Loyalty programs have been around for ages. The idea behind them is to gain information about consumers, then tailor a store’s offers to them to increase their spending in store and to ward off competition. Often, these programs were done on a store-by-store basis and offers were targeted for their stores alone. However, in the last few years the economy has witnessed the emergence of cross-store loyalty programs. For example, gas rewards and grocery stores.
Currently there are several versions of this program. For example, the grocery chain Giant has partnered with Shell and, similarly, Safeway has partnered with Exxon/Mobil. Under these programs, a consumer purchasing their weekly groceries at Giant or Safeway can swipe their “Bonus” or “Rewards” card and redeem savings on their groceries. Then, the additional cross-store rewards begin. The store states that for every dollar a consumer spends, they will receive a specific number of gas rewards points. Using their newly accrued rewards points, grocery consumers can proceed to the pump and enter their card number, redeeming these points to reduce their per gallon price for gas.
As Morgan and Hunt (1994) state in their research, these programs operate under the assumption that both the consumer and the retailer are committed to specific brands. However, as Liu (2007) points out, the consumer preference for grocery stores and gasoline brands may be relatively low and therefore the tradeoff between brands is relatively easy for consumers. In a review of consumer loyalty programs, Liu (2007) does find that over a period of time consumers will often continue to shop at the same retailers and increase spending levels under loyalty programs. According to Kim, Shi, and Srinivasan (2001), the increased demand through loyalty programs has an advantage for stores as well because this will inadvertently increase their tradeoff between firms for the same goods.
Savings at the Pump and Increased Disposable Income
At RESI, one of our favorite things to do is to consider general, everyday issues in relation to Maryland’s economy. Often, this results in us doing a bit of background work and then determining inputs for our REMI model. Thinking about gas rewards programs and their impact on Maryland’s economy, some questions arise. Taking into account the gas rewards savings on an annual basis across households, what would this translate into for Maryland’s economy? What would this increased annual savings across households look like in REMI?
Disposable Income Changes
RESI always needs some primary data, and, given the short timeframe, the group needed a guinea pig. Thankfully, at least one employee shops at one of these grocery stores weekly and saves their receipts. This same employee visits the pump at least every two weeks, and happened to save their receipt this week.
The photo above shows the receipt on the bottom as the employee’s current rewards amount, and the receipt on top was their savings at the gas station that week from rewards over a two week timespan. It’s unlikely most people will save $0.60 per gallon every time they go to the gas station, but it is reasonable to suggest a $0.10 savings given the employee’s current gas rewards points.
RESI then took this $0.10 savings and multiplied it by 15, as the average fuel tank size in Maryland is 15 gallons. Therefore, if most people fill their tanks at the close to empty mark this translates to roughly $1.50 in savings on each trip. Over one month, this could equate to roughly $6.00 in savings. Over a year, these savings would increase each consumer’s disposable income by $72.00. Although this isn’t much to a consumer, there are roughly 2,598,000 automobiles registered in Maryland as of 2009 according to the U.S. Federal Highway Administration. If at least 50 percent of those vehicles were to take part in this loyalty program and save $72.00 a year that would increase Maryland’s total household disposable income by $93,528,000 a year.
RESI ran this increased disposable income in REMI and found the following:
Source: REMI PI+, RESI
The reallocation of the disposable income from consumers supported 172 jobs, $19.6 million in output, and $7.8 million in wages in 2013. What does this do to prices? According to RESI’s analysis, although the price of consumer goods would increase, the change would be relatively small across the economy. Areas such as transportation services, motor vehicle fuels, and food and beverage purchases for off-site consumption (grocery) would see relatively small increases (less than half a percent).