These 2 Companies Reap Rewards From Underpinning Retailer Loyalty Programs

If you've paid any attention to companies in the retail space in recent years, whether they're selling leggings, lattes, or living room furniture, you'll have heard analysts talk about their loyalty programs. A good rewards program is now vital for those businesses that want to grow. Which leads to an interesting question from a MarketFoolery listener: Are there any publicly traded companies that help those retailers manage their rewards programs?

In other words, can we invest in the trend? Yes, we can, says senior analyst Emily Flippen -- Shopify and the Brazil-based StoneCo -- and in this segment of the  podcast, she discusses with host Chris Hill how those two are riding the loyalty tide and how other companies are capitalizing on it, too.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 29, 2019.

Chris Hill: A question from Mike Patrick, who writes, "Whenever the topic of retailers comes up, someone mentions their rewards program. Is there a publicly traded company that helps these retailers manage their rewards programs? I've often wondered about this, but I don't have any idea where to start the research." Well, you came to the right place, Mike. What about this? He's right. Last week on Motley Fool Money, we were talking about retailers and restaurant companies. Frequently, the rewards program comes up.

Emily Flippen: Their rewards program is vital, actually, for the performance of a lot of great companies. As such, many companies manage it their own. There are smaller, non-publicly traded companies that may help with rewards programs. But there are actually two big publicly traded companies that are really doing well in the business of helping companies manage their rewards programs. The first one is probably a company everybody knows, but doesn't realize that they work in this space, and that's Shopify. Shopify, while obviously helping small businesses with their e-commerce presence, their payments solutions, they actually have robust loyalty program management as well. A lot of these small businesses -- if you're going online and buying something directly from a producer of the product, and you get a loyalty email from them, or sign up for some sort of program, that is more than likely managed by Shopify. And it's been one of the more lucrative aspects of their business.

Also, another company, and my personal favorite, though it doesn't get much love around here, is actually a company called StoneCo, ticker STNE. It's a Brazilian payment processor. They actually acquired a company called Collact and they have an innovative way of managing rewards programs. What they do is they actually track credit cards. When you go into one of their retail outlets and you pay with a credit card on a StoneCo machine, it gets your name, it gets your information, and then it tracks how often you go there. Let's say that you go to a coffee store on your way to work three times a week. They'll track that. You paid with the same card, you buy the same coffee, and then one week you say, "I'm not feeling coffee," you keep skipping, well, what they'll do is, they'll send you an email and say, "Hey, 10% off your next purchase!" to reincentivize you to start going back to that probably bad habit of getting coffee three times a week.

Hill: Bad habit? What are you talking about? That's the one of the healthiest things you can do.

Flippen: That's what I tell myself, too, although if you see how much sugar and milk I put in my coffee, you'd probably be saying the opposite.

Hill: Fair.

Flippen: But the point being, there are lots of companies that are operating in the space. I do think StoneCo and Shopify are two of my favorites. And they're kind of under the radar when you look at their loyalty program support systems.

Hill: Mike gets at something, we've talked about this with restaurants before, where it seems like restaurants are now at the point where, if you're thinking about investing in a restaurant, one of the questions on your checklist should be, what is their delivery strategy? Do they have one? What is it? How well is it working? Etc. I think Mike's question gets at something, a cousin of that. If you're investing in a retailer, what is their rewards program? We were talking before we started recording. Speaking of coffee, as a longtime Starbucks shareholder, in general, I'm obviously thrilled with how the business has been run for the last 20 years. But for a good stretch of time, and we talked a little bit about this on Motley Fool Money the other day, their rewards program was bizarrely, to me, a massive underperformer, when you consider how big the company is, how successful they've been, it is one of those habit-forming sayings. So, the fact that they were trailing so many different retailers and businesses in terms of the number of people in the rewards program said to me, they're doing this wrong. It seems like under Kevin Johnson, they're starting to get that right.

Flippen: It's important to remember that not all awards programs or loyalty programs were made the same. While it's true that Starbucks didn't make a concerted effort to improve their rewards program, ultimately the quality of the people they have in their program is very different than a lot of the retailers that they were being compared to. Even if you look at DSW, or Lululemon, Victoria's Secret, for instance, all of these companies are loyalty programs that people put just their emails in when they purchase an item. That doesn't necessarily mean that you've made the decision to become an active part of their loyalty community. The vast majority of these people are just getting these emails that are being sent to spam and not engaging with them at all. Starbucks was completely different. When you ordered a drink at Starbucks, they didn't ask you for your phone number or your email address the way they do at other retailers. So, it's unfair to look at Starbucks' loyalty program and compare it in terms of numbers to another company's.

That being said, it was clear they needed to do something to improve the number of people they do have in it, because there's a lot of optionality there. I think over the past couple of quarters, they've shown that they have been making strides in getting members into their program. But it's important to remember that not rewards programs are the same.