By Stoytcho Vlaykov, Managing Director of Cashwave
Inflation has come to be a daily discussion topic in every corner of the world. Rapidly rising prices for food, gasoline, electricity, housing and almost everything else the average person deals with on a daily basis are making headlines. In May, inflation measured by the Consumer price index (CPI) in the USA climbed to its highest level since 1981, rising 8.6% from a year earlier.
This is a major shock to an entire generation of mostly younger consumers who have never experienced an inflationary environment. Bloomberg Economics estimates that the average US household will have to spend an extra $5,200 this year, or about $433 a month, for the same consumption basket. As someone who lived through a period of hyperinflation in Eastern Europe in my 20s, I have painful and vivid memories from this time, as the phenomenon badly hit the middle and lower-income parts of the population, including my parents, who lost most of the value of their savings.
But what is the impact of inflation on the rewards and loyalty programs, which offer both physical merchandise and “branded currency” or digital rewards, better known to consumers as gift cards?
Cashwave has been offering digital gift cards in Turkey since 2020 and had a front-row seat witnessing the effects of recent run-away inflation on the behaviour of participants in employee reward programs. During the sudden depreciation of the Turkish Lira in late 2021, redemption volume into gift cards spiked by 200-300% literally overnight. Employees seemingly treated their rewards points much like currency – rushing to redeem gift cards to buy merchandise before prices in retail stores fully adjusted to the massive currency devaluation. We also noticed that the lion’s share of redemptions in that period was for gift cards from a large supermarket. Clearly, program participants were making rational choices to optimize the value of their reward points – just as they would do with real money.
Employee rewards and recognition program providers aim to maximize value for employees at an optimal cost to the employer, and inflation introduces some real challenges to designing solutions that continue to provide the desired reward and incentivization benefits to ultimate beneficiaries during a period of great uncertainty. An inflation rate of 7-8% simply forces programs to make difficult choices to balance the interests of their clients (employers), program beneficiaries (employees) and the program operator’s own commercial interests (margins).
Finding better ways to deliver value to employees during times of high inflation is very much top of mind at Cashwave. We know from experience that employees, worried about the rising cost of living, will become more tactical in extracting the most value from any rewards points they receive. This can lead to increased redemption levels as participants aim to take advantage of any additional value their employer provides, as well as shorter redemption times. Digital gift cards tend to be the fastest redemption option. We believe redemption speed and efficiency were the main factors behind the jump in digital gift card order volumes we witnessed by Cashwave’s clients in their Turkey user base late last year.
Similarly, the “spend” will get skewed towards “utility” type of rewards instead of “discretionary” or “luxury” category spending.
Employees are expected to show much more interest in food/groceries retail brands and fuel/petrol cards, as price increases in those verticals have been especially painful. Of course, gift card discounts in those categories tend to be much lower or even zero. Consequently, programs focusing on the revenue from digital gift card margins are well-advised to monitor the redemption share going to groceries and fuel/petrol cards, as this will likely depress the overall margin on the gift card category. Such programs must discuss those dynamics proactively with their corporate client base in light of the cost-of-living crisis for the average employee and find areas for adjustments in their commercial arrangements which are mutually agreeable, while at the same time, do not limit the choice of employees to convert their rewards in gift cards of supermarkets, grocery stores or petrol retailers. After all, the impact of reward programs to incentivize and reward beneficiaries has the potential to be stronger than ever in this environment, and corporate clients, providers and brands need to work together to adjust in a way that allows each piece of the puzzle to benefit from suitably tailored solutions.
In the area of physical merchandise, Cashwave’s dialogue with industry experts points to significant price pressures in the supply chain of popular reward merchandise items such as electronics, as well as logistics and fulfillment costs (linked to rising transportation costs). CNBC recently reported that prices for consumer electronics remain on an upward trajectory, driven by a 10-15% increase in semiconductor prices, quoting a Forrester Research Analyst. Program participants are widely expected to trade down to lower-priced merchandise items that can be redeemed in the short term rather than big-ticket discretionary items like TVs, laptops and high-end accessories. A review of the merchandise reward selection and introduction of products with more attractive price points might be in order.
In summary, inflation seeps into the reward programs ecosystem irrespective of the reward type/format, either by direct cost increases or via changes in the purchasing patterns of the end-users which affect margins for the programs. This calls for frequent reviews and analysis of the redemption patterns within clients and suppliers in order to maximize the value of the total reward package to employees while managing cost increases to both program operators and their corporate client base.
Finally, it’s worth remembering that in times of high inflation a salary which maintains purchasing power is key for companies to retain and motivate their workforce; reward programs should provide an additional element for personalized recognition rather than act as a substitute for providing compensation that allows employees to maintain a reasonable standard of living.
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