Sainsbury’s (SBRY) $105m (£60m) swoop for full ownership of its loyalty card scheme will immediately add to its bottom line, according to the supermarket.
But what does the willingness of Sainsbury’s former Nectar partner Aimia to sell off the loyalty scheme in a cut price deal say about Nectar’s value?
A look at the figures involved suggests Nectar is not an asset on the up.
The $105m selling price is largely negated by Aimia’s commitment to cover $183m (£105m) of liabilities relating to outstanding Nectar points.
The selling price also pales into comparison to the £368m ($755m) the Montreal-based group bought Nectar for in 2007.
So what has gone wrong with Nectar?
Canadian broker National Bank Financial said the price “was remarkably low”, but reflected the fact that Nectar’s contract with Sainsbury’s was up for renewal next year giving the supermarket the upper hand in negotiation.
More widely, fragmenting consumer demand and promiscuous shopping habits, particularly in the grocery sector, have diminished the cachet of the loyalty card concept. As the big weekly shop increasingly becomes a thing of the past so has the loyal customer collecting their points each week for voucher rewards. Notably fast-growing Aldi and Lidl have no loyalty card concept.
Specifically in Nectar’s case, Aimia admitted that the far-reaching tentacles of Sainsbury’s limited the programme’s ability to attract new partners. As the supermarket operates in finance, energy, clothing and – in particular given its Argos acquisition – general merchandise, it has developed competitive conflicts with a wide array of other consumer-facing businesses, limiting the ability to further grow the Nectar group.
In actual fact the Nectar community of companies has been shrinking, with British Gas and Homebase recently ending their ties with the programme.
Aimia stated: “The evolution of the Sainsbury’s group has led to more limited prospects for Nectar to add new non-competitive partners of scale. When combined with the takeover of partner Homebase by Bunnings and the exit of British Gas, Aimia ultimately determined that retaining its ownership of the Nectar business offered more limited opportunities to add value to the company.”
Question marks over the ability to grow loyalty programmes to third parties is not only affecting Nectar.
A major factor that scuppered Tesco’s (TSCO) plans for a £2bn sale of its data arm Dunnhumby in 2015 was the over-reliance on its parent to drive profits amid fears among bidders that, should the relationship with Tesco end, the Dunnhumby model would be unviable.
In December The Grocer reported that Dunnhumby has plunged to a £33m pre-tax loss after a new agreement with its parent company cost the data arm an extra £30m after an effort to “set up an arm’s length relationship” with its parent.
However, while the ability to scale-up loyalty programmes is in question, their value as a provider of consumer insight remains undiminished.
Sainsbury’s said acquiring Nectar supports its “strategy of knowing its customers better than anyone else” and analysts see strategic merit in the deal.
Edison Investment Research analyst Paul Hickman said that, with Sainsbury’s efforts to push into general merchandise and online grocery, “Increasing effort is going into enhanced joint promotional planning and product cross-selling, which is precisely the area where Nectar can contribute.”
“The acquisition of the UK’s largest loyalty scheme brings with it a comprehensive consumer database across a wide range of sectors which will enable Sainsbury’s to better understand its customers’ behaviour and increase opportunities for targeted marketing across its brands.”
Shopper ‘loyalty’ as a concept is diminishing, but that arguably makes the ability to analyse consumer behaviour more valuable as it has become more difficult to predict.
Hickman suggests the Nectar deal could “bring strategic insights into longer term trends that will help it adapt its business to the 21st century retail reality.”
Nectar still has plenty of partners outside Sainsbury’s – including Expedia, The AA, eBay, The Hut Group, Virgin Trains and The Daily Mail.
Sainsbury’ strategy for Nectar is unlikely to be predicated on growing this list of partners considerably. But those third party agreements give the group consumer insight over and above just its own shoppers – the supermarket will be keen its partners do not follow British Gas and Homebase out of the door just yet.
Loyalty cards may have had their day in terms of engendering loyalty, but supermarkets are still only scratching the surface of the opportunities big data can bring. In that sense, even if Aimia had lost faith in the concept, £60m looks a snip.