The influence of loyalty programs on brand image in the grocery retail industry

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The influence of loyalty programs on brand image in the

grocery retail industry

Msc in Business Administration – Marketing track

Name Laurien Lammertink

Student number 11410655

Supervisor Dr. F. H. Mattison-Thompson

University University of Amsterdam

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Statement of originality

This document is written by Laurien Lammertink who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Acknowledgement

I would like to express my gratitude towards my thesis supervisor, Dr. F. Mattison Thompson of the University of Amsterdam. I would like to thank her for her guidance and critical but constructive feedback during the process of writing this thesis.

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List of figures and tables

Figures

Figure 1 Conceptual model 20

Figure 2 Plots 29

Tables

Table 1 Research design: conditions 22

Table 2 Pre-test: average perceived value of rewards 24

Table 3 One-way anova: age 26

Table 4 Descriptives mean brand image pre- and post-conditioning 28 Table 5 Factorial anova dependent variable: change in brand image 29

Table 6 Anova: change in brand image 30

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Abstract

This aim of this study was to investigate the influence of loyalty programs on brand image in the grocery retailer industry. Also, the study examined whether different types of brands and types of rewards have a moderating impact on the influence of loyalty programs on brand image. A pre-test has been conducted first, followed by an online experiment which tested the hypotheses. The study sample included 242 participants. The findings indicated that loyalty programs in the grocery do influence brand image. However, contrary to the expectations, the type of reward and the type of brand did not have a moderating impact on the influence of loyalty programs on the change in brand image. Future research is recommended to investigate the influence of loyalty programs in a longitudinal way. Also, in a new research about this topic, other types of monetary and non-monetary rewards should be added in order to generalize the findings. This paper contributes to the current knowledge of the impact of brand loyalty by investigating it on a new construct, where previously no specific attention was given on. The findings of this study suggest that companies can use loyalty companies as a tool to build on brand equity.

Key words:

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Introduction

“It takes months to find a customer and only seconds to lose one” is a famous saying that a lot of companies can relate to, given all the different methods that companies engage in to turn their customers into loyal ones. The focus of many firms on customer loyalty is understandable, since customer loyalty is positively related to firm profitability (Hallowell, 1996). To illustrate, one of the many advantages of loyal customers is that they are willing to pay more for a brand compared to non-loyal customers (Chaudhuri & Holbrook, 2001).

In order to turn customers into loyal customers, a lot of companies have set up loyalty programs throughout the past decades (Dowling & Uncles, 1997). A loyalty program is “a marketing process that generates rewards for customers on the basis of their repeat purchases” (Krafft & Mantrala, 2006, p. 361). Especially in the grocery retail industry, loyalty programs have become increasingly popular (Gómez, Arranz & Cillán, 2012). In fact, a lot of customers are members of several loyalty programs simultaneously (Dowling & Uncles, 1997; Meyer-Waarden & Benavent, 2009). The effects of loyalty programs on customer loyalty have been analysed through an extensive number of studies (e.g. Bolton, Kannan & Bramlett, 2000; Meyer-Waarden, 2008), but have led to mixed outcomes regarding their impact on repurchase behaviour (Leenheer, van Heerde, Bijmolt & Smidts, 2007).

Most studies have solely focussed on the influence of loyalty programs on the behavioural aspect of customer loyalty (Bandyopadhyay & Martell, 2007). However, customer loyalty is also seen as a two-dimensional construct which consist of behavioural loyalty and attitudinal loyalty (Dick & Basu, 1994). Hence, to fully understand the impact of loyalty programs on customer loyalty, a prerequisite is to acknowledge all variables that are being influenced by these programs. One of the identified drivers of attitudinal loyalty is brand image (Tepeci, 1999; Ogba & Tan, 2009), which is defined as “how people think about a brand abstractly rather than what they think the brand actually does” (Keller, 2001, p.11). Despite

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this, no studies about the influence of loyalty programs on brand image have been published thus far. To start filling this gap, this paper seeks to extend the theoretical knowledge on the impact of loyalty programs by measuring their impact on brand image. Therefore, the following research question will be answered in this paper: How do loyalty programs influence the

perceived brand image of customers in the grocery retail industry, and how is this effect

moderated by the type of brand and/or type of reward?

Because customers establish a brand image through associations they hold about a brand in their memory, and since these associations are influenced by marketing programs (Keller, 1993), one might expect that loyalty programs do influence brand image as well. Therefore, this paper theorizes that loyalty programs have a positive influence on the change of brand image of customers in the grocery retail industry. Additionally, this effect is likely to be moderated by the type of brand. In the grocery retail industry, there are two types of brand: private label brands and non-private label brands. Finally, this effect is expected to be moderated by the type of reward. This study therefore makes a distinction between monetary rewards and non-monetary rewards.

The effects of loyalty programs on brand image are researched through an online experiment in which 242 people voluntarily participated. This paper contributes to the theoretical world, because there is a lack of knowledge regarding the influences of loyalty programs on brand image. This is important, because previous research has shown that brand image is a powerful construct which has the power to increase the perceived quality of a brand (Cretu & Brodie, 2007) Additionally, it helps to differentiate a brand from its competitors (Pitta & Katsanis, 1995) and finally, it is an important driver of attitudinal loyalty (Taylor et al., 2004)

The findings contribute to the practical world as well in the sense that the outcomes can guide brand or marketing managers to make better decisions when it comes to investing in

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loyalty programs. Since brand image has a positive impact on customer loyalty (Cretu & Brodie, 2005) which in its turn leads to firm profitability (Hallowell, 1996), it is essential for managers to know which marketing mix tools influence brand image.

This paper is organized as following: in section 2, previous research is being discussed, which results in a conceptual framework. Secondly, in section 3, the method, research design and data collection are being described. Thereafter, in section 4 the analysis is described which in turn leads to section 5, in which the findings and implications of the study are discussed. Additionally, the suggestions for further research are described in this section.

