Strathmore University SU+ @ Strathmore University Library Electronic Theses and Dissertations 2016 The effect of loyalty programs on customer patronage of supermarkets in Nairobi County Wathigo, P. Strathmore Business School Strathmore University Follow this and additional works at: https://su-plus.strathmore.edu/handle/11071/2474 Recommended Citation Wathigo, P. (2016). The effect of loyalty programs on customer patronage of supermarkets in Nairobi County (Thesis). Strathmore University. Retrieved from http://su-plus.strathmore.edu/handle/11071/4790 This Thesis - Open Access is brought to you for free and open access by DSpace @Strathmore University. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of DSpace @Strathmore University. For more information, please contact [email protected] THE EFFECT OF LOYALTY PROGRAMS ON CUSTOMER PATRONAGE OF SUPERMARKETS IN NAIROBI COUNTY BY WATHIGO, Peter Submitted in partial fulfilment of the requirements for the Degree of Master of Business Administration at Strathmore University Strathmore Business School Strathmore University Nairobi, Kenya December, 2015 This thesis is available for Library use on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement. DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree in this or any other University. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the thesis itself. Student’s name: WATHIGO, Peter Student number: MBA/1775/11 Student’s signature: ………………….………………Date: …………………… The thesis of PETER WATHIGO was reviewed and approved by: Dr. Elizabeth Muthuma (Supervisor) Strathmore Business School Dr. George Njenga Dean, Strathmore Business School Prof. Ruth Kiraka Dean, School of Graduate Studies, Strathmore University ii ABSTRACT Customer loyalty programs are a common strategy adopted in business to increase customer value and achieve competitive advantage. This study sought to investigate the effect of loyalty programs on customer patronage of supermarkets in Nairobi County. The research sought: to analyze the effect of loyalty programs on consumer patronage of supermarkets; establish the influence of perceived value of loyalty programs on patronage behaviour and to determine the mediating role of supermarket’s service quality on loyalty program effects. Descriptive research design was used. Questionnaires were administered to a sample of 384 supermarket loyalty card holders from Nairobi County’s four administrative divisions namely: Nairobi West, Nairobi East, Nairobi North and Westlands. Stratified sampling technique was used. The sampling unit was all consumers with a supermarket loyalty card. Data was analyzed using Chi-square tests and hierarchical regression analysis. The results showed that after accounting for consumer demographics, convenient location and service quality, loyalty programs explained 5.7% of the variability in customer patronage of supermarkets to a statistically significant degree (p<.05). It was concluded that loyalty programs positively influenced patronage behaviour of consumers towards supermarkets in Kenya, although the degree of influence was relatively small. Perceived value of loyalty program rewards moderated patronage behavior of card holders to supermarkets. Generally, loyalty programs were not that important to card holder’s shopping experience although they conferred a sense of prestige as card holders felt special. Instead, convenient location was a more important store attribute that determined patronage behavior. It was recommended that supermarkets need to be more innovative at their rewards program offerings. Loyalty schemes should provide instant gratification to customers. Supermarkets should exploit the sense of prestige conferred by the loyalty cards through appropriate brand positioning strategies. Supermarkets that do not enjoy strong brand identity should reallocate resources away from loyalty schemes to improving store attributes such as speed of service and staff responsiveness as well as location convenience. Further studies could focus on the contribution of loyalty schemes to the operational efficiencies of supermarkets in Kenya. iii TABLE OF CONTENTS DECLARATION ................................................................................................................ ii ABSTRACT ......................................................................................................................iii TABLE OF CONTENTS .................................................................................................. iv LIST OF TABLES ............................................................................................................ vii LIST OF FIGURES .........................................................................................................viii LIST OF ACRONYMS ..................................................................................................... ix DEFINITION OF TERMS ................................................................................................. x ACKNOWLEDGEMENT ................................................................................................. xi DEDICATION .................................................................................................................. xii CHAPTER ONE ................................................................................................................. 1 1 INTRODUCTION .................................................................................................. 1 1.1 Research Background ............................................................................................. 1 1.1.1 Global Adoption of Loyalty Programs ................................................................... 3 1.1.2 Supermarkets Sector in Kenya ................................................................................ 4 1.2 Research Problem ................................................................................................... 5 1.3 Research Objectives ................................................................................................ 7 1.4 Research Question .................................................................................................. 7 1.5 Significance of the Study ........................................................................................ 7 1.6 Scope of the Study .................................................................................................. 8 1.7 Chapter Summary ................................................................................................... 8 CHAPTER TWO .............................................................................................................. 10 2 LITERATURE REVIEW ..................................................................................... 10 2.1 Introduction ........................................................................................................... 10 2.2 Theoretical Review ............................................................................................... 10 2.2.1 Stimulus-Response Theory ................................................................................... 10 2.2.2 SERVQUAL Model .............................................................................................. 12 2.2.3 Importance-Satisfaction Model ............................................................................ 13 2.3 Loyalty Program Features and Benefits ............................................................... 15 2.4 Empirical Review ................................................................................................. 17 2.5 Research Gaps ...................................................................................................... 20 2.6 Conceptual Framework ......................................................................................... 21 2.6.1 Hypothesis 1 ......................................................................................................... 21 2.6.2 Hypothesis 2 ......................................................................................................... 22 2.6.3 Hypothesis 3 ......................................................................................................... 23 CHAPTER THREE .......................................................................................................... 24 3 RESEARCH METHODOLOGY ......................................................................... 24 3.1 Introduction ........................................................................................................... 24 3.2 Research Design ................................................................................................... 24 3.3 Population and Sampling Design .......................................................................... 24 3.3.1 Population ............................................................................................................. 24 3.3.2 Sample Design ...................................................................................................... 24 3.3.3 Sampling Size ....................................................................................................... 25 3.4 Data Collection