Coalition loyalty: future-proof, or reaching its limit?
There is some debate about whether the coalition model for loyalty programmes is truly future-proof, or whether it is already reaching its limits, according to loyalty expert, Peter G Wray.
British market research consultancy Finaccord recently published an estimate of the number of memberships of coalition loyalty programmes, suggesting that currently some 650 million consumers around the world are likely to be members of at least one coalition loyalty programme - by which the company meant "loyalty programmes that involve more than one organisation and are jointly owned and managed".
This estimate equates to around 14.4% of the world's adult population. This is a significant finding that is surely a truly staggering figure even if it is out by some margin.
In searching for the origin of the coalition model, one good candidate for this accolade is the launch in the early 1980s of American Airlines' AAdvantage frequent flyer programme. Another claimant as an originator of the model is Sir Keith Mills who developed the original Air Miles loyalty programme in the late 1980s, and then sold it to British Airways as he expanded the idea into other markets.
But what has been the cause of this rise to dominance by the coalition loyalty programme model, and is it set to offer a future-proof loyalty programme format, or does the basic customer value proposition have limits to its growth? To answer this question, we must answer three basic questions about the coalition model:
- Are coalitions delivering value for all stakeholders?
- Are they more efficient than standalone loyalty programmes?
- Do they travel well globally?
The dominant sector for coalitions (as defined in the Finaccord research) was airline frequent flyer programmes, and this is hardly a surprise. When American Airlines introduced its programme, the purpose was simple: to reward customers for using the airline, and to promote future customer loyalty. It is an understatement of its influence on all that followed to merely call it "successful". Other airlines soon followed until the frequent flyer programme became a 'hygiene factor' for the airline industry.
- Has the coalition model delivered value to its stakeholders? The answer "yes and no" may be a reasonable response, depending on which way you approach the question. At an FFP conference in 2008, Craig Landy from Groupe Aeroplan quoted figures of 20 trillion miles accumulated in FFP programmes globally - clearly a success by most people's definition. Many members must have responded and flown many miles or indirectly made purchases linked to the programmes to build up this kind of unredeemed liability. He also revealed that mileage growth was then ten times the capacity of the airlines to redeem in the form of free flights.
This redemption dilemma may pose a question about the value to the members of these programmes. Indeed, Landy said that only 60% of flight reward demand was being satisfied at the time. The reality is that the FFP model became a victim of its own success. It spawned the spin-off of FFP organisations (such as Groupe Aeroplan) that then developed standalone expertise that further developed into international coalition loyalty marketing mega-groups.
This inspired Sir Keith Mills to create the original Air Miles sales promotion model. He then took this idea global and his International Loyalty Management Group then refined the model into one of the dominant coalition loyalty models of the past two decades. For the profit-challenged airline business in the era of intense competitive pressures and rising jet fuel prices it also opened the Pandora's box of selling 'miles' to organisations to promote sales via their FFPs, which encouraged an over-issuance of this form of currency relative to airline redemption capacity. What is undeniable is that the original AAdvantage idea has gone way beyond what any one at the time could have anticipated. Big money, from large companies to private equity have seen and realised value in these programmes.
- Are coalitions more efficient than standalone loyalty programmes? This is possibly a more straightforward question to answer. The coalition model aggregates the earn-and-burn options across all consumer channels for collectors (members) and that offers better value than most standalone loyalty programmes which may offer the same issuance rate (typically around 0.5% - 1.0% of the retail purchase price) but which then fragment the earn-and-redeem options across a wallet full of plastic.
The average consumer's view of a coalition programme could be summarised as "one card, one currency, easier to earn, and a good supplier of rewards". Convenience, that ultimate motivator of the modern consumer, is a powerful 'call to action' even in the post recession era of tighter household budgets and less discretionary spending.
From the perspective of retailers considering becoming partners of a coalition loyalty programme, the model offers shared costs (both start-up and ongoing), shared launch advertising, possible shared ownership possibilities and shared multi-channel collector communications. For the independent programme managers who typically build and then operate the coalition loyalty models the greater value is increasingly due to factors beyond the loyalty programme operation itself: greater consumer spend across more sectors, and much greater penetration of target market households, as well as in-depth consumer lifestyle and life stage segmentation opportunities. Intelligent commercialisation of this insight offers very real value opportunities.
