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Try to buy anything these days and shoppers are inevitably encouraged to sign up to a loyalty programme.
Rewards schemes are proliferating. Globally, one in three of the businesses that do not currently operate loyalty schemes will do so by 2027, says consulting firm Gartner. Companies that have long offered programmes are also sweetening the rewards. US retailer PetSmart added premium tiers to its loyalty scheme this month.
What appears good for shoppers has perks for investors too. An academic study based on 322 companies with loyalty programmes found both long and short-term benefits. Sales rose 7 per cent on average in the first year of a scheme’s introduction and gross profits 6 per cent, according to the 2019 research by academics from Michigan State and Oakland universities in the US.
At their simplest, loyalty programmes offer a pact with consumers: keep coming back to us, leaving a data trail each time, and in return you will receive points that can be swapped for goods and services.
Their very longevity implies effectiveness. Frequent-flyer points have been around since the 1970s. Trading stamps, a precursor, began life in the late 19th century. So, too, does the increasing complexity of many schemes, with different tiers and discounted prices. The addition of membership fees is also increasing. These have been found to increase usage.
Yet some schemes have started to attract unwanted attention. The UK’s competition watchdog has launched a probe into loyalty cards at two of the country’s biggest supermarkets — Tesco’s Clubcard and Sainsbury’s Nectar — over concerns of “two-tier” pricing. The former has more than 20mn members, the latter 18mn-plus. In the US, the Department of Transportation is looking into frequent-flyer programmes at major US airlines.
Any effort to restrict programmes is likely to be unwelcome for shareholders, although in the case of supermarket schemes that offer special prices for loyalty card holders, they have already achieved the aim of increasing market share.
Some airlines, selling air miles to credit card providers, have turned points into a bigger money-spinner than the far more volatile business of flying.
Loyalty programmes feed through to the bottom line in several ways. First, repeat custom is cheaper than bringing new customers on board. That story is told most graphically by the massive cash burn at consumer-facing start-ups as they woo customers with freebies and steeply discounted goods or services. Even the relatively mature Deliveroo spent 9 per cent of revenues on sales and marketing last year.
The troves of data on spending habits garnered by providers helps them to cross-sell and provide tailored deals: for instance, marketing ready meals to a buyer of newborn nappies or plant-based burgers to vegan shoppers.
Granted, this can go wrong on occasion. One notorious example is when Target of the US used predictive analytics on shopping patterns to work out pregnancies and even due dates, and sent off baby coupons to a teenager who had not disclosed her condition to her father.
These data caches can also be monetised by selling them on — in anonymised format — to third parties. Sainsbury’s expects its Nectar360 business, which runs its loyalty programme, to generate £90mn of incremental profits by March 2026. US bank JPMorgan, although not actually selling the data, is charging brands to target their ads at its retail customers based on their spending history.
That suggests shoppers should not be the only ones watching their points accumulate, as more companies spin out the concomitant data into its own money-making unit.
Record cocoa prices leave bitter aftertaste
Supply disruptions have sent cocoa bean prices to remarkable heights. Chocolate makers are melting. Shares in the world’s largest, Switzerland’s Barry Callebaut, have lost a third since the start of 2023.
Some relief arrived for the group’s investors this week with better than expected first-half results. Yet commodity volatility means the sweet taste is unlikely to last long.
The biggest concern for investors, of course, is consumers buying less chocolate.
Traditionally, that has not been a problem at Barry Callebaut. It is well known for its inelastic demand even though its prices have been rising for years. Its prices are up some 20 per cent since the start of 2021. Volumes over that time have been flat. Surprisingly, volumes remained resilient in the six months to February, rising 1 per cent.
Elsewhere, there are definite signs of strain. Working capital in particular is squeezed. This jumped by SFr800mn over the six months and contributed to negative free cash flow of SFr1.1bn. As a result, net debt jumped to SFr2.6bn — almost three times ebitda. Barry Callebaut has refinanced its debts and expanded revolving credit facilities. It aims to offset the impact of higher bean prices with cost savings.
Cocoa prices may remain high even though fears of inadequate supply look overblown. A stocks-to-use ratio of more than 30 per cent is high compared with the previous bull market in 1977 when that figure fell to 18 per cent, notes Jonathan Parkman of broker Marex.
The cocoa market has since evolved. Big chocolate makers now seek premium grades to make good on sustainability promises. Spot prices are stuck at record levels because of producers’ fears of running out of the right kinds of higher-quality beans. On top of that, buyers are staying out of forward markets in Ghana due to the country’s financial crisis and debt default.
Both factors will keep spot prices higher for longer. This will continue to drip debt on to chocolatiers’ financials.
Read the full article here