How Grocery Stores Are Feeding Fears


By Jane Black On June 15, more than three dozen demonstrators gathered at the QFC grocery store in Seattle's Capitol Hill neighborhood. The group, which included pierced teenagers in leather jackets, middle-aged computer professionals, and one feisty, sign-swinging 70-year-old woman, had gathered to protest the store's new loyalty-card program. For two hours, they picketed, handed out leaflets, and chanted "No Cards!" and "One Price for All!"

In a city dominated by Microsoft, a.k.a. The Evil Empire, you have to wonder just why Seattle residents are so upset about supermarket loyalty cards, which QFC and almost every other grocery store chain around the country say are simply a way to reward loyal customers with discounts. Not so, say the protesters in Seattle and growing ranks of disgruntled shoppers around the country. They claim that the personal data and shopping information collected by supermarket companies from loyalty cards purchases violates their privacy rights and doesn't even save them money.

Longer-term, the impact of data collection could be far more disturbing. Using cards to track purchase histories, stores are beginning to segment customers into groups based on how much and how often they purchase. Such information will help stores target desirable -- read: profitable -- customers and cater to their needs.

LESS INCOME, HIGHER PRICES? This is high priority in the grocery business. After all, the top 30% of customers account for 75% or more of sales, while the bottom 30% account for just 3%, according independent grocer Gary Hawkins, who also serves president of Syracuse (N.Y.) consulting firm DataWorks Marketing. Ultimately, the information could be used to tailor prices to individual shoppers -- much the way airlines charge vastly different prices for two seats on the same flight. While that makes economic sense, under a worst-case scenario, the system could discriminate against lower-income shoppers who may simply have less money to spend.

The strategy is called customer-specific marketing, and it's the supermarket industry's Holy Grail. The reason? In a nutshell, Wal-Mart. As grocery stores see revenues and profits flatten, Wal-Mart, with its low prices and huge selection, continues to lure shoppers.

Supermarkets need to fight back. But they don't want to compete on price, says DataWorks' Hawkins. "They need to extend special prices, but only to certain customer segments," he says. "As stores begin to better understand the data they're collecting, they'll use it not just for marketing but to develop new metrics to manage and serve customers."

ECONOMIC SENSE. Hawkins is already experimenting along these lines in his own store in Syracuse, Green Hills Farms. The grocery uses shopper information to assist in selecting products, allocating category shelf space, and deciding what products to discontinue. For Hawkins, it just makes economic sense to provide more of the products that his higher-spending, more profitable customers desire.

However, true tailored pricing systems are still years away. Hawkins estimates that fewer than 30% of grocery stores that now collect data know how to use it effectively and that less than 10% are able to use it strategically to set prices.

Opponents say the loyalty cards are already being used to adjust prices, and the effect is that card-carrying shoppers don't really save anything, while the innocent consumers who chose not to participate in loyalty programs pay even higher prices.

"OVERINFLATED"? Take the Seattle QFC. On June 14, New Hampshire schoolteacher and president of anti-card organization NoCards.org Katherine Albrecht shopped at QFC and at a local Albertson's that doesn't have a loyalty-card program. She purchased six items -- Kellogs cereal, Cheez-Its, Orowheat bread, Oreo cookies, one pound of strawberries, and a two-liter bottle of Coke. At QFC with her card, Albrecht's bill totaled $16.09 instead of the $20.29 she would have paid without the card. Cheez-Its, for example, cost $2.39 with the card instead of $3.79 without it. Orowheat bread had a shoppers-card price tag of $2.00 instead of a $2.99.

Compare that to prices she paid at the nearby Albertson's, which doesn't have a loyalty-card program. Albrecht's total bill was just $11.22, nearly half what she would have paid at QFC without a card. Considering that five out of six of the products are brand-name items that rarely fluctuate in price, such a huge differential is hard to justify in the hypercompetitive supermarket business, says Albrecht.

"The card price is regular price, and the noncard price is a ridiculous overinflated price" to punish customers who refuse to join the program, says Albrecht.

WIDER PROTESTS. Gary Rhodes, a spokesman for QFC, which is owned by No. 1 U.S. chain Kroger, says that's not true. He says QFC is a more upscale food retailer than Albertson's and doesn't claim to be the lowest-price chain in Seattle. Rhodes also points out that all the products purchased at Albertson's were on sale, while at QFC, Kellogs cereal wasn't. "QFC could choose any number of products from our stores and go to Albertson's and find them at higher prices," he says.

Maybe. But more consumers are beginning to balk. The Seattle protest was hardly an isolated instance. NoCards.org's Albrecht is quietly recruiting members across the country who in turn are raising awareness in their communities. In January, NoCards.org staged a well-attended protest in Dallas. Next up: A rally in Denver where No. 2 grocery chain Albertson's is considering launching a shopper-card program.

Grassroots rallies are important, says Albrecht. To date, most consumers who fear that shoppers' cards will result in an invasion of privacy have simply refused to use them. But that only helps the grocery chains and hurts consumers, says Albrecht. "Fear increases the number of people who will not scan a card and pay highway-robbery prices," she says. "We need to change people's habits."

NO FAVORS. Of course, in a market economy, grocery stores can price products anyway they want. Prices are set for what the market will bear, not what people might think is right. One can hardly blame supermarket chains laboring under single-digit profit margins, and facing the Wal-Mart juggernaut, for trying to extract a bit more profit. Most important, supermarket companies have yet to employ the more sophisticated data-mining techniques that would really give privacy advocates fits.

None of that appeases shoppers like Redmond (Wash.) resident Robert Eberel. The 48-year-old Microsoft employee was one of the organizers of the June 15 Seattle protest. "I abhor having someone tell me they're doing me a favor when they're actually collecting information that could be used to make me pay higher prices," says Eberel. Others are bound to agree. Grocery stores, take note: Fooling customers with false promises won't earn their loyalty. Black covers privacy issues for BusinessWeek Online in her twice-monthly Privacy Matters column


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