Loyalty cards: great value for the supermarket, not the customer

For many shoppers, loyalty cards are considered necessary to access lower prices and accrue points. Research from the Commerce Commission, IPSOS and the major supermarkets confirms this motivation – shoppers sign up for loyalty programmes to access discounts.

But what if the discounts aren’t meaningful or real?

Aaron, from Churton Park, Wellington has his doubts. He shops at his local New World and uses his Clubcard, but has a sneaking suspicion about the pricing.

"I sometimes buy Clubcard specials, but it looks like they put the price up, and then push it back down, so it looks like a ‘special’. I often look at a loyalty deal and feel like it's similar to ‘regular’ pricing I saw a few weeks ago. I have my suspicions, but it’s hard to really know if I’m being a conspiracy theorist."

The power of loyalty

Loyalty cards do exactly what they say – they keep us loyal, chasing specials and points at the same retailers.

Professor Ekant Veer, a marketing lecturer at the University of Canterbury describes loyalty cards as a way of breaking our standard shopping habits.

"The thing about the supermarket shopping experience is it's habitual, and we buy the things we routinely buy. When you see 'specials' it draws you away from your typical behaviour. People are more likely to try new items, even if that discount is fake. When it comes to loyalty cards, there's a lack of evidence that you’re getting value for your spending.”

Determining the value of a loyalty card

To understand the true value of supermarket loyalty card specials, we analysed the prices of 50 products that had either a Onecard or Clubcard discount, and were also available at Pak’nSave and The Warehouse – both retailers that don’t require a loyalty card to access lower prices. Prices were collected from Wellington and Auckland supermarkets.

Three-quarters of the time we found items marked with loyalty discounts available for a lower price at one of the retailers that didn't use a loyalty system. Such findings raise the question – are loyalty deals genuine, or are supermarkets hoodwinking us with faux discounts?

Typically, a “sale” means a limited opportunity to buy an item at a genuinely reduced price. While the supermarkets set timeframes for loyalty card deals, it’s questionable whether their pricing is really “reduced” when the same products can consistently be found cheaper elsewhere.

As an example, at the time of our analysis, you could use your Countdown Onecard to purchase a Moccona Classic Medium Roast Instant Freeze Dried Coffee Refill at the special price of $11, or you could pay 27% less at Pak’nSave, buying it for just $8. Alternatively, you could pop out your Clubcard at New World to purchase a one litre bottle of NZ Natural Sparkling Water for $1.79, or pay 46% less and pick it up for 97 cents at The Warehouse.

The smoke and mirrors nature of loyalty club deals becomes particularly apparent when comparing prices at New World and Pak’nSave. Both are owned by parent company Foodstuffs, yet in our analysis Pak’nSave offered an equal or cheaper price than a Clubcard deal 70% of the time. Given Foodstuffs determines the pricing for both supermarkets, this again brings into question how true the “discounts” offered by the loyalty card are. How can a shopper know when a deal is really a deal? In short, they can’t.

Natasha, from Tauranga, feels loyalty cards aren’t worth the savings.

“Before the cost of living became too high, I used Countdown’s Onecard. Every three months I’d hit enough points to get a $15 food voucher. When food became too expensive, we switched to Pak’nSave where we save $50 a fortnight from the same shop.”

Response from the duopoly

When asked about the lack of genuine savings on offer through their loyalty card programmes, both Foodstuffs and Countdown provided responses that failed to address the crux of the issue.

Foodstuffs said:

With over 1.6 million active users in New Zealand, New World's Clubcard delivers heaps of rewards and offers a multitude of benefits, from savings on groceries, opportunities to enter exciting competitions, access to exclusive giveaways and options to earn Flybuys, Airpoints Dollars, or New World Dollars that can be redeemed at New World for groceries.

Clubcard members have saved hundreds of dollars with Club Deals every year. Many New Zealanders prefer the convenience of shopping in one place and enjoy the range, shopping experience and Clubcard benefits that come with New World. Compared to the normal shelf price, by shopping the Club Deals at New World, Consumer NZ saved themselves nearly 20% on these items.

Countdown said:

We don’t share information about our discounts as this is commercially sensitive. We are confident our programme offers good value to the 1.9 million customers who use Onecard. Those who use Onecard benefit through discounts with us and via accruing points to earn shopping vouchers. We want to incentivise use of Onecard because it gives us a better understanding of what our customers want and how to improve their shopping experience.

Under the Onecard points accrual system, for every $2000 spent in the supermarket customers get a $15 voucher – a 0.075% bonus.

Duopoly reaps the rewards from loyalty programmes

Putting aside the questionable value of loyalty club deals, there are other reasons loyalty cards are such good business for the major supermarkets.

Supermarkets don’t rotate stock through their loyalty card programme on a whim. Instead, they offer promotional slots to suppliers who pay good money for them. Every bit of promotional space and stickering you see in stores and online is prime real estate that can be purchased by suppliers.

For example, a Club Deal at New World will cost a supplier a flat fee of $3900. At the time of writing, there were 546 Club Deal specials offered on the New World website, equating to $2.1 million dollars in revenue. What’s more, Club Deals change relatively frequently, and represent just one way that supermarkets generate revenue through specials.

