From supermarkets to shoe stores, baristas to bottle shops, retailers are falling over themselves to sign people up to their loyalty programs. But for all the points, offers, freebies and discounts, is the consumer really getting the better end of the deal?

In today's retail market it can be difficult for businesses to stand out from their competitors. Similar products at similar prices means there's nothing particular on the shelves to make customers stick with one store over another. But by using a loyalty program to reward spending, retailers offer customers an incentive to keep coming back to their store.

The most helpful way to look at loyalty or 'rewards' programs is to think of them as a transaction between you and the store. A business isn't going to give you something for nothing, so before you sign up for the card think about what you're bringing to the table and what's in it for the retailer.

We investigate prices at Coles, Woolworths, Aldi and IGA to see which supermarket has the cheapest groceries.

So do loyalty programs even work?

A recent marketing industry survey found that four in five shoppers tend to buy more from businesses whose cards they hold, and 55% say that when choosing between two similar companies they'll usually pick one with a loyalty program. But the research suggests loyalty schemes don't actually do much to build an emotional attachment to a brand. Fewer than half of Australian consumers actually feel loyal to a company whose LP they're members of.

That's because these programs don't target rusted-on brand loyalists; those customers are already going to spend at the store. Loyalty programs target a more mercenary group, who shop where they think they're getting a good deal. This lot are the 'swing voters' of retail – the lucrative target market retailers aim to attract, and keep from their rivals.

Loyalty programs are also incredibly expensive, and implementing them can force price hikes. But this doesn't stop businesses from investing heavily in them. For example, the new Woolworths Rewards program could cost the company as much as $500 million a year. This is a huge investment, especially at a time when the group is reporting a 12.5% drop in net profits. So why take the risk?

What do retailers get out of loyalty programs?

Loyalty schemes provide retailers with an astounding volume of data. When you sign up (and maybe give linked loyalty cards to your family) the company takes record of your age, gender, address and household size. Every time your scan your loyalty card at the register, your transaction is recorded against your account. Over time the business is able to create a profile of your buying habits: what you buy and when, how full your basket is, how much you spend and how you pay.

Retailers use this data to build a profile of you, and as Woolworths puts it, to "learn of your likely preferences so that we may promote our goods and services to you in a way which may be of most interest to you" – that is, most likely to cause you to spend. Retailers want to get to know the 'real' you. Then they want to compare you to everyone else with similar profiles, so they can more easily pitch you products the data analysis has predicted you're likely to buy. It's called targeted marketing, and everything about it is designed to manufacture reasons to get you back in the shop as often as possible.

"If they identify that you're spending an average amount, but you could be spending more, they can offer you targeted deals," says Violet Lazarevic, a research consultant with the Australian Consumer, Retail and Services Research Unit at Monash Business School. "The accepted wisdom is that if you can get someone to come to the store three times, you've got them."

As unsettling as the idea may be that an algorithm can predict your buying preferences, targeted marketing can offer people deals on products they genuinely want to buy. But the larger rewards programs can provide the businesses that run them with much deeper insights than who likes eating what brand of baked beans.

Retailers get serious about data

In recent years, retailers have jumped on the big data bandwagon to help supplement traditional marketing techniques. In 2013, Woolworths spent $20 million acquiring a 50% stake in Quantium, an analytics firm which helps businesses leverage collected data to develop marketing strategies: "from data to dividend".

Later that year, when they started selling Woolworths-branded insurance, Woolies took their underwriter's existing car crash database and compared it with transaction records from Woolworths Rewards members to find correlations between shopping habits and insurance risk. They were excited by the results.

"Customers who drink lots of milk and eat lots of red meat are very, very, very good car insurance risks versus those who eat lots of pasta and rice, fill up their petrol at night, and drink spirits," the then director of group retail services Penny Winn told a marketing industry event at the time.

This allowed the company to market insurance directly at the supposedly low-risk customers. Having possession of so many potential customers' information meant the business didn't have to invest in a pricey ad campaign and could target customers less likely to make claims.