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2 Literature review

In this chapter, a deeper understanding of loyalty programs in the grocery retail industry is established through academic literature. In section 2.1, the effects of loyalty programs in the grocery retail industry and their impact on both behavioral and attitudinal loyalty are explored. In section 2.2, the importance of brand image in the grocery retail industry is established. Also, the ways in which loyalty programs impact brand image are investigated. In section 2.3, characteristics of different types of loyalty programs and their implications are discussed. Finally, in section 2.4 the differences between private label brands and non-private label brands in the grocery retail industry are discussed.

2.1 Loyalty programs in the grocery retail industry

Loyalty programs have been a topic of interest for many researchers since the introduction of the concept in 1981, when American Airlines launched its loyalty program called Aadvantage (McCall & Voorhees, 2010). This section illustrates the growing popularity of loyalty programs in the grocery retail industry. Also, it explains which goals companies wish to achieve with these programs and finally, it provides an understanding on the effects of loyalty programs on several variables. As defined in the introduction, a loyalty program is “a marketing process that generates rewards for customers on the basis of their repeat purchases” (Krafft & Mantrala, 2006, p. 361). Especially in the grocery retail industry, loyalty programs have become increasingly popular (Gómez et al., 2012). To illustrate, 66% of the European respondents and 84% of the North-American respondents in the global retail report of Nielsen (2016) said they were a member of at least one loyalty program. The costs of loyalty programs for companies are not always visible (Dowling & Uncles, 1997), but are generally high (Furinto, Pawitra & Balqiah, 2009). Besides, during the implementation phase there are certain risks involved (Furinto, et al., 2009). Therefore, it is important to fully recognize and understand the effects

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of loyalty programs. This information is essential for companies in order to decide whether to invest in a loyalty program or not, and if so, which goals they would like to achieve.

Many companies start loyalty programs primarily because they either want to respond to competitors or because they want to pre-empt them (Dowling & Uncles 1997). In general, companies wish to achieve two main goals when they invest in loyalty programs: increase sales revenues and maintain the current customer base (Uncles, Dowling & Hammond 2003). Additionally, there are certain sub-goals related to starting loyalty programs. Namely, “furthering cross-selling, creating databases, aiding trade relations, assisting brand PR, establishing alliances, etc.” (Uncles et al., 2003, p. 295). Furthermore, loyalty programs are helpful in creating databases, because they facilitate companies with customer-specific insights. This enables companies to make marketing-mix elements customer-specific and to develop stronger relationships (Leenheer & Bijmolt, 2008).

Multiple studies have been conducted about the effectiveness of loyalty programs (e.g. Bolton et al., 2000; Leenheer et al., 2007; Waarden, 2008;). The study of Meyer-Waarden (2008) indicates that loyalty programs in the grocery retail industry do affect customer purchase behavior positively and that members of loyalty programs are more profitable for firms compared to non-members. These results are contrary to the findings of McCall & Voorhees (2010), who argue that “little empirical evidence links program participation with actual loyalty and firm performance” (McCall & Voorhees, 2010, p. 36). These contrary findings might be explained by limitations that hinder proper assessments of the effects of loyalty programs, like not considering customer heterogeneity (Meyer-Waarden & Benavent, 2009). Also, the study of Meyer-Waarden (2008) has not taken the endogenous nature of loyalty programs into account. This means that customers who are loyal towards a firm, are more likely to become a member of a loyalty program because they want to benefit from the program. These self-selecting members already have a higher share-of-wallet at the

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firm compared to non-members of the loyalty program. Therefore, the effect of loyalty programs might be overestimated. (Leenheer et al., 2007). Namely, Leenheer et al. (2007) acknowledged that when self-selecting members are taken into account, loyalty programs increase behavioral loyalty seven times less than when self-selecting members are not taken into account.

Various researchers have found potential downsides for companies related to investing in customer loyalty programs. For example, Dowling & Uncles (1997) state that loyalty programs mainly cost companies money. Another interesting insight concerning the grocery retail industry that Meyer-Waarden & Benavent (2009) pointed out is the commonness of customers to own loyalty cards of competing stores simultaneously. This implies that the number of loyalty card members of a firm does not necessarily identify the number of true loyal customers. This results in the fact that customers often buy products from several firms or brands, based on contingencies such as promotions and loyalty programs. Dowling & Uncles (1997) refer to this phenomenon as polygamous loyalty. They argue that this behavior cannot be fundamentally changed by a loyalty program.

Altogether, it can be concluded that empirical research has led to mixed outcomes regarding the effectiveness of loyalty programs on repurchase behavior (Leenheer et al., 2007). However, many studies do not acknowledge that brand loyalty is a two-dimensional construct that exists of both behavioral loyalty and attitudinal loyalty (Dick & Basu, 1994). Namely, brand loyalty is also seen as “the strength of the relationship between an individual’s relative attitude and repeat patronage” (Dick & Basu, 1994, p. 99). This view has been supported by many researchers (e.g. Baldinger & Rubison, 1996; Taylor et al., 2002; Geluch & Goodwin, 2004; Bandyopadhyay & Martell, 2007). Therefore, both attitudinal and behavioral loyalty are equally important.

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Nevertheless, most studies mainly focused on brand loyalty from a behavioral perspective (Bandyopadhyay & Martell, 2007). Behavioral loyalty can be defined as “observed repeat purchase action that customers have demonstrated toward a particular product or service” (Furinto et al., 2009, p. 310). The interest in behavioral loyalty is understandable, because as stated, one of the main goals is to increase sales revenues (Uncles et al., 2003) and repurchase behavior does actually lead to increasing sales revenues (Gómez, McLaughlin & Wittink, 2004). However, the effects of attitudinal loyalty should not be underestimated. Attitudinal loyalty can be defined as “The consumer’s predisposition towards a brand as a function of psychological processes. This includes attitudinal preference and commitment towards the brand” (Jacoby & Chestnut, 1979 as cited in Bennett & Rundle-Thiele, 2002, p. 194). These effects will be further explained in section 2.2.

