Loyalty programs reward buyers and shareholders

Loyalty programs reward buyers and shareholders

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Try to buy anything these days and shoppers are inevitably encouraged to sign up for a loyalty program.

Rewards programs are multiplying. Globally, one in three companies that do not currently implement loyalty programs will do so by 2027, according to consultancy Gartner. Companies that have been offering programs for a long time also sweeten the rewards. US retailer PetSmart added premium tiers to its loyalty program this month.

What looks good for buyers also has benefits for investors. An academic study based on 322 companies offering loyalty programs found both long- and short-term benefits. Sales increased by 7% on average in the first year of a program’s introduction and gross profits by 6%, according to a 2019 study by academics at Michigan State and University of Michigan. Oakland in the United States.

In their simplest form, loyalty programs offer a pact with consumers: come back to us regularly, leaving a trail of data each time, and in return you will receive points that can be exchanged for goods and services .

Their very longevity implies their effectiveness. Loyalty points have existed since the 1970s. Commercial stamps, a precursor, emerged at the end of the 19th century. The same goes for the increasing complexity of many programs, with different levels and reduced prices. The addition of member contributions is also increasing. These have been found to increase usage.

Still, some projects have begun to attract unwanted attention. Britain’s competition watchdog has launched an investigation into the loyalty cards of two of the country’s biggest supermarkets – Tesco’s Clubcard and Sainsbury’s Nectar – over concerns about “two-tiered” pricing. The first has more than 20 million members, the second more than 18 million. In the United States, the Department of Transportation is studying the loyalty programs of major American airlines.

Any effort to restrict the programs will likely be unwelcome to shareholders, although in the case of supermarket programs offering special prices to loyalty card holders, they have already achieved their goal of increasing market share.

GM130419_24X Buyers LEXPOP_UK

Some airlines, selling air miles to credit card providers, have turned points into a bigger revenue stream than the much more volatile business of air travel.

Loyalty programs impact the bottom line in several ways. First, repeating personalization is cheaper than attracting new customers. This story is illustrated most starkly by the massive burn of cash by consumer-facing startups, as they woo customers with gifts and heavily discounted goods or services. Even Deliveroo, a relatively mature company, spent 9% of its revenue on sales and marketing last year.

The extensive data on consumption habits collected by providers helps them to cross-sell and offer tailor-made offers: for example, by marketing prepared meals to a buyer of diapers for newborns or hamburgers to plant-based with vegan buyers.

Of course, this can sometimes go wrong. A notorious example is when Target in the United States used predictive analysis of shopping habits to determine pregnancies and even due dates, and sent baby discount coupons to a teenage girl who did not had not revealed his condition to his father.

These data caches can also be monetized by reselling them – in anonymous form – to third parties. Sainsbury’s expects its Nectar360 business, which runs its loyalty program, to generate £90 million in additional profits by March 2026. US bank JPMorgan, although it doesn’t actually sell the data, charges customers brands to target their advertisements to its retail customers based on their spending history. .

This suggests that shoppers shouldn’t be the only ones watching their points pile up, as more and more companies move the concomitant data into their own lucrative unit.

Record cocoa prices leave a bitter aftertaste

Supply disruptions have driven cocoa bean prices to remarkable heights. The chocolate makers are melting. The shares of the world’s largest group, Switzerland’s Barry Callebaut, have lost a third since the start of 2023.

Some relief came to the group’s investors this week with better-than-expected half-year results. Yet the volatility of raw materials means that this sweet taste probably won’t last long.

Investors’ biggest concern, of course, is that consumers are buying less chocolate.

Traditionally, this is not a problem at Barry Callebaut. It is well known for its inelastic demand even though its prices have been increasing for years. Its prices have increased by around 20 percent since the start of 2021. Volumes over this period have remained stable. Surprisingly, volumes remained resilient in the six months ended February, increasing 1 percent.

Elsewhere, there are clear signs of tension. Working capital is particularly low. This jumped by 800 million francs over the half-year and contributed to negative free cash flow of 1.1 billion francs. As a result, net debt jumped to 2.6 billion francs, or almost three times Ebitda. Barry Callebaut refinanced its debts and expanded its revolving credit facilities. It aims to offset the impact of rising bean prices through cost savings.

Line chart of Liffe cocoa price (£ per tonne) showing cocoa futures curve

Cocoa prices could remain high even if fears of insufficient supply appear exaggerated. An inventory-to-use ratio of more than 30 percent is high compared to the previous bull market of 1977, when the figure fell to 18 percent, notes Jonathan Parkman of broker Marex.

The cocoa market has since evolved. Major chocolatiers are now looking for premium qualities to keep their sustainability promises. Spot prices are stuck at record highs due to growers’ fears of running out of higher-quality bean varieties. Additionally, buyers are staying away from the futures markets in Ghana due to the country’s financial crisis and default.

These two factors will keep spot prices higher for longer. This will continue to add debt to the finances of chocolate makers.


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