Woolies' blue sky mine

Six months after it was first foreshadowed the loyalty scheme partnership between Woolworths and Qantas is about to launch. The billion dollar question is whether, in Qantas' frequent flyer program, Michael Luscombe has found something similar in impact to the fuel docket schemes that so dramatically transformed the grocery and petrol retailing landscape.

The partnership isn't at face value, quite as obvious a game-changer as the petrol alliances between Woolworths and Caltex and Coles and Shell. However, it does reinforce Woolworths' fuel discount scheme and adds a potentially powerful driver to its Everyday Rewards scheme and Everyday Money credit card program.

What's more, unlike petrol, there is no Shell available to Coles and Woolworths' other competitors. The Qantas scheme, with its 5.6 million members, is the dominant rewards scheme in the country and one of the more successful in the globe. Beyond reward flights, it offers more than 1000 products or services against which points can be redeemed.

Coles has been de-emphasising the importance of its own FlyBuys program, arguing that its customers are more interested in cash or cash equivalents than in flight rewards. However, it will be anxiously monitoring the Woolworths/Qantas partnership in the knowledge that there is no direct ability to counter it if it is successful.

Certainly the partners believe that bringing the Qantas Frequent Flyer program's membership base next to Woolworths' 3 million members – a base built in only 18 months – will underwrite growth for both. Qantas Frequent Flyer chief executive, Simon Hickey, is forecasting growth in his program to 7 million members within 12 months, helped by the partnership with Woolworths.

For Woolworths, the new relationship is about securing its existing customer base by creating layers to the relationship and overall a deeper engagement. However, it is also about creating a new dimension to its dominance of grocery retailing. (The partnership will also apply to its co-branded petrol outlets and its Big W chain, Dick Smith technology stores and BWS liquor outlets).
Michael Luscombe knows that he can't make any more large-scale grocery acquisitions in this market, which means that growth in share has to be organic and incremental.

He also knows that the grocery wars are sufficiently competitive that offering low prices doesn't create a unique proposition – Coles and others will match or better the offer. He hired Richard Umbers, Woolworths' general manager for customer engagement, from Aldi in the UK to help drive the group's customer loyalty program as a mechanism for understanding and responding better to customers but also for widening the retail battlefront.

The relationship with Qantas Frequent Flyer is akin to acquiring, not a business but a new customer base. The success of Frequent Flyer says it has members who value its offerings and therefore are motivated to acquire points.

Presumably a significant number of them shop at Coles, Target, Kmart and other supermarket and general merchandise stores. To the extent that Woolworths can leverage off the relationship with the frequent flyer program it may be able to attract some of those customers to its stores.

If the partnership were successful, no doubt Woolworths would be keen to use the bulked up Everyday Rewards program to create other alliances and 'acquire' new customer bases.

For the Qantas program, Woolworths brings the biggest of the potential 'everyday' shopping partners into its scheme. It has taken Qantas two decades to build its program to its current size, so the 25 per cent increase in the size of its membership it expects over the next year would represent turbo-charged growth, with the Woolworths deal a significant driver.