Sainsbury’s is a medium-sized UK supermarket and gas station chain.

It is also the
largest participant of Nectar, UK’s most extensive rewards program. When Justin
King took over as Sainsbury’s CEO in 2004, he was faced with the decision of
whether Sainsbury’s participation in the Nectar loyalty program was worth its annual
$120,000,000+ budget.King came over from ASDA, Sainsbury’s lower-cost
competitor, where there was no loyalty program and the savings were applied
directly to lower the product prices.

King had 6 months to review the Sainsbury’s marketing strategy and to decide
whether the company was going to maintain its 18-month- old participation in the
Nectar loyalty program. This case analysis is going to argue that Sainsbury’s should
maintain its participation in the Nectar program. The Nectar loyalty program was
launched in 2002.The scheme was backed by ? 50 million pounds worth of
advertising and direct marketing spend to support the launch. A number of
organizations or sponsors joined forces to launch this coalition loyalty program;
Sainsbury’s, Barclaycard, Debenhams, and BP, all merged their existing loyalty
programs under one umbrella brand called Nectar. Their existing rewards programs
were phased out within a year of the launch of Nectar and their members were
encouraged to transfer to the new Nectar scheme.

Consumers who used their Nectar card at participating outlets collected points,
typically 2 points per each pound spent, which then could be redeemed directly at
Sainsbury’s at checkout as credit towards the grocery bill or through Nectar for free
flights, vacations, or Argos Catalogue purchases. Nectar was operated by Loyalty
Management UK (LMUK), which covered the loyalty program’s administrative costs,
customer data collection, point redemption, and other day-to-day operations for all
participating sponsors. Points were sold to the sponsors for $0. 05 each and bought
back upon redemption for $0. 005 from Sainsbury’s and for smaller amounts from
other sponsors. This difference, or spread, was Nectar’s main form of revenue. Each
sponsor paid a flat program support fee for participation and Nectar earned interest
on the earned but not yet redeemed points.

By leveraging several big brands rather than one single supermarket, like Tesco,
Nectar’s loyalty program had a much broader appeal, as rewards were more
attainable due to number of different participating partners available, where points
could be built up more quickly.In addition to this, Nectar frequently sent their
members coupon books with which they could obtain discounts, earn bonus points
and even double points on certain purchases. SWOT Analysis Strengths * 2nd
Largest Grocery Retailer * Strong Brand Name * Nectar Participation Weaknesses *
Poor Product Availability * Prices higher than 43% of other stores * High Cost of
Nectar Program Opportunities * Better and More Targeted Marketing * Higher
Customer Loyalty * Lower Churn Rate * New customer acquisition * Better product
stockingThreats * Loosing market share to other grocers * Nectar participant
cannibalization * Negative Nectar PR When Sainsbury’s joined Nectar loyalty
program, it was positioned 2nd behind Tesco in market share size. Tesco, a low-cost
grocer with a strong, extensive loyalty program of its own, maintained a 26% share
of the market. Sainsbury’s and ASDA, another low-cost grocer, both had a 17%
share of the market. Sainsbury’s had a competitive advantage above both of those
competitors of having a better, more premium lines of product, priced accordingly.
Sainsbury’s had a well-known, respected brand and over 50% of the store’s revenue
was generated through the store brand sales. Nectar participation meant that 13. 5
million or half of all UK households would receive reward points and possible
discounts for shopping at Sainsbury’s. As no other grocery chain participated in
Nectar, Sainsbury’s was the only food outlet destination for Nectar card holders.
Loyalty program participation also meant that Sainsbury’s was getting invaluable
data on its own customers as well as the customers of other program participants.

Additionally, to offset inter-Nectar cannibalization, it has to be noted that Sainsbury’s

was benefiting considerably from the multi-sponsor rewards program. Those
customers who collected points from two additional sponsors besides Sainsbury’s
spent 40% more a week than those customers that earned points only at
Sainsbury’s. Issues with supply chain infrastructure have left Sainsbury’s with the
reputation of having poor product availability.Also, its two largest competitors, Tesco
and ASDA both had lower price points and together amounted for 43% of all market
share, so that almost half of all UK consumers were buying their groceries at
cheaper prices than Sainsbury’s was charging. However, Sainsbury’s had plenty of
exciting opportunities available.

As mentioned before, its participation in the Nectar program provided Sainsbury’s

with extensive and precise data regarding its customer base.As noted by the new
CEO, It allowed the grocery chain to have better, more precise marketing and the
company’s issue of poor stocking would surely improve with the new knowledge of
consumer preferences and frequency of purchase. These improvements would
eventually translate into better customer experiences in their interaction with the
chain and therefore stronger customer loyalty. Nectar program participation also
proved to lower customer churn rate and to increase overall customer loyalty
because of perks consumers received from Nectar.

