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The Oriental Crown

2009. 4 October

by Rick Ferguson
( For a useful metaphor describing China’s growing interest in loyalty marketing, look to the 2010 World Expo site, currently under construction in Shanghai. The Expo, which occupies over five square kilometers on both banks of the Huangpu River across from the city’s historic Bund area, will soon feature dozens of parks, pavilions and performance spaces. The Expo’s centerpiece will be the 160,000-square-meter China pavilion, designed to represent the concept of the "Oriental Crown."

The Expo’s web site features breathtaking images of planned buildings—think of them as the architectural equivalent of the opening ceremonies of the Beijing Olympics. But when you stand on Zhongshan Road and look at the site today, all you see are construction cranes, concrete barriers, tall wooden fencing and debris. The potential is there, but realizing that potential is some ways off.

So it is with loyalty marketing in China. Chinese marketers, both natives and westerners doing business in the country, all speak positively of the growing interest in building and mining customer databases, of creating stronger relationships with best customers. Everyone’s willing to get on board—but not yet. Like Shanghai’s Pudong, the massive business district on the east side of the Huangpu that rose out of empty farmland over the past two decades, the Chinese consumer economy is literally growing out of nothing. And where consumer marketing matures, loyalty marketing is sure to follow.

The earth below, the mountain above
My own impression from visiting Shanghai for the first time this summer is that the best thing I could do to prepare my two-year-old son for future financial success is enroll him in Mandarin classes. If the center of global commerce hasn’t already shifted from the U.S. to China, it will certainly do so in the next few decades. China’s growth will far outpace that of the U.S. and Europe for the foreseeable future—it’s been averaging 9% GDP growth over the past decade, and has already rebounded nicely from the recession—and any company that hopes to compete in the globalized economy must do business in the region. China’s emerging middle class, meanwhile, is growing exponentially and is set to generate significant spending power as more consumers seek affordable luxuries. Globalization has hit the major urban sectors in a big way, and the pace of internationalization will continue to increase; such Western stalwarts as Walmart, Home Depot, Best Buy and Tesco have already partnered on joint ventures in the region, and more will follow.

Although credit card penetration is still quite low compared to western economies, Chinese banks are furiously issuing new cards—162.6 million in China this year alone, up 32.9 percent from last year. While the banks are pushing credit cards to boost revenue, the Chinese government is pushing them to boost domestic consumption. Retailers, meanwhile, are slowly moving out of the small shops and stalls and into the bigger chain stores, although the comparative poverty of individual consumers means that brands must rethink their value propositions—IKEA, for instance, which positions itself as an economy brand everywhere else, is viewed by most Chinese consumers as an aspirational luxury brand.

It is within this rapidly expanding and evolving consumer landscape that Chinese marketers struggle to define the proper scope and role for loyalty marketing. The Chinese middle class comes to loyalty programs primarily through business travel; most hotels in the major cities are foreign-owned and bring their points programs with them, while the native airlines all operate frequent-flyer programs. Retail is under-penetrated, mostly because Chinese consumers are extremely price-conscious, and even sophisticated loyalty players such as Tesco are treading carefully. Banks are heavily into co-branding, and while some cards do include reward components, card marketing generally focuses on the co-branding relationship. Still, ICBC’s co-branded Air China PhoenixMiles Peony Card, CCB’s (China Construction Bank) Long Card and Bank of China’s Great Wall Card are the most popular cards in China, and all three have rewards programs attached.

And what about a national loyalty coalition? The very idea of attempting to launch a national multi-merchant program in China would require a healthy dose of suicidal hubris—even the idea of an urban coalition program based in Shanghai, Beijing or one of China’s many other major urban centers is currently little more than a pipe dream.

Arguably the most likely candidate to evolve into a coalition is a program owned and operated by Ping An Insurance Group, a financial services holding company with product lines in insurance, retail banking and investment. The company operates the Wanlitong Loyalty Program (WLT), a relationship banking program with 20 online partners and 20,000 B&M partner locations—think of it as Citi ThankYou on steroids. WLT begins with discount offers at lower levels and adds points and soft benefits in tiered memberships as customers consolidate banking and insurance products and shop at program partners in the travel, auto service, grocery and online retail sectors. Top customers are invited into the VIP Club, which provides the highest level of soft benefits. Current WLT enrollment stands at 4.5 million, and there are 500,000 members of the VIP Club. Ping An is seeing significant increases in member spend, cross-product migration and in-network shopping behavior due to the program, which the company hopes will give it a retention edge against arch-rival China Life. WLT is not a coalition yet—but the insurance giant is certainly poised to evolve it into one.

Two other Shanghai-centric programs also present likely targets for evolution: SmartClub Shanghai, an online coalition program now adding brick-and-merchant partners and geared toward young Shanghai businessmen, and Enjoy China, an entertainment-themed discount card program. SmartClub in particular has, through admitted trial-and-error, developed a robust member database and can segment customers by demographic profile, purchase behavior and online community activity. The company’s work with McDonald’s is, according to the marketing director of McDonald’s Shanghai, "the most advanced [analytical] system McDonald’s uses anywhere in the world"—and SmartClub proves it by providing up to 337% ROI on marketing promotions with the quick-service restaurant chain.

So plenty of strong Chinese brands offer loyalty value propositions, and an exploding pool of middle-class consumers seeks engagement with their favorite brands. The biggest obstacle to success, frankly, is the sheer lack of understanding of the nature and purpose of loyalty marketing. Programs are considered afterthoughts or add-ons, and consequently many suffer from one of the cardinal sins of loyalty marketing—program under-funding. One popular credit card program, for example, requires 4,000 points to redeem for a simple plastic child’s chair from Walt Disney—which requires the cardholder to spend 80,000 Yuan (about $11,700) to earn enough points to redeem for it.

Compare that minuscule funding rate—a common story in points programs across Chinese credit card and travel programs—to your average U.S. issuer’s points program, and it’s easy to see why many programs fail to resonate with consumers. Most programs are funded so poorly that they fail to change consumer behavior, and this failure is often blamed on the concept of loyalty marketing itself. Redemptions are low and companies are for the most part content to let points expire rather than focus on behavior change.

The mountain below, heaven above
With no end in sight of emerging middle-class consumers to fill the acquisition funnel, Chinese marketers are having too much fun chasing new customers to spend a lot of time focusing on current customers—heck, if I were CMO of a Chinese telecom or retailer, I’d probably focus on acquisition, too. Data analytics are likewise in their infancy, particularly in retail, and most marketers therefore have difficulty tying loyalty investment directly to incremental behavior and ROI. Analytics firms in the region therefore focus on small wins in price optimization and offer relevance rather than trying to lead with a broad enterprise loyalty message.

That’s not to say that Chinese marketers don’t "get" loyalty marketing; they certainly do. There is simply a general sense in the marketplace that, while loyalty marketing will demand attention in the future, it isn’t necessary now.

But this mindset will change, and soon. Just as the World Expo site will soon be complete and hosting 70 million visitors from around the globe, so too will the Chinese market mature and begin to grow relationships with existing customers. Loyalty marketing isn’t something we do for the fun of it—we do it because in markets with high levels of price and service parity, it’s essential. There is no better way to drive incremental revenue from existing customers. And in China as elsewhere, those companies who invest in loyalty ahead of the curve will find themselves at significant advantage in the race to claim the Oriental Crown.