Is Sears Holdings' Loyalty Program Helping or Hurting It?

Retailer Reports Loss as 'Shop Your Way' Members Redeem More Points

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Ads promoting Shop Your Way proved successful.
Ads promoting Shop Your Way proved successful.

Sears Holdings says its Shop Your Way rewards program is working -- very well in fact -- but it hasn't been enough to push the retailer into the black.

During the second quarter, the retailer, which operates Sears and Kmart, continued to offer traditional promotional discounts and spend on advertising, getting plenty of exposure from the popular, "Ship My Pants" and "Big Gas Savings" ads. It also took a hit as more Shop Your Way members redeemed points. The retailer reported a $194 million loss during the second quarter as same-store sales fell 1.5%.

Sears Holdings spokesman Chris Brathwaite said, over time, points and other Shop Your Way promotions will replace some traditional advertising programs. He declined to provide a specific time frame.

"Results were impacted as we accelerated activity around transforming the company into more of a member-centric retailer," said Mr. Brathwaite. "There is some level of duplicative discounting."

Under the program, members earn points for purchases made at any Sear Holding brand. During the second quarter, the retailer said more than 65% of its sales came from the program's members, a 10 percentage point increase over a year ago. Members also redeemed more points, and the number of members shopping regularly – defined as more than four times in the past 12 months – also rose. Sears does not break out Shop Your Way sales between its different brands, nor does it specify how many members it has.

Though redemptions cut into earnings, "sales would have been much, much worse without the program," said Paul Swinand, an analyst with Morningstar. "[Shop Your Way] is an interesting and smart strategy, but you still need some more gross margin dollars and more sales to turn up."

Mr. Swinand noted the company is, essentially, incurring "double costs" by relying on traditional advertising as well as a robust loyalty program. "I'm not sure how you wean yourself off of one," he said.

Sears Holdings spent $642 million on measured media in 2012, making it the 22nd largest U.S. advertiser, according to Ad Age's Leading National Advertisers report.

In a note to employees today, Chairman-CEO Eddie Lampert, said he believes the company is improving the "member experience" and generally headed in the right direction. Members, he said, are becoming more familiar with the benefits of the program and sales increases show the program is resonating.

Benefits of membership include members-only pricing, the ability to return merchandise without a receipt and advance previews of products, in addition to perks like gas savings and free shipping.

"Shop Your Way is at the core of everything we're doing," Mr. Brathwaite said. "We're focused on our most loyal customers, and building relationships with them is something that will drive our company to profitability."

Earlier this month Kmart announced that DraftFCB would retain its creative account, as well as take on additional duties for the retailer's fashion business. The agency was behind the popular "Ship My Pants" and "Big Gas Savings" advertising. McGarry Bowen handles creative for Sears. Y&R, Chicago handles the Craftsman, Kenmore and DieHard brands, which are currently conducting an agency review.

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