How grocery loyalty programs stack up against the "Big Five"

We reviewed the loyalty programs from best-in-class American grocery retailers to see if successful programs drive more market share.

January 5, 2024
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How grocery loyalty programs stack up against the "Big Five"
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How grocery loyalty programs stack up against the "Big Five"

The retail marketplace is consolidating, with massive players like Walmart and Amazon gobbling up market share from mid-size retailers. Consider that in Q2 2023, Walmart was responsible for almost 36% of total online grocery sales in the U.S., a increase of five percentage points year-over-year.

As a result, mid-size retailers have had to get creative in their hunt for customer transactions. Some retailers answer the call by strengthening their commitment to their loyalty programs, expecting repeat, loyal shopping to boost transaction frequency and basket size.

Is loyalty a solution to help mid-sized retailers keep (or grow) their market share? 

We reviewed the loyalty programs from the "Big Five" grocery retailers in the U.S. (Walmart, Amazon, Costco, Kroger, and Target), along with four others we consider “best-in-class,” to see if successful loyalty programs drive more market share.

Here’s what we found:  

The problem: Loyalty membership doesn’t equate to loyal behavior.

Many retailers have dedicated extensive resources to differentiate their loyalty programs and provide the best experience for their customers. These programs are often highly sophisticated, and many of them have driven real value—encouraging repeat business, providing grocers with valuable customer insights, and creating new opportunities for customer engagement. 

But loyalty programs have become table stakes to the modern shopper—things that they’ve come to expect from their preferred brands.

Data shows that today’s average shopper has 18 loyalty programs on their mobile device; two to three of which are for grocery brands alone. Related data from FMI shows that the average grocery shopper frequents five different banner stores — notably more than the number of loyalty programs they belong to on average. 

So if these loyalty programs aren’t defining their shopping routines, what is? In a recent Upside survey, grocery customers said that a store's distance away from them is 3.2 times as important as whether that store has a loyalty program.

The result: Grocery loyalty programs have mixed financial benefits.

For the top 10 grocery retailers in the U.S.—with the most resources and influence to drive customer loyalty—there is no clear connection between the loyalty programming they use in-market and fiscal growth. 

Our research shows minimal revenue increases over time for grocers with loyalty programs, paid or free. While the research did find a positive correlation between app downloads and revenue, it’s not enough to imply causation.

Even more surprising, those retailers with a paid membership program experienced slower growth in the past year relative to those with a free loyalty program.

To be clear, these loyalty programs are necessary. As noted above, customers expect them as part of their shopping experience. While these programs may safeguard market share, they are doing little to expand it. 

The problem: Loyalty programs are all fairly similar.

Today’s loyalty programs offer fairly similar benefits to members, no matter which retailer you consider. Need proof? Try searching online for the “best loyalty programs.” You’ll surface a handful of “top-10” lists, but the publications lack any real consensus. Each list mentions different stores with similar perks.

This phenomenon held up in Upside’s research on the top retailers and their loyalty programs, as well. As you can see, there’s a practically interchangeable list of features, without industry standards or proven effectiveness from one program to another.

The result: Loyalty is becoming an arms race.

In the sea of nearly identical programs, grocers are racing to keep up by adding perks such as free delivery or bigger buy-one-get-one savings. The nature of an arm race is that entities are all fighting for the same thing — in this case, a finite number of customers — but individually spending more money than what they will be able to recoup.

These additional program “perks” often end up costing retailers much more than traditional points-based loyalty programs do. These offers overshadow any return on investment that loyalty programs might provide, with retailers essentially overinvesting in a portion of their customer base.

One way for retailers to cover the cost of these added perks is by charging customers additional fees or subscriptions—and bigger corporations have an advantage here. Market leaders like Walmart, Amazon, and Costco have a de-facto lock on fee-based loyalty (think Amazon Prime). And since their participating shoppers are unlikely to invest in other programs that require membership fees, these conglomerates have a stronger grip on customer spending.

Loyalty programs can be upgraded and augmented internally as much as a retailer can afford.  But by their nature, these programs often cannibalize expected sales and do not provide a positive return on investment

The verdict: Retailers need a loyalty boost.

Let’s return to our original question: Is loyalty programming the solution to help mid-sized retailers keep (or grow) their market share? 

In short, it’s not likely. 

Retailers must ask themselves two pivotal questions when contemplating loyalty as a strategy for expanding their market share:

  • “Will adding more perks to my loyalty program differentiate my business for customers who are part of multiple loyalty programs already?”
  • “If I invest more in my loyalty program, will I eventually receive a clear and measurable return on that investment?”

If the answer to either of these questions leans toward "no," then channeling more resources into existing loyalty programs is a risky way to protect against the encroachment of emerging rivals.

Loyalty programs are valuable tools for targeting existing customers and those for whom your locations are conveniently situated. But reflecting on the data presented, loyalty programs alone don't provide the guaranteed path to success for mid-sized retailers trying to compete with Walmart-sized retailers for market share. 

To compete effectively against Amazon and Walmart, retailers must think, "loyalty and..." In other words, they need both loyalty and other strategies that expand their brand’s reach, and include consumer behavior. Digital marketplaces with dynamic and personalized incentives for each customer are an example of that.  

Retailers have the opportunity to win more wallet share by tapping into ready-made customer networks of hungry shoppers deciding where to buy. There are a number of marketplaces with massive built-in user bases, acquired and retained through their own advertising and marketing spending so our retailers don’t have to. These marketplaces introduce their user base to participating retailers, and incentivize them to choose participating retailers instead of their competitor.  

In this increasingly consolidated market landscape, marketplaces are a good start in engaging the shoppers who don’t know those retailers today, and introducing them to everything that makes the retailers’ store worth visiting again… and again, and again. 

How grocery loyalty programs stack up against the "Big Five"

Dr. Thomas Weinandy

Linkedin - Upside

Dr. Weinandy is a Research Economist at Upside, providing valuable insights into consumer spending behavior and macroeconomic trends for the fuel, grocery, and restaurant industries. With a Ph.D. in Applied Economics, his academic research is in digital economics and brick-and-mortar retail. He is currently writing a book on leveraging AI for business intelligence.

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