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July 24, 2018 • Volume 19


 California’s Consumer Privacy Act: Threat or Opportunity?

In late June, California passed a sweeping privacy protection law intended to provide consumers with control over their own data – allowing them to see what data is being captured and sold, and allowing them to opt out of tracking going forward. Sort of a light version of the General Data Protection Regulation (GDPR) that recently rolled out in Europe. 

This legislation has scared the bejeesus out of pretty much everyone in the digital ecosystem, but will be refined over the next 18 months. Depending on your perspective, this 18 months will either allow evil business interests to spoil it, or will allow those with a vested interest and deep knowledge of the issues, to fix it.

I’ll steer clear of the impact of this legislation on publishers, given that this is an e-commerce newsletter. There is a part of the law though, that is causing angst amongst retailers and brands. The law stipulates that businesses are not allowed to discriminate against consumers that don’t agree to having their data tracked (they can’t charge higher prices or withhold certain services). This, of course, is a key element of loyalty programs – an exchange of discounts (or sometimes services) for data.

The future of loyalty programs

There are really two types of loyalty programs: loyalty programs that offer rewards to encourage consumers to spend more, usually in an effort to capture as much consumer category wallet share as possible. Think airlines, hotels, and the hand-punched coffee shop cards where the 10th cup is free.  

It is the other flavor of loyalty program, where retailers offer rewards to consumers for the ability collect data and then target offers to them in the future, that is potentially endangered by the California privacy law. The grocery store loyalty program best exemplifies this. In order to take advantage of sale prices, the consumer needs to swipe his or her loyalty card at checkout, which allows retailers then use this data to target direct mail and receipt coupons, often funded by brands.

The problem, of course, with the targeted grocery store loyalty card-driven promotion is that few people clip the coupons on the back of receipts and the coupons that they get in the mail. The opportunity to drop a convenient, impactful, targeted promotion happens during the list-building and shopping process, but loyalty programs haven’t historically had mechanisms to deliver targeted promotions into these largely analog processes.

The imposition of the California’s privacy law should compel retailers to ask themselves a hard question: Are they actually extracting the value out of their loyalty programs to warrant jumping through the increasingly high hurdles being thrown up by legislatures and regulators?

If not, as will be the case for many retailers, the action item shouldn’t be to kill their loyalty program. Instead, they need to prioritize the use of digital marketing to create opportunities to target consumers while they’re shopping or preparing to shop. Encourage shoppers to create shopping lists online, on mobile devices, and on voice-powered devices, where there will be opportunities to suggest promoted items while consumers are in shopping mode. Retailers should also create and drive utilization of mobile shopping tools that recognize which aisle the shopper is in, and target promotions to him/her when it will be most welcome.

How retailers can pull ahead

The most compelling opportunity for targeted promotions, of course, is when consumers are shopping online, where shopping histories, basket contents, and promotional availability can be married to create wins for brands, retailers and consumers, but deep penetration of e-commerce purchases in the grocery space is still 5 to 10 years away in the US.

While the efficacy of many loyalty programs to date might be disappointing, we are just now entering an era where they can be successful, given the proper focus by retailers and brands. California’s privacy law should compel retailers to double down on loyalty programs, rather than to run for cover.

On June 28th, Amazon announced its intent to acquire Boston-based pharmacy, PillPack, for a reported $1 billion. PillPack has built an interesting business catering to consumers with multiple prescriptions, packaging each day’s pills into little packets. But in the process of doing so, they had gone through the legal and regulatory hoops necessary to ship prescription drugs to residents of all US states.

They had developed supply relationships with many of the big pharmaceutical manufacturers. And they had begun to develop relationships with the pharmacy benefit managers (PBMs) that administer drug benefit plans for insurance companies. These were obstacles that Amazon competitors had assumed would slow Amazon’s efforts to disrupt the consumer prescription drug market.

There seems little doubt that Amazon’s plans for PillPack will extend well beyond the niche that PillPack had initially envisioned. Amazon will undoubtedly focus first on removing friction from the process of filling and refilling recurring prescriptions, and secondly on offering lower prices to consumers. 

Prior to the announcement of Amazon’s intent to acquire PillPack, CVS had announced a plan to deliver prescriptions through the US mail for a $4.99 fee, in a clear effort to thwart Amazon’s as yet unidentified move into the prescription drug market. Prior to this, drugstore chains had been compelled by competitive threats to put drive-through windows in their pharmacies to remove friction from the process of picking up prescriptions.

All of this conspires to dramatically cut the number of trips into the drugstore where consumers pick up over-the-counter medications, beauty supplies, greeting cards, candy, and grocery staples. Increasingly, it seems that the drugstore as we know it is beginning to fade away. It seems that the basis for competition amongst drugstores will come down to who can deliver the most pain-free experience. Instead of adding margin selling Mother’s Day cards, seasonal candy, and shampoo, brick and mortar retailers will use their stores to deliver accessible medical services. CVS acquired a pharmacy benefits manager [Caremark], stopped selling cigarettes, and acquired Aetna, and has carried its medical services well beyond flu shots. Selling greeting cards is suddenly much less important.

As this transformation takes place, brands that have historically been reliant upon the drug channel and the store traffic driven by prescription drug activity need to be thinking about how they are going to compensate for the loss of trips and sales from the drug channel. This will elevate the importance of other channels [grocery and mass especially], and will compel brands and retailers to crack the online convenience model that has, thus far, been elusive given the high costs of last-mile delivery.

Will Amazon succeed in the prescription drug space? For Amazon, with its focus on market share before margin, the answer is certainly yes. Competitors CVS and Walgreens will be pressured to lower prices and invest in consumer convenience to keep up with the disruptive options that Amazon will offer. That doesn’t mean that they will lose, though. It only means that CVS and Walgreens will have to accelerate to push into healthcare services, leveraging their stores and associates, and continuing to transform their businesses. Fast. No big deal.

About Ken

Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data.

Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.