Nectar: Making Loyalty Pay Case Study

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  • Topic: Nectar loyalty card, Loyalty program, Air Miles
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Nectar: Making Loyalty Pay Case Study

Background and Problem Definition

Sainsbury’s is a medium-sized UK supermarket and gas station chain. It is also the largest participant of Nectar, UK’s most extensive rewards program. When Justin King took over as Sainsbury’s CEO in 2004, he was faced with the decision of whether Sainsbury’s participation in the Nectar loyalty program was worth its annual $120,000,000+ budget. King came over from ASDA, Sainsbury’s lower-cost competitor, where there was no loyalty program and the savings were applied directly to lower the product prices. King had 6 months to review the Sainsbury’s marketing strategy and to decide whether the company was going to maintain its 18-month- old participation in the Nectar loyalty program. This case analysis is going to argue that Sainsbury’s should maintain its participation in the Nectar program. The Nectar loyalty program was launched in 2002. The scheme was backed by £50 million pounds worth of advertising and direct marketing spend to support the launch. A number of organizations or sponsors joined forces to launch this coalition loyalty program; Sainsbury’s, Barclaycard, Debenhams, and BP, all merged their existing loyalty programs under one umbrella brand called Nectar. Their existing rewards programs were phased out within a year of the launch of Nectar and their members were encouraged to transfer to the new Nectar scheme. Consumers who used their Nectar card at participating outlets collected points, typically 2 points per each pound spent, which then could be redeemed directly at Sainsbury’s at checkout as credit towards the grocery bill or through Nectar for free flights, vacations, or Argos Catalogue purchases. Nectar was operated by Loyalty Management UK (LMUK), which covered the loyalty program’s administrative costs, customer data collection, point redemption, and other day-to-day operations for all participating sponsors. Points were sold to the sponsors for $0.005 each and bought back upon redemption for $0.005 from Sainsbury’s and for smaller amounts from other sponsors. This difference, or spread, was Nectar’s main form of revenue. Each sponsor paid a flat program support fee for participation and Nectar earned interest on the earned but not yet redeemed points. By leveraging several big brands rather than one single supermarket, like Tesco, Nectar’s loyalty program had a much broader appeal, as rewards were more attainable due to number of different participating partners available, where points could be built up more quickly. In addition to this, Nectar frequently sent their members coupon books with which they could obtain discounts, earn bonus points and even double points on certain purchases.

SWOT Analysis

Strengths * 2nd Largest Grocery Retailer * Strong Brand Name * Nectar Participation

Weaknesses * Poor Product Availability * Prices higher than 43% of other stores * High Cost of Nectar Program
Opportunities * Better and More Targeted Marketing * Higher Customer Loyalty * Lower Churn Rate * New customer acquisition * Better product stocking

Threats * Loosing market share to other grocers * Nectar participant cannibalization * Negative Nectar PR

When Sainsbury’s joined Nectar loyalty program, it was positioned 2nd behind Tesco in market share size. Tesco, a low-cost grocer with a strong, extensive loyalty program of its own, maintained a 26% share of the market. Sainsbury’s and ASDA, another low-cost grocer, both had a 17% share of the market. Sainsbury’s had a competitive advantage above both of those competitors of having a better, more premium lines of product, priced accordingly. Sainsbury’s had a well-known, respected brand and over 50% of the store’s revenue was generated through the store brand sales. Nectar participation meant that 13.5 million or half of all UK households would receive reward points and possible discounts for shopping at Sainsbury’s. As no other...
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