Many suppliers say they feel pressured to buy promotion space to maintain a competitive edge and drive sales. Depending on the supermarket, they can secure “specials” by paying a promotional levy and being rewarded if their sales do well, or by purchasing promotional offers for their stock.

Consumer spoke to an anonymous beverage supplier stocked at one of the major supermarkets. They felt being included in promotions was a cost of business, but it took its toll. Paying extra for a special and having a product potentially lowered in price, while the supermarket continues to take the same cut, squeezes suppliers even further.

Another supplier of a gourmet food product described supermarket promotions as “financed off the back of suppliers”. They felt punished when they opted not to be a part of Foodstuff's promotion levy – unable to introduce new products, unable to raise prices and absolutely unable to engage in promotions. "The duopoly never lose," they said.

Supermarkets also receive huge amounts of customer data from loyalty card sign ups. Card holders may receive targeted marketing and their personal information may be shared with service providers, market research companies, or Google and Facebook.

The Commerce Commission market study into the grocery sector flagged that low levels of consumer understanding regarding data was problematic given how much data is being collected via loyalty cards. An anonymous source who worked at Loyalty NZ also spoke of the power of data collection that loyalty cards afford.

If you use a Flybuys card, for example, the picture that can be painted from data about your in-person and online shopping habits is astounding. Not only does Loyalty NZ know when and where you shop, they can deduce whether you have children or pets, how many cars you own and how often you're driving them, if you have a mortgage or if you're renovating your home.

All this data is pushed into a larger ecosystem, which is then used to serve you very specific advertising. Even if you only use your Flybuys card at one store, your data can still be used by Flybuys on behalf of its partners who you may have no affiliation with. You could be targeted by Caltex or Liquorland, based purely on your shopping habits at New World. This may be legal, but raises questions around how this data collection is being disclosed.

What’s going on with pricing at the supermarket?

So many factors go into pricing an item at the supermarket. With local and global pressures on food supply, we’re told the reason for food price hikes include crop shortages, erratic weather, increased production costs, surging fertilizer costs, labour pressures and disrupted grain exports from Ukraine.

These issues are all very real, but can make food pricing complex and difficult to understand. They also make it hard to gauge how competitive our supermarket sector truly is.

Two terms frequently mentioned in the media are “power imbalance” and “supplier squeeze”. A particularly common complaint has been about the profit margin creep from Foodstuffs and Countdown, with margins jumping from around 25% to 40% over the last two decades.

Anonymous suppliers have also expressed concern about their lack of control over prices for their products, and the impact this can have on sales.

Recently, a Foodstuffs supplier reached out to Consumer when it noticed its product, found in pantries across Aotearoa, was being sold for 45% more than the recommended retail price. Because of this increase, sales plummeted, and the product risked being deleted from supermarket inventory lists.

The supplier was not notified of the price increase, only noting the new price when visiting its local New World. When it queried Foodstuffs about its pricing approach, it received the following response.

The movements you mentioned have been driven by our data science pricing tool, which uses banner guidelines to optimise the shelf pricing. This pricing tool allows us to review our shelf pricing based on a range of important factors including price perception protection, market competitiveness, profitability, and price rounding. Until now we’ve only been able to benchmark against the competition, so the introduction of this new tool is a leap forward to support the strategic management of our shelf pricing. We’ll be using the new tool to review every product in our store and aim to review each product on the above criteria on a regular basis.

When asked to comment on its new data science pricing tool, Foodstuffs declined.

The new grocery commissioner, Pierre van Heerden has the power to open the supermarkets’ books and scrutinise things like pricing, profit, promotions and supplier relations. The commissioner’s first report is due next year and will be an important first step in providing much-needed transparency around these issues and breaking down a deeply entrenched power imbalance.

Shoppers more vulnerable to ‘specials’

At present, supermarkets have every incentive to keep shoppers locked on the loyalty card merry-go-round. Food price inflation is at the highest level in 36 years, the cost of living is hitting hard, and people are more eager than ever to make savings.

Consumer NZ’s sentiment tracker shows that the cost of food is now people’s second highest financial concern, after housing. This is a stark difference to two years ago when food was ranked as the eighth highest concern.

Some New Zealand-based Facebook community groups that discuss cost of living hacks have even begun talking about more drastic saving measures, including fasting, as a means of making groceries bills go further and ensuring children can be fed.

Yet, as financial food anxieties rise, trust in the duopoly is declining. In February 2022, 26% of New Zealanders said they didn’t trust the supermarkets. Fast forward to July 2023 and that number has risen to 37%.

For shoppers under financial pressure, the promise of a deal can make promotional pricing more enticing. Yet, with so many specials on display, it can be hard to make informed purchasing decisions or trust that prices are transparent.

Where to from here?

Next time you reach for a discounted item at the supermarket, whether it’s a loyalty card price or a “special”, pause and question its value. As our study found, sometimes promotions are nothing more than an illusion. Websites like grocer.nz give consumers the power to compare pricing across multiple supermarkets and vote with their dollars. And new supermarket options, like The Warehouse, are starting to introduce some price competition.

The onus isn’t just on shoppers though. There is work to be done at the broader market level. New Zealand’s supermarket duopoly enjoys a level of power that’s been decades in the making. Unwinding that dominance over households will require significant work, including from the government. New Zealand is still a long way from a healthy and competitive grocery sector.