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Loyalty in China

Interview with Henry Winter, CEO of SmartClub

China will soon be the focus of world attention as it stages the 29^th Olympiad in Beijing and the world's best athletes will assemble to strive for gold in their quest for personal achievement and national pride. China is also the world's fastest growing economy. In 2007 Newsweek quoted Lawrence Summers, former US Secretary of State, on the extraordinary nature of the rise in Chinese living standards. During Europe's industrial revolution two centuries ago, the average European saw living standards rise by 50 per cent over their lifetime. During China's modern-day economic revolution, in contrast, he predicted that the average Chinese person would see their standard of living rise by 10,000 per cent.

Against this background it seemed timely to interview one of the leading exponents of customer loyalty marketing in this dynamic and fast-evolving consumer culture. What happens in the 'workshop to the world' will surely create ripples back across the developed markets that are the buyers of much of what they produce.

SmartClub was launched in Shanghai in 2003 by founder and current CEO Henry Winter. SmartClub comprised two key business models, a coalition loyalty programme and an On-line Rewards Community. An exclusive contract was signed early in the life of the scheme with the operators of the Shanghai transportation system. This created an immediate 'in the wallet' loyalty identification token that was smart card-based for the membership. The scheme was also successful in quickly signing deals with some major retailer partners: McDonald's, Chow Tai Fook (a major jewellery retailer), Allianz Insurance, Lianhua Supermarkets, Sport 100 and the number two mobile operator Shanghai Unicom, plus many others.

We asked Henry how he got involved in the programme and his background.

"I was born in Michigan and am an American Citizen, I hold three masters degrees from the Universities of Pennsylvania, Columbia and Wharton Business School. After working as a derivatives trader in Paris in the 90s I moved to work for Booz Allen consulting in Hong Kong in 2000. It was during this period that I became interested in the music industry and I left Booz to create my own marketing agency called 'Groove Street'. This was an agency offering services to large consumer brands to access their customers via the medium of music."

Henry then explained how this venture did not develop as profitably as he had originally hoped so he started to consider other business models. During his time in Hong Kong he had spent a lot of time understanding and speaking with the operators of the 'Octopus' mass transit system and this knowledge had enabled him to fast-track a deal in Shanghai with the operating company of the Shanghai transportation system when he moved to the city in 2003.

"Basically, my knowledge gained with the Octopus scheme enabled me to agree an exclusive deal in Shanghai within three months. This offered me the platform solution for a start up loyalty program and an existing card user base of five million metro transit customers but they had no data base information on the consumer preferences of this base."

At the end of 2007 the SmartClub programme had three million registered members with an active membership of 600,000 (defined as having purchased or engaged with the scheme in the previous quarter). Viewed from a distance this seemed an entrepreneurial and successful platform for future growth in the world's fastest-growing consumer economy. The opening comments of Henry Winter the CEO were therefore a bit of a surprise as he started to explain the current status of the programme.

"The loyalty business in China (defined as points and rewards schemes) does not work!" was his emphatic opening statement.

"I have a power point presentation entitled 'How to Fail at Loyalty and Reward Schemes' and it is based on five years of trying to make the current business model work effectively and concluding that this has been a low return on my time and money invested so far." He went on to explain that in his experience standalone or single brand loyalty and member reward schemes in China struggle to offer real value to their memberships. He has concluded that only already successful large-scale businesses such as airlines or banks can operate a loyalty schemes on a large scale. He has also observed that most of the existing consumer loyalty schemes in China are driven by a focus on the IT platform and not the end member value proposition.

These are strong views coming from one of the leading players in this area in the emerging Chinese consumer market. The reasons given by Henry for his conclusions are based on the fact that the Chinese consumer just does not perceive any value in the points per se or the rewards that are associated with redemption. A very interesting 'acid test' for Henry was that none of his staff nor he personally could really be bothered to collect or redeem the points that were being issued under the existing scheme.

"If even our staff find these schemes dull, boring and lacking in exciting rewards to motivate buying behaviour then why should our members be bothered to chase the points?" was his telling conclusion. Towards the end of 2007 Henry had therefore determined to find a better business model. Effective July 2008 he announced that he has concluded a deal with Xinhua Media Group (they operate the largest printed media channel in Shanghai with the three largest daily news paper readerships). Henry stated that the deal is based on Xinhua injecting working capital into a new joint venture company and providing free advertising space in their huge circulation press. The deal from Henry's side is that he provides the SmartClub branding, the intellectual capital and the marketing team.

"I now not only attend loyalty conferences but also go to media conferences."

SmartClub is now on-course to be re-positioned as a media marketing company that will provide targeted marketing via the club membership to brands that are building consumer interest in China. Members will be offered specific 'deals' with real value and the free advertising space with his new media partnership with Xinhua Group will provide him with access to the targeted audiences.

Henry explained that he is not trying to attract in this business model the entire 5-10 million consumers (amongst the 20 plus million population base in Shanghai) who are working in modern business and routinely travel to work on the Metro system whilst reading the press. He is now seeking to identify 'clusters and segments' of consumers who have specific lifestyle or life-cycle interests rather than just a very broad grouping of 'young, white-collar and Internet users'. He defines these clusters in terms such as 'consumers who are female, young and love fashion', 'consumers who are male and love fast motor cars', 'consumers from either gender who like sport' and he is expecting these clusters to be around fifty thousand consumers in size. His approach will be to then target these groups with a large and regular advertising copy through the Xinhua newspaper coverage with specific and great value offers. His analysis is that 'Plan A' which he had been developing in the previous scheme had been to cut a deal with a supplier to offer as an example one week's free health club membership for the majority of his members but he has concluded that the consumers perceive this as a very poor deal and consequently lose interest in the overall program.

