How the Safeway Club Built Loyalty

Many companies are experimenting with loyalty programs. The best known are the airline programs, many of which have worked extremely well. But others are having successes. This is the story of the Safeway Savings Club built by PreVision Marketing in Concord, Massachusetts.

Safeway is the third largest grocer in the US. Before they started the club, all of their stores were equipped with POS terminals that would accept a bar-coded membership card along with the product scan, and permit the computation of member benefits on each product during the transaction. Although Safeway had a points program in mind, PreVision got Safeway to think through their economics and objectives:

• How much can you afford to spend on your best customer to get her to change her behavior? When they worked out the economics, with the thin margins in the supermarket business it amounted to about $2 per month. Two dollars a month isn’t going to change much behavior.

• Whose behavior do you want to change? This was a much more rewarding question. Looking at the economics, PreVision found that the top quintile at Safeway represented about 40% of sales. In the application for the Safeway Club membership, they asked two questions: How much do you spend on groceries every week, and where else do you shop? An analysis of customer spending patterns showed something like this:

Much as Mozo savings accounts and similar price comparison sites have to be very careful to offer competitive rates to customers while still being able to make money themselves, there is a delicate juggling act for the loyalty program business model. One problem for anyone starting a loyalty program is to recognize that the people who will make most use of the program will be your top customers. You will run the danger of cannibalizing your business by giving rewards to people who are going to shop with you anyway. You will spend a lot of money, and not change behavior. It is better to target your programs mainly to those whose behavior you want to change.

When the customer’s answers on the application form were combined with the actual data on their spending patterns, it was possible to determine “share of wallet” – how much of each customer’s grocery dollars was going to Safeway. Looking at this data provided this picture:

This revealing graph showed that while there was some opportunity for additional sales among the best customers, the real opportunity came in segments two and three. This finding squares with data from other industries. Fleet Bank, for example, found that it could not profitably market to its best customers. They were maxed out. Marketing at Fleet is more profitable to the second and third quintiles where there is incremental revenue going to other banks.

Before going more deeply into the Safeway design, PreVision Marketing did an analysis of Safeway defectors. What was the profile of the people who had recently left the store? Analysis showed that the biggest losses came in the second and third quintiles, rather than in the best customers:

Armed with all of this data, PreVision Marketing began to develop a hybrid program for Safeway that had a different strategy for each segment of shoppers. The program included rewards, relationship building elements, and recognition.

The core of the Safeway program is a plastic card issued to frequent shoppers. When the card is scanned during checkout, the customer receives members-only discounts on certain merchandise throughout the store. Many of these discounts are provided by product manufacturers, seeking to promote particular brands, so the costs are not all borne by Safeway.

There was a monthly mailing that went to all 1.2 million card holders. It included a personalized letter. Customers were divided into Primary Shoppers and Secondary Shoppers. Secondaries were those whose spending patterns indicated that they did most of their grocery shopping elsewhere. Their package included a coupon for a manufacturer-sponsored item (i.e.free Dannon Yogurt) . In addition they received a $1 off coupon for anything in the meat department (if they did not shop that department) or the produce department (if they did not shop heavily there). The result of this mailing to secondary shoppers was that sales in the meat and produce departments shot through the roof! They were changing customer behavior, by getting people to visit store departments that they had not previously shopped. The strategy was working.

For Primary Shoppers, in addition to the free gift, they got a $1 off in the cookie department. There was no point in getting them to visit the meat or produce department since they already shopped there. Giving $1 off on these purchases would have cost the store too much money. But, if you give $1 off to good customers who had not previously bought cookies, it generates incremental revenue. Every Primary Shopper that bought orange juice got $0.50 off on their total order. The entire package to the 1.2 million card holders used personalized laser letters and selective inserts – for the coupons. There were 451,800 different versions of the mailing that went out.

To build a relationship with these card holders, PreVision Marketing created a newsletter called Food Sense. It contained tips and recipes. In addition, PreVision used selective insertion techniques to achieve their marketing objectives. For example, to boost the private label business, PreVision designed a “peanut butter conversion series”. Over a four month period, a series of articles in the newsletter promoted the Safeway private label peanut butter. The articles described how this peanut butter was made, and what went into it. In the third month, the article included a “stock up” offer with a coupon to take $1 off any two jars of it. In the fourth month, there was a “cross sell” offer with $0.50 off any brand of Safeway jelly. Who converted to the Safeway peanut butter as a result? Jiff Users, Skippy Users and previous non-users of peanut butter at Safwway. . It is an illustration of the pinpointed accuracy with which club membership targeting programs can change customer behavior.

The program also included personal recognition. Members get free ice cream on their birthday. “For all those who are having a birthday this month, come in for some free Safeway Ice Cream”. The customers loved it.

Was the newsletter working? One evidence was provided by the reaction to Bill McDown, a division manager whose picture was featured on the first page of the newsletter. All the laser letters were personalized from him. When he would go to the stores, people would recognize him and come to shake his hand. The first year of the program, he got 3,000 Christmas cards from Safeway Customers.

The result of the program: dramatic increases in same store sales, and increased margin which came from careful targeting. It definitely turned around Safeway’s image which had been declining in recent years. The Safeway Club went beyond discounting to produce loyalty. People were thinking, “Safeway may charge me three cents more for peas, but they send me birthday cards, and treat me right. I will shop there.” You can track that attitude down to increases in sales.

Looking at the success of this program and others that she has run, PreVision Marketing developed some tips for others who want to try something similar. Any loyalty program must be:

• easy to use
• provide immediate rewards
• have value that is worth it from the customer’s perspective
• be targeted to customers whose behavior your are trying to change
• be limited to what you can afford to spend
• have a published exit strategy

Ease of use is important. Several US programs have failed because they were cumbersome. One example is the Air Miles program in the United States. It required members to soak off or peel off UPC labels from household products and send them in for miles. It was far too much work for the customer, and collapsed. The Canadian Air Miles program, which was much simpler, is still going strong. The Safeway program worked because the company developed a relationship marketing strategy which combined recognition and reward elements with sophisticated offer targeting.

The exit strategy is also vital. Deborah Pine, Principal of PreVision Marketing, points to the Continental Airlines program a few years back which was touted as having the most liberal policy of upgrades to first class. They found that it wasn’t affordable any more so they had to pull it. They estimated in the press that they lost $100 million dollars from lost revenue from frequent fliers who were upset. A class action lawsuit followed. What was designed to be a customer loyalty program turned out to be an abysmal failure.

The Safeway program avoided these failures and proved to be an outstanding success.

Arthur Middleton Hughes, vice president of The Database Marketing Institute, has presented 28 seminars on database and email marketing.  Arthur has also authored several books includingStrategic Database Marketing 4^th Edition (McGraw-Hill 2012). He and Andrew Kordek, chief strategist and co-founder of Trendline Interactive, are hosting a two-day Email Strategy Study Group in Fort Lauderdale  March 26-27, 2013, featuring group competition for email marketers responsible for subscriber acquisition, lifetime value, ratings and reviews, boosting their email budget, and doubling their ROI.  To learn how to attend the Study Group, click here

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