2.2 Loyalty programs & brand image

Attitudinal loyalty is an important brand-specific personality trait in the sense that firms need to understand the attitude of customers towards the brand, in order to design marketing programs that modify behavioral loyalty (Bennet & Rundle-Thiele, 2002). Attitudinal loyalty is influenced by several variables, among which is brand equity (Taylor et al., 2004). Brand equity can be defined as “the customer’s subjective and intangible assessment of the brand, above and beyond its objectively perceived value” (Lemon, Rust & Zeithaml, 2001, p. 22). Customers base this subjective and intangible assessment on their brand knowledge, which can be categorized into brand image and brand awareness (Keller, 1993; Lemon et al., 2001).

Despite the fact that brand equity has received much interest in the consumer behavior research field (Keller, 1993), there is little agreement about the correct definition of the term brand image (Dobni & Zinkhan, 1990). Due to its extensive use, brand image is in this paper defined as “how people think about a brand abstractly rather than what they think the brand actually does” (Keller, 2001, p. 11). Consequently, in order to create and maintain customer

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brand loyalty, a positive brand image needs to be built and sustained (Tepeci, 1999; Ogba & Tan, 2009). The study of Cretu & Brodie (2005) indicates also that brand image has a positive influence on customer loyalty. However, these findings were not statistically significant, which could be due to the fact that the scale that has been used to measure customer loyalty had a Cronbach’s alpha of 0.63, which means that this scale was questionable. Now it has been established that brand image generally has a positive impact on customer loyalty, it would be interesting to investigate whether loyalty programs have an impact on brand image. These findings will be useful for both researchers and practitioners. If proven, this would implicate that loyalty programs are positively related to brand image, which in turn is positively related to customer loyalty. And since customer loyalty is a two-dimensional construct, brand image indirectly increases both attitudinal and behavioral loyalty simultaneously.

Brand awareness, the other driver of brand equity, relates to “brand recall and recognition performance by customers (Keller, 1993, p. 2). It can be expected that customers who participate in loyalty programs already show a high sense of brand awareness. That is, because customers need to be aware of the brand in order to become a member of the loyalty program. This implies that these customers already have the brand in their consideration set and apparently hold some strong and favorable brand associations in memory (Keller, 1993). Therefore, brand awareness is not relevant for this paper.

Because purchase decisions in the grocery retail industry are often based on routine and customers generally spend little attention towards these decisions (Lemon et. al, 2001) a positive brand image is desirable in the sense that it increases both behavioral brand loyalty as well as attitudinal brand loyalty (Taylor, Bennett & Rundle-Thiele, 2002). Also, brand image has the power to differentiate a brand from its competitors in the mind of customers (Pitta & Katsanis, 1995). Additionally, customers are influenced by brand image during their purchase decisions because they tend to buy products that are congruent with their self-image, in order

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to reinforce their self-image (Tepeci, 1999). Finally, Cretu & Brodie (2007) found that brand image has a positive impact on perceived quality. This indicates that if loyalty programs influence brand image in a positive way, customers would perceive the quality of these brands as higher. Therefore, it can be concluded that it is essential for companies to understand how loyalty programs influence brand image.

Customers establish a brand image through associations they hold in their memory about a brand. These associations can be influenced by marketing programs (Keller, 1993). Since loyalty programs are part of many marketing programs nowadays (Dowling & Uncles (1997), one might expect that these programs affect brand image as well. However, up to now, no empirical research has been conducted about the direct effect of loyalty programs on brand image in the grocery retail industry. Therefore, the first hypothesis predicts that:

H1: Loyalty programs have a positive effect on change in brand image.

2.3 Monetary versus non-monetary rewards

Companies have developed many different types of reward-based loyalty programs since the concept was first introduced. Dowling & Uncles (1997) designed a reward scheme which distinguishes loyalty programs based on the type of reward and the timing of reward. They make a division between two types of rewards, whereby direct rewards “support the value proposition of the product or service offered to customers” (Dowling & Uncles, 1997, p. 76) and indirect rewards, “are designed to motivate loyalty by a more indirect route” (Dowling & Uncles, 1997, p. 76). These rewards can either be offered immediately or delayed.

This reward scheme has been used widely and received a lot of support in literature about loyalty programs (e.g. Yi & Jeon, 2003; Jang & Matilla, 2005; Mattison Thompson & Chmura, 2015). Yi & Jeon (2003) elaborated on this scheme and found that the level of involvement moderates the effect of loyalty programs on customer loyalty. In general, the

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purchases that customers make in grocery stores are low in involvement (Broniarczyk, Hoyer & McAlister, 1998). Since this paper focuses on the grocery retail industry and customers who are lowly involved do not value these types of rewards differently, no further attention will be given to the to the differences in direct and indirect rewards (Yi & Jeon, 2003).

However, customers with low involvement do value loyalty programs with immediate rewards higher compared to loyalty programs with delayed rewards (Yi & Jeon, 2003), especially in developed countries (Mattison Thompson & Chmura, 2015). Therefore, the timing of the reward is an important element to take into account when it comes to loyalty programs in the grocery retail industry. Nevertheless, delayed rewards encourage continued patronage whereas immediate rewards do not (Mattison Thompson & Chmura, 2015). Hence, it can be concluded that delayed rewards are more desirable for companies in terms of repurchase behavior, but customers in developed countries value these types less compared to immediate rewards. In order to develop attitudinal loyalty and to become more profitable for a firm, customers need to perceive the loyalty program as favorable (Furinto et al., 2009). This raises the question about what type of loyalty program would satisfy both the firms in the grocery retail industry as well as their customers. Ideally, an effective loyalty program should encourage customer repurchase behavior and in turn behavioral loyalty, but also be perceived as favorable by customers in order to increase attitudinal loyalty. A new perspective on which types of rewards are desired by customers might lead to new theoretical insights and practical implications.

Recently, Nielsen (2016) conducted a global study based on 30000 respondents, which explored consumer perspectives on loyalty programs. This study makes a distinction between monetary and non-monetary rewards and the results indicate that customers value monetary rewards more positively compared to non-monetary rewards. Although the study of Nielsen (2016) was not based on a theoretical framework, the results and findings are profound enough

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to be further explicated in this paper. However, in this paper, the definitions of monetary and non-monetary rewards will be based on academic articles.

