WOOLWORTHS may cut back on promotional spending to fund a new customer loyalty program which is estimated to cost the retailer about $500 million a year.
Under the new program, which scraps Qantas Frequent Flyer points in favour of food and liquor discounts, the average Woolworths Rewards member would earn a $10 reward every 7.4 weeks after spending $107 a week, according to analysis by the Australian Centre for Retail Studies at Monash Business School.
This equates to an earn rate or discount of 1.25 per cent, compared with an earn rate between 0.22 per cent and 0.42 per cent under Woolworths' existing Everyday Rewards program (assuming customers redeem their points for domestic or international Qantas flights).
Based on Woolworths' food and liquor sales of $40 billion (excluding Dan Murphy's), the new loyalty offer is likely to cost Woolworths around $500 million a year, according to Deutsche Bank analyst Michael Simotas.
Mr Simotas said the implied $500 million spend was much higher than the cost of Qantas Frequent Flyer points, which was estimated to be between $60 million and $80 million a year.
However, under Everyday Rewards, Woolworths was also spending on other loyalty offers, including discount fuel, grocery promotions, vouchers and gift cards.
More value to customers
"It is difficult to tell at this stage whether Woolworths will be spending more on its rewards program post the changes," Mr Simotas said.
Mr Simotas said that by removing the 'middle man' (Qantas Frequent Flyer) Woolworths should be able to deliver more value to customers for the same outlay.
If this was communicated well, the change should be positive for Woolworths and its loyalty card holders, he said.
However, Woolworths may reduce the value of discounts on promotional items to fund the rewards and minimise the impact on margins.
For example, a box of Arnotts Shapes may be on promotion at $1.49, compared with a shelf price of $2.00. Woolworths could offer a promotional price of $1.65 and give loyalty card holders 20c in rewards.
"This new spend will be part of the promotional mix," Mr Simotas said.
Woolworths declined to say how much it would spend on loyalty, but Mr Banducci said spending would increase under the new program.
"We see it as a key component of our overall value equation going forward - this is in addition to our commitment not to be beaten on price," Mr Banducci said.
Under the new loyalty program, customers will earn credits averaging 15 per cent off the value of about 500 fresh foods and packaged grocery products marked with orange tickets in Woolworths supermarkets. When the value of credits reaches $10, customers automatically receive $10 off their next grocery or BWS liquor shop.
Everyday Rewards customers currently have to spend $30 before they earn points, but the $30 threshold will be scrapped for the cash-back program. Customers will still need to spend $30 to receive discount fuel credits.
Woolworths' customers have taken to social media to criticise the decision to scrap Qantas Frequent Flyer points, with some threatening to shift their allegiance to Coles.
However, Woolworths Food Group managing director, Brad Banducci has defended the decision to move away from QFF points, saying they were less relevant to shoppers than they were seven years ago.
In customer surveys conducted by Woolworths over the last 12 months, 68 per cent of customers favoured dollars off their shop and only 9 per cent favoured frequent flyer points.
Half of Woolworths' nine million Everyday Rewards cardholders were not earning air mile points because they had not linked their rewards cards to Qantas' Frequent Flyer scheme. Of those who had linked their cards, only 20 per cent had redeemed points for flights in the last 12 months.
Woolworths is still in talks with Qantas about augmenting the cash-back offer with frequent flyer points. This could include adding QFF points to selected cash-back items or for selected customers, setting up a mechanism for converting Woolworths Dollars into QFF points, or allowing shoppers to buy QFF points with Woolworths Dollars at a discount.
"We are trying to make this very simple and very clear and something all our customers can benefit from, and customers don't need to change their shopping behaviour," Mr Banducci told Fairfax Media when the the new scheme was announced on Sunday.
However, Mr Simotas fears the new program could confuse shoppers, as Woolworths will now have three colour-coded promotions or offers in stores - red tickets under its "Low Price Always" offer, yellow tickets for short-term promotions and orange tickets for the new Woolworths Dollars program.
"One concern we have at this stage is that Woolworths' value message has been too complicated," Mr Simotas said. "While this program is more simple in some ways than the old one, it adds something else for customers to look out for in stores. In comparison, Coles' in-store value messaging is very simple and resonates well with customers."
