The Economics of Supermarket Rewards Cards

It’s unlikely that there is no benefit to supermarkets, particularly since basically all of the major ones appear to do it (except high-end ones, which is understandable from a marketing perspective).

There are two obvious benefits: price discrimination and fake “sales.” Some people who seldom go to grocery stores and are not particularly price sensitive (married men, perhaps) are likely to not understand they can get a card by merely asking semi-politely, and will therefore pay the premium price. Anyone remotely price-sensitive will ask about the card.

On top of that, there’s the psychology of the sale price. People think they’re getting a deal, which may inspire them to buy more. It also allows stores to change prices based on inventory without having to change the list price – they can add and remove “Customer special” tags. I know that some grocery stores do indeed do this regularly.

I also know some stores use “5 for $10″ phrasing with their discount cards, when there is no actual bulk discount – it’s $2 per unit however many you buy. It is interesting that Safeway also lists $2 each, whereas Kroger does not admit this is a unit price. The simple priming of “5 for $10″ likely primes people to buy more. This would be much more difficult to do advertise without the “special” price.

While there is a profit margin in the products the wholesalers sell to the stores is present, the cost of stocking, damaged or returned products and the price on the shopping experience is also factored in. The grocers buy this product and both parties know that the real money is spent on the slotting fees. Stores use the information tracked on rewards cards as a way to price shelf real estate based on their data gathering. This forces wider displays of some products, often as entire, stand-alone sections, for those that can afford it. In this business, it is volume that counts.

It is also another data collection site. My son once quipped that he bought only beer at Safeway and wondered what portrait of a customer he was painting of himself. Aside from that concern, the stores proffer coupons that get issued to frequent buyers of this product or that and the rewards, in some market areas, are returned as cash (redeemable only with the card in use) or substantial discounts on frequently purchased general items such a meat or produce.

In a extremely connected world, what’s the real harm in getting the discount in return for giving them a name, address and phone number? In many instances we share more info with strangers from whom we will never reap any financial benefit. So why not get a few percentage points knocked off of the purchases we are already buying, and most likely, at the store of our choicest convenience?

Either way, the customer without a card is likely to see an upside, albeit minor. Even without the card, some retailers will put items on sale or price them competitively. Only a foolish retailer would force your hand to “pay more” and discriminate against any potential sale. They know: money walks. These are shrewd retailers who track every penny (often pressing retailers, often through stricter labor controls – i.e. vendor stocked shelves, resisting good labor agreements despite record profits) in order to keep the customer shopping at their locale.