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 — 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, which 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, 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, with nearly 34 million Rewards members driving 60% of the company's sales, according to CEO Laxman Narasimhan.
And Dick's has said loyalty members who also use its fast-growing youth sport management software spend twice as much with the retailer than 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, online marketplace Etsy said it would start a test of a paid "Etsy Insider" program, which would give members free shipping on items purchased through its website as well as other discounts.
The goal is "to drive frequency and loyalty over time," the company said in a press release. Etsy has reported quarterly drops in merchandise sales over the last few quarters.
Tractor Supply Company, which has had its free Neighbor's Club loyalty program for most of the last decade, extended its best discounts to customers with military service records and first responders earlier this year.
About 20% of those who signed up for the "Hometown Heroes" program are new to Tractor Supply's loyalty program, while 15% haven't been to Tractor Supply before, CEO Harry Lawton said on a call in July to discuss the company's second-quarter results. Comparable sales among Neighbor's Club members grew faster during the period than among non-members, Lawton added.
Beauty store chain Ulta, which already has its Ultamate Rewards program, is testing a complimentary program that includes 42 mini-games, Glossy reported in May. By playing the games, customers can win discounts, gift cards, and other prizes personalized to them, according to the report.
Loyalty programs come in a variety of forms, but they ultimately allow companies to do a couple of things that benefit the company in exchange for giving customers a better deal — beyond simply driving higher sales, that is.
For starters, a loyalty membership makes it a lot easier for companies to track your spending and build a customer profile about 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 (i.e. ads in stores and apps) continues to expand.
It also helps retailers better target promotions and discounts to select customers, rather than offering across-the-board markdowns that can prove to be costly. Can you say "unlimited shrimp?"
That said, the most successful programs emphasize the rewards part as much or more than the membership part. After all, a big part of what is 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 new loyalty program, just remember that the big savings are real — but only if you spend a lot, too.
