Green Hills Marketing Loyalty Program

Green Hills market in Syracuse, New York had been an independent, family-owned
store for four generations. Opened in 1934, the store’s history and longevity in the
competitive retailing sector was unique. Green Hills building was similar to many
other stores in the area, and a relatively modest 28,000 square feet with 22,000 square
feet dedicated to selling space. While Green Hills’ 40,000 stock keeping units (SKUs)
provided a good variety for shoppers, nearby competitors, including Wal-Mart and
Wegmans, boasted almost double the number of items. The store’s 14 checkouts
allowed for streamlined exit, but were far fewer than the almost 40 at some stores
nearby.

In contrast to retail stores plagued by a high employee turnover, Green Hills had
numerous loyal people who had been working at the store for decades. Among the
185 employees, 26 were either second or third generation. The store was run by CEO
Gary Hawkins, who was the great-grandson of the founder. Bud Kennedy, one of
the store managers, had been with the company for 43 years. Lisa Piron, director of
information technology, was a 25-year veteran. Most notably, bakery employee
Leigh Bucktooth’s great- grandfather was the second employee hired by Green Hills.

Competitive Intensity
Syracuse was a highly competitive retailing market. In fact, Green Hills faced a
number of world-class retailers in it’s catchment area. These stores offered a
spectrum of shopping formats and price levels. Shoppers could choose from a high-
end outlet to a bare bones warehouse shop with extreme discounts. The regional
chains in the Syracuse area included Wegmans, Price Chopper and P&C Foods. The
national chains included Aldi, Save-A-Lot/Supervalu, Wal-Mart and Stop&Shop.
The location of other retailers in Green Hills operating area is given in Exhibit-1.

For price-conscious shoppers in the area, there was an Aldi store directly across the
street from Green Hills. Aldi, a subsidiary of the German retailer of the same
name, boasted 1,000 stores in 29 states. A competitive advantage of Aldi included its
strong U.S. store base and an enormous global footprint allowing for strong buying
power. In addition, with an extremely limited assortment and minimal services, Aldi
was very distinct from Green Hills. To shop at Aldi, consumers had to forgo national
brands as the vast majority (95 percent) of the store’s 1,400 items was private label.
While Green Hills aimed to differentiate through customer service, Aldi
intentionally limited perks in order to keep prices low and even charged
for shopping bags and shopping cart use.

Green Hills also operated less than two miles away from a P&C foods and
Wegmans. P&C Foods, owned by parent company Penn Traffic, had 103 retail
grocery supermarkets in the Northeastern U.S. and was a tough competitor to Green
Hills given its focus on healthy living and customer service. Wegmans was a
privately owned chain with 79 stores and nine in Green Hills’ operating area.
Wegmans was a strong competitor in the local area and the chain’s superstores
offered tremendous variety. In addition, Wegmans had an excellent reputation in the
Syracuse region having been voted #3 on FORTUNE magazine's 2008 list of the 100
Best Companies to Work For.12 Also, the Wall Street Journal quoted industry analyst
Neil Stern: “We consider them (Wegmans) to be the best chain in the country, maybe
in the world.”Within 5 to 10 miles of Green Hills were even more shopping options:
Save-A-Lot, Syracuse Real Food Co-Op, Target, BJs and Price Chopper. Although the
name would indicate a more warehouse style of store, Price Chopper provided
additional competition given its own expanded loyalty program and services.
Syracuse Real Food Co-Op was an independent food retailer that provided full-line
natural and locally grown foods. Given Green Hill’s focus on local produce
and organic and specialty items, Real Food Co-op added to the cutthroat retail
environment.
Another important and growing set of competitors for Green Hills included drug
stores, including CVS, Rite-Aid, and Walgreens. Across the street from Green Hills
was a large Rite- Aid with extensive non-food and food offerings. Green Hills noted
that time-strapped shoppers would often buy bananas at the nearby Rite-Aid when
shopping the store’s weekly toilet paper sale. Ultimately, Green Hills redirected
categories such as greeting cards toward more specialty and unique cards to avoid
direct competition with the close-by drug and dollar store chains.
Likewise, retail in the greater Syracuse market was heavily impacted by the entry of
Wal-Mart supercenters during the past decade. There were several supercenters in
the Syracuse area, two within a 10-minute drive of Green Hills. The supercenters
impacted retail competition by forcing other drug stores and supermarkets to lower
their pricing to compete. Effectively, Wal- Mart’s entry increased consumers’ focus
on pricing.

Loyalty Program at Green Hills

During the 1980s, CEO Gary Hawkins watched as consolidation in the supermarket
industry gained momentum. As a result of the mergers, larger companies were able
to leverage their scale and buying power to drive down prices. An independent store
without the operating characteristics that would allow it to fight on price, Green
Hills had to find a different approach.

