Visitors to England usually have an easy to predict list of “must see” destinations during their stay. After coping with the adjustment to a different time zone, most are off to see Buckingham Palace, Big Ben, and the London Eye. With cultural needs somewhat satisfied, a bevy of High Street merchants are on the “shopping” list including Burberry’s, Fortnum & Mason, Harrods and Marks & Spencer, to name a few.

In these challenging economic times, one might assume that these big names might be viewed almost as touristic destinations with discounters being given the nod for actual purchases. That is not necessarily the case as the retail phenomena in the UK seems to favour the high and low ends of the market with only those mired in the middle encountering difficulty.

The grocery price war underway seems to reflect the trend as Asda; Wal-Mart’s European subsidiary is prospering while perennial market leader Tesco is seeking to re-establish its position by offering double points for the first time ever as part of its Club Card rewards program.

There appears to be a significant change in the UK Retail Fashion Market. Similar to the grocery retail sector, consumers are seeking bargains and the trend is for the low-price retailers (e.g. Primark, George at Asda, H&M) to enjoy growth in revenues, the middle-market retailers (e.g. Next, M&S) suffering a decline in sales whilst the high-end market is performing well with the likes of Hackett, Hugo Boss and Harrods showing significant results.

Over the past decade one of the most enduring trends on the UK high street has been price deflation. Fast and inexpensive fashion has become a fact of life for consumers used to being able to grab the latest looks at throwaway prices. The rise of value fashion has seen some of the biggest success stories of recent years with the likes of Primark, New Look and the supermarkets establishing cut-price clothing offers.

Retailers have been working with ever tighter margins to keep pace with the intense competition on price. But the global financial crisis has skewed a lot of the economic dynamics that made the rise of the value retailer possible, and now manufacturers, brands, retailers and consumers are all feeling an unprecedented pressure on finances.

The dramatic changes in the value of currencies, most notably the weakness of the sterling against the dollar and the euro, have meant that in the space of just a few months, suppliers and retailers have seen the cost of buying product (retailers typically buy in dollars from the Far East) rise significantly.

In this sector, Harrod’s posted surprisingly strong results as the Knightsbridge retailer owned by Mohamed Al Fayed said sales grew by 9% to hit a record £751.7m in the year to January 31.  For Loyalty Marketers, the news was good as well as the retailer commented that “take up of its loyalty card scheme had been strong over the period“.

Customer centric marketing combined with capital expenditure of £24m during the year were just a few aspects of Harrods’ secret to success. The fact that Harrod’s credits the loyalty scheme as a contributor to its recent success  tells us that Loyalty works among affluent shoppers as well as the mid-market. There is a similar case in the US, as Niemen Marcus continues to promote its “In Circle” program, generally rated as one of the best structured in the North American retail sector.

In other retail loyalty news, Debenhams withdrew from the Nectar Coalition Programme in 2008 as the relationship had failed to deliver an acceptable ROI for the leading UK department store.  I would suggest that Debenhams may have enjoyed greater success from the Nectar relationship if they had focused their Loyalty activities on Nectar rather than confusing customers by also offering their own Store Card Programme.

Nectar has now recruited House of Fraser and Next as new partners although points are only earned for online purchases. Marks and Spencer also operate a Loyalty scheme for their private label cardholders but also fail to recognise and thank other ‘loyal’ customers that prefer to pay cash or use another form of payment.

Across Europe there are numerous Fashion Retailer Storecard programmes offering rewards for consumers using high APR (average 19.9%) cards but seemingly ignoring the ‘invisible customer’ who may be a more valuable consumer.

It seems that Loyalty works with the affluent sector as in any other but, unlike the grocery market; Fashion Retailers are failing to create effective Customer Management strategies and only use Loyalty as a promotional tactic.

One mantra of Loyalty Marketing practitioners is that discounting is not a sustainable strategy. While it does create temporary impact to boost sales and adjust inventory levels, it is not a differentiating tactic and does not serve as the foundation for creation of competitive advantage through a strategic marketing plan.

That said, discounting is one of the preferred tools of retailers and grocers. The Wall Street Journal reported that leading UK grocers have taken to slashing prices, offering discounts, and launching new private label brands to vie for basket share.

