Tesco's Fresh & Easy Neighborhood Market Developing Loyalty Card Program it's Planning to Launch This Year

Breaking News & Analysis

Tesco's El-Segundo, California-based Fresh & Easy Neighborhood Market is working on a loyalty card program it currently plans to implement in its stores later this year, Fresh & Easy Buzz has learned.

The loyalty program is still being worked on at Fresh & Easy. But it's in its mid-to-final stages of development, according to our sources.

Neither Tesco or its Fresh & Easy Neighborhood Market have publicly mentioned or announced anything about the loyalty program or planned implementation this year. We're the first publication to break the news about the plans.

Those plans currently call for Fresh & Easy's loyalty program to be handled in house, where it's being developed with some outside help, rather than being developed, implemented and administrated by Dunnhumby, the UK firm now fully-owned by Tesco, which developed and administrates Tesco's Clubcard in the UK.

Dunnhumby's U.S. office, which is in Cincinnati, Ohio, can't develop, implement and administrate the loyalty card program for Tesco's Fresh & Easy Neighborhood Market because of its long-term partnership agreement and contract with Kroger Co., who's loyalty card program was developed by Dunnhumby, which is why the firm's U.S. office is in Ohio where Kroger is headquartered

Dunnhumby works closely with Kroger Co. in implementing and administrating its loyalty program, along with creating new marketing programs featuring Kroger's loyalty cards. Kroger Co. is the second-largest  retailer of food and groceries in the U.S. Walmart Stores, Inc. is number one.

The Fresh & Easy loyalty program isn't a direct version of Tesco's popular UK Clubcard. This is the case for a couple reasons, according to our sources.

First, the Dunnhumby partnership and contract poses a problem in terms of using resources from the Tesco program for Fresh & Easy's loyalty card program. But of course Tesco owns Fresh & Easy, so it would be hard to fathom it's not borrowing from Clubcard to a certain degree for Fresh & Easy's loyalty program.

Second, Fresh & Easy has an information technology (IT) system of its own that isn't directly compatible with Tesco's in the UK. Therefore, the software for the loyalty program at Fresh & Easy has to be made to be compatible with its legacy IT system, which has been since day one and continues to be a source of numerous problems for Fresh & Easy Neighborhood Market.

Not being able to use Dunnhumby - although that doesn't mean Tesco CEO Philip Clarke, Tesco group deputy CEO and chief marketing officer Tim Mason, who's also CEO of Fresh & Easy Neighborhood Market, aren't asking questions of or getting informal assistance from certain people at Tesco-owned Dunnhumby - to develop, implement and administrate the loyalty program is a major drawback for Tesco and its Fresh & Easy chain because the firm founded by Anita Dunn and Clyde Humby, who sold out their shares in the company to Tesco and retired, is one of the best around at customer response marketing and loyalty programs.

In fact, one of our sources who's familiar with Fresh & Easy's loyalty program tells us, from the source's perspective, the program lacks expertise from a marketing, information technology and software delivery standpoint. And when it comes to loyalty programs, IT, software performance and marketing are about all that matters. Therefore, in the source's view, Fresh & Easy's loyalty program is far from ready for prime time.

Tesco considered developing and introducing a loyalty program at Fresh & Easy Neighborhood Market last year. But it decided against it for a variety of reasons.

Two key reasons it decided against it last year were because CEO Mason decided sales and sales growth at Fresh & Easy was not at a point where doing so was feasible, and because one of Fresh & Easy's key marketing propositions since 2008 has been its low prices without having to use a loyalty card positioning and slogan.

The latter of the two remains a problem from a marketing positioning and communications for Fresh & Easy in introducing a loyalty program, even though the chain has been down-playing that particular positioning element for the last year or so.

But the issue doesn't even have to come up publicly to be a problem. Rather, the inherent problem is that using the low prices without a loyalty card theme and then introducing a loyalty card has the potential to create confusion in the minds of consumers about Fresh & East, despite whatever marketing and public relations spin the chain puts on the 180-degree change.

Read what we wrote about a loyalty card at Tesco's Fresh & Easy in this 2010 piece - February 2, 2010: Dunnhumby; Trial Balloons By Media; and Fresh & Easy's Loyalty Card Marketing Trap. We also offered this analysis in 2009 - December 8, 2009: Analysis: Why A Loyalty Club Card Program Makes Zero-Sense For Tesco's Fresh & Easy USA.

