As Americans get thrifty, retailers are turning to the tried-and-true strategy of loyalty programs in the hope of members driving higher sales.
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American shoppers are running out of steam — or rather, some of them are.
Whether you call this split (as some economists do) bifurcated, divergent, or K-shaped, the idea is that wealthier households are still spending strong while lower-income ones are dialing back.
So what's a retailer to do when confronted with such a shift? Follow the money, of course.
For companies like Costco, Starbucks, and Dicks Sporting Goods that have robust and well-established loyalty programs, a common thread is that rewards members are the biggest spenders. Now some less obvious names, like Etsy and Tractor Supply Co., are launching or revamping their loyalty programs as another way to get cautious shoppers to buy more.
"Consumers today are mindful about when, where, and how often they spend due to continued economic uncertainty," Jennifer King, a content manager at eMarketer, wrote last month. "For price-conscious consumers, loyalty programs provide opportunities to spend more comfortably thanks to discounts and deals."
Costco says its executive-tier members, who pay twice the annual fee of gold-star members and get 2% rewards on purchases, represent less than half of the total membership base but are nonetheless responsible for more than 73% of worldwide sales.
That sounds like a version of what Starbucks has going on — its CEO, Laxman Narasimhan, has said its nearly 34 million Starbucks Rewards members drive 60% of the company's sales.
And Dick's has said loyalty members who also use its fast-growing youth-sport-management software spend twice as much with the retailer as loyalty members who don't.
The strategy is so effective that some retailers are feeling inspired in an otherwise uncertain outlook.
At the end of July, the online marketplace Etsy said it would test a paid Etsy Insider program that would give members free shipping on items purchased through its website as well as other discounts.
The company said the goal was "to drive frequency and loyalty over time." Etsy has reported drops in merchandise sales over the past few quarters.
Tractor Supply Co., which has had its free Neighbor's Club loyalty program for most of the past decade, this year extended its best discounts to customers with military-service records and first responders.
The company's CEO, Harry Lawton, said on a call in July to discuss the company's second-quarter results that about 20% of those who signed up for the Hometown Heroes program were new to Tractor Supply's loyalty program, while 15% hadn't been to Tractor Supply before. Lawton added that comparable sales among Neighbor's Club members grew faster during the period than among nonmembers.
Glossy reported in May that the beauty-store chain Ulta, which already has an Ultamate Rewards program, was testing a complementary program with 42 mini-games that customers could play to win discounts, gift cards, and other personalized prizes.
Loyalty programs come in many forms, but they ultimately allow companies to do a couple of things that benefit them in exchange for giving customers a better deal — beyond simply increasing sales, that is.
For starters, a loyalty membership makes it a lot easier for companies to track your spending and build a customer profile with your preferences. There's a reason Target recently expanded its free-to-join Circle membership.
This data is helpful in many ways, but it becomes increasingly important as retail media (that is, ads in stores and apps) expands.
It also helps retailers better target promotions and discounts to customers rather than offering across-the-board markdowns that can prove costly. (Can you say "unlimited shrimp"?)
That said, the most successful programs emphasize the rewards part as much as or more than the membership part. After all, a big part of what's keeping customers spending right now is a sense of getting a good value for an increasingly stretched dollar.
Of course, effective loyalty programs aren't just about encouraging existing members to spend more; they also depend on getting more casual shoppers to sign up.
Starbucks, for example, said it was able to grow its Rewards ranks by opening up a few mobile-app perks that were previously limited to members only.
So the next time you're invited to join a loyalty program, remember that the big savings are real — but only if you spend a lot, too.