Jang & Mattila (2005) describe monetary rewards as discounts or cash back and non-monetary rewards as special services or products. Their findings suggest that customers prefer monetary rewards compared to non-monetary rewards, which is in line with the findings of Nielsen (2016). However, the research of Jang & Mattila (2005) was specifically based on the restaurant industry. As stated, the appreciation of loyalty programs greatly depends on the level of involvement of the customers (Yi & Jeon, 2003). This level differs between customers in the restaurant industry who are generally highly involved (Kim, Jeon & Hyun, 2012) and customers in the grocery retail industry who are generally lowly involved (Broniarczyk, et al., 1998). Therefore, the preference of monetary versus non-monetary rewards is not yet generalizable for the grocery retail industry.

So far, other studies have not focused on the difference in influence on brand image between loyalty programs with monetary rewards and non-monetary rewards. Contrary to the studies that argue that customers value monetary rewards better than non-monetary rewards, research has shown that customers prefer products with a price of zero over products with a price reduction, even when this reduction is five-times-larger (Shampanier, Mazar & Ariely, 2007). If products with a price reduction are seen as monetary rewards and free products as non-monetary rewards, the outcomes are not in line with the findings of Nielsen (2016) and Jang & Mattila (2005). However, it has to be noted that research of Shampanier et al. (2007) was not specifically about loyalty programs so these preferences might differ when it comes to rewards of loyalty programs.

Another important suggestion that Shampanier et al. (2007) make, is that companies that try to bring up the sales of one good by bundling it with a cheap good, would be more successful when the cheap good would be offered for free. That is, because free products have

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a higher impact on demand. Therefore, the findings of Shampanier et al. (2007) indicate that customers would prefer non-monetary rewards (free products) over monetary-rewards (discount), even when the true value is equal. Additionally, the study of Nielsen (2016) suggests that non-monetary rewards have more power to differentiate a brand and argues that retailers could use these type of loyalty programs for brand building. Because customers are more able to differentiate brands when they hold a positive brand image (Pitta & Katsanis, 1995), it can be expected that loyalty programs with non-monetary rewards have a greater impact on brand image compared to monetary rewards. Lastly, Dowling & Uncles (1997) argue that for low-involvement products, the incentive instead of the product itself can become the primary reward and that this can lead to differentiation.

Since the study of Nielsen has not been based on a theoretical framework, it would be interesting to see how these two types of rewards influence brand image differently, and ultimately, are better able to differentiate a brand. Also, because customers value free goods over discounted goods (Shampanier et al., 2007), it is likely that they will perceive a loyalty program with free goods as more favorable compared to a program with discounted good, which in turn has a positive influence on brand image. Since the first hypothesis was that loyalty programs have a positive influence on the change in brand image, one might expect that this change is even higher for non-monetary rewards compared to monetary rewards. Therefore, the second hypothesis predicts that:

H2: The positive effect of loyalty programs on brand image is stronger for loyalty programs with a non-monetary reward compared to loyalty programs with a monetary reward.

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2.4 Private label brands versus non-private label brands

In general, grocery retail stores offer two types of brands: private label brands and non-private label brands. Private label brands are also called store brands, and have become increasingly popular during the last decades (Martenson, 2007). Private label brands are defined as: “consumer products produced by or on behalf of distributors and sold under the distributor's own name or trademark through the distributor's own outlet” (Morris, 1979, as cited in Burt, 2000, p. 875). Non-private label brands are also referred to as manufacturer brands (Martenson, 2007) or national brands (Vahie & Paswan, 2006) and can be defined as “a product with a particular brand name that is available all over the country, rather than in just one area” (Cambridge Dictionary, n.d.). This paper makes solely use of the terms private label brands and non-private label brands in order to avoid confusion.

A major difference between private label brands and non-private label brands is that private label brands are only for sale in the distributor’s own outlet (Morris, 1979; Hoch, 1996) whereas non-private label brands are available all over the country and often even around the world (Steenkamp, Van Heerde & Geyskens, 2010). Another difference is that private label brands appear in almost all categories throughout the store, in contrast to non-private label brands (Hoch, 1996).

Private label brands are not only interesting for customers because of the relatively low priced products compared to non-private label brand products (Garretson, Fisher & Burton, 2002), but are also profitable for retailers because private-label brands have the potential to increase store loyalty, chain profitability, and more (Batra & Sinha, 2000). In 2014, private label brand products accounted for $1 of every $3 spent in the packaged goods market (Nielsen, 2014). This illustrates the high demand for private label brands in this industry. In Europe, private label brands have been more successful compared to the USA. This difference is

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attributed to the higher quality of private label brand products in Europe compared to the USA (Martenson, 2007).

Customers value these types of brands differently while making purchase decisions (Vaidyanathan & Aggarwal, 2000). To illustrate, some customers prefer non-private label brands over private label brands because they think that non-private label brands offer higher quality. According to these customers, the lower price of private label brands signals inferior quality (Garretson et al., 2002). The findings of Martenson (2007) and Garretson et. al (2002) implicate that customers in the grocery retail industry do take product quality into account when they make purchase decisions. However, even though private label brands are cheaper, blind taste tests have proven that customers value the quality of private label brand products as equal or even better compared to national brands (De Wulf, Odekerken-Schröder, Goedertier & Van Ossel, 2005). In that particular study, the participants were asked to evaluate different types of apple juice. The results indicated that customers appreciated the same products more when they were branded as non-private label products. Therefore, the researchers concluded that private label brands lack brand equity (De Wulf et al., 2005).

The results of a global study conducted by Nielsen (2014) confirm this conclusion. Through this study, it has been found that the lack of brand equity of private label brands is especially visible in the hair-category. In this category, only 2% of the sales come from private-label brands. According to Nielsen (2014) that is due to the fact that non-private private-label hair product brands have more invested in innovation and marketing, which resulted in strong brand equity. This huge difference in market share emphasizes the importance of a strong brand equity.

A strong brand equity has several positive outcomes. One of these outcomes is that customers react “more favorably to an element of the marketing mix for the brand than they do for the same marketing mix element when it is attributed to a fictitiously named or unnamed

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version of the product or service” (Keller, 1993, p. 1). Because previous studies have found that non-private label brands generally have a stronger brand equity compared to private label brands (De Wulf et al., 2005; Nielsen, 2014), one can argue that customers react more favorably towards the loyalty programs of non-private label brands compared to the loyalty programs of private label brands. Since the first hypothesis was that loyalty programs have a positive influence on the change in brand image, one might expect that this change is even higher for non-private label brands compared to private label brands.

