Focus on China: A new consumer revolution?

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By: Wise Marketer Staff |

Posted on August 14, 2008

Focus on China: A new consumer revolution?

The Wise Marketer has recently interviewed Henry Winter, CEO for Chinese loyalty programme operator SmartClub, to find out how the country's customer loyalty outlook is changing. In this interview, our European editor, Peter Wray, explores the rise of SmartClub and its e-community and coalition loyalty models.

China is now the focus of world attention as it stages the 29th Olympiad in Beijing, and the world's best athletes have assembled to strive for gold in their quest for personal achievement and national pride. China is also the world's fastest growing economy. In 2007 Newsweek quoted Lawrence Summers, former US Secretary of State, on the extraordinary nature of the rise in Chinese living standards. During Europe's industrial revolution, two centuries ago, average Europeans saw living standards rise by 50% during their lifetimes. But during China's modern-day economic revolution, Summers predicted that the average Chinese person would see their living standards rise by as much as 10,000%.

Evolving consumer culture Against this background it seemed timely to interview one of the leading exponents of customer loyalty marketing in this dynamic and hyper fast evolving consumer culture. What happens in this 'workshop to the world' will surely create ripples back across the developed markets that are the buyers of much of what the country produces.

SmartClub was launched in Shanghai in 2003 by founder and current CEO Henry Winter. SmartClub comprises two key business models: a coalition loyalty programme and an online rewards community. An exclusive contract was signed early in the life of the scheme with the operators of Shanghai transportation system operators. This created an immediate 'in the wallet' loyalty identification token that was smart card based for the membership.

The scheme was also successful in quickly signing deals with some major retailer partners, McDonald's, Chow Tai Fook(a major jewellery retailer), Allianz Insurance, Lianhua Supermarkets, Sport 100 and the number 2 mobile operator Shanghai Unicom plus many others.

The start of SmartClub We asked Henry how he got involved in the programme and his background: "I was born in Michigan and am an American Citizen, I hold three Masters Degrees from the Universities of Pennsylvania, Columbia and Wharton Business School. After working as a derivatives trader in Paris in the 90's I moved to work for Booz Allen consulting in Hong Kong in 2000. It was during this period that I became interested in the music industry and I left Booz to create my own marketing agency called 'Groove Street', this was an agency offering services to large consumer brands to access their customers via the medium of music."

Henry then explained how this venture did not develop as profitably as he had originally hoped so he started to consider other business models. During his time in Hong Kong he had spent a lot of time understanding and speaking with the operators of the 'Octopus' mass transit system and this knowledge had enabled him to fast track a deal in Shanghai, China with the operating company of the Shanghai system when he moved to the city in 2003. "Basically, my knowledge gained with the Octopus scheme enabled me to agree an exclusive deal in Shanghai within three months. This offered me the platform solution for a start up loyalty programme and an existing card user base of five million metro transit customers but they had no data base information on the consumer preferences of this base."

Rapid development At the end of 2007 the SmartClub programme had 3 million registered members with an active membership of 600,000 (defined as having purchased or engaged with the scheme in the previous quarter). Viewed from a distance this seemed an entrepreneurial and successful platform for future growth in the worlds fasted growing consumer economy. The opening comments of Henry Winter were therefore a bit of a surprise as he started to explain the current status of the programme: "The loyalty business in China (i.e. points and rewards schemes) does not work. I have a power point presentation entitled 'How to Fail at Loyalty and Reward Schemes', based on five years of trying to make the current business model work effectively - and concluding that this has been a low return on my time and money invested so far."

Winter went on to explain that in his experience standalone or single brand loyalty and member reward schemes in China struggle to offer real value to their memberships. He has concluded that only already successful businesses such as Airlines, Banks and existing successful large scale businesses can operate a loyalty schemes with any scale. He has also observed that most of the existing consumer loyalty schemes in China are driven by a focus on the IT platform and not the end member value proposition. The reasons given by Winter for his conclusions are based on his assertion that the Chinese consumer does not perceive any real value in the points, or the rewards that are associated with redemption. A very interesting 'acid test' for Winter was that none of his staff could personally be bothered to collect or redeem the points that were being issued under the existing scheme.

"If even our staff find these schemes dull, boring and lacking in exciting rewards to motivate buying behaviour then why should our members be bothered to chase the points?", Winter explained. Toward the end of 2007 Winter therefore decided to find a better business model. From July 2008 he announced that he has concluded a deal with Xinhua Media Group (which operates a major printed media channel in Shanghai, including the three largest daily newspapers). Winter said that the deal is based on Xinhua injecting working capital into a new joint venture company and providing free advertising space in its circulation press. The deal from Winter's side is that he will provide the SmartClub branding, intellectual capital, and marketing team.

New positioning SmartClub is now on course to be repositioned as a Media Marketing company that will provide targeted marketing via the club membership to brands that are building consumer interest in China. Members will be offered specific 'deals' with real value and the free advertising space with his new media partnership with Xinhua Group will provide him with access to the targeted audiences.

