Retailers adjust loyalty programs to cope with inflation and boost margin growth in 2023

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Amid the current macroeconomic environment, retailers across product categories are facing significant cost pressures. As a result, many are exploring ways to boost their profit margins, including cutting the value of their loyalty points. This strategy allows retailers to reduce their expenses while still providing consumers with a perceived benefit, although at a lower cost to the retailer. From the United States to the United Kingdom, many well-established quick-service restaurant brands and retailers have adopted the strategy in 2023.

• Starbucks, which operates one of the most successful customer loyalty programs worldwide, announced that it is making changes to its loyalty and reward program starting February 2023.
• Under the new loyalty and reward program, members are required to earn more points to redeem freebies such as coffee, lattes, and teas, among others. This means that customers will have to buy more to earn freebies. This emphasizes higher profits for Starbucks, which has attained widespread success with its loyalty and rewards programs over the years.

With 28.7 million members, Starbucks Rewards members accounted for 55% of the total sales in the United States in Q4 2022. Consequently, the new reward program might aid the revenue growth for Starbucks over the next few quarters in 2023, if the economy continues to face macroeconomic pressure.

In the United Kingdom, retailers such as Tesco and Boots have also followed suit and announced changes to their loyalty and rewards program in March 2023.

• Tesco, one of the leading supermarket chains in the United Kingdom, revealed that the firm will cut down the exchange rate of consumers’ loyalty vouchers with reward partners by a third, starting June 2023. The changes, which will impact Tesco Clubcard members, are aimed at improving the profit margins for the firm amid the economic downturn.
• Boots, one of the leading pharmacy chains in the United Kingdom, also announced similar changes to its loyalty and rewards scheme in March 2023. The firm reduced the value of its reward points by 25%. The changes are slated to come into effect in May 2023 and will affect the Advantage Card loyalty scheme members in the United Kingdom.

While these measures, adopted by Starbucks, Tesco, and Boots, might have a positive impact on their margin growth, pulling back on reward schemes can also have severe consequences, as consumers are seeking more value from their reward programs amid the soaring cost of living.

Alongside Starbucks, many other quick-service restaurant brands worldwide have announced similar measures over the last few quarters. For instance,

• In March 2023, Chick-fil-A, which operates over 2,800 restaurants in the United States and Canada, announced that the firm is increasing the number of loyalty points required to redeem some items in its Chick-fil-A One rewards program. The changes, which are slated to come into effect in April 2023, are also driven by inflationary pressures.
• In October 2022, Dunkin’ announced that the firm is replacing its old rewards program with a new one, which will require members to spend more of their points for getting free drinks. The new program, Dunkin' Rewards will ask members for 700 points to get a free coffee. In the old program, DD Perks, members were able to get a free drink for 200 points.

Overall, the impact of retailers and quick-service restaurants cutting the value of their loyalty points is likely to be mixed. While this strategy may help retailers boost their margins and bottom line in the short term, it could lead to a decline in customer satisfaction and loyalty over a period of time. In addition to this, if more and more retailers follow the same strategy, it can lead to a broader decline in the global loyalty and rewards program industry. Consequently, it is crucial for retailers and quick-service restaurants to consider the potential long-term implications of this strategy to boost margin growth.

To know more and gain a deeper understanding of the global loyalty programs market, click here.