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Almost 30 years ago, Tesco surpassed its rival J Sainsbury with the help of a pioneering rewards card. Now, Sainsbury is crediting its own loyalty scheme, “Nectar Prices,” for its recent rise in market share. Simon Roberts, the chief executive of the supermarket group, explained that this initiative fueled a return to volume growth last quarter.
Critics claim that supermarkets are using inflation as an excuse to charge higher prices. However, a more astute suspicion is that the current cost of living crisis makes it easier for store chains to collect data through loyalty schemes.
Nectar offers attractive savings, such as Nescafé Gold Blend instant coffee at less than half price. This may infuriate those who dislike sharing their data, but such individuals are becoming a minority. Since April, the number of Nectar users has increased by nearly a tenth, reaching 11 million.
Nectar provides Sainsbury with benefits beyond signaling value. The data from this loyalty scheme enables the company to sell tailored ads on its app and demonstrate their effectiveness. Sainsbury’s claims a marketing return on investment of £2-£4 for every £1 invested. With its digital advertising arm, Nectar 360, the company expects to generate an additional £90 million profit by 2026.
The data also supports customized promotions. Price-sensitive customers receive fewer but deeper discounts, while loyal customers are encouraged to try a wider range of discounts. Algorithms determine the generosity of the discounts based on a customer’s potential value. In a week, customers can expect offers on up to 10 items, amounting to savings of up to £200 a year.
Sainsbury’s operating profit margins of 3.3% are slightly below pre-pandemic levels, partly due to recent price increases that were 0.9 percentage point lower than the sector average. UBS reports that discount-focused retailers like Aldi, who do not have a loyalty scheme, are still cheaper than Sainsbury’s. However, the gap is narrowing.
The company has been regaining its competitive edge, with its shares increasing by a fifth this year, more than twice the growth of Tesco. Currently, the stock is priced at 13 times forward earnings, which is 10% higher than its 10-year average.
Investors may worry, while shoppers dream, of a grocery price war. However, personalized loyalty card discounts make it harder to compare prices. This success of loyalty schemes makes a sector-wide food fight less likely.
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