His 'Plan B' approach will be to negotiate reward deals such as free membership to a health club for three months for a selected group of one thousand members who will feel that they have received a really good offer. One thousand very happy members will then offer greater viral marketing support and generally better public relations support for his programme even if economically this can only be made available to one thousand of his members. These are going to be distributed to SmartClub members in an unapologetically non-democratic manner. True value for the end-user will be his guiding dictum and he has instructed his reward negotiations staff to seek deals that are so good that they want to retain one of them for themselves. He admits that it is taking time to get his staff to realise that he is serious in this statement. Quality not quantity in the offers will be the objective and his data analysis of the SmartClub membership will allow him to make these offers to specially selected members based on their consumer profile relative to the offer. Using this approach Henry believes that his members will respond rapidly to the offer and quickly identify their interest and validity as consumers within the target segment.

The creation of these self-identifying 'clusters' of consumers is very similar to the creation of special interest 'clubs' that are a feature of the well developed large scale loyalty schemes such as the Tesco plc 'Clubcard' programme, which includes 'mother and baby', 'fine wine' and 'organic food buyers' clubs. The difference in SmartClub's business model is that the consumer is effectively being challenged to self-identify him- or herself due to the very high value in the offers advertised. This differs to a Tesco approach that uses the extensive data analysis capabilities of Dunnhumby based on their Clubcard programme to identify potential club members by data analysis. It also has the advantage over the 'analysis based' approach in that sophisticated IT and point of sale connectivity to capture consumer transaction details are not required since the consumer is effectively finding the club rather than the supplier targeting of potential members. This is an approach that accepts the reality of fast growth emerging consumer markets as opposed to mature and highly developed markets.

The revenue model that Henry has negotiated will be based around a 'finders fee' to brands for a targeted consumer segmentation plus a flat fee, rather than a transaction based fee for assumed revenue uplifts. This has the attraction of being similar to the existing type of calculation that is undertaken when brands select media channels for above-the-line advertising. The deal that SmartClub have negotiated with Xinhua Media Group gives them access to this advertising space and this approach then leverages the reach to the SmartClub membership. The proof of this approach will be tested as this new model SmartClub is developed over the next six months but Henry is confident that the 'pull' of the really attractive consumer offers will drive sales for brands. Looking to the future, the current deal will be evaluated by all parties in early 2009 and Beijing is the next target city in China for expansion of this new business model.

The path to enlightenment he claims is with "greater simplicity not greater complexity", which is an interesting observation from a long-term student of the martial art of kung fu. The challenge for the future with his programme will be to build consumer segmentation models by aggregating other loyalty programmes in China and he is busy making deals with other operators in the market to add to his scale. He concludes that consumer loyalty schemes have a long way to go in China and that sophisticated retailers are not yet engaged with this type of marketing which is why he believes his new venture will offer better member value and better consumer access for the brands new to the Chinese market.

Henry's experience with developing SmartClub in Shanghai over the last five years has convinced him that the classic 'air miles'-type coalition loyalty programme is a very complex way to try and create value for shareholders and members.

"To be blunt about it, not many people create high personal wealth value using this traditional business model approach to consumer loyalty programmes and Sir Keith Mills, the ex-owner of LMG, is a notable exception."

As a final thought Henry stated that he felt that when the history of consumer loyalty marketing is re-written in some business school case study another decade from today he is hopeful that his observations and presentations from the early years of the 21^st century will be credited with the initial insight into the way to add value to that massive legacy of customer loyalty from the last two decades of the 20^th century, the airlines' frequent flyer programmes.

These are based on the concept of 'hub-to-spoke' one-way dialogue and control mechanisms of the pre-Internet era. Henry believes that the way towards a more democratic and better value membership model in some of these large scale frequent flyer programmes is to open them up to 'member-to-member' dialogue. This will not be an easy transition in his view since the successful business model has yet to be developed in this space although he concedes that it could be solved eventually.

"For frequent flyer programmes to start adding real value for their membership they should allow members to exchange information on hotels, restaurants, airport lounges and other travel-related insights. They should allow members to organize to possibly travel together with people from the same business so that they can exchange information on their sector if they wish, they should allow members to contact other frequent flyers from other airline schemes in a 'Facebook for travel'-type approach."

This was by some measure the most honest and informative interview that this editor had undertaken with a loyalty programme owner and practitioner in some years. Henry Winter has been there, got the t-shirt, read the book and watched the film on consumer loyalty in China for the last five years. He has invested his own and other investors' money and from his perspective the most important investment, his time allocation in life. His conclusions are that the business model for loyalty with the emerging Chinese consumer with money to spend is currently flawed and that the new partnership deal with Xinhua Media Group is what is going to change the dynamic and build a more scalable and sustainable business model. With the speed of developments in China he expects this new strategy to be justified by the end of this year.

In the developed economies of Europe, the Americas and Asia, the recessionary pressures are building and consumers are seeking greater value and more service from their chosen suppliers. Many loyalty models currently being deployed are based on a one-way flow of communication from programme manager to the member that was the only option in the late 20^th century pre-Internet and ATL advertising hegemony. This has all changed and yet many loyalty programmes are still based on this premise which dates back to the original frequent flyer schemes launched in the early 1980s.

The strategic justification for many loyalty schemes is the collation, analysis and intelligent application of customer insight to make marketing offers relevant, timely and convenient to their customer base. This is a solidly researched business 'truth', especially for the solus loyalty schemes run by increasingly broad-based retailers such as Tesco plc. What the experience of Henry Winter and his SmartClub in Shanghai supports is that real customer value is going to have to figure more prominently in the overall customer value proposition if loyalty schemes globally are going to remain relevant in the future. China has been the manufacturing 'engine' that has driven value for consumers globally. It may now be setting the standards for consumer expectations in terms of value and service.