It’s time for the retail industry to wake up, open its wallet and ditch those loyalty cards. A little too strong? OK, then how about committing to some major out-of-the-box thinking on how to make these programs actually work — because it certainly is not happening now.

For decades, loyalty cards have been pushed by the retail intelligentsia as the ticket to sophistication. There is the basic idea of tethering shoppers to one’s store by offering them exclusive discounts with the store-branded card. Beyond that, the pitch is all about data: Know your customer and you’ll have an edge on the competition when it comes to selling more stuff at your stores.

This kind of argument is highly seductive. How could it not be useful to know your shopper’s age, her family income, her household and whether she cooks dinners at home? If she is buying baby food, offer her some coupons on diapers. If she buys TV dinners, how about some deals on DVDs and ice cream?

Certainly this approach seems smart, and some very smart retailers have been knee-deep in the loyalty card scene for years. But as the economy has slowed and competition has increased, we would expect to see these cutting-edge retailers with leading performance, right?

Wrong. All the evidence points to a simple fact: Retailers with loyalty card programs have failed to outperform the market as a whole, and many are underperforming.

Consider that none of the three largest drug chains are outperforming the overall industry in sales growth. TABS Group research found, for example, that one of the chains saw a dramatic drop in reported shopper occasions in key health and beauty care categories concurrent with the implementation of its loyalty card rewards.

Safeway — one of the early adopters of loyalty cards — has underperformed the market for some time and, likely as a consequence of this weak performance, has decided to sell out to private equity giant Cerberus. In the United Kingdom, the originator of mass retail loyalty cards, Tesco, is now facing a shareholder revolt, according to local media. Upon rival grocer Morrisons’ vowing to invest 1 billion pounds into price cuts, Tesco responded that it would invest 200 million pounds into price cuts, as well as a similar amount in its ClubCard promotions. This has been pooh-poohed as inadequate by several of the company’s biggest shareholders.

Indeed, London investors have caught on to something Tesco hasn’t: Shoppers are like heat-seeking missiles when it comes to price, and any store — not just your store — is a target. Recently Tesco’s market share sank to its lowest levels in a decade, just as deep-discount rivals Aldi and Lidl posted whopping sales increases of 33% and 17%, respectively, according to Kantar Worldpanel. And we don’t need to mention the bankruptcy of Tesco’s U.S. operation, Fresh & Easy, that also relied heavily on loyalty cards. The fact that Tesco spends something approaching 500 million pounds a year on this program is looking increasingly like good money after bad.

These bad news stories fail to address the elephant in the room: Kroger. On the face of it, Kroger would appear to obliterate any argument on the absence of efficacy for loyalty cards. After all, the nation’s largest grocer celebrated its 40th consecutive quarter of identical-store sales growth. Sales were up 5%, on a weekly adjusted basis, and 4% on an identical-store basis.

Curiously, executives had little to say about the loyalty card program Kroger operates with dunnhumby, the U.K.-based customer research firm it owns in a partnership with Tesco PLC (as discussed above). Indeed, Kroger execs mentioned dunnhumby only twice in their latest conference call, with little substance attached to the comments. Of course, this could be taken as evidence that they are reluctant to divulge the ingredients of their secret sauce. After all, they’ve been developing this increasingly monstrous database for two decades now.

More likely is that these mountains of information that Kroger and Tesco are gathering are less useful than the companies are letting on. Looking at the Kroger 2012 10-K, we see that Kroger claims to have gained share in 10 markets and lost share in nine. So its loyalty program only makes its customers more loyal in slightly better than 50% of its markets? Despite the theoretical potential of loyalty card marketing to optimize a localized marketing approach, random occurrence for an average-performing retailer would have yielded the same results.

So why aren’t these various “loyalty” card schemes working? One of the reasons can be identified in TABS Group research that shows users of loyalty card programs to be among the least loyal of a particular outlet’s shoppers.

These people are deal seekers that employ frequent shopper cards as one of many tools to secure the best deal. Our research shows that they actually prefer a more direct approach to getting these deals: a straight price reduction, a Sunday circular or a value pack offer. Any notion of developing more sophisticated “relationships” with these shoppers fails to acknowledge their predominant need of getting better deals on the products that they like. It also fails to recognize that 70% to 90% of their shoppers’ purchases are taking place in other outlets, where their needs cannot be measured.

Despite the lack of results and a lack of recognition of the core needs of these frequent card users, retailers seem to be doubling down on these already expensive investments in “loyalty” card programs. Sears is loudly proclaiming its new “Shop Your Way” program as the future of retailing. Whole Foods, facing slowing growth, is now toying with a loyalty card that gives 10% off on its private label goods. And Safeway continues to push loyalty cards with a vengeance.

“There’s going to come a point where our shelf pricing is pretty irrelevant because we can be so personalized in what we offer people,” Safeway chief executive officer Steve Burd said last year, conjuring images of shoppers standing at checkout with each of them paying a different price per pound for their chicken cutlets. While that might sound state-of-the-art to some industry experts, it sounds irritating and unfair to a lot of shoppers.

Furthermore, let’s say you do truly uncover an insight about an important shopper target through your data analytics. How do you target them? E-mail or mail them a coupon? More deals! What other way is there? You can mail them literature, meal ideas and such, but that ends up in the trash. Of course there is store clustering — offering different assortments for different stores. But that is extremely expensive and difficult to operate, based on the logistics structure of major chains. The results on clustering are equally as elusive as those for loyalty cards.

The last argument against the current approach to loyalty card marketing is the data privacy issues. The risk of data breach is being driven home by the Target disaster, which has spurred a flurry of negative media coverage on the shopper privacy issue. Even if you still cling to the belief that loyalty cards are a path to profitability, one data-hacking misstep can wipe out a decade’s worth of incremental profits.

At this point it might be interesting to ask: What’s the best-performing mass market chain in America? A good candidate would be Publix. This month the company reported that fourth quarter sales rose 5%, and 4% on a same-store basis, just like Kroger. One more statistical coincidence is that both companies had the exact same profit, $422 million. What’s the difference between the two? Publix delivered that profitability with only one-third of the sales and no loyalty card program. Instead, Publix was vocal about providing strong customer service and offering discounts — both everyday and promotional — to anybody who enters the store.

Last summer Albertsons went crazy, bucking the trend by dropping loyalty cards entirely. Turns out you just need to know the neighborhood, not each and every customer, according to Albertsons execs. Shaw’s, for example, pushed “card-free savings” on its website as it announced the switch. “The card isn’t so special anymore. Everyone has one,” Shaw’s noted. “So we want to take the special step of not requiring one ­anymore.”

Though Albertsons’ results have not been particularly good over the last few years, they certainly have not gotten any worse since this retailer ditched its loyalty card programs.

Realistically, we know retailers and manufacturers won’t all ditch their loyalty programs en masse. However, there can be a significant about-face in how they are used.

First, stop offering basic deals exclusively to these shoppers; offer them to all shoppers. The marginal shoppers that don’t use the cards are perhaps a bigger source of incremental volume.

Second, use the cards to layer on even more savings to basic deals. Acknowledge that these loyalty card shoppers will be less profitable per transaction, but the good news is that they are very heavy buyers of everything. You can make it up on volume.

Third, eliminate the current contortions in the shopper offers such as “good on next purchase,” “when you buy three” or “when you spend $50.” Simplicity in the shopping experience is not only cheaper to execute but it is also more impactful to your customers. Isn’t that what we mean by shopper-centric?

KURT JETTA is the founder and chief executive officer of TABS Group Inc. He can be contacted at ­[email protected].