectively manipulating suppliers to their own ends as the findings exposed that consumers are shopping around for the best deals and they own and actively use more than one loyalty card. The primary research revealed the failure to evolve the Tesco Clubcard scheme into what today’s consumer demand has brought the Clubcard proposal to a unique crossroad. It is recommended that the Clubcard model evolves to adapt to the new tastes, attitudes and demands of the new generation of consumers. An understanding of the 21st century consumers will help ensure a loyal customer base. Areas such as lowering prices shall help sustain a competitive advantage within the supermarket industry. Further consideration should be given to giving customers an instant rebate at the point and time of sale rather than rewarding them through the collection of points. The current image of the Clubcard feels dated and as such a revision and re‐launch may give it a much needed boost and help motivate and excite consumers. 2 Acknowledgements ACKNOWLEDGEMENTS I would like to give thanks to the following people for their help and support in the completion of this study. First and foremost I would like to give great thanks to my family and friends who have supported me through my studies. Special thanks to my partner Jenny for all her help and support during my course and the writing of this thesis ‐ I couldn’t have done it without you! I would like to thank my tutor Anders Hederstierna for his time, attention and guidance throughout the writing of this thesis. Finally I would like to thank Tesco for allowing and helping with the research of this dissertation. Philip Law Table of Contents TABLE OF CONTENTS Abstract Acknowledgements Table of Contents Table of Figures 1.0 CHAPTER ONE – INTRODUCTION 1.1 The Rise of Tesco 7 1.2 The Background to the Study 8 1.3 The Scope of the Study 9 1.4 Purpose 10 1.5 Objectives 10 1.6 Summary 11 2.0 CHAPTER TWO – LITERATURE REVIEW 2.1 Introduction 13 2.2 The Tesco Story 13 2.2.1 The Tesco Timeline 17 2.3 Characteristics of Customer Relationship Management (CRM) 20 2.4 The Clubcard Phenomenon 21 2.5 Defining Loyalty 23 2.6 Loyalty Marketing 26 2.6.1 The Customer Loyalty Ladder 29 2.7 The Tesco Clubcard as a Loyalty Marketing Tool 31 2.8 The Relationship between Satisfaction and Loyalty 34 2.9 Does Loyalty Result to Profit? 36 Table of Contents 2.10 Do Customer Reward Programs Deliver Long Term? 39 2.11 Conclusion 43 3.0 CHAPTER THREE – METHODOLOGY 3.1 Introduction 48 3.2 Research Objectives 48 3.3 Selection of Research Methods 50 3.3.1 Features of Qualitative and Quantitative Research 52 3.3.2 Analysis of Data 54 3.4 Questionnaire Design 54 3.4.1 The Eight‐step Questionnaire Construction Procedure 55 3.4.2 Justification of Questions 56 3.4.3 Question Types and Wording 56 3.4.4 Questionnaire Layout 57 3.4.5 Interviewer Versus Respondent Completion 58 3.4.6 Coding 58 3.5 Sample Selection Procedure and Sample Characteristics 59 3.6 Strengths, Limitations and Validity 60 3.6.1 Strengths 60 3.6.2 Limitations 61 3.6.3 Validity 62 3.7 Summary 62 4.0 CHAPTER FOUR – RESEARCH FINDINGS AND ANALYSIS 4.1 Introduction 64 4.2 Analysis 64 4.2.1 User Profile of Tesco Clubcard Respondents 64 4.2.2 Customer Perceptions on Tesco Clubcard 67 2 Table of Contents 4.2.3 Loyalty and Satisfaction 72 4.2.4 Tesco's Efficiency and use of the Information Gained from Clubcard 73 4.2.5 Has the Tesco Clubcard Created Loyalty? 75 4.2.6 Are consumers Manipulating Suppliers? 