Depending on the nature and quality of the loyalty program Tesco's Fresh & Easy implements this year, if it doesn't change its mind about doing so which it's done before, it might not pose a problem from a sales standpoint to do so now - particularly to the extent it would have in 2009 or even last year - although based on what we've learned from our sources it doesn't appear the loyalty program is ready for prime time.

But the devil is in the details. For example, we wouldn't suggest the loyalty card be required to get promotional deals on items offered in the grocer's weekly advertising circular or for in-store specials, as commonly is the case with grocer loyalty programs.

Why: Because at Fresh & Easy's limited stage of development, along with its struggles to grow sales, limiting such promotions to loyalty card members only is a prescription for reduced sales, in our analysis, which is something the grocery chain can hardly afford to do. Using the card in this way also has the potential to serve as a barrier to new shoppers trying Fresh& Easy, in our analysis.

Fresh & Easy Neighborhood Market CEO Mason and Tesco CEO Clarke at present intend the loyalty card program to be a replacement for the grocery chain's chronic use of its deep discount (20%-25% off) store coupons - the $5 of $20/$25, $6 of $30 and $10 off $50 versions particularly - which as we've written extensively about are a major contributor to Fresh & Easy's negative-38% margin, which it reported for its 2010/11 fiscal year, ended February 26, 2011.

That margin metric hasn't improved over the last four months. In order for Tesco to break-even with Fresh & Easy by the end of its 2012/13 fiscal year, which is just 20 months away, it must increase the El Segundo, California-based chain's margin significantly - and fast.

Tesco currently has 176 Fresh & Easy stores - which average about 10,000-12,000 square-feet and offer a limited assortment (about 5,000 SKUs) of fresh foods including: produce, meats, perishables, frozen and ready-to-eat and heat fresh-prepared foods, along with beer, wine (liquor in some stores) and packaged food, grocery and general merchandise items - in California (127 units), Arizona (28) and Nevada (21)

Replacing the discount coupons, which are also a major contributor to the 11% comparable-store-sales growth Tesco reported for Fresh & Easy in April for the 2010/11 fiscal year, is far easier thought about and said than actually done though.

Fresh & Easy Neighborhood Market has been using the coupons chronically since 2008. It tried eliminating them in 2009, as we've reported, but after a couple months sales dropped so significantly without the vouchers it started issuing them again at the same regular pace, something Fresh & Easy has continued to do right on up to today. Take them away, in our analysis, and that double-digit comparable-sales-growth drops significantly.

So far this year, for example, the grocer has had one or more of the 20%-25% off coupons in distribution at virtually all times, issuing a new coupon online about every three weeks (with dates good for about three weeks), along with including paper coupons in its direct mailed advertising circulars nearly every week, plus issuing special coupon books regularly, which contain one month's worth (usually four) of coupons.

Fresh & Easy includes the online coupon in its quasi-loyalty "friends of fresh&easy" e-mail-based promotional program. Theoretically at least, the coupons are therefore only supposed to go to consumers who are signed up for the program.

But that's not the case because every time Fresh & Easy distributes a new coupon via "friends of fresh&easy," numerous Coupon Maven and Mommy Bloggers post the vouchers on their sites, where the discount coupons are available for download by anyone. Google "Fresh & Easy Coupon" and you will see what we're talking about. People also post the coupons on Twitter, Facebook and other social media sites. All that's required to obtain them is knowledge of how to use Internet, or knowing someone who does.

The store coupons serve a "pull" function for Fresh & Easy Neighborhood Market though, in which in addition to encouraging people to return to the stores and shop (by getting more coupons), they also are designed (at least in theory) to draw or "pull" new customer into the stores, which is something that's essential for Fresh & Easy a this stage in the game.

The coupons are designed to do this in an immediate - nothing to join; just clip a coupon and come on in and shop - and regular way; and to do it fast. In contrast loyalty programs take a long time to develop and aren't the best vehicle for "pulling" shoppers into grocery stores until hundreds of thousands of consumers join the retailer's loyalty program.

This is a factor Tesco and Fresh & Easy better think deeply about as they go forward with the loyalty program. They have to eliminate or only use the deep discount coupons promotionally, say once per quarter instead of all the time, in order to improve margins.

But we doubt if a loyalty card program will address or solve the coupon issue directly for Fresh & Easy. And its hard to believe the program we've learned about from our sources is something Tesco wants to unleash on the Fresh & Easy stores soon.