The approach is short of subtle as Asda, Morrisons, Sainsbury’s & Tesco are creating advertising campaigns highlighting price advantages and a slew of discounts.

The price wars were triggered by the economic meltdown started one year ago and each brand that formerly differentiated itself by a unique characteristic (Asda “low prices”, Morrison’s “low priced deli”, Sainsbury’s “good food”, Tesco “broad choice”) now seem to be merging at a rapid pace.

As example, Sainsbury’s renamed a familiar advertising campaign from “Taste the Difference” to “Spot the Difference” and has a celebrity chef instructing on how to “feed your family for a fiver”.

The introduction of new privately branded products is driven by gross margins typically 10% higher than regular brands. The chain that can convince the public that they offer highest quality and best price while looking out for the families’ interest will presumably break from the pack. Waitrose, a traditionally up-market retail grocery chain, have also introduced an ‘own label’ range to retain consumers’ loyalty.

There is an element of Consumer Fatigue in all of this ‘price-war’ activity with each Supermarket claiming to have many prices lower that its competitor. Consumers are confused and research indicates that all retailers are doing well during this ‘credit-crunch’ as many families are eating at home more often.

Fascinating here is that ALL of the competitors seem to be benefiting from price wars. Of those reporting, Morrison’s led with an 8.2% same store sale increase in the latest quarter while Sainsbury’s chalked up a 7.8% gain and Tesco’s 4.3%. In the US, Kroger posted a 13% increase in the most recent period. Tesco, however, has seen a decline in its share value (down 7.4p to 364.5p) and remains bottom of the UK supermarket league table in terms of underlying sales.

Kroger is of interest as they are the second largest food retailer in the U.S. following Walmart and are using DunnHumby, a data analytics firm owned by Tesco to leverage its loyalty program data and enable discounts and special offers choreographed by historical purchase data and customer preference.

Where the current price war will end is uncertain and experts including Darrell Rigby, Head of Global Retail Practice at Bain & Co. are sounding early alarms by saying “price cuts are management heroin“. He notes “they’re addictive …. customers develop a craving for big discounts and an aversion to full prices. Companies get used to the boost in volume and risk a backlash when they try to raise prices later.”

For Asda, its almost business as usual. A subsidiary of Walmart, the company subscribes to the “Always Lowest Prices” motto. For market leaders Tescos (30.8% market share) and Sainsbury’s (16%), pure price competition is new ground.

The question, particularly for Tesco is whether they are progressively eroding the equity they have built into the Club Card over the past decade and how they can change course in time to ensure that this will not, in fact, be the case.

STOP PRESS !!!

Tesco is determined to get back onto the front foot and is doubling Clubcard Reward Points. Members will now receive 2 points for every £1 spent, meaning that a family spending £100 a week will receive £104 a year in rewards. This is the biggest change made to Clubcard since its launch 14 years ago.

Analysts suggest that, on one level, this strategy could be put down to the fact that Tesco has performed well for a decade, whereas others are recovery plays or have much more patchy records. Also, with a Tesco on almost every corner, there is an element of saturation and some stores are bound to cannibalise sales of others.

The increase in points funding will cost Tesco £400m but their track record suggests this move has been properly planned and is not a knee-jerk reaction to rivals.

Mike Atkin is President MJA Associates a UK based Loyalty Consultancy. We welcome him as the kickoff contributor to the “Loyalty in Any Language” series.  A highly respected industry expert with twenty plus years experience within the Loyalty/CRM Solutions Market, Mike Atkin  has broad knowledge of all aspects of Loyalty Programmes, including strategy and operations.

Mike has reviewed and benchmarked over 40 global Loyalty Software Platforms and completed evaluation studies of capabilities on behalf of programme operators in the USA, UK, South Africa and Russia.

Mike has worked with many notable brands including Premier Points, Amex Membership Rewards, Shell Smart, Boots Advantage, Marriott Rewards, as well as Tesco, Sainsburys, Somerfield, LloydsTSB, Asda, ExxonMobil, GE Capital, American Airlines, Visa EMEA, House of Fraser and Microsoft.