Nordstrom’s Nordy Club rewards are so popular its losing the company money

The Seattle-based merchant reported on May 30 a worse-than-expected loss in part because Nordstrom credit card-holders cashed in on more reward perks than the company anticipated. Nordstrom posted a $39 million first-quarter net loss and a 2.25% dip in gross profit to 31.6% in part because of the points-redemption boom. Supply chain theft and increased inventory ahead of the company’s July anniversary sale also contributed to the loss.

But Nordstrom executives were not concerned with the loyalty program issue, with CFO Cathy Smith saying the timing of the loyalty engagement will eventually even out with “deferred revenue that will drive sales and profit in future periods.” Per the company’s earnings, purchases made by loyal customers were nearly 70% of the company’s total sales.

“Strength in our loyalty or Nordy Club sales is a good thing. It just will be a little bit of a reserve this quarter, but we’ll see that strength continue to come back,” Smith said. “So that’s a positive, kind of in disguise. It will impact us this quarter, but it will come back [in] the remainder of the year.”

Nordstrom did not disclose to Fortune how many members Nordy Club has, but the program has been an important part of the company’s ethos of strong customer service and a key engagement tool. Launched in 2018, Nordy Club was a way for customers to earn points which convert to Notes to redeem for discounts. Before the launch of the program, Nordstrom had more than 10 million active members of its previous rewards model who spent four times more than non-members. Last August, Nordstrom reported 90% of its top-tier Nordy Club members shopped at its anniversary sale.

‘It’s probably going to wash out’

But beyond Nordstrom expecting loyalty program losses to self-correct by next quarter, the Nordy Club itself is unlikely to be the defining factor in the retailer’s financial health for better or worse, Caryn Pang, professor of marketing at the Hult International Business school, tells Fortune. When customers shop—though they may acquire and cash in points— they’re already purchasing more than the point rewards are worth, Pang says. Moreover, Nordy Club’s currency of points and notes expire after a year, with many customers simply forgetting they exist.

“It’s probably going to wash out,” Pang says.

The impact of loyalty programs more broadly has weakened in the clothing retail industry, she argued. Brand loyalty decreased 14% last year, according to SAP Emarsys’s Customer Loyalty Index, with 59% of consumers saying they’d switch over to products if they were cheaper, and 18% saying being loyal is something they can’t afford to do. 

Indeed, numerous retailers, including Nordy Club, have overhauled or relaunched their loyalty programs to incorporate greater perks, like holiday gifts and even more points, to reverse this trend. JCPenney launched a loyalty program in April, announcing $500 million in incentives to rival its competitor Kohl’s Cash. But rather than being an enticing factor for shoppers, these loyalty programs are instead being canceled out by competitors that have essentially introduced the same programs.

“Everybody has an incentive program now, and the incentive programs seem to be very similar,” Pang said. “The market is diluted, and there’s no differentiating factor in the market.”

‘If the incentive was gone, you would switch’

There is still a way for loyalty programs to be an effective tool in customer engagement and retention, Subramanian “Bala” Balachander, professor of marketing at the University of California at Riverside School of Business Administration, tells Fortune. While loyalty programs can generate behavioral loyalty, consumers will continue to purchase items from the retailer of which they are a member out of convenience—they don’t generate deeper emotional connections to a brand, he says.

“People are just being motivated to accumulate points in order to get free stuff which impacts profit, rather than being willing to pay the price because they really value the brand or the merchandise,” he says. 

Loyalty programs are therefore in precarious spots, Balachandar says. Should a consumer’s circumstances change and it’s no longer practical to shop at a store, their loyalty program is essentially useless.

“If the incentive was gone, you would switch,” he says.

In recent years, some retailers including streetwear apparel darling Kith and tween fashion chain Claire’s have worked to combat this effect. They’ve pivoted to loyalty program models with tiers of exclusivity, giving members access to customized products or new items before the general public. Ian Baer, founder of marketing strategy platform Sooth, told Modern Retail this strategy better appeals to consumers’ psyche.

“[Putting] something really uniquely beneficial and memorable in front of a customer builds the sort of emotional bond that a [purely] transactional relationship never can,” he said.