By Joe Cahill, Crain News Service
CHICAGO (Aug. 23, 2013) — Add loyalty programs to the list of tactics that haven't saved Sears.
Hoffman Estates, Ill.-based Sears Holdings Corp. reported Aug. 22 that sales fell 6.3 percent to $8.9 billion in its second quarter, extending a string of disappointing results. The net loss surged 47 percent to $194 million, worse than Wall Street expected. Sears shares tumbled 8 percent on the latest installment in the longest-running corporate train wreck I can remember.
By way of bright spots, Sears noted members of its new Shop Your Way loyalty program "represented over 65 percent of our sales and they redeemed rewards points at a significantly higher rate than last year."
Sears CEO and majority owner Edward Lampert has been touting Shop Your Way as the answer to the company's woes. Members accumulate loyalty points redeemable for merchandise, a la airline frequent-flier programs. Sears also is rolling out discount pricing for loyalty program members. Other perks include personalized deals, coupons and speedier exchanges.
"Shop Your Way is more than a loyalty program," a spokesman said. "It transforms customer transactions into relationships and allows us to know our members better and to serve them better."
The theory is that shoppers who become members will spend more money at Sears than they did before joining the program, eventually lifting overall sales. It's hard to tell if that's happening, because Sears discloses only limited data on the program.
For instance, it doesn't disclose exact membership totals, saying only that it's in the "tens of millions." (A spokesman said membership is growing, which isn't surprising given how hard Sears is pushing the program in its stores.)
Members outspend non-members
The spokesman said the number of members who shopped at Sears four or more times over the past 12 months has increased 5 percent. He also said members spend more than non-members. That's to be expected, because people who shop more often at Sears are more likely to become members.
What we really need to know is whether a shopper who joins the programs starts shopping and spending more at Sears. Average spending by a shopper before and after joining would shed light on that question. But the spokesman said, "We don't quantify the specific sales per member."
Still, the continuing decline in overall sales at Sears tells us Shop Your Way hasn't turned things around. It's possible, however, that the program has slowed the overall rate of decline.
We do know Shop Your Way is squeezing profits. Those increased redemptions Sears mentioned? That means the company gave away more merchandise to members. In its financial presentation for the quarter, Sears disclosed that Shop Your Way redemptions squeezed $67 million from its gross margin in the quarter.
"While the increase in Shop Your Way promotional activity and member redemptions resulted in a meaningful increase in our costs, it demonstrates that our members are deepening their engagement with our program, which will allow us to further accelerate our transformation," Mr. Lampert said in a statement.
I guess that's one way to look at it. Another way to look at it is that giving free stuff and discounts to people who probably would have shopped with you anyway is bad for your bottom line.
Loyalty programs work well for airlines, which offer consumers the chance to earn something truly unique: a free airplane ticket. It's harder for general merchandise retailers like Sears to gin up the kind of excitement that motivates customers to buy more at higher prices.
Retailers are becoming more sophisticated in their use of loyalty programs to generate customer data that can be used to tailor offerings to each shopper's preferences. But they have a long way to go, and nobody has proved loyalty programs can help a struggling chain like Sears overcome the advantages of Amazon and Wal-Mart in price, selection and convenience.
Then there's the proliferation of loyalty programs. Everybody from Petco to Walgreens to Nordstrom's offers some kind of rewards to frequent shoppers. At some point, all these loyalty programs add up to discounting by another name.
And that's a game Sears can't win.
Joe Cahill wrote this "On Business" blog for Crain's Chicago Business magazine, a sister publication of Tire Business.