Therefore, the third hypothesis predicts that:

H3: The positive effect of loyalty programs on change in brand image is stronger for private label brands compared to non-private label brands.

2.5 Conceptual model

This conceptual framework provides an overview of all examined relationships in the study.

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3 Methodology

This chapter describes the research method. The structure is as following: in section 3.1, the research question is described. This is followed by section 3.2, in which the research design and sample selection are being explained. In section 3.3, the pre-test and its results are being discussed. Thereafter, in section 3.4, the chosen rewards are being described. Finally, in section 3.5, the procedure of the experiment is explained.

3.1 Research question

The purpose of this paper is to extend the knowledge on the impact of loyalty programs in the grocery retail industry by testing its influence on brand image. Therefore, the following research question is central in this study: How do loyalty programs influence brand image in

the grocery retail industry, and is this impact moderated by the type of reward and/or type of

brand?

3.2 Research design & sample

An online experiment was held to examine the effect of loyalty programs on the change in brand image. An experiment is particularly useful for this study because the aim was to determine a causal relationship between loyalty programs and brand image. This indicates high internal validity, because the questions can be shown statistically to be associated with an outcome (Saunders et al., 2016).

This experiment had a 3 (type of reward: monetary reward/non-monetary reward/no reward) x 2 (type of brand: private label brand/non-private label brand) between subjects-design. This means that the participants belonged to just one of the six groups. The dependent variable was the change in brand image and the independent variable was the loyalty program. The moderators were the type of brand and the type of reward.

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In total, 242 people (72 male, Mage = 32.6 years, age range: 16-64 years) participated voluntarily in the experiment. The technique that has been used to collect participants is called self-selection sampling (Saunders et al., 2016). People were asked to participate in a survey through e-mail and social media. However, the participants were not told that they were actually participating in an online experiment, instead of a regular survey. The participants were randomly assigned to one of the six different treatment conditions and were unaware of the other conditions. Therefore, they could not have been influenced by the other reward or brand while filling in the questions.

Table 1. Research design: conditions

Private label brand Non-private label brand

Monetary reward 1 2

Non-monetary reward 3 4

No reward (control group) 5 6

As table 1 shows, the experiment also included 2 control groups (condition 5 and 6). These conditions had the job to rule-out alternative explanations and to guarantee that change in brand image can only be assigned to the manipulated independent variable, instead of other unknown variables.

3.3 Selected rewards

The chosen rewards were low in value, which is usual in the grocery retail industry (Meyer-Waarden & Benavent, 2009). A common monetary reward in this industry is a discount after an X amount of purchases (Taylor & Neslin, 2004) and a common non-monetary reward is a special service or product (Jang & Mattila, 2005). Therefore, the monetary reward was 50% discount on the 5th_{purchase of a Jumbo private label chocolate product (condition 1), or 50%} discount on the 5th_{purchase of a Côte D’Or product (condition 2). These specific products have}

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been chosen because the price of a Jumbo chocolate bar was €1.50, while the price of the chocolate bar of Côte D’Or was €2.00. This price difference of 25% is representative for products in the grocery retail industry, because the average private label brand products are 30% cheaper compared to private label brand products (Martenson, 2007). The non-monetary reward was a ‘Jumbo private label hot chocolate on a stick’ (condition 3) or a ‘Côte D’Or hot chocolate on a stick’ (condition 4). These products can be seen as special because they do not really exist and are not for regular sale. As stated, the respondents in condition 5 and 6 were not offered a reward. All rewards can be found in Appendix 2.

3.4 Pre-test

As stated before, this paper is interested in the moderating effect of the type of reward and the moderating effect of the type of brand on the change in brand image. The perceived value of these rewards had to be equal in order to ensure that a higher change in brand image could not be influenced by the perceived monetary value of the reward, but solely by the type of reward. Therefore, a pre-test (N=33) was conducted first. The goal of this pre-test was to indicate which two brands would be suitable for the actual experiment, to determine whether the respondents were familiar with the term ‘loyalty programs’ and to establish the perceived value of the rewards. The questionnaire of the pre-test can be found in Appendix 1.

The first step was to determine which brands would be suitable for the experiment. Because people can only establish a brand image when they already have a brand node in memory (Keller, 1993), a prerequisite was to select well-known brands. The results show that 100% of the respondents of the pre-test were familiar with Jumbo and Côte D’Or. Therefore, these brands were selected for the actual experiment. Also, these two brands offer products in the same category. This prevents for the possibility that effects of loyalty programs would differ among different product categories because of the level of involvement. The last

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requirement was that the selected brands don’t offer loyalty programs yet, to secure that the current brand image cannot already be influenced by a loyalty program. That was the case for both these brands, so they were perfectly suitable for the experiment.

Secondly, the pre-test indicated that 66.7% of the respondents knew what a loyalty program was. Because confusion about the meaning of loyalty programs might influence the results during the experiment, a definition of the term was given to the participants during the actual experiment.

Finally, the perceived value of the rewards was checked. The results of the pre-test indicate a clear difference in the perceived value of the rewards, which can be seen in table 2. The respondents assigned a lower value to the non-monetary rewards compared to the monetary rewards for both types of brands. Therefore, the value of the rewards was mentioned in the actual experiment.

Table 2. Pre-test: average perceived value of rewards

Type of reward Perceived average price

Côte d’Or chocolate bar €1.95 - €2.10

Côte d’Or hot chocolate on a stick €1.30 - €1.50

Jumbo chocolate bar €1.55 - €1.75

Jumbo hot chocolate on a stick €0.70 - €0.90

3.5 Experiment

All participants (N=242) filled in an online survey in which they were randomly assigned to one of the six conditions. Dependent on the condition, a participant either had to answer questions regarding a private label brand (Jumbo) or a non-private brand (Côte d’Or) and were either exposed to a monetary reward, a non-monetary reward or no reward at all.

