Pick n Pay makes steep cut to Smart Shopper programme

South Africa’s second-largest supermarket group Pick n Pay is making steep cuts to its Smart Shopper loyalty programme. From March 30, cashback points will be earned for every R2 spent at its stores, from R1 previously. Simply put, you now need to spend R200 to get R1 back, from the rate of R100 to get R1 back until now. This means PnP has halved the cashback rate to customers from 1% to 0.5%.

The retailer is characterising the change as one that makes the rewards programme “more rewarding and more personal”. In an e-mail to members, Adrian Naude, group executive: Marketing, says that “from now on, Smart Shopper is going to give… personal discounts every week, based on… actual shopping habits”.

“Our aim is to give you over R500 in personal discounts over the year, focusing on the products you already buy.” It also mentions the change to how points are earned, but this aspect of the programme has been somewhat ‘de-emphasised’ on its website. It has managed to somehow also intertwine this change with its anniversary: in published ‘frequently asked questions’, the retailer says: “It’s our 50th anniversary this year, so we’re going to invest more than ever before in savings for our customers.”

Customers – and there are well over 10 million of them – may not be very happy with this change. Smart Shopper has regularly been voted the country’s favourite rewards programme (in multiple surveys) and it’s fairly obvious why: it is among the most lucrative (for customers) of them all.

Perhaps because of this, it is the largest loyalty programme – by members – in the country (Pick n Pay no longer discloses the number of cardholders in its financial results; the last confirmed number from the group is 9 million as at March 2015, but recent estimates have put this at 10.7 million). A discount of 1% on every purchase (food, liquor, clothing, pharmacy) at any of its stores (including franchise and forecourt convenience) is a good deal! On certain items, it also offered double- or triple-points or instant savings, which were effectively supplier-funded discounts.

So while there’s undoubtedly been a top-line boost for the retailer, that hasn’t all flowed through to the bottom line. In the bulk of the categories it trades in, margins are razor thin (or highly regulated) and Pick n Pay has (in effect) been ‘giving away’ profits to customers. In the first half of the 2017 financial year (March to August 2016), it reported a trading profit margin of 1.5%, up from 1.3% in the comparable period (the gross margin was 17.9%). Obviously, there’s not a lot of margin to ‘play with’ there, and giving back 1% is costly.

In recent years, it has also decreased the ‘lifespan’ of any points earned. As at early 2015, according to notes to the financial statements in its 2015 integrated report, points were valid for three years. More recently, the group changed this policy and points now expire after 13 months. This deferred revenue is not insignificant.

As at February 28 2016, unused Smart Shopper points balances (i.e. points granted but not yet redeemed (effectively cash) saw the group report deferred revenue of R123.9 million (adjusted for a forfeiture rate of 18.6%). This was a big jump from the outstanding balances (less forfeiture) of R46.2 million in the prior year. The group’s turnover for H1 2017 was R37.4 billion.

In October 2012, deputy chief executive Richard van Rensburg let slip the actual cost to the group’s margin of Smart Shopper. At the time, he told Moneyweb “we have a customer base now that’s more than double what we initially predicted when we did the feasibility study for the programme. That’s positive, because we’ve taken on a lot more customers than we thought we would and the programme is obviously enjoyed by our customers. It’s negative because it’s costing us quite a lot of money, which was originally unforeseen.

“We gave away R186 million in this six-month trading period in terms of points to our customers.”

Its turnover for that period (H1 2012) was R28.3 billion, with trading profit of R288 million. Suddenly that R186 million looks a big number. One can only imagine how much it gave back in points on that R37.4 billion in turnover in the most recent first-half (especially with more than R124 million in unused points), with a far larger number of Smart Shopper customers.

The other (hard) cost to running the programme is the operational, mostly IT-related one. In its H1 numbers to August 2016, Pick n Pay also highlighted that it had “reduced costs in Smart Shopper” by insourcing the loyalty engine.

The change announced on Thursday is a big one, and might yet impact shopping habits. But, the broader trend in retail to personalisation is unstoppable, however.

Pick n Pay has been touting this ‘future’ from day one. In fact, one could say that this is the entire point of the exercise: to gather detailed data on what people are buying. This has value to the retailer (it knows what to stock, when and where) and to its suppliers (and, PnP would no doubt argue, to its customers too).

Personalised ‘Just for You’ vouchers have been a hit with more than double the amount of these redeemed by Smart Shoppers in FY 2016 than in FY 2015 (7.2 million vs 3.4 million). The new vouchers (via the app or kiosk) are a continuation of this strategy. It’s offered more than a hint that more personalisation is to come. Now, just that small matter of ensuring those 10 million-plus Smart Shoppers stay engaged and don’t take to social media with their pitchforks. Or, worse, shift their spending.

Brought to you by Moneyweb

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