Computer coupon and discount

Byline: DIANE CYR

Supermarkets do it, pet stores do it, mass retailers everywhere do it. For winning over finicky customers, key tags - the portable, scannable consumer discount cards - have become the retailer's equivalent of a going-steady pin.

So why aren't more chain drugstores doing it? Only CVS, the No. 1 chain in store counts, has stepped up to this game of tag in a big way, rolling out its ExtraCare dollar-rewards program across its approximately 4,000 stores.

That's created a wholesale change in how CVS communicates with customers - but so far, that alone hasn't been enough to rally its commitment-phobic competitors.

For its part, CVS claims ExtraCare has led to nothing but relationship bliss. Since its 2001 launch, ExtraCare has signed on about 32 million shoppers who spend some $12 billion annually, about half of the chain's annual revenue. Thanks to its card-scanning data, CVS now knows these folks (or at least their shopping habits) more intimately.

Previously, the company had done virtually no direct communication with its customers. Today, it's sending millions of targeted coupons and mailings 10 times a year. "ExtraCare has been a tremendous success," says Todd Andrews, CVS' director of communications.

Still, that hasn't been enough to convince other players to join in. Of the top 35 chains, for instance, only nine offer some kind of loyalty card, says Crystal Wright, vice president, media relations for the National Association of Chain Drug Stores (NACDS). Of those, most are either product-specific (the Insulin Club Card) or market-specific. Rite-Aid, for instance, operates 3,400 stores nationwide, but its Rite Rewards program hits only a half-dozen markets. Duane Reade's Dollar Rewards Club is chainwide, but all of its 200 stores are in metropolitan New York.

As it turns out, chain drugstores have good reason to be wary of the key-tag game. For one thing, a program the size of ExtraCare has proven a huge commitment. So far, it's cost CVS tens of millions of dollars in store credits, as well as undisclosed millions more in hardware and software support in thousands of stores. It's one thing to operate a frozen yogurt shop and hand customers a "Buy 10, Get One Free" card; it's another to create an entire computer network for data scanning, collecting and analyzing across so many stores. "There is a cost attached to rolling out a loyalty card," says Karen Ramos, spokeswoman for non-players Osco Drugs and Sav-On. "We need to be responsible to our shareholders and make sure we're moving into activities prudently and not overspending."

CVS also has found itself with the added expense of steadily sweetening the program. Initially, customers only earned store credits on non-prescription purchases made during certain "spree" hours. Today, ExtraCare operates at all hours, giving shoppers credits worth 2% of all front-of-store purchases, as well as $1 in credits for every two prescriptions. Credits are now presented at the register, instead of mailed to customers quarterly.

Despite the obvious costs, though, "ExtraCare has been a good investment," Andrews says. ExtraCare shoppers tend to spend more than their non-card-carrying counterparts (although CVS won't say how much). Better still, these shoppers now spend more than ever overall. "They're not only redeeming their ExtraBucks, but they're spending more on top of that," Andrews says. Per-store sales climbed 8.6% in 2001, and 50% of transactions

today are made with the ExtraCare card. "There's been a net dollar gain," he notes.

Targeting, he says, has been an additional benefit. Granted, CVS is still treading lightly in the area of data gathering: ExtraCare participants haven't been obliged to disclose any personal information beyond name, address, and optional e-mail address. Even prescription data is off-limits, aside from units purchased. (Which, incidentally, is probably why Andrews says the company has received virtually no negative customer feedback about data collection, aside from "a few calls expressing concern" at the program's start.

Thanks to ExtraCare, in fact, a "very substantial portion" of participants, Andrews says, opt in for coupon mailings targeted from ExtraCare's purchase data. It's a big deal, since CVS had done zero DM in the past, aside from saturation mailings introducing new CVS stores.

As a result, ExtraCare's purchase data has opened up new sales avenues based on customer awareness. "If the data tells you that half the customers developing photos aren't buying film, that tells us we need to target those customers with film offerings [via targeted coupons]," Andrews points out. The data has further "helped us in the way we merchandise," he adds.

"It shows what kinds of trips customers are making, their patterns, their shopping habits. For instance, if they're buying batteries, they're usually also buying film. We had known some of this intuitively, but this gives a level of detail that we didn't have." Overall, he says, ExtraCare's accumulating data "helps us know our customers better."

To other drugstore chains, though, all that loyalty and targeting is still a big so-what. Now, virtually none of them talk directly to customers or offer targeted coupons. They stick to traffic drivers - sale circulars and saturation mailings - and impulse drivers, such as shelf talkers and displays.

For them, the matter comes down to cost vs. benefit. At supermarkets, for instance, it's a no-brainer to offer a retention device to a customer who spends, say, $200 a week on groceries. But it's an iffier call to "get to know" a customer who stops in twice a month for shampoo and mascara.

For drugstores, "the logic [for offering loyalty cards] isn't as strong as it is in other retail categories," says Rob Markey, director of consumer retail financial services at Bain & Co. in New York. "The question has to be, can you get enough of those consumer purchases, and give back enough value to change the customer's behavior? Or are you just converting people who are just walking in the door anyway?"

Non-players also claim there's no competitive need for drugstore loyalty cards. Albertson's, for instance, owns both major grocery chains (which have loyalty cards) and Sav-On, a drugstore chain (which does not). Among supermarkets, Ramos points out, loyalty cards aren't simply business drivers; they're essential for keeping up with the Joneses. "In that market, there are other competitors that have it as well," she says. Clearly, that hasn't been true of most chain drug competitors. At Sav-On, she notes, loyalty cards aren't yet required "in the package of value we're able to offer."

Some point out, too, that chain drugstores already have a built-in loyalty device of sorts. That's the pharmacy. Because they also shop the front of the store, regular prescription-fillers, by far, are the ones who contribute most to a drugstore's bottom line. "Pharmacy is what drives people into our stores," says Carol Hively, corporate spokeswoman for Walgreens. Compared with front-of-store products, "pharmacy purchases are very low margin," she admits. "But they create high customer retention." That's one reason why chains like Walgreens offer discount prescription cards, but no loyalty cards. "The most valuable customers," says Bain's Markey, "are the ones who have a pharmaceutical relationship, and they don't necessarily need a loyalty program to come in the door."

Clearly, though, CVS sees loyalty cards as its future. For one thing, Andrews points out that drugstore competition is building. Between 1997 and 2001, according to the NACDS, drugstore chains added 1,300 retail outlets, while mass merchants added about 1,000 pharmacies and supermarkets, about 2,200 pharmacies - and that's not counting the burgeoning pharmacy business on the Internet. "You can get prescriptions anywhere," Andrews says. "If you look at the fierce competition for customers, you need to differentiate yourself. You need to give the customer more, and ExtraCare does that."

Another trend also points up a growing potential for loyalty cards. While pharmacy sales have ticked up nicely in most chains - due in part to an aging population - more-profitable front-of-store sales haven't kept up. CVS, for instance, racked up 13% gains in pharmacy sales last year, while front-of-store sales nudged only 2.3%. Moreover, pharmacy accounts for more than 65% of the average CVS store's revenue. That alone has fed the quest to get customers shopping for more shampoos and toothpaste.

"ExtraCare has been one way of adding value for the consumer without surrendering margin," Andrews says. "We wanted to reward loyalty, and that's what drives sales. At CVS, 20 percent of our customers make 80 percent of the purchases. That's a very telling statistic. It tells us we need to reward and retain this base."