Cut it out: U.S. stores may kill coupon clutter

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You're a vegetarian dog owner with a weakness for ice cream who drinks nothing but organic milk, suffers from an obsessive-compulsive cleaning disorder and consumes three cans of artichokes a week. So why does your corner grocer send you cat food ads, chuck roast offers and coupons for Gatorade?

Despite sitting on a mound of data painstakingly collected via loyalty cards, grocers are guilty of not just killing their margins with irrelevant markdowns, but annoying consumers with advertising clutter from cumbersome coupons to one-size-fits-all promotions.

Despite a test market here and a rollout there over the last decade, widespread adoption of so-called one-to-one grocery marketing programs in the U.S have stalled, in part, industry insiders said, because of Wal-Mart's meteoric rise to No. 1 in the category in just 15 years.

As the big chains hustled to catch up and with the behemoth's outright rejection of any kind of loyalty-card program, ambitions were dampened in an industry known for its copycat ways. But now change is coming-albeit slowly-to the billions in trade promotion spent by consumer package-goods companies and retailers, especially considering the success in this arena of the U.K.'s No. 1 grocery retailer, Tesco.

The chain's widely lauded in-store kiosk program and Clubcard developed with sophisticated database marketing tools managed by Dunnhumby, an international customer management specialist, allows customers to insert their club cards and recieve customized coupons. And it has many U.S.-based grocers eager to sign on. Where they have failed to win against Wal-Mart, Tesco has more than held its own against Wal-Mart's Asda division-so much so that Wal-Mart CEO Lee Scott even asked the U.K. government to scrutinize the chain's 30% market share in 2004.


"The Wal-Mart effect has been very large and people have been struggling with how to react," said Simon Hay, CEO of the U.S. division of Dunnhumby in Cincinnati.

Mr. Hay said his firm, of which Tesco has an ownership stake, launched a joint venture with No. 2 Kroger two years ago and since then his offices have exploded to more than 140 people. Mr. Hay said the division works closely with more than just Kroger, though, and consults with retailers in many categories, including electronics, and the likes of Procter & Gamble Co. and other package-goods marketers.

Mr. Hay would not elaborate on specific marketing programs at Kroger, but said the retailer is "trying to engage the customers and use the data to improve the customer shopping experience."

Industry watchers expect Kroger to adopt many of Tesco's strategies in its 2,515 stores nationwide. No. 3 grocery chain Albertson's, currently in takeover talks with Kroger Co., is also launching its own Tesco-like program with in-store promotional kiosks in 200 Chicago-area stores. There, instead of lugging in coupons or scanning newspaper inserts, a shopper inserts a loyalty card at an in-store kiosk to receive offers or log onto a Web site to find out if they get a $1 off their favorite frozen pizza or shampoo brand.

So how does this help margins for grocers? The technology used for the Albertson's test can hypothetically allow the retailer to offer a truly loyal shopper organic milk for $1.99, while selling the same gallon to a less loyal shopper for $3.19. "Why sacrifice margins to a customer you don't want?" said John Hennessy, VP-sales and marketing at Concept Shopping, the Chicago-based technology firm implementing the Albertson's test.

Down the road, this kind of tailored promotion could theoretically end the need for mass distribution of newspaper inserts, circulars and coupons, industry experts said. The technology also gives retailers a way to vary pricing and improve margins. Until now, retailers have tended to use point-of-sale coupons to reward customers, mostly offered via Catalina Marketing, the $400 million firm known for its cash register coupons.

"Today, when you buy Coke, you get a coupon to buy Pepsi," said Caroline McNally, chief marketing officer at Pay By Touch, a San Francisco-based biometrics payment company founded in 2002 and rolling out an in-store kiosk. "The package-goods guys are always trying to get you to switch. That's it. But the retailer wants to give the Coke drinker a reward for buying Coke."

Pay By Touch already has a deep client base including Albertson's, Cub Foods, Farm Fresh, Piggly Wiggly, Thriftway and Pick n' Save Metro Market using its checkout system that requires customers to place a finger on a scanner to verify identity. Ms. McNally said it would be easy for clients to add its kiosk technology to the stores.

Long way off?

Jon Hauptman, VP of Willard Bishop Consulting, a Chicago-based firm focused on the grocery industry, said widespread adoption of this kind of technology is a long way off. After all, the billions spent on trade promotion is focused not on building shopper loyalty for retailers, but to consumer brands. Shifting this prevailing mind-set requires consumer package-goods companies to give up even more control over that spending.

The motivation is clearly there, though. The nation's grocery store retailers have mostly given up on competing with the everyday low-price strategy used by Wal-Mart, the nation's biggest grocery chain. Instead, these chains must use focused promotions to drive traffic and reward customers-something Wal-Mart cannot do because it lacks a card-based loyalty program.

"Why should a retailer spend all their markdown offers on people who are just going to come in and pick up sale items only? They are looking to reward the loyal ones," Mr. Hauptman said.

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