- Does the coalition model travel well globally? Many of the big financial bets that have been placed in the past decade on building or acquiring ownership of coalition loyalty programmes are predicated on the fact that the business model for coalition loyalty will travel well. All of the current 'Big 3' coalition loyalty management operating companies (LoyaltyOne in Canada, Groupe Aeroplan in Canada, and Loyalty Partner in Germany) have either already started to expand internationally or declared it as a strategic objective.
European, Latin American, India and Asian markets are all now seen as growth opportunity areas. Some initiatives are already in play. The Dotz coalition loyalty programme in Brazil has attracted significant equity investment from LoyaltyOne. India has the i-Mint programme that is now owned by Loyalty Partner. And in Australia and New Zealand, the Fly Buys coalition programmes are well established and, in early 2011, FlyBuys Australia was fully acquired by Coles (a major partner in the programme).
Despite these positive indicators for the coalition model, some very large consumer markets have so far proved difficult to penetrate. The United States has numerous consumer loyalty initiatives but has so far proved elusive in terms of a coalition across all States, with the exception of cause-specific programmes such as 'Upromise' (college savings). The Malina coalition is running in Moscow but has so far not expanded into other Russian Federation cities.
Historically, retailer-focused coalition programmes have struggled to cross national borders as the customer base of the issuance partners is firmly rooted in national markets. The management expertise, operational and IT support systems can obviously be leveraged across national borders but the cultural issues and some national legislative constraints on consumer promotions have limited approaches to rolling these programmes out across national borders without considerable local modification.
The Arabic markets have seen limited coalition activity with the notable exception of Aeroplan-owned RMMEL programme in the UAE and Bahrain that partners with HSBC. Significant Asian markets with a large middle class consumer target market such as Japan have seen little coalition activity until the launch of the Ponta Point coalition programme in 2010 which is supported by some large corporations based in Japan. The Bonus Link coalition programme running in Malaysia and the eBucks coalition developed in South Africa suggest that the model does travel.
But what are the opportunities in the fastest growing consumer market in the world: China? So far, China remains an opportunity area that is yet to be explored, with the notable exception of Henry Winter's Smart Club programme. In 2001, Winter started Smart Club in Shanghai, one of the first businesses in China to focus on consumer loyalty programmes. Recently, Winter stepped down as the CEO of Smart Club but he still thrives on being an entrepreneur and is preparing for his next venture. In an exclusive interview with China Knowledge@Wharton, Winter talked about what he had learned in the past decade in China, and the gap between entrepreneurial ideas and business realities.
Looking back, he thought that one of the reasons that Smart Club did not turn into a huge money machine was that he designed it at the beginning to be half-way between consumers and retailers. But, in the business of consumer shopping, he now realises that it simply does not work that way: "You have to be 100% on the side of consumers. If you have a lot of passionate consumers who believe what you do, then they will buy from anyone that you recommended. So if you can really deliver consumer sales to a retailer or a brand, then the client will come to you and say, 'I want to work with you, please take my money'. So we have been trying and we are still trying to make Smart Club more valuable for consumers."
So what do these insights and the investment bets of the last decade imply for the near term and long term of international coalition loyalty programmes? The operational efficiency and improved shareholder value gains that are theoretically possible within this type of programme is evidenced by the investments made to date. The benefits of leveraging these skills, world class data analysis, and customer insight resources is evident in the successes of and subsequent re-signings of partner brands that have supported coalitions. The coalition loyalty model does offer significant benefits for most stakeholders, for most of the time. We can reasonably 'tick the box' for stakeholder value and overall efficiency, but the ability travel may have some limitations. In terms of consumer growth over the next 25 years, keep a watchful eye on China and India. The relative success of the i-Mint programme in India suggests that, despite the difficulties of a fragmented retailing environment and the logistics challenges, India may yet be a huge coalition opportunity.