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High-street retailers have not enjoyed the best of times lately as a poor Christmas period saw many of the leading brands register significant financial downturns. In this environment, keeping hold of existing customers becomes the first point of business.

The most common answer to this issue in recent years has been loyalty schemes. However, the validity of these programmes is now being questioned, with some analysts suggesting that current methods are tired and that retail brands should be looking at other incentives for their customer base.

David Blunkett, then Home Secretary, put loyalty cards in the political spotlight late last year, by highlighting the data held by loyalty schemes and comparing it directly to the Government's proposed compulsory ID card programme.

Holding up a Nectar card, he said: 'Store loyalty cards keep continuously updated details such as the size of a person's household, whether they're employed or not and the ages of their children. If you hold a store loyalty card - and the odds are that you do - you have already consented to all this information being repeatedly shared with other companies without any requirement to ask again for your approval.'

As one would expect, Blunkett's action drew fire from Loyalty Management UK (LMUK), which owns Nectar and whose chief executive Rob Gierkink rightly pointed out that to draw a parallel between voluntary loyalty schemes that people opt in to and a mandatory state-run ID card was simply ludicrous.

While Blunkett's words may have done more harm than good in terms of the consumer perception of loyalty schemes, they did ram home the fact that the data held by these programmes is comprehensive and, therefore, immensely valuable - not only to those who operate them, but also to partner brands that want access to the unprecedented customer insight generated.

What is on offer certainly sounds good, especially when the detailed information every loyalty card operator or partner is likely to collate is broken down.

Each swipe sends information on what was bought, where, and the payment method into a databank that, in all likelihood, also holds the personal information customers give when they sign for a card. This is why the Boots advantage card application form asks for your employment status, number of children, and whether you wear spectacles or contact lenses; Nectar asks how many people live in the house, the ages of under-18s, the number of cars owned by the household, and their total mileage; and Tesco's Clubcard form includes questions on diet and details about partners, albeit in an 'optional' information box. Given that 85% of UK households have at least one active loyalty card, it is a no-brainer for brands looking to change purchasing behaviour.

Intelligent data

A powerful pull for brands comes from the fact that operators such as Tesco have proved if you use the data intelligently, the points-mean-prizes approach can work phenomenally well. Its Clubcard enables it to track £4 out of every £5 spent at the shop, and the data it holds has informed its entire retail strategy to take it from number two 10 years ago to the unassailable number one behemoth it is now. The Clubcard's impact was clear only a year after Tesco introduced the scheme in 1995: Clubcard holders were spending 28% more at Tesco and 16% less in arch-rival Sainsbury's.

In response, Sainsbury's launched its Reward card that year and had built up a 10m following by 1998 before joining the Nectar scheme in 2002.

Introduced by Air Miles founder Keith Mills, Nectar works on a consortium concept. Heavyweights such as BP, Barclaycard and Debenhams - which has just recommitted to the scheme - were part of a launch contingent of affinity brands that now totals 17.

Over 60% of households now have a Nectar card, and 42% have been active over the past 12 weeks, according to Nectar (LMUK) client services director Brian Sinclair. 'We've haven't lost a brand partner yet,' he states. 'Three sponsors have already renewed their agreements - and UK companies in 2005 won't make that sort of commitment unless they have found real commercial value in it.

Sinclair claims that Nectar's last points mailing generated more than £40m in incremental spend for its partners through a straightforward mechanic that offered collectors bonus points if they spent more than usual.

Sainsbury's was one of the founding brands to sign up with Nectar but the benefits have not translated into its overall performance. It commands a market share of about 15%, 2% less than Asda and 13% less than Tesco.

To add to its woes, last year it recorded a financial loss for the first time in its 135-year history. Not that Nectar is to blame for this downturn, according to Sainsbury's chief executive Justin King. In his October business review, he said: 'We remain committed to the Nectar scheme. (It) is valued by many customers and the priority is on ensuring that the results it delivers justify the investment.'

A rounded view

The results referred to by King are derived from the collated customer data. 'By combining this quantitative data with qualitative data we have a more rounded view of the customer that allows us to constantly improve our offer,' explains Sainsbury's Nectar manager Leigh Rengger. 'We are also able to tailor offers and communication directly to the people who will benefit most - with Nectar we have 75% more malleable customers than under the previous Reward scheme.'