The program also made it easier for Sainsbury’s to acquire new customers by
allowing them to directly market to those consumers that collected Nectar points but
bought their groceries elsewhere. Some of the threats Sainsbury’s faced as the
Nectar sponsor, included loosing market share to other grocery chains as well as the
internal cannibalization by the other Nectar participants. For example, BP and
Sainsbury’s both sold gas, and each company lost some of their customers to the
other one.Also it had to be considered, that any negative publicity surrounding
Nectar, if it encountered any, would reflect negatively on Sainsbury’s as it happens in
any business partnership. Quantitative Analysis However, strength is always found in
numbers, so naturally the most important argument for Sainsbury’s continuing
participation in the Nectar program can be derived from the actual points value. More
than 50% of all Nectar points were earned at Sainsbury’s.

Nectar’s redemption rate was around 67%, out of those 80%, or 53. 6% of total
points, were redeemed at Sainsbury’s.Based on this information, it can be argued
that Sainsbury’s saw a 3.

6% return on the points it bought from Nectar. To make it clear the actual point
consumption has to be considered. On average, a collector earned 300 points a
month, so after 18 months of the program an active collector would have earned
5400 points. Out of 13.
5 million collectors, only 88% or 11. 88 million collected actively, meaning that about
64,152,000,000 total points were collected during the program’s operation. Out of
those, half or 32,076,000,000 were earned at Sainsbury’s and 53. % or
34,385,472,000 were redeemed there. Since Nectar bought Sainsbury’s points back
at their face value of $0.

005, the positive difference between the points Sainsbury’s bought from Nectar and
the points it sold back, amounted to $11,547,360. So, whereas other sponsors were
paying for using Nectar, Sainsbury’s was actually making some money back. This
single argument is substantial enough alone to make sticking with Nectar a no-
brainer for Sainsbury’s. Alternatives Let’s consider Sainsbury’s alternative
options.Being that Sainsbury’s was the largest Nectar sponsor, leaving the program
would undoubtedly take time, staff, budgetary maneuvering, and a whole lot of PR
work. If Sainsbury’s decided to revert back to their own rewards program, they would
loose access to all those Nectar points their clients already accumulated as well as
the other points accumulated elsewhere, but redeemed at Sainsbury’s. The grocery
chain would have to either create a whole new department dedicated to running their
own rewards program or to outsource it to another company, in which case what
would be the difference between that and staying at Nectar?Also, Sainsbury’s had
already tried their hands at running their own rewards program and it proved to be
largely unsuccessful with low participation rates and low customer satisfaction
scores, whereas the Nectar program had an astounding satisfaction rate of 98%.

Additionally, Sainsbury’s would potentially see a decline in their sales, since those
consumers that actively collected points at multiple Nectar sponsors spent a
considerably higher amount per week at Sainsbury’s than other consumers. Another
option would be to discontinue the rewards program altogether and to apply the
associated budget elsewhere.True, lowering the prices would allow Sainsbury’s to
compete with Tesco and ASDA, but how much can Sainsbury’s lower their prices
without damaging its brand image? Sainsbury’s customers perceived the grocer’s
products to be of higher quality than the products of its lower-priced competitors and
so meeting Tesco and ASDA at their bottom line could tarnish the value perceived by
customers. Also, Sainsbury’s would have to create an entirely new way to collect the
data on their customers as well as having to pay for the collection and analysis, the
costs absorbed by Nectar.And it cannot be discounted, that point collection and
redemption resulted in consumers spending more per each visit at Sainsbury’s as
well as in the increase of the frequency of shopping visits immediately following point
redemption. Conclusion To sum up, the benefits derived by Sainsbury’s from its 18-
month participation in the Nectar loyalty program and the future value of the benefits
to come if Sainsbury’s maintains this relationship, far outweigh the risks and possible
benefits of leaving the coalition.Sainsbury’s should continue to participate in Nectar
and aggressively pursue the opportunities of growing its customer base through
Nectar, improving its marketing, streamlining its supply chain, and anticipating
customer demand.

Furthermore, Sainsbury’s should look for new ways to increase Nectar point
redemption at its locations to offset the program costs and expand the margin
between earned and redeemed points.Finally, Justin King’s suggestion that the
marketing cost of participating in the Nectar program could be better spent on
increasing store staff seems far-fetched. Increasing store staff is an operational
issue, not marketing one. The existing staff training policies can be reviewed or
amended to better customer service.

Consumer shopping information obtained from Nectar can be reviewed for possible
changes in staffing stores based on traffic or shopping patterns. Overall, staying with
the Nectar loyalty program would be the best course of action for Sainsbury’s.