After researching industry and global best practices, Hawkins became increasingly
interested in loyalty card programs. Loyalty programs or ‘club card’ plans were
gaining some traction in the late 1980s (Ukrop’s) and early 1990s (Tesco). With Green
Hills’ tradition of superior customer service, a club card program seemed a logical
extension of normal practice. Hawkins and the team produced a program called
“MarketExpert” that would allow for dissection of margin, category, brand and item
information in the back-end operations. With these data, Hawkins expected to be
able to analyze the purchasing habits of shoppers and begin to offer more targeted
discounts. This allowed Green Hills to create different “buckets” of shoppers with
similar purchasing characteristics.

With this process, Hawkins believed he would be able to move shoppers to new and
more profitable spending patterns. Despite certain limitations, the
MarketExpert system was a far superior way for Green Hills to create targeted
marketing campaigns including personalized direct mail and point reward
programs. When the program was launched, Green Hills was among the first
retailers in the U.S. to institute a loyalty card. Six months into the process, Hawkins
found himself up late at night going through reams of data, including household
frequency and spending patterns. Hawkins quickly realized that he was able not
only to evaluate transactions but also to gauge the consumer behavior behind the
purchase.
Hawkins knew that all customers were not equal in value. He realized that
something like the 80/20 rule prevailed, i.e., that a relatively small minority of his
customers accounted for the majority of Green Hills’ profit margin. Hawkins had
always tried to please those he considered to be his best customers while worrying
less about the more deal-promiscuous shoppers. With this perspective, Hawkins had
always used customer lifetime value (CLV) as a part of his business plan for Green
Hills. CLV referred to the present value of the future cash flows attributable to a
customer relationship. By analyzing customer lifetime value, Green Hills tended to
place greater emphasis on customer service and long-term customer satisfaction. In
this way, Green Hills’ focus on CLV differed from retailers that focused on
maximizing short-term sales.
Leveraging this capability made possible by the Green Hills Card program, Hawkins
divided customers into deciles and grouped shoppers into spending tiers. When he
analyzed the data, he was surprised by the results. Some of the shoppers that
Hawkins was convinced were his best, in fact, were not. On the other hand, a few
customers that he assumed were sporadic buyers were actually some of the store’s
top consumers. Hawkins commented:
“ Very early on, our initial thoughts were, ‘ when we have all this information
we’ll know all our occasional shoppers and we’ll be able to convert them into
great shoppers.’ But that is not the most effective thing to do. The trick is to
focus on the great shoppers and keep them coming back.”
With CLV in mind, Hawkins began to evaluate opportunities within the store to
reward his best customers and further enhance their loyalty. With this new program,
shoppers would see a direct correlation between their spending and their targeted
rewards.
Pricing Experimentation
Hawkins created tiers for customers that were based on spending totals per 13-week
quarter. While the specific levels evolved over time, segmentation ultimately
included the following:

The tiers allowed Green Hills to track the number of customer households by tier in
each quarter (Exhibit 2) and evaluate the share of total company revenues
attributable to each tier. Hawkins commented: “We have seen a clear connection
between the composition of our shopper base and our margins and profitability.”
By measuring the changes in these numbers over time, management was able to
adjust marketing spend, product mix and pricing to target the most profitable
customers.
At the time of the Green Hills loyalty card launch, other retailers offered same
discounts to all the customers. For example, a store might offer a one-liter bottle of
Pepsi at its regular price of $2.59 or at the low promotional price of $1.99. Hawkins,
on the other hand, was now able to tier his shoppers and target these shoppers in
various new ways. For example, Hawkins could create a sophisticated direct mail
program where Pepsi shoppers in the Diamond tier would receive a coupon in the
mail for 50 percent off while Pepsi shoppers in the Ruby tier received a coupon for
25 percent off. Within six months, Green Hills was experiencing redemption rates of
up to 40 percent on some offers, more than quadruple the prior levels. This initial
hint of success made Hawkins even more confident in his ability to change consumer
behavior and industry practice.

Turning Point – Thanksgiving

Thanksgiving Day is a national holiday celebrated primarily in Canada and the
United States as a day of giving thanks for the blessing of the harvest and of the
preceding year. It is celebrated on the second Monday of October in Canada and on
the fourth Thursday of November in the United States. Several other places around
the world observe similar celebrations. The centerpiece of contemporary
Thanksgiving in the United States and Canada is a large meal, generally centered on
a large roasted turkey.
Historically, the industry had a standard practice of using the holiday turkey as a
loss leader. In the period leading up to Thanksgiving day , stores might regularly
charge consumers $0.20 per pound for frozen turkeys while paying suppliers double
or triple that amount, or more.
It was not uncommon for Green Hills and other supermarkets to lose as much as
$10,000 to $20,000 (per store) selling turkeys below cost. As a result, many shoppers
became holiday cherry-pickers, shopping from store to store in search of the best
deals. Consequently, margins were squeezed as higher-margin goods remained
unsold. As retailer margins are notoriously razor thin, holiday losses could be
routine for some stores.
While Hawkins admitted to loathing this industry practice, Green Hills had followed
it for decades. However, for the holiday period of 2004, Hawkins decided that Green
Hills would not follow industry practice and price turkeys below cost. Instead, Green
Hills would direct those funds toward their best, most loyal customers and risk
losing the cherry-pickers who were harder for Green Hills to serve profitably.
Thus was born Green Hills’ Great Gobbler Giveaway. The program involved a
reward promotion rather than a traditional price discount. Green Hills’ loyalty card
shoppers spending $500 in the 10 weeks leading up to Thanksgiving would receive a
fresh (not frozen) turkey for free. By the end of the 10-week period, the number of
shoppers spending $500 or more increased by 25 percent compared to the
comparable period a year earlier. Hawkins noted that loyal shoppers began to do
even more of their shopping at the store. Likewise, more sporadic shoppers began to
skip trips to competing stores and consolidate their purchases at Green Hills.
Even more importantly, according to Hawkins, the impact of the program on gross
margin was “mind-blowing.”
Gross margin for the period increased by over 100 basis points year-over-year.
These gains were significant, particularly given the tight margins typical in the
industry. Hawkins attributed the improvement to shoppers adding Green Hills’
higher margin items to their holiday baskets.
While deal-seeking shoppers made fewer purchases, participating customers spent
more, resulting in overall gain of around 2 percent year-over-year. Hawkins saw the
program as a success for the following reasons:
• It fundamentally changed customer behavior from historic patterns of cherry-
picking,
• It effectively redirected marketing expenses to reward shoppers with food
merchandise rather than discounts, and
• It used the loyalty program to execute management strategy.