Professor Joshua Bamfield, director of the Centre for Retail Research, has doubts about the efficacy of collaborative schemes, however. While affinity brands do get some benefits from sharing, he is not sure 'that partners receive the data when and how they need it'. He concedes that his observation comes from informal conversations rather than anything more substantive. Yet he makes a valid point when he says: 'The big issue is whether a brand that wants to differentiate itself can do so with a raft of other brands.'

Nectar's Sinclair admits that 'the most challenging part of maintaining a coalition like ours is getting big companies to play together nicely'.

'But,' he adds, 'we've implemented database principles through a data protection statement that informs how our data can be used.'

Tesco guards its data more jealously: it does not release or sell customer details either to its partners or to any third-party organisation, although customers can earn and spend Clubcard points with its nine partners, including Marriott, Avis and Powergen. This, Sinclair believes, could be one reason that Clubcard has lost about 10 partners to date, including Whitbread brand Beefeater, which switched to Nectar last month. Sinclair is at pains to point out that he thinks highly of the Tesco scheme, but that it is not without its issues when it comes to hanging on to partnership brands.

For Professor Bamfield, the nit-picking among scheme operators fails to hide the fact that most of them are 'boring'; he goes as far as predicting that at least one major retailer will have junked its scheme in the next six months. They wouldn't be the first. Safeway introduced its ABC card in 1995 - and had ditched it by 2000.

Yet the Co-op's trials of a system that involves customers paying for groceries and accruing loyalty points by having their fingertips scanned at the till, are far from dull. The fingertip reader, which will link directly with the customer database, will negate the need for cards and has the potential to offer real-time data. According to Bamfield, the scheme Co-op currently has in place, and which reinvents the dividend, is also effective and has grown two or three times over the past six years to contribute to the group's success.

Another retailer that has opted for a different approach is Somerfield.

Its Saver Card rolled out last year as it ditched the familiar points-based strategies to offer instant rewards at point of purchase via key fobs and coupons. Ian Fay, Somerfield's direct marketing controller, says it's been a runaway success. He declines to reveal his targets, but says that the scheme has delivered incremental sales.

Fay claims Somerfield's suppliers are showing a great deal of interest in gaining access to its data. 'At the moment, we're not interested in selling it - we wouldn't go down the brand versus brand route - but we are looking at testing a couple of brand-partnered pushes in six months or so,' he says.

With LMUK's Sinclair also claiming that some 200 companies have approached Nectar since March, there is a clear indication that most brands, regardless of size or category, are still hot for loyalty. However ludicrous Blunkett's analogy between ID and loyalty cards appeared, he was spot on with one thing: in marketing, as in politics, the key to power is knowledge.

CASE STUDY - TESCO CLUBCARD

On 13 February 1995 the face of retailing started to change, with the national rollout of Tesco's loyalty scheme, the Clubcard.

It began as an attempt to maintain market share by sustaining and developing the value of its customer base against market leader Sainsbury's, and fending off threats lower down the grocery food chain, from price cutters such as Asda. Now, 10 years later, it informs every decision the supermarket chain makes.

Tesco has always acknowledged that Clubcard plays a vital part in what it does. It would be no exaggeration to say the scheme turned around Tesco's fortunes and was pivotal in helping it leapfrog over Sainbury's into the number-one slot. The data it provides will have been instrumental in winning £1 out of every £8 spent nationally, as it does today.

The Clubcard has 10m active members and generates more than £100m in incremental sales every year. The primary reason for its success is the rich seam of data it provides for the chain. This, says a Tesco spokesman, 'helps us to understand what customers want and develop products and services that are relevant'.

Clearly, the transactional data offered by Clubcard gives Tesco almost unparalleled customer insight. This, combined with the intelligence with which that data has been used, makes it one of the most successful schemes of its sort. But it has its challengers. While Tesco will not be drawn on the competition, the launch of Nectar and schemes such as Somerfield's key fob Saver Card have presented enough of a threat for Tesco to adopt brand partners to Clubcard as well as replicate Somerfield's key fob and coupon initiative.

Yet these appear minor niggles for Tesco's Clubcard scheme. The card is helping Tesco stay well ahead of its rivals and the behemoth is tipped to be firmly on track to become the first British retailer to break the elusive £2bn profit barrier when it unveils its annual results later this month.