To measure the brand image of the respondents prior to the conditioning, they were asked to answer questions regarding the specific brand on a 10-point grading scale. Martínez and de Chernatony (2004) made use of a brand image scale based on Aaker (1996). They have

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removed the items that refer to the organizational brand image. Since these items are not interesting in this context either, this adjusted scale is suitable for this study too. The following statements were shown in the experiment:

• This brand provides good value for money

• There is a reason to buy the brand instead of others • The brand has personality

• The brand is interesting

• I have a clear impression of the type of people who consume the brand • This brand is different from competing brands

After their brand images were established, the respondents had to fill in a general question about their shopping behaviour. Also, the respondents in conditions 1, 2, 3 and 4 were given a definition of loyalty programs and were asked whether they participated in a loyalty program and if they liked the idea of a loyalty program. These questions were added in order to minimize the ‘direct test’ error, but were also valuable because their attitude towards loyalty programs in general might influence the outcomes. Research has shown that a more favourable attitude towards loyalty program increases the likelihood to participating in a grocery retail loyalty program (Gómez, Arranz & Cillán, 2012), so this attitude might influence other variables as well. Subsequently, the participants were shown a short press release in which they were told that the brand was going to start a specific loyalty program. These press releases can be found in Appendix 2. After the respondents have read the press releases, their brand images were measured again. Finally, some control variables were taken into account. The respondents were asked which gender they had because research has shown that males tend to be more loyal to groups, such as companies, compared to women (Melnyk, van Osselaer & Bijmolt, 2009). Additionally, they were asked other demographic questions such as age, education level and income as these answers could serve as control variables.

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4 Results

This section discusses the results of the experiment. Section 4.1 evaluates the comparability of the groups. Section 4.2 measures the reliability of the brand image scale that has been used. Section 4.3 describes the main effect of loyalty programs on brand image, as well the possible moderating effects of the other variables. Finally, section 4.4 explores whether there are significant differences between groups.

4.1 Comparability of the groups

As stressed in the methodology section, all participants were randomly assigned to one of the six conditions. After removing the results from participants who did not finish the survey, the answers of 242 participants were analysed. To secure that the results of the different conditions would be comparable, the first step was to check whether the participants were evenly distributed across the conditions in regard to their background characteristics; age, gender, education and income. The distribution of age (an interval variable) has been tested with a one-way anova and the nominal variables (gender, education and income) were tested with chi-square tests. The results of the one-way anova show that Mage = 32.6 and SDage = 11.776. There were no statistically significant differences between age across the groups, F (5, 235) = 1.660, P = .145), which can be seen in table 3. Therefore, the groups were comparable in regard to age.

Table 3 One-way anova: age

SS DF MS F SIG.

Between groups 1135.150 5 227.030 1.660 .145

Within groups 32145.829 235 136.791

Total 33280.979 240

After this one-way anova, three chi-square tests have been executed. First, the distribution of gender across the conditions has been tested. The results were (X2 _{= 6.861, P = .231). Because}

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0.231 > 0.05, the differences in gender across the conditions were not significant either. This makes the conditions comparable in regard to gender as well, which increases the internal validity of the results because males tend to be more loyal to brands compared to women (Melnyk et al., 2009). Therefore, no differences between the groups can be attributed to differences in gender.

Subsequently, the distribution of the levels of education across the conditions have been tested. However, because not all levels (vmbo, have, vwo, mbo, hbo, wo bachelor, wo master,

none of these) were chosen in all conditions, some levels have been merged in order to be able

to measure whether there would be significant differences between the conditions. Therefore,

vmbo, havo, vmbo, mbo and none of these have been merged into other. The remaining options,

hbo, wo bachelor and wo master have remained the same, because these options have been

chosen abundantly. The chi-square tests show that (X2 _{= 7.784, P = .932). Because 0.932 >} 0.05, the differences in education across the conditions were not significant either. Finally, the differences in income across the conditions have been tested. 34 respondents preferred not to answer this question. Because a reliable test cannot be based on assumptions, these respondents have not been taken into account during this chi-square test. The results show that (X2_{= 25.116,} P = .048). Because 0.048 < 0.05, it can be stated that the groups are significantly differently distributed in regard to income. This means that some groups have a significant different income compared to other groups.

4.2 Reliability analysis

The next step was to analyse the reliability of the 5-items scale of Martínez and de Chernatony (2004), which has been used to measure brand image. This has been done twice, once prior to the conditioning and once after the conditioning. The reliability analysis of the scale prior to the conditioning shows a Cronbach’s alpha of 0.81, which indicates that this scale has high

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reliability and no items need to be removed. Also, the corrected item-total correlations show that all items have a good correlation with the total score of the scale, since they were all above 0.30. The reliability analysis of the scale after the conditioning shows a Cronbach’s alpha of 0.87, which confirms that this scale is highly reliable. To conclude, the external reliability of this study is high, because the reliability of the scale implicates that the data collection techniques would yield consistent findings regardless of the occasion and researcher (Saunders, Lewis & Thornhill, 2016).

4.3 One-way & factorial anova

A one-way anova was executed to describe the mean ratings of brand image before and after the conditioning. The mean ratings of each group can be found in table 4. The table demonstrates that all groups have a different mean before and after the conditioning, however, some differences are more outstanding compared to others. All experimental groups (condition 1, 2, 3 and 4) illustrate an increase in the mean of brand image after being exposed to the stimulus. An unexpected finding is that the brand image rating of participants in the control condition with a private label brand (condition 5) slightly decreases, while these participants were not primed with a stimulus. The participants in the control group with a non-private label brand (condition 6) show a miniscule mean difference.

Table 4 Descriptives mean brand image pre- and post-conditioning

Condition Mean pre SD pre SE pre Mean post SD post SE post Mean difference 1: MR & PLB 5.470 1.487 .235 5.700 1.494 .237 .230 2: MR & NPLB 6.330 1.218 .193 6.535 1.376 .217 .205 3: NMR & PLB 5.429 1.507 .233 5.671 1.684 .260 .242 4: NMR & NPLB 5.470 1.688 .267 5.630 1.747 .277 .160 5: NR & PLB 5.765 1.016 .166 5.655 1.083 .171 -.110 6: NR & NPLB 6.610 1.454 .230 6.615 1.662 .263 .005

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Subsequently, a factorial anova has been executed. This made it possible to investigate the effect of the two independent variables, the type of reward and the type of brand, on the dependent variable, the change in brand image. The results of the factorial anova can be found in table 5 and the complementary plot in figure 2.