Winter explained that he is not trying to attract in this business model the entire 5-10 million consumers (among the 20 plus million population base in Shanghai) who are working in modern business and routinely travel to work on the Metro system whilst reading the press. In fact, he is now seeking to identify 'clusters and segments' of consumers who have specific lifestyle or life cycle interests rather than just a very broad grouping of 'young, white collar and internet users'. He defines these clusters in terms such as 'consumers who are female, young and love fashion', 'consumers who are male and love fast motor cars', 'consumers from either gender who like sport' - and he is expecting these clusters to be around 50,000 consumers in size.

His approach will be to then target these groups with a large and regular advertising copy through the Xinhua newspaper coverage with specific and great value offers. His analysis is that 'Plan A' which he had been developing in the previous scheme had been to cut a deal with a supplier to offer as an example one weeks free health club membership for the majority of his members but he has concluded that the consumers perceive this as a very poor deal and consequently lose interest in the overall programme.

Alternative approach His 'Plan B' approach will be to negotiate reward deals such as free membership to a health club for three months for a selected group of one thousand members who will feel that they have received a really good offer. One thousand very happy members will then offer greater viral marketing support and generally better public relations support for his programme even if economically this can only be made available to one thousand of his members. These are going to be distributed to SmartClub members in an unapologetically non-democratic manner.

True value for the end-user will be his guiding principle, and he has instructed his reward negotiations staff to seek deals that are so good that they want to retain one of them for themselves. He admits that it is taking time to get his staff to realise that he is serious in this statement. Quality not quantity in the offers will be the objective and his data analysis of the SmartClub membership will allow him to make these offers to specially selected members based on their consumer profile relative to the offer. Using this approach Henry believes that his members will respond rapidly to the offer and quickly identify their interest and validity as consumers within the target segment.

The creation of these self identifying 'clusters' of consumers is very similar to the creation of special interest 'clubs' that are a feature of the well developed large scale loyalty schemes such as the Tesco plc 'Clubcard' programme who have created 'Mother and Baby clubs', 'Fine Wine clubs', 'Organic Food buyers clubs'. The difference in the business model approach from SmartClub is that the consumer is effectively being challenged to self identify themselves due to the very high value in the offers advertised. This differs to a Tesco approach that uses the extensive data analysis capabilities of Dunnhumby based on the Clubcard programme to identify potential club members by data analysis.

It also has the advantage over the analysis based approach in that sophisticated IT and point of sale connectivity to capture consumer transaction details are not required since the consumer is effectively finding the club rather than the supplier targeting of potential members. This is an approach that accepts the reality of fast growth emerging consumer markets as opposed to mature and highly developed markets.

A new revenue model The revenue model that Winter has negotiated will be based around a 'finders fee' to brands for a targeted consumer segmentation plus a flat fee, rather than a transaction based fee' for assumed revenue uplifts. This has the attraction of being similar to the existing type of calculation that is undertaken when brands select media channels for above the line advertising.

The deal that SmartClub has negotiated with Xinhua Media Group gives the company access to this advertising space and this approach then leverages the reach to the SmartClub membership. The proof of this approach will be tested as this new model SmartClub is developed over the next six months but Winter is confident that the 'pull' of the really attractive consumer offers will drive sales for brands. Looking to the future, the current deal will be evaluated by all parties in early 2009 and Beijing is the next target city in China for expansion of this new business model. The path to enlightenment, Winter claims, is in "greater simplicity, not greater complexity" - which is an interesting observation from a long term student of the martial art of Kung Fu.

Future challenges The challenge for the future with the programme will be to build consumer segmentation models by aggregating other loyalty programmes in China and he is busy making deals with other operators in the market to add to his scale leverage. Winter concludes that consumer loyalty schemes have a long way to go in China and that sophisticated retailers are not yet engaged with this type of marketing which is why he believes his new venture will offer better member value and better consumer access for the brands new to the Chinese market.

His experience with developing SmartClub in Shanghai over the past five years has convinced him that the classic coalition loyalty programme structure is a very complex way to try to create value for shareholders and members. "To be blunt about it, not many people create high personal wealth value using this traditional business model approach to consumer loyalty programmes, and Sir Keith Mills is a notable exception," said Winter.

Conclusions Winter's conclusions are that the business model for loyalty with the emerging Chinese consumer with disposable money to spend is currently flawed and that he new partnership deal with Xinhua media group is what is going to change the dynamic and build a more scalable and sustainable business model. With the speed of developments in China he expects this new strategy to be justified by the end of 2008.

In the developed economies of Europe, Americas, and Asia, the recessionary pressures are building and consumers are seeking greater value and more service from their chosen suppliers. Many loyalty models currently being deployed are based on a one-way flow of communication from programme manager to the member that was the only option in the late 20th century pre-internet and ATL advertising world. This has largely changed, and many loyalty programmes are still based on a premise that dates back to the original schemes launched by the airlines back in the early 1980s.

The strategic justification for many loyalty schemes is the collation, analysis and intelligent application of customer insight to make marketing offers relevant, timely and convenient to their customer base. This is a solidly researched business truth, especially for the loyalty schemes run by increasingly broad-based retailers such as Tesco in the UK. But the key finding that the experience of Henry Winter and his SmartClub supports is that real customer value is going to have to feature more prominently in the overall customer value proposition if loyalty schemes are going to remain globally relevant in the future. China has been the manufacturing 'engine' that has driven value for consumers globally, but it may now be setting the standards for consumer expectations in terms of both value and service.

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