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Why loyalty schemes are a con

Woolworths Limited (ASX: WOW) has just signed a new alliance with Qantas Airways Limited (ASX: QAN), allowing shoppers to earn frequent flyer points for every dollar they spend in stores above $30.

It comes after a massive consumer backlash over the supermarket giant’s previous plan to give shoppers an automatic discount for spending on ‘selected’ items in store, rather than earn frequent flyer points.

One Woolworths customer who spent $1,000 in store and accumulated just $4.80 in savings posted his thoughts on the retailer’s Facebook page complaining about the new scheme and more than 50,000 shoppers agreed with him.

“I used to love your rewards card, until its so-called upgrade. I was an average spender of $200 to $300 per week for the basic fact I’d get weekly bonuses of $20 to $30 on my purchases to be spent on my next shop or some random midweek items. “I’ve had the new upgraded ‘Rewards’ for now a few weeks and have earned a whopping accumulation saving of $4.80 on an amount of shopping in excess of $1,000 (previous returns of $80+).”

You see those ‘selected’ items Woolworths wants you to buy instore are marked with orange tickets, but they seem to be extremely rare. The Australian Financial Review (AFR) says it found around 20 orange tickets at a full-format supermarket in Sydney last Sunday. That’s far and away less than the 500 items Woolworths claims.

The move is clearly designed to lift profits at the struggling supermarket retailer, with most of the orange-ticketed items appearing to be high margin products, including some private label products such as Woolworths salad dressing.

Under the new scheme, shoppers using the Woolworths Everyday Rewards card will earn one Qantas frequent flyer point for each dollar they spend of $30 – so a $50 shop will earn you 20 points. Members will also be able to redeem $10 worth of Woolworths’ dollars into 870 points.

Analysis shows that shoppers would need to spend around $814 to earn $10 in Woolworths dollars. Frankly, consumers could probably save much more than that by shopping around.

The tiny amount of points means shoppers would need to spend around $16,000 in store to qualify for 16,000 points, which would buy a return economy trip from Sydney to Melbourne (and still have to pay $61 in cash).

Therein lies the ultimate problem with loyalty cards. In exchange for giving Woolworths an enormous amount of information about your shopping habits, which they will then link up with social media, profiling, and other information databases to create a picture of you and allow them to predict reasonably accurately what you are going to buy and when. I’m sure most consumers would be horrified by how much information they can put together.

Coles – owned by Wesfarmers Ltd (ASX: WES) is not much better when it comes to data gathering and market intelligence, and for many retailers this is absolutely vital.

Foolish takeaway

I wrote an in-depth article on this issue more than three years ago, including how US retailer Target works out if a customer is pregnant (before her father knew) and can estimate the due date to a small window – allowing the company to send customer targeted offers long before other rivals.

Are loyalty card’s rewards really worth it? Perhaps not.

 

Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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