The results of the factorial anova indicate that type of reward has a significant main effect on the change in brand image: F (2,236) = 3.086, p = 0.048. Secondly, the results show that type of brand has no significant main effect on brand image: F (1,236) = 0.001, p = 0.981. Finally, there is no moderating effect between type of brand and type of reward (F = 0.350, P = 0.705).

Table 5 Factorial ANOVA (N=242), dependent variable: change in brand image

SS DF MS F SIG.

Type of reward 3.683 2 1.841 3.086 .048*

Type of brand .000 1 .000 .001 .981

Type of reward * type of brand .417 2 .209 .350 .705

Error 140.817 236 .597

Total 148.600 242

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4.4 One way anova and post-hoc tests

Because the factorial anova has determined that change of reward is the only independent variable that has a significant influence on brand image, the next step was to detect whether there was a difference between the groups: monetary reward, non-monetary reward and no reward. Therefore, a one-way anova has been executed. The results in table 6 indicate a significant difference (p = 0.046) between the groups.

Table 6 Anova: change in brand image

SS DF MS F SIG.

Between groups 3.696 2 1.848 3.127 .046

Within groups 141.235 239 .591

Total 144.930 241

Now it has been determined that there are significant differences between the groups, an LSD post-hoc test has been executed. This made it possible to demonstrate whether the change in brand image was significantly different between the three groups. The results in table 7 show that the change in brand image was significantly higher (p = 0.255) in the non-monetary reward group compared to the control group and in the monetary reward group compared to the control group (p = 0.270). However, there was no statistically significant difference (p = 0.015) in change of brand image between the non-monetary reward group and the monetary reward group. To conclude, both monetary and non-monetary rewards have a significant influence on change in brand image, however, there is no significant difference in influence between these two types.

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Table 7 Post Hoc test: type of reward

Type of reward (I) Type of reward (J) Mean Difference

SE SIG.

Monetary reward Non-monetary reward .015 .121 .901

No reward (control) .270* .122 .027

Non-monetary reward

Monetary reward -.015 .121 .901

No reward (control) .255* .121 .036

No reward (control) Monetary reward -.270* .122 .027

Non-monetary reward -.255* .121 .036

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5 Discussion

This section discusses the findings of each hypothesis as defined at the research design. Section 5.1 discusses the impact of loyalty programs on brand image. Section 5.2 explores whether the influence of loyalty programs on brand image is moderated by the type of loyalty program. Thereafter, section 5.3 indicates whether the influence of loyalty programs on brand image is moderated by the type of brand. Section 5.4 explains the practical implications of this study. Finally, section 5.5 addresses the limitations of this study and makes suggestions for future research.

5.1 The influence of loyalty programs on brand image

The main aim of this study was to determine a causal relationship between loyalty programs and brand image in the grocery retail industry. Therefore, hypotheses 1 predicted that loyalty programs have a positive effect on the change of brand image in the grocery retail industry.

The results of the experiment indicate that participants who were shown a press release in which the brand announced that it was going to start a loyalty program, demonstrated a significant positive, yet small change in brand image. Participants in the control conditions, who were told nothing about a loyalty program, did not show a significant change in brand image. This leads to the conclusion that loyalty programs do have a positive influence on the change in brand image of brands in the grocery retail industry. Therefore, hypothesis 1 is confirmed.

This confirmation is in line with previous research on the drivers of brand image. Keller (1993) for example, argues that marketing programs influence the associations that customers hold about a certain brand. Subsequently, these associations establish a brand image in the mind of a consumer. Since loyalty programs are a common marketing tool nowadays (Dowling & Uncles, 1997), it is not surprisingly that they do influence brand image.

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This finding contributes to the existing literature about loyalty programs in the grocery retail industry, because it proposes and tests a causal relationship between loyalty programs and brand image. Because previous studies have led to mixed outcomes regarding the influence of loyalty programs on customer loyalty (Leenheer et al., 2007), it is important to acknowledge all variables that are influenced by loyalty programs. The majority of previous studies focused on behavioural loyalty (Bandyopadhyay & Martell, 2007). That explains why very little was found in existing literature about the influence of loyalty programs on attitudinal loyalty. According to Bennett & Rundle-Thiele (2002), attitudinal loyalty can explain some of the variance in behaviour loyalty. Because brand image does influence attitudinal loyalty (Taylor et al., 2004) and additionally, attitudinal loyalty predicts behavioural loyalty (Bandyopadhyay & Martell, 2007), the positive influence of loyalty programs on brand image likely improves brand loyalty as a two-dimensional construct.

5.1 The moderating effect of the type of loyalty program

Hypothesis 2 predicted that the positive effect of loyalty programs on brand image is moderated by the type of loyalty program, in a way that this change is stronger for loyalty programs with a non-monetary reward compared to loyalty programs with a monetary reward. The findings show that there is no significant difference in the effects of loyalty programs with monetary rewards and non-monetary rewards on the change in brand image. Therefore, this hypothesis is rejected.

In order to gain a deeper understanding of the influence of loyalty programs on the change in brand image, this study looked into possibly moderating variables. Previous research suggested that non-monetary rewards are more able to influence brand image (Nielsen, 2016) and that companies would be more successful in bringing up the sales of a certain product when a bundled good would be offered for free instead of a cheap price (Shampanier et al, 2007).

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Therefore, it was likely that non-monetary rewards have a stronger influence on change in brand image compared to monetary rewards.

Despite that, the findings of this paper do not confirm these suggestions. Since customers need to perceive a loyalty program as favourable in order to develop attitudinal loyalty (Furinto et al., 2009), a possible explanation could be that customers did not perceive the chosen non-monetary reward (hot chocolate on a stick) as a favourable reward. This could explain why the increase in brand image is not higher for customers who were offered a non-monetary reward.

