The secret power of supermarket membership cards

  • More shoppers join rewards programs
  • “Retail media” provides 60-70% profit

A high street fashion chain has started asking shoppers for their mobile numbers at checkouts. The ostensible reason is customer convenience: receipts arrive via text, rather than paper, which can easily be crumpled and lost. However, this logic is called into question when a store clerk refuses to process a sale to a customer. I see The author did not provide a phone number, claiming this was company policy.

This may be a confusion. However, the broader strategy shows a shift in the relationship between retailers and consumers. Today, cash is no longer the only thing shoppers have to provide – personal data is also required.

Nowhere is this more clear than in supermarkets. Use of supermarket loyalty cards has surged since the pandemic as supermarkets began offering cardholders cheaper in-store prices. According to Morgan Stanley, 92% of UK consumers now own at least one, and they are increasingly influencing where we shop.

The development sparked interest from the Competition and Markets Authority (CMA), which began a review of the industry in January. However, this also creates opportunities for retailers, who have a number of additional revenue streams to tap into.

Data on trolley

Tesco (TSCO) and J Sainsbury's (SBRY) Has the largest loyalty program in the industry, easily surpassed Marks & Spencer (MKS), Morrison and Co-op. These time-honored systems, which allow members to accumulate points and take advantage of discounts, have gained further attention since the coronavirus pandemic.

In March 2021, Sainsbury's had a Nectar participation rate of 67%, but after the launch of “Nectar Prices” in April last year, participation rates jumped to over 80%. The situation is similar at Tesco: membership card penetration has climbed from 70% in February 2021 to 82% today.

As the name suggests, retailers use loyalty cards to attract and retain customers. However, they also generate a very valuable asset: data.

Sainsbury's Nectar360, founded in 2019, processes all data collected about registered shoppers. It turns this analysis into profit by selling advertising space and promotions to supermarket suppliers. Suppliers are willing to pay a premium because marketing can be very targeted and, best of all, pops up when customers have already viewed the product, meaning the returns are usually good.

Historically, Sainsbury's has never revealed how much profit it makes from retail media. However, that changed last month when the company said Nectar360 should deliver incremental profits of £100m in the three years to March 2027. .

Tesco remains tight-lipped about how much money it makes from its data business, Dunnhumby. However, people are increasingly paying attention to this division. Last year, it formed a team dedicated to retail media and just hired two big guys. Amazon (US: AMZN) and Pinterest (US: PINS) Help things run smoothly.

Analysts are enthusiastic. Shore Capital analyst Clive Black said: “When Tesco Clubcard prices go up, it's a lot more important than we thought three or four years ago.”

Analysts now expect more digital screens to be installed in stores (Tesco has installed 2,000), including on trolleys, and greater use of personalized pricing.

bag of potential

A study by McKinsey shows that retail media is extremely profitable, with an operating profit rate of 65-70% within three years after launch.

It's also growing fast: European advertising spend on retail media is expected to double over the next three years to €22bn (£19bn). Changes elsewhere should work to its advantage. For example, as Google eliminates third-party cookies that allow advertisers to track people's movements online, companies that hold large amounts of proprietary information should thrive.

Amazon still dominates the advertising space, but its market share may decline slightly as more companies join the ranks.One American business making good progress is Walmart (US: WMT).

In the final quarter of 2023, the company's advertising sales grew by a third and for the full year were up 28% to $3.4 billion. The company has since acquired a television company to sell more advertising, and Jefferies analysts believe the unit will have sales of $10.3 billion and profits of $6.7 billion by 2029. The compound annual growth rate is 25% and the profit margin is 65%.

The UK obviously operates on a much smaller scale and retailers also have to contend with competition regulators. However, Walmart’s progress highlights the potential of retail media and the importance of going beyond the supermarket shelf.

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