Nectar Case

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Problem Statement
Sainsbury’s implementation of LMUK’s Nectar loyalty program is one of its largest outsourcing collaboration in history. Although the partnership has been proven to be successful, Justin King ponders over whether Sainsbury’s should continue to work with LMUK or go solo and develop its own loyalty program. Benchmarking with other grocery chains, the group chief executive is wondering if Sainsbury’s should continue to invest £120 million on Nectar or shift the investment to other potential uses to generate more returns. If Sainsbury’s pulls out from the collaboration and discontinues its investment in Nectar, it will risk losing its customer equity built upon the Nectar loyalty program. Thus, Sainsbury’s should stay with LMUK and invest into improving its loyalty program to grow customer equity and retain its profitable customers.

Market Analysis
The grocery market is undoubtedly large and is dominated by four large players which are: Tesco, ASDA, Sainsbury’s, and Morrison. The rest of the market is taken up by smaller grocery chains and convenience stores, which have been losing market shares to the aforementioned supermarket chains. Loyalty programs were introduced several years ago, but is not necessarily a current industry trend in the grocery retail market since companies hold conflicting beliefs towards the effectiveness of a loyalty program; some believed strongly in loyalty programs, while others believed that customers preferred price-cuts instead. Nonetheless, loyalty programs much like Nectar were common overall in the United Kingdom.

The correlation between a customer loyalty program and sales revenue or market share is not illustrated in the market; Tesco, which believes strongly in its program, has leading market share of 26%, but Sainsbury’s, which also has a program, is losing market share to ASDA while having the same share of 17% each. However, revenue is not an accurate measure of the benefits of a customer loyalty program since those numbers on the income statement do not reflect the churning of customers.

Competitor Analysis
Sainsbury’s’ as well as Nectar’s competition can be separated into different categories. Sainsbury’s has competition within the grocery retail industry and within that industry the partnership between Sainsbury’s and Nectar have direct competitors, which are chains who also employ a loyalty program. Moreover, Sainsbury’s also has competition with the other sponsors of Nectar.

Within the grocery retail industry, Sainsbury’s competitors are Tesco, ASDA and Morrison. However, beyond the three large chains, other smaller chains such as Waitrose and Marks & Spencer cannot be overlooked since they offer high quality products. In terms of positioning by price, Sainsbury’s is positioned lower than Waitrose but higher than Tesco and ASDA, believing that its higher quality product offering gives reasons for its higher prices. Along with higher prices, poor product availability and poor previous loyalty program are likely to be reasons to Sainsbury’s losing market share to ASDA.

Tesco is Sainsbury’s most direct competitor since it is also a grocery chain that has a extremely successful loyalty program in effect. Tesco’s program is different from Nectar in the sense that Tesco owns the program and other retailers are partners on Tesco’s terms. Tesco argues that an independent branded loyalty program with multiple partners does not strengthen customer relationships. Thus, it has its own program to keep a closely tied relationship with its customers since its card is solely for Tesco customers.

In addition to competition between grocery chains, Sainsbury’s also competes with other Nectar sponsors who sell some of the same products or offer similar service. The Nectar program intensifies the competition between sponsors, but is still beneficial for the sponsors since it increases the share of each sponsor by taking the shares from other retailers who have...
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