CM4P

Customer
Management
4
Profit

Making
Loyalty
Work

Air Miles UK Interview

'We deliver Dreams'

We last interviewed Drew Thomson back in early 2001 when Colloquy ran a double header article that also featured Alexander Rittweger, CEO of the German Loyalty Partner Payback programme. Much has happened in the European market for multi-partner coalition loyalty programmes since the original interview with Drew, so it seemed timely to revisit and gain his perspective on what is happening generally with coalitions across Europe. We also wanted to understand his very special interest in the impact of the new Nectar coalition loyalty programme, which has been launched in what is effectively Drew's own backyard by the original creator of Air Miles, Keith Mills.

To recap for the benefit of readers of Colloquy who missed the first Air Miles interview, it is the UK's best known customer loyalty scheme and has been running for 14 years. It has members in the millions and a 'hard core' collector group who will change their buying behaviour to follow collection opportunities. Sainsbury's, who are the UK's number two grocery player, found this to their cost when the Air Miles partnership was moved to the number one grocery player Tesco and 60,000 shoppers switched across within weeks! The business model for the company is simple: they have a broad range of partners trying to incentivise their customers to greater brand loyalty and Air Miles role is to deliver the rewards promise for these customers engaged with the programme. Over 450 million Air Miles were redeemed in 2001 and the post 9/11 travel sector depression seems not to have affected their member's enthusiasm for collection and travel related rewards.

We started the interview by asking Drew for his philosophy on the business:

"We are about selling dreams and delivering on the promise. The focus of our business in the last few months has been on the travel aspect of it. Taking ownership of the travel sector, when it comes to loyalty, and moving more towards aspiration elements away from goods and services or money offers, hat was our focus a few years ago. We believe that we need to take ownership of the travel and leisure sector when it comes to loyalty."

Drew then went on to re-enforce this shift in focus against the context of the Nectar loyalty programme.

"Nectar is focussing on short term quick incentives rather then long term loyalty rewards. We are looking to build affinity and loyalty with customers for a reward with more aspiration. I think they [Nectar] are competing more with [Tesco] Clubcard rather than with Air Miles. Predominately, Sainsbury's will bring the volume of customers to the Nectar programme: it will compete through the most used relationship of the partners, which is your grocer, that will be the backbone of the programme. It is clearly positioned only against Tesco in their [Nectar] competitive advertising. They have not targeted Shell or NatWest."

Drew then went on to observe that Keith Mills of Nectar makes constant reference to being the original creator of the Air Miles programme when speaking to the press, to attract extra column inches. Drew finds this referral amusing and the source of additional publicity to his brand. The generic nature and strength of the Air Miles brand has created the 'Hoover effect', in that any multi-partner coalition tends to be described in a short hand of 'air miles type', that is actually reinforcing the customer perception of the original Air Miles brand values.

"Nectar will overlap with us in the travel and leisure rewards space, but they themselves have stated that this will account for less than 10% of what they do. The travel and leisure rewards in the Nectar brochure are on the back page, whilst they feature free meals at fast food restaurants and cinema tickets on the front page. This tells you something about their focus.

"We respect Nectar: we acknowledge they are there: they are clearly looking at some of the same type of customers. We regard them as a challenge but a very strong positive is that on any dimension we are stronger in travel and leisure than Nectar. We cannot afford to make mistakes now, which is different to pre-Nectar days since the customer now has a choice."

We then explored the split of the long term relationship between Air Miles and Sainsbury's. This had made the national press in the UK prior to the launch of the Nectar programme and was seen by many commentators as a strategic move on the part of Air Miles and Tesco to weaken Nectar. Sainsbury's claimed that they had fired Air Miles: Air Miles claimed the reverse. Drew was not able to comment freely due to outstanding legal issues, but he did observe wryly that it was an unusual move for Sainsbury's to try to take out an injunction to stop Air Miles partnering Tesco since they had claimed to have fired them.

Drew was keen to explain his long term partner strategy since taking over the helm at Air Miles, to strengthen relationships with key partners by sector that shared the Air Miles vision.

"Any company in my market place would aspire to partner with Tesco given their commitment, dedication and investment to customer loyalty through their Clubcard programme. The fact that they [Tesco] are publicly able to demonstrate over one billion USD returns on Clubcard, whereas Sainsbury's will not quote any figures publicly about their return on investment in a customer loyalty programme and the fact that Tesco is clearly number one in the grocery sector."

Tim Mason, Marketing Director of Tesco, has stated that on the day they started to offer Air Miles as a loyalty reward it was 'like switching on a tap'. The figures quoted are 60,000 new customers and 35,000 'reawakened' customers rejoining after the launch.

Drew went on to explain that other key partners in Banking and Fuel retailing had all recently reviewed their involvement in the Air Miles programme, had gone over it with a fine tooth comb, and the fact that they had reconfirmed their intention to continue the relationship was a testament to the value that Air Miles delivered to its strategic partners. In fact, Drew was able to reveal that since the acquisition of NatWest Bank (a long term partner in Air Miles) by The Royal Bank of Scotland, they had been testing the use of Air Miles across their product range and had decided to rollout Air Miles to their credit card customers. The company estimates that Air Miles has increased income on its credit card by 23 percent and is 10 percent more effective as a loyalty tool than previous promotions.

