Retail marketing strategy: Using loyalty to compete with DTC brands

That narrative is shifting. Customer acquisition costs keep climbing. VC funding contracted in 2022–2024 before rebounding in 2025. Profitability remains elusive for many DTC players.

Meanwhile, retailers investing in loyalty program infrastructure are quietly achieving something worth paying attention to: DTC-level customer data capture at scale, across both physical and digital channels. The competitive gap is closing, and loyalty programs are the mechanism making it happen.

The question is how to turn that mechanism into a real differentiator.

DTC brands do certain things well. eMarketer data shows that 55% of US customers feel more connected to brands when shopping on their own websites, and nearly 60% shop directly with brands for exclusive benefits. That direct relationship creates a data flywheel. Deeper engagement generates more precise first-party data, which powers more targeted offers, which drives deeper engagement.

That flywheel is powerful, but increasingly expensive to spin up. Apple's App Tracking Transparency made targeted digital advertising significantly more expensive, competition intensified as established brands adopted DTC tactics, and the cheap capital that subsidized growth-over-unit-economics strategies disappeared. DTC brands are pivoting toward loyalty and retention as acquisition costs show no signs of declining.

DTC structural advantages like first-party data, direct relationships, and personalization remain real and durable. But the model's commercial vulnerabilities are creating an opening, and loyalty programs built on first-party data are the most direct way through it.

Mature loyalty programs are now achieving near-universal transaction capture, functionally equivalent to what DTC brands get through their owned checkout, at massive member scale across physical and digital channels.

Ulta Beauty reports in SEC filings that more than 95% of total sales come from its now 46.7 million active Ultamate Rewards members. At its October 2024 Investor Day, then-CEO Dave Kimbell described expanding the addressable loyalty universe from roughly 70 million to 140 million "beauty enthusiasts," executed through loyalty rather than channel.

Kroger Plus links more than 95% of customer transactions to a loyalty card across roughly 63 million members, according to a May 2025 Consumer Reports investigation. Kroger's precision marketing division has become a key alternative profit driver.

Abercrombie & Fitch achieves 70% to 80% penetration. As a named executive explained at NRF: "We're transacting directly with the customer, and we've got a loyalty program that has a very high penetration, 70% to 80% of our customers are members... Layer on top of all that, the fact that our business is almost 50% digital. When you have a business that's that heavily penetrating digital, you get to learn a lot more about the customer journey."

These programs are becoming core retail infrastructure. They give traditional retailers data capabilities that rival, or exceed, what DTC brands built natively.

Bain's research quantifies the urgency: insurgent brands (the category that includes DTC challengers) are capturing a growing share of incremental category growth year over year, despite representing less than 2% of market share. Loyalty as a competitive strategy is no longer optional.

The financial logic supports this. Bain research shows that increasing retention by as little as 5% can boost profits by 25% to 95%. And HBR/Bain data found that 63% of US customers say they make buying decisions based on loyalty programs they participate in.

Too many retail marketing strategies treat loyalty programs as points programs sitting in a silo, disconnected from the rest of the promotional ecosystem. The retailers winning against DTC are building loyalty programs into the fabric of their entire customer experience.

Target restructured its loyalty program in early 2024 with changes launching in April. Chief Guest Experience Officer Cara Sylvester told CX Dive that free Circle members spend 3x more than non-members, Circle Card holders spend roughly 6x more, and Circle 360 paid members spend 8x more and shop 6x more frequently. Target's goal is to triple its paid Circle 360 membership within 3 years, as part of a $15 billion sales growth target by 2030.

Walmart+ has reached 28.4 million members as of January 2026, an all-time high. Walmart reported $6.75 billion in membership and other income in FY2026, and the combination of advertising income and membership fees represented nearly a third of Walmart's operating income in Q4.

These examples show loyalty programs operating as revenue engines, not cost centers.

Several major brands have tested the theory that going DTC-only delivers stronger customer relationships. The results tell a different story. Cutting wholesale partners to consolidate around direct channels can produce impressive loyalty enrollment numbers, but it often can't offset the revenue and reach lost from abandoning established retail distribution.

The brands now course-correcting are landing on a more sustainable approach: Connected loyalty. Rather than requiring customers to shop through a single owned channel, connected loyalty programs let members earn and redeem rewards wherever they purchase, including through wholesale and retail partners. The brand retains the loyalty relationship and the first-party data. The customer gets a consistent experience regardless of where the transaction happens.

For traditional retailers competing with DTC, the lesson is clear: The loyalty relationship matters more than the channel. Own the data, and the transaction can happen anywhere.

