Article

Watch Germany for loyalty explosion

With two restrictive retail laws scheduled to be axed July 1, Germany is the country to watch. The result could be an explosion of loyalty programs.

March 26, 2002

Germans may remember the summer of 2001 as the time shoppers were flooded with loyalty card offers, if predictions about the consequences of repealing restrictive retail laws come true.

"If you're interested in where loyalty cards are going, the thing to watch in the short term is Germany," said Peter Kelly, managing director of kiosk designer Interact Systems UK Ltd. "Germany is in a very peculiar position which is that there are some very odd laws."

Illegal discounts

The two laws that hold loyalty programs at bay are the Rabattgesetz, or Proper Discount Law, and the Zugabeverordnung, or Bonus Regulation. The Proper Discount Law limits rebates and discounts to three percent. The Bonus Regulation prohibits any purchase incentives. That means stores daring to offer large discounts, bonuses or free gifts can face hefty fines.

According to an April Wall Street Journal article, Germany's incentive to repeal its laws arose from a recent European Union (EU) directive that e-commerce transactions would be based on the rules of the vendor's country, not the customer's country. That means British, French and U.S. online retailers can offer discounts and frequent-buyer bonuses to German consumers that German retailers can't match.

Faced with growing competition, Germany's parliament will axe the law on July 1. Kiosk makers are preparing to move in.

Skillbury, a Hamburg, Germany-based e-commerce consultant, issued a report, "Customer Loyalty Programs as a Driving Force for Online-Offline-Fusion," in January. It stated that retailers will use the freer environment to create loyalty programs. The new programs will merge online and offline activities, the report said.

Quirky regulations

The Wall Street Journal story mentioned that among activities illegal in Germany are half-price drinks during happy hours.

Even two-for-one offers and giving different offers to men and women are illegal, Kelly said.

"There are a number of things which as an American you won't believe," Kelly said, "Which means that something like loyalty cards are just a non-starter, because the difference between a loyalty card holder and a non loyalty card holder you can't exploit."

Americans are already loyal

In contrast to Germans, many Americans use loyalty programs that reward them for their buying behavior. Kiosks are often used to dispense coupons, discounts and even frequent flyer miles. Supermarkets, malls, casinos, airports, car-rental stores and other retail locations are installing kiosks at a rapid pace.

One successful new program at Travel Centers of America uses a kiosk-based loyalty program in its 160 truck stops. Drivers get rewards by swiping their cards at a RoadMile kiosk. Between the program's launch in September 1999 to March, 300,000 drivers had signed up for the revamped program. (See "One for the Road")

Legacy of a dark period

According to The Wall Street Journal, the archaic German regulations were created during the Nazi era in the 1930s as part of a condemnation of what the Nazis called "leftovers of Marxist economic models." Now that these laws, themselves leftovers of a time most people would like to forget, are sinking into history, kiosk companies can't wait to move in.

 "There's a huge amount of activity in the German market," Kelly said. "They're all running around tearing their hair out, because they've got no experience at this. They have no history, because the environment they've been working in has had no exposure to it."

New market

Interact Systems is working to capture a share of the emerging market, and soon.

"We have high hopes of getting a significant contract in Germany before the end of this year," said Kelly, whose company created high volume loyalty programs for the UK's Sainsbury's supermarkets and Boots pharmacies.

Mihajlo Hadzi-Stevic, an associate analyst at Forrester, underscored the significance of the change. He said that the end of these laws means retailers can use more tools for increasing customer loyalty.

"I think that we will have pretty similar development like in the U.S., and that the marketers will use the new opportunities," he said.

Forrester plans to publish a report about the German loyalty market this July.

According to the Skillbury research, about half of all EU members have laws that limit discounts, though few members have rules comparable to the Bonus Regulation outlawing incentives.

Flauting the laws

As of January, Germany had about 40 loyalty card programs, the report said. In some cases the programs exist despite the laws. For example, in 1999 the German Supreme Court found it illegal to grant bonus miles for credit card use. However, the bonus mile program still operates, the report said.

Despite the coming flood of new offers, the report concluded that customers will probably only participate in two bonus programs, and only five or six major loyalty programs will corner the market.