Future plans include potentially extending Air Miles into innovative clubs attached to checking accounts, and other financial products and services from The Royal Bank of Scotland group. These initiatives and the Tesco link are seen by Drew as key drivers of Air Miles volume growth into the future.

This is an interesting strategy since a founding partner in the Nectar programme has been the Barclaycard credit card owned by Barclays Bank. Convergence between multi-partner customer loyalty programmes and financial services will be at the centre of the two largest coalition schemes likely to be operating in the UK market in the emerging scenarios of the immediate future. Even large scale single brand loyalty programmes will face pressure from the strategic depth and customer spending insights gained by Air Miles and Nectar as they circle each other in the UK market supported by these large scale banking partners.

Drew went on to explain the Air Miles philosophy in more detail.

"We don't appeal to everybody: we never claim to. We appeal to 10 percent of Tesco customers but they are very, very valuable. When Nectar talk about appealing to half of the UK's population, we would ask what percentage of Nectar's members are profitable customers? With Nectar there is no differentiation: they are not looking at where the value driver is. Tesco now invest more in Air Miles because their customers who like us will invest more in Tesco on higher margin items. Our customers spend more: the valuation equation is clear.

"The challenge for Sainsbury's involvement in Nectar will be delivering value to the bottom line, not just driving revenue in some 'good news' message to the city analysts."

We went on to explore the issue of global inflation in frequent flyer rewards, and the inflationary pressures that that creates in a currency built around surplus inventory in airline seats when downsizing in the airline industry post 9/11 has actually reduced the available inventory. Globally, there are now estimated to be more than 100,000 frequent flyer members having over 1 million miles in their accounts. The frequent flyer currency is estimated to be only second to the dollar as an international currency!

Clearly, if more and more collectors are chasing fewer and fewer seats on planes, then something has to give. This problem has received an added twist in Europe as the growth of low cost airlines has put further pressure on the value of the liquidity of the currency. Drew had a typically upbeat response.

"Nectar is not focussing on travel and leisure because they cannot get access to the total value chain that is possible within Air Miles due to our parent company BA. We can leverage with our partners total travel and leisure offers in a more personalised offer. The 'Great Air Miles Giveaway' is the most sophisticated, segmented and targeted offer that has ever been done in the UK. We are mailing about 3.5 to 4 million of our collectors with this offer, and to date the DM has changed over 750 times throughout the mailing because we monitor every day what comes into the call centre and adjust the print run to drive a much higher response rate from our customers."

He went on to further explain the nature of the data exchange relationship with customers and the importance of using data freely given by customers in return for something that they value as a service.

"We need customers to work with us, but what we need to do is raise our game and commit to them that what they will get back in return will be much more targeted to their interests and currency available for redemption."

We pressed further the impact of the growth of low cost airlines in Europe and the possible negative impact on a currency such as Air Miles. Drew's response was again to seek to turn a possible challenge into a benefit for the brand.

"We are no cost, they are low cost. They have also been good for us by increasing the number of people in the UK willing to travel and experience the thrill of foreign destinations. This is good for us. On the value side we believe that our customers differentiate between low cost and full service airlines. It has not had an adverse impact to date."

Given the previous positioning about Air Miles target market being higher net worth individuals, this line of logic may be correct; but we suspect that a continued growth in low cost travel will have some negative impact at the margins of Air Miles collectors. On the plus side, however, the increased numbers of people who will be tempted to travel further and more often may well encourage a 'taste for travel and adventure' that will play to the Air Miles strength of marketing travel related 'dreams'.

We ended the interview by asking Drew about his views on the future for European coalition loyalty integration.

"We took a long hard look at Europe when I first joined the business to understand its potential going forward. We came to the conclusion that the benefits of expanding into Europe would not outweigh the costs associated with doing it. I do not believe there will ever be such thing as a pan-European programme. Other markets may catch up with where the UK is already. The Scandinavian market already has a lot of loyalty programmes and has the integrating elements of banking and financial services interwoven. They travel a great deal as a region and so they have the potential for a travel and leisure offer. A key principle behind the success of this type of programme is a propensity for the population to travel."

He went on to emphasise this point.

"I think these markets will operate independently and only a very, very small proportion of customers will seek out air miles type partners when they are outside their home market."

Drew closed out, "We are still selling dreams and delivering the promise, and we continue to be driving the gap so that we remain the UK's premier travel and leisure loyalty reward programme."

Bold words and a very clear vision of what he wants to achieve with the Air Miles brand are a characteristic of any interview with Drew. You are left in no doubt about his personal commitment and energy to deliver the promise to his customers, staff and BA shareholders.

The UK market is entering a very interesting phase of rationalisation and development. The arrival of Nectar has made every player review their strategy and lift their game plan. We are still at the early stages of this process which will take 18-24 months to fully sort itself out in terms of winners and losers. What we have seen in the last few months in the UK is more like the opening skirmishes of a longer term battle for supremacy. All the big players are making claims and counter claims. As ever, it will be the customer who makes the final decision and they have historically, and increasingly, shown very little 'loyalty' to any organisation that incorrectly interprets their wishes. When the dust settles, however, we were left with the impression that Drew Thomson and his vision for Air Miles will still be standing, maybe bruised and a little battered, but still a major player with a huge brand awareness that will take some denting. Have Nectar got the resources and the stamina to make that dent?


Peter G Wray

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