The average customer belongs to 19 programs but actively engages in only 9, according to Bond Brand Loyalty research cited by BCG. Loyalty programs have moved from a nice-to-have to a strategic lever, but with engagement lagging enrollment by that margin, generic earn-and-burn designs aren't delivering on the promise. The opportunity gets specific in 3 areas.

Customers increasingly expect more tailored loyalty value than one-size-fits-all programs provide. Talon.One's Loyalty Playbook reports that only 25% of programs offer personalized experiences based on purchase history, which helps explain why so many retail programs still feel interchangeable. Closing that gap requires a loyalty platform that can support more flexible reward mechanics and make personalized loyalty easier to operationalize.

Gamification works when it connects to genuine behavior change rather than functioning as a novelty. Talon.One's promotion gamification research cites a 47% rise in engagement and a 22% rise in brand loyalty from gamification. The case is clear for interactive mechanics that shape progression, encourage deeper participation, and extend value beyond purchase behavior.

The 2025 EY Loyalty Market Study reports that 30% of loyalty enrollments occur at store checkout (slightly down from 32% in 2024), while mobile apps account for 31%. Checkout is where loyalty programs either influence a purchase decision or get ignored entirely.

3 ways loyalty programs become more visible during the shopping journey:

Surfacing loyalty value throughout the shopping journey, not only at the payment stage, is one of the clearest ways retailers can compete with the smooth, data-rich DTC experience.

DTC brands' reliance on third-party data has collapsed faster than most marketing teams realize, and that shift gives retailers with loyalty-based first-party data a structural edge.

A Klaviyo-sponsored Digiday survey tracking DTC brands and agencies found that in fall 2023, 84% of respondents said third-party data plays an outsized role in their marketing outcomes. By spring 2025, only 4% said the same. That's an 80-percentage-point collapse in roughly 18 months. And 92% of respondents predicted first-party data would play the most significant role in campaign outcomes going forward.

The forces extend beyond Google's cookie deprecation. DTC brands built their personalization engines around data targeting that has become less reliable and less durable, and the first-party data advantage that traditional retailers are building through loyalty programs has never been more valuable.

Traditional retailers with physical stores and loyalty programs also have a structural data advantage over DTC in one critical respect: cross-channel behavioral data. Retail media revenue rose 23.0% year over year to $53.7 billion in 2024. The IAB/PwC report attributes the growth to first-party data ecosystems and closed-loop reporting. Retailers like Walmart, Target, and Kroger are activating loyalty and purchase data to reach high-intent shoppers across both onsite and offsite channels.

The retailers winning against DTC brands share something in common: They've stopped treating loyalty programs as standalone programs and started treating them as infrastructure. Kroger has described its precision marketing business as a key contributor to its alternative profit strategy and an important driver of digital profitability.

Dick's Sporting Goods turned its loyalty audience into a media network that generates 18 billion annual impressions. Target's membership revenue more than doubled year over year, while Roundel posted double-digit advertising growth. These are business model metrics, not loyalty program metrics.

Getting there requires solving an operational problem that McKinsey has highlighted: integrating personalization and omnichannel engagement so retailers can tailor offers precisely enough to prioritize retention for frequent shoppers showing signs of defection.

The Talon.One-sponsored HBR Analytic Services Report (2025) found that 60% of respondents plan to increase the integration of promotions and loyalty program strategies over the next 12 months. When those two functions operate as a unified system, the strategic value becomes much easier to realize.

The retailers achieving 95% transaction linkage through loyalty programs aren't working with some secret formula. They've made a deliberate investment to own the customer relationship through data, across every channel. Five moves that translate the data in this article into operational changes:

1. Prioritize more flexible reward design. Customers increasingly demand more personalized loyalty experiences rather than rigid one-size-fits-all structures. The 25% personalization stat from Talon.One's data shows how much room the industry has to improve.

2. Make loyalty visible in the cart, not at checkout. If points, member pricing, and rewards only appear at the payment stage, you're missing the chance to influence the purchase decision when it matters.

3. Shift from calendar-based promotions to behavior-based offers. Retailers are increasingly exploring individualized offers as an alternative to broad discounting, with personalization often associated with better customer engagement and stronger economics.

4. Treat your loyalty data as a business asset, not a marketing tool. The Kroger, Dick's, and Walmart examples show that first-party loyalty data can power retail media networks, precision marketing divisions, and membership revenue streams that fundamentally change business economics.

5. Build for connected loyalty, not channel dependency. A connected loyalty model lets a brand maintain a unified customer relationship across partner channels it doesn't fully control. The transaction can happen anywhere. The loyalty relationship stays with you.

The DTC advantages of direct customer relationships and first-party data aren't going away. But retailers building loyalty as infrastructure are proving those advantages don't have to be exclusive to brands that sell direct. What remains is whether your loyalty program is built to capitalize on it.