Breaking Industry Norms: Redirection of Marketing Spend

With the Gobbler Giveaway and other reward programs, Green Hills was having
success driving frequency and gross margins higher. However, Hawkins had
another bold move in mind that would again challenge typical operating behavior
for supermarkets. Having always felt that scattering flyers over a wide distribution
area provided little benefit, Hawkins began to focus his attention on the vast
promotional funds spent on newspaper flyers. However, with the customer data
from the loyalty card program, Green Hills was able to make important changes by
overlaying its customer segments with its ad flyer distribution.
In 2005, Green Hills' marketing team spent more than $6,000 a week on advertising,
including flyers. In evaluating these habits, Hawkins noted that Green Hills was
distributing 5,000 ad flyers into a postal code with only a handful of their Diamond
shoppers. Hawkins decided that going forward Green Hills would only distribute
flyers in areas with loyal shoppers.
Consequently, Green Hills went from distributing weekly store flyers in as many as
12 to 15 zip codes to only eight. As a result of these changes, the store’s expenditure
on ad flyers was cut by more than half. In the same manner, Green Hills began to
evaluate cutting unneeded exposure in other media outlets, including radio. In turn,
the company then would redirect these monies to fund different loyalty-based
initiatives.

Smartshop Loyalty Program

Emboldened by the success of Gobbler Giveaway and other reward programs,
Hawkins wanted to achieve total personalization both on the frontend POS and the
back-end analytics. The newly created loyalty product, dubbed SmartShop, would
allow customers to gather loyalty points and access customized digital coupons.
These rewards and promotions would be built on data from earlier shopping trips.
Each week, consumers were offered new specials, in addition to the storewide
savings offered to the general public through newspaper circulars. These items were
based on their past shopping patterns for the six prior months.

In order to make it simpler for Piron to achieve Green Hills’ management

goals, the algorithms were designed to take into account the following targeting
strategies:
 Reward: Same product category, same brand (e.g., Froot Loops buyer gets
more of that product)
 Category: Same product category, different type (e.g., Muenster cheese buyer
given
 Cheddar cheese)
 Introduction: New item (e.g., new flavored Coffeemate given to all SmartShop
members)
 Up-sell: Same product category, upscale brand (e.g., offering Huggies in place
of Luvs)
 Cross-sell: Item from a complementary category (e.g., A-1 Steak Sauce with
steak purchase)
  Brand change: Same product category, different brand (e.g., giving Pepsi
shoppers a new brand option)
 Filler: Control study Green Hills may operate for a supplier
 Custom: Management option to customize a product offer for a certain week
(e.g., Piron able to cater an exclusive special to a few top shoppers)

With the success of the SmartShop program, Green Hills was able to move the
funds away from the more traditional ad placements and into the SmartShop loyalty
system.
This effort ensured that most attractive offers are made only to most loyal and
profitable shoppers. Meanwhile, Hawkins continued to look for additional suppliers
to work with:
“Manufacturers and retailers have needed a system that allows them to create
differentiated marketing strategies and initiatives for different shoppers and
shopper segments, communicate those initiatives cost efficiently to
consumers, and then deliver them electronically at the POS. This is what
SmartShop does and what SmartShop represents to the industry.”

As he looked back on the accomplishments of the Smartshop program, Hawkins was

confident that it fulfilled a number of its objectives. To begin, Hawkins felt the
program had successfully increased the number of SmartShop members, a core
element to Green Hills’ competitive advantage. Sales and profits has been
continuously showing growth over the years despite a difficult competitive
environment with rapidly increasing fuel prices and pricewars.

Discussion Questions

1. What are the benefits of a good CRM driven loyalty programs?

2. Why many loyalty programs do not yield the targeted success?
3. What do you think are the elements of a successful loyalty programs?
Exhibit -1
Exhibit – 2