76 4.2.7 Does Tesco Really Need the Clubcard? 79 4.3 Conclusion 82 5.0 CHAPTER FIVE ‐ CONCLUSION 5.1 Introduction 85 5.2 Conclusion of the Study 85 5.3 Recommendations 89 5.4 Limitations and further research 90 REFERENCES 93 BIBLIOGRAPHY 103 Appendix A ‐ Questionnaire Justification 105 Appendix B – Questionnaire 107 Appendix C ‐ SPSS Coded Questionnaire Results 110 Appendix D ‐ SPSS Frequency Tables for Questionnaire Results 114 3 Table of Figures TABLE OF FIGURES 2.0 CHAPTER TWO – LITERATURE REVIEW 2.2.1 The Tesco Timeline 17 2.6.1 Customer Loyalty Ladder 29 3.0 CHAPTER THREE – METHODOLOGY 3.3.1 Features of Qualitative and Quantitative Research 52 3.4.1 The Eight‐Step Questionnaire Construction Procedure 55 4.0 CHAPTER FOUR – RESEARCH FINDINGS AND ANALYSIS 4.2.1.1 Frequency table: Gender of Respondents 65 4.2.1.2 Cross tabulation: Please Choose your Gender * Please Indicate Which Age Group You Fall Into 65 4.2.1.3 Cross tabulation: Please Indicate Which Age Group You Fall Into * I Trust Tesco Products and Their Image 66 4.2.2.1 Frequency table: Please Indicate How Often You Use Your Clubcard When You Purchase Goods or Services with Tesco 67 4.2.2.2 Cross tabulation: Please Indicate Which Age Group You Fall Into * If Tesco Did Not Have the Clubcard Scheme, Would you Still Continue to Shop There? 68 4.2.2.3 Cross tabulation: I Think Tesco is Very Innovative * I Feel More Could be Done to Increase my Loyalty 69 4.2.2.4 Cross tabulation: I Trust Tesco Products and Their Image * I Feel More Could be Done to Increase my Loyalty 69 4.2.2.5 Cross tabulation: If Tesco did not have the Clubcard scheme, Would you Still Continue to shop there? * I Expect Rewards to be a part of my Normal Shopping Experience 70 4 Table of Figures 4.2.2.6 Cross tabulation: Importance of Loyalty Card Schemes * Have you Redeemed any Rewards from the Clubcard Scheme within the last 12 Months? 71 4.2.3.1 Cross tabulation: Would you Describe Yourself as Being Loyal to Tesco? * Would you Describe Yourself to be a Satisfied Customer of Tesco? 72 4.2.4.1 Frequency table: Do you read Clubcard Magazine? 74 4.2.4.2 Cross tabulation: Do you read Clubcard Magazine? * If "yes" or "sometimes" Please Indicate what you think of the Magazine 74 4.2.5.1 Cross tabulation: Does the Collection of Points Influence you to buy more or to buy specific/alternative Promotional Products? * Location Of Store Importance 75 4.2.6.1 Frequency table: Apart from Clubcard, do you own and regularly use other store loyalty cards? Please indicate how many 76 4.2.6.2 Frequency table: I Usually Shop Around to get the Best Deals 77 4.2.6.3 Frequency table: I Expect Rewards to be a part of my Normal Shopping Experience 78 4.2.6.4 Cross tabulation: Please Indicate which age group you fall into: * Do you know how many Clubcard Points you gain for every £1 you spend in store? 79 4.2.7.1 Table: The Importance Respondents Placed upon Factors that Influence Loyalty 79 4.2.7.2 Frequency table: What more could Tesco do to make you more Loyal? 81 5 Chapter One ‐ Introduction Chapter One Introduction 6 Chapter One ‐ Introduction 1.0 CHAPTER ONE – INTRODUCTION 1.1 The Rise Of Tesco Categorically today Tesco is not only the UK’s largest grocer, but also the world’s most successful internet supermarket (Humby and Hunt, 2004, pg 1). Arguably one of the world’s most successful advocates of Customer Relationship Management (CRM) (Humby and Hunt, 2004, pg 1) and as commented by Tapp (2005, pg 176), “The big success story of database driven management is Tesco.