Even though this hypothesis is rejected, the findings still attribute to the theory about loyalty programs and types of rewards. Previous studies have mainly distinguished rewards in terms of timing and whether they were related to the brand or not (Dowling & Uncles, 1997). However, these studies did not take the perceived value of the rewards into account. This paper indicates that even though customers might have a preference when it comes to monetary or non-monetary rewards, this preference does not affect the change of brand image.

5.1 The moderating effect of the type of brand

Hypothesis 3 predicted that the positive effect of loyalty programs on brand image is moderated by the type of brand, in a way that this change is stronger for private label brands compared to non-private brands. The findings show that there is no significant difference between the change in brand image between private label brands and non-private label brands. Therefore, this hypothesis is rejected.

Previous research showed that in general, non-private label brands have a stronger brand equity compared to private label brands in the grocery retail industry (De Wulf et al., 2005; Nielsen, 2014). Because one of the consequences of a strong brand equity is that customers react more favourable towards the marketing activities of the brand (Keller, 1993),

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it was expected that the participants in the non-private label brands would have shown a higher increase in brand image.

Indeed, the results show that the participants held a more favourable brand image of the non-private label brand Côte D’Or, compared to the private label brand Jumbo in all conditions. This confirms the findings of previous studies about the difference in brand equity between private label brands and non-private label brands (De Wulf et al., 2005; Nielsen, 2014).

However, the findings of this study show that there was no significant difference in the change in brand image between participants in the private label brand conditions and participants in the non-private label brands conditions. Even though this is against the expectations, this finding still contributes to current theoretical knowledge of loyalty programs.

5.4 Practical implications

In the competitive grocery retail industry, managers often have difficulty in deciding where to spend the marketing budget on. The choice whether to invest in a loyalty program or not, is often based on experience and intuition (Rust, Lemon & Zeithaml, 2004). However, many marketing departments are asked to indicate the potential contribution of loyalty programs (Dowling & Uncles, 1997). Because the costs of loyalty programs are often high and the implementation phase involves certain risks (Furinto et al., 2009), it is important that managers are aware of all the effects of different types of programs.

This study provides managers with more insights in regard to the potential contribution of loyalty programs. The results indicate that loyalty programs have a positive influence on the change in brand image. A positive brand image is valuable for companies because it increases attitudinal loyalty (Taylor et al., 2004). Subsequently, attitudinal loyalty predicts behavioural loyalty (Bandyopadhyay & Martell, 2007). Therefore, it is likely that the positive influence of loyalty programs on brand image increases both brand equity as well as sales revenues.

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Once managers have decided to implement a loyalty program, the next step is to design a reward scheme that is both profitable for the firm and its customers. Previous research has not yet focused on which types of rewards have a more positive influence on brand image. The outcomes of this study implicate that customers don’t show a significant different change in brand image between monetary and non-monetary rewards. The monetary reward in this study stimulated repurchase behaviour, because it offered a 50% discount on the 5th_{purchase. The} non-monetary reward did not do this. Because customers do not show a significant different change in brand image between these types, managers are suggested to design a reward schema that is most profitable for the firm. Since one of the main goals of loyalty programs is to increase sales revenues (Dowling & Uncles, 1997), this research suggests that monetary rewards are more suitable for companies in the grocery retail industry.

Finally, previous research has shown that many non-private label brands see private label brands as any other non-private label brand in terms of competition (Hoch, 1996). This paper confirms that statement, because the participants did not show a significant difference in change in brand image between private label brands and non-private label brands. This could be attributed to the fact that private label brands in Europe are qualitatively high (Martenson, 2007).

5.5 Limitations and suggestions for future research

Like every empirical study, this study has some limitations. Also, the results arise several questions which are suggested to be studied in future research.

The first limitation regards the chosen research method. Online experiments have a lower external validity compared to field experiments, because the extent to which the findings are able to be generalized to the real world is low (Saunders et al., 2016). Another limitation in regard to the research method, is that the research was cross-sectional. This means that the

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change of brand image of the participants was studied at a particular time. However, a longitudinal research would have been more suitable for this study. Even though the participants showed a significant change in brand image, it is unsure whether these ‘new’ brand images would be sustainable over time. Therefore, it is suggested to replicate this study in a longitudinal way and in a real-life setting.

Secondly, this study had some limitations in regard to external validity. The first issue was that only one monetary reward and one non-monetary reward were taken into account. However, it could be that different types of monetary and non-monetary rewards would have differently influenced the brand image of the participants. In future research, it would be interesting to test the effect of different monetary and non-monetary rewards in order to be more able to generalize these findings. The second issue in regard to external validity was that the value of rewards in real life is often unknown to customers. For example, customers who collect stickers in order to save for the Albert Heijn (a Dutch retailer) casserole pans (Albert Heijn, n.d.), are not aware of the monetary value of these pans. However, in this paper, we had to make sure that customers perceived the same value in each condition in order to make the results more generalizable. Nevertheless, in future research it would be better to keep it as real as possible.

Finally, the respondents were collected through a convince sample. Therefore, the external validity of the results could be subject to limitations.

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6 Conclusion

Loyalty programs have become a common marketing tool for companies in the grocery retail industry. The effects of loyalty programs on customer loyalty have been analysed through an extensive number of studies. However, the focus of most studies was particularly on

behavioural loyalty, while customer loyalty is actually a two-dimensional construct which also consists attitudinal loyalty. No prior studies have focussed on the impact of loyalty programs on brand image, despite the fact that this is one of the main drivers of attitudinal loyalty. Therefore, the purpose of this study was to determine a causal relationship between loyalty programs and change in brand image in the grocery retail industry. During this research, the moderating variables ‘type of brand’ and ‘type of reward’ were also taken into account. The findings confirm that loyalty programs do have a positive influence on the change of brand image. However, the type of brand and type of reward did not have a moderating impact on this relationship. This study contributes to both the theoretical and the practical world because the positive influence of loyalty programs on brand image likely improves loyalty as a two-dimensional construct.

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The influence of loyalty programs on brand image in the grocery retail industry