Rewards programs give retailers access to detailed demographic data about some of their customers. But information collected from non-loyalty members is also valuable. Electronic point-of-sale technology allows retailers to track the buying habits of individual bank cards, even if they can't put a name to the number. This lets retailers follow not only what product lines are selling well, but what items are being bought together, allowing managers to organise store layouts to better increase sales. That means that even if you're not a loyalty member, it is possible for stores to collect data on you – they learn the what, where and when of your buying patterns, just not the who.

At the end of the day, the only way to truly stay out of the big data net is to pay with cash.

Can't I control what happens with my data?

Whenever you sign up to anything where you hand out your personal information, you normally have to tick a box saying you've read and agree with the organisation's privacy policy. Just about nobody ever actually does this (except for you savvy CHOICE members), but these documents give a sometimes worrying insight into why businesses have set up these programs.

The rules about the collection and use of personal information are set down in the Australian Privacy Principles (APPs), which form part of the Privacy Act 1988 (Cth). The first thing any organisation needs to do when collecting your sensitive information is get your consent, and tell you the "primary purpose" for gathering it. In this case, that would be for the running of your loyalty account: keeping track of your points, emailing you relevant discounts and so on.

The APPs say that businesses also have to gain consent to use your sensitive information for secondary purposes, unless it is "directly related" to the primary purpose. However, "directly related" isn't defined by the Act, and in any case many retailers will often throw vague, catch-all clauses into their privacy policies which they can use to demonstrate your consent.

For example, the Coles flybuys privacy policy states "We may also handle your personal information to protect our lawful interests and facilitate purchases and potential purchases of our businesses." This particularly abstruse statement seems to have little to do with providing discounts or marketing groceries, but if you belong to one of the 5.5 million households with a flybuys membership, you've given consent. Coles was contacted to clarify the scope of this clause, but declined to comment.

The APPs also give you the right to access personal information about you that businesses hold, and to provide corrections. However, there is no requirement for them to give you specifics about how they use your data. Vague clauses and non-negotiable privacy agreements mean that when you sign up to a rewards program there's a good chance you are agreeing to hand over your information to be used in ways you might not have expected.

We review and compare credit cards to find those with the best frequent flyer rewards and the best cashback and gift card rewards.

Shopper data offers rich opportunity

"The use of data by retailers is still very rudimentary," says Paul Harrison, a senior lecturer in marketing and consumer behaviour at the Deakin Business School. "They are gathering data at a broad demographic level, but demographics are still sledgehammer level." 

He says there's still a gap between people who understand the analytics, and those in control of marketing strategy.

Dr Harrison says businesses could be using their loyalty customers as guinea pigs in practical experiments of behavioural economics. "Businesses aren't using the analytics in a very sophisticated way. They should be conducting experiments – blocking aisles [laying out shelves to make them look full] at times of high sales, adjusting lighting in certain context to increase sales." The detailed data gathered from loyalty programs can be used to measure the success of these experiments on customer behaviour.

As data analytics becomes more entrenched in marketing departments we can expect businesses to become smarter about how they derive value from customers' personal information. It will be up to consumers to decide whether the rewards they receive from loyalty programs are indeed worth as much to them as their information is to the businesses at which they shop.

Avoid the shopping traps

If the goal of supermarket loyalty schemes is to encourage customers to buy specific products, get you into the shop more often to spend larger amounts and ultimately reinforce their relationship with you (and discourage you from engaging with their competitors), the evidence suggests they're working. As Woolworths' General Manager of Customer Engagement in 2009, Richard Umbers said "the total basket size has jumped up for customers who have linked their Everyday Rewards card to the Qantas Frequent Flyer scheme".

To take action against supermarkets' tricks, follow our tips:

  • Stock up on all the basics once a month at your local discount store..
  • Use unit pricing, as sometimes the biggest packet isn't the cheapest.
  • Go online to check specials for the week at your local supermarkets and plan your meals accordingly.
  • Avoid doing small top-up shops when you can, as they'll result in more unplanned spending, research by Roy Morgan shows that the more often you shop, the more you spend.
  • Buy locally whenever you just need milk and bread, to avoid temptation.

Find more tips in our article about supermarket sales tricks.