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LMG interview

Interview with Alex Moorhead, CEO of Loyalty Management Group, following the acquisition of LMG by Aeroplan

The new owner of the Loyalty Management Group has been described as a 'perfect fit' by LMG's CEO Alex Moorhead following the Canadian loyalty marketing company Aeroplan's acquisition announced recently. The Wise Marketer's European Editor thought that the readers would like to get a bit more background so we interviewed Alex shortly after the formal announcement to get some insight from the top on this very significant development in the loyalty marketing world.

Montreal-based Aeroplan was originally operated as Air Canada's loyalty programme and was then spun off as a marketing company in 2005. Aeroplan has over 60 partners representing approximately 100 brands under the current Canada-based scheme. It still operates the Air Canada loyalty scheme and has 4 million cardholders; it also has co-branding deals with American Express and Canada-based CIBC Bank. The largest loyalty programme in Canada is the very successful Air Miles Canada scheme owned by Alliance Data Services which historically was also created with the LMG team's expertise in this area.

LMG's operations in the UK are managed under the LMUK legal entity which is the operating company for the UK based 'Nectar' coalition loyalty scheme. This programme was created by Sir Keith Mills and his team in 2002 and has as core partners the Sainsbury grocery retailer (which is in close competition with Wal-Mart Asda for the number two grocery operation position in the UK); they also have as key partners BP and Debenhams department store plus many other consumer sector partners.

The 'Nectar' programme claims 12.5 million UK households have signed up as members in the five years since launch. A key source of funding for the scheme development at the time of launch in the UK was Warburg Pincus, the VC investor, and speculation has been running for the last 18 months regarding a possible sale of the UK scheme to interested parties.

The surprise with this deal however was the acquisition of the Loyalty Management Group in total since this owns the the Air Miles trademark around the world and has a 20% interest in a Middle East-based coalition scheme.

The acquisition cost to Aeroplan was £350m plus £18m in working capital arrangements. Sir Keith Mills, who foundered Nectar in the UK in 2002, will earn £161m from the sale of LMG and several LMG senior executives are also facing the prospect of significant shares in the proceeds.

The CEO of Aeroplan, Rupert Duchesne has stated that he feels the loyalty programme sector will consolidate and become global very quickly. This view was also expressed at a recent loyalty marketing conference held in London by the COO, Steve Grey, of Loyalty Partner Germany which operates the EU's largest coalition loyalty scheme, 'payback', in the German market.

We started the interview with Alex Moorhead by asking him how the deal had taken place.

"The skill sets and programmes are a very complimentary match", he stated.

"The LMG management team has extensive international experience at creating successful large scale consumer loyalty programmes with multiple partners. Aeroplan by contrast has significant experience in the travel and financial services sectors. The two combined are an excellent platform with which to approach the international expansion plans of the combined group."

The LMG team has recently organised their focus into three major areas:

• the management of the Nectar programme in the UK;
• creation of an 'Insight and Communications' division to focus on customer insight and analysis for partners;
• an expanded 'Loyalty International' group that will actively seek other loyalty scheme opportunities in other markets around the globe.

Mr Moorhead explained that the LMG team would be left substantially in place to operate independently from Aeroplan; in fact he stated that they would be encouraged to grow. He also explained how the greater financial strength that Aeroplan will bring to the combined entity plus the cross-fertilisation of expertise will significantly boost the ability of the new group to seek opportunities for international growth and rationalisation.

We asked about specific plans given that LMG already have offices in Mumbai, India and the huge growth being experienced in the Chinese economy must be an obvious additional target market amongst the BRIC emerging markets (editor note: BRIC is a common acronym for Brazil, Russia, India and China).

Mr Moorhead was naturally reluctant to be specific regarding their plans but he did state that they are "looking at a lot of markets, and the Asian growth opportunities are obviously attractive."

We asked his view regarding the current global economic impacts of the falling US dollar and 'sub-prime' fallout, which has impacted the bank sector in many mature markets. Alex was very optimistic regarding the opportunities that this scenario creates for his organisation.

"We find that more competitive markets and more intensity in our partners desire to compete is actually good for our business. Our partners are seeking a competitive 'edge' and a large scale consumer rewards programme with customer insight capabilities can deliver that benefit exclusively to our partners."

We also asked his views on the huge international concerns now being raised regarding environmental issues and whether this was a specific focus that the new group would address.

He was a bit more reserved regarding this trend and stated that the partners are the main drivers of initiatives in this 'green marketing' space. He explained that internally the group is seeking to develop a more 'carbon neutral' footprint in its operations but the use of the consumer behaviour change potential inherent within consumer loyalty schemes was a decision for partner companies. He explained that many LMG partners are already very active in this area, especially BP, for which the Nectar programme provides support in respect of its 'Carbon Neutral' fuel marketing scheme in the UK.

He also cited the use of 'green mailings' using recycled materials and 'green clubs' as sub-sets of the existing Nectar brand as evidence of the group activities, driven by their partners, in this space.

Exploring his views on the scope for further efficiency impacts within the new group he cited the area of digital communications and 'real-time' partner offers to members within the schemes as an area with significant opportunities for leveraging expertise within Aeroplan and LMG. He was also careful to re-emphasize the personal privacy issues that the group take very seriously in terms of their members data and information. This is a particularly sensitive issue in the UK market at present given the UK Government's recent well-publicized loss of 25 million records of its citizens.

As we explored the potential impact within LMG operations of the Aeroplan approach in using a tiered structure for members 'earn and burn' opportunities, Alex re-iterated that the airline loyalty model differed and that the Nectar approach was to concentrate on partners' base points issue supplemented by bonus offers to create added interest and specific partner product or service focus for members. He did not see that this approach would change under the new ownership and that the differences between airline frequent fly schemes and large scale coalitions would remain consistent for their active members.

This is a significant and in many ways logical development in the world of customer loyalty schemes. The move to leverage global expertise and seek operating efficiency and greater financial scale is consistent with the developments in many other areas of business. If car manufacturing, financial services and energy suppliers have seen the need to consolidate their business models globally, why should the world of consumer loyalty be different?

And yet?

Operational efficiency and improved shareholder value gains are theoretically possible within this type of play. The leverage of skills and combined application of scarce 'world class' data analysis and customer insight resources is obvious. But the challenges to deliver are as yet unproven and the global history of mergers and acquisitions has seen as many shareholder losses as gains. This deal will be a real challenge to the management teams at Aeroplan and LMG to deliver; cultural issues and cross border co-operation will most likely feature as significant factors in the eventual success of the venture - as they have done in other very high profile international consolidations.

The other significant feature will be the membership responses to the 'new world order' that increased activity in this space will create. It is one thing to join a programme such as Nectar in the UK and Aeroplan in Canada but how will members feel if/when these type of schemes become ever more consolidated? Will added value benefits flow down to members with improved offers, services and functionality? Will customer data be kept as closely protected when databases for consumers become combined for analysis purposes?

These will be key issues to be sorted. We are sure from our interview with Alex Moorhead that LMG is focused and does not underestimate the challenges and opportunities ahead.