No Stupid Questions

They can gather a lot of information about you that way. Information is $$$

Because if you have a Kroger's card you're going to want to shop there more often to get the free stuff. You're not paranoid, it is a psychological tactic to get you to spend more money. Casinos do similar things.

They get even more detailed information about your buying and spending habits. They can use this information to better manage their stock and sales to maximize profit, and probably more importantly, they can sell your contact information and buying habits to other companies who are in the very lucrative business of aggregating consumer data and monetizing it.

There are lots of reasons. Some off of the top of my head:

1. People are more likely to shop there because they get "deals".
2. People feel better about shopping there because they get "deals".
3. More and better data for the business. (Associated with individuals over time rather than "anonymous" purchases, the also get extra info like a phone number that they can cross-reference)
4. If you carry the card or app you will see it frequently and think about the store (free advertising).
5. Often times you agree to some sort of marketing communication when you sign up.
6. You usually get "points" which you need to come back again to use.

The answer is nearly going to always be ‘your data’ and loyalty

First, more business. (If you get "rewards" like discounts or whatever, you're psychologically more likely to return more often. Or at least some customers are and it's not like they can really offer rewards only to the ones who are more likely to return.)

Second, and probably more significantly, data about you that they can use to do targeted advertising at you or sell to others (for a profit) who want to do targeted advertising to you.

If the rewards program involves a phone app or web app, that can get access to a lot of information on your phone or information about your browsing habits. And that can also be directly used or sold to someone else who wants data on you.

You're definitely justified in being paranoid. It's very much the kind of thing where if you stop buying Oreos regularly, Facebook will start sending you Oreo advertisements. (Oreos are just an example. It could be any company/brand that they advertise to you this way. But you know what I mean.)

There's a reason they are called, internally in business parlance, "Loyalty Programs."

The point is to get you to come back. Using the Kroger card at Kroger gets you discounts. Or rather, gets you their regular price; their non-card prices are artificially inflated in most cases. So consumers form the idea in their heads that those discounts have value and will return to that store to take advantage of them. This is played up by the retailer in their marketing, who will use terminology to try to make you feel special about the program. (As if it's not offered to absolutely everyone who will listen, and also everyone who won't.) Look for words and terms like "exclusive," "VIP," or "members only," or "just for you."

The buy-stuff-to-get-rewards schemes are the worst, because they prey on the inbuilt sunk cost fallacy neurons in people's brains. You are statistically likely to buy and spend more if you think you're going to get something back, or spend a little more than you otherwise would have to meet whatever threshold they set to get the next reward. Even if the reward you get back does not actually match in value to the extra amount(s) you spent. (Hint: It never does. The house always wins.)

Nowadays, of course, they also track and record your purchase history and sell it to whoever will pay. Possibly anonymized in some way, but probably not.

used to be it would make you a happier customer that was more likely to patronize them over a competitor. Nowadays though its all about harvesting your information which is why they really have a hard on for you using their app usually.

Free stuff gets you in the door where you'll be likely to spend money on other stuff.

Building 'points' or whatever to get free stuff gives you an incentive to buy things from Kroger you might get elsewhere. Ton of benefits to 'gamification' of damn near anything.

And giving free stuff creates a positive experience attributed to Kroger so you'll be more likely to think positively about Kroger in the future.

Plus all that if they have your email\address they can send you more coupons or whatever to get you back in the door. And a more sophisticated system may track your spending to more effectively influence you through the first three mechanisms. But those are pretty classic 'customer loyalty' ideas from before big data was even a thing.

I've worked at Safeway for a few years and one night my friend who counts the tills showed me what type of info they collect.

I scanned my own safeway card into the system and holy shit they have data on everything I've ever purchased using that card.

This is from a talk the CEO of the self-proclaimed first Canadian company to offer its own points based rewards card, not just AirMiles(which was presumably making money on the same thing, selling metrics.) it was a long time ago, so forgive the inexact quoting.

The purpose of the rewards card is metrics. With it, we know which customer is buying what, at what time, with what payment. This allows us to better target both sales as well as tailor entire stores to their respective customer bases.

Check out the Target story from years ago where a dad went mental that they sent vouchers for baby stuff to his pre 16 yo daughter.

Turns out they knew she was pregnant before the family.

Point being. Data is scary powerful at scale. Tesco in the UK is holding us hostage to get a card as literally half the items are cheaper with one. My friend group all use the same one though to pollute the data.

To get you to shop there more

Protip: use the Jenny phone number for any loyalty programs you don’t want to sign up for. I use 512-867-5309 as the alt ID and it works every time.

I can kind of answer this question. For a year, I worked at a big box store where you can "save big money". They had periodic training and one of the modules was on their store card.
The question was, "Why do we want people to have our card?"
I replied, "Because we don't have to pay the standard processing fees."
"No, it's because of loyalty. If they have a [big box store] card, then they're much more likely to spend their money here instead of [competitor]."

Here, let Bill Burr tell you

They're trying to capture the consumer surplus. Normally, a seller can have either high margins and low volume, or low margins and high volume. The retailers wet dream is to get the benefits of both. If the reward program profiles you as someone who buys coffee at $4.00, but not at $6.00, you'll get coupons for coffee that the people who buy coffee every week regardless of price won't get.

FWIW, I've found stores that don't even have rewards cards frequently have lower prices than their competitors' reward card sale prices.

The Walgreen's near me sometimes lists prices in points. Companies use these rewards programs to muddy the waters of who has the best deal. They want you to buy their produce even if they're more expensive because you've already bought into their rewards program. Its easy to say, Bob and Jim are selling the same product but Bob is $5 cheaper. But if Jim has a rewards program where you get compounding discounts over time as you buy more from them, it becomes real hard to do the math about who is really cheaper in the long run. It should be absolutely illegal or at least heavily regulated because its not only anti consumer, but undermines the free market by allowing companies to "lock down" customers with long term savings that can change over time. A free market makes it easy for consumers to make choices, not harder.

I guess if they have a closer relationship to you as a customer you're more likely to buy more of their products in the future.

There’s never as much free stuff as they make it seem, plus usually it means the regular price is higher than elsewhere. If a store is picky with their card, I take the hint and go elsewhere.

Although realistically, my ex also thinks she benefits from those, so I usually pollute her data. She doesn’t mind plus she gets the benefits quicker, whereas I like that the data is not directly connected to me

Edit: yeah, I do use credit card though