6

CHAPTER 2

THEORETICAL FOUNDATION

2.1. Customer Loyalty

According to The American Heritage® Dictionary of the English Language,

Fourth Edition, Loyalty is best defined as “the state of being loyal” or “a feeling or

attitude of devoted attachment and affection.” In line with Jacoby and Chestnut

(1978, p. 80), loyalty is “The biased behavioral response, expressed over time, by

some decision making unit, with respect to one store out of a set of tares, which is

a function of psychological (decision making and evaluative) processes resulting

from commitment”.

Although many doubts the existence of it in this highly competitive market,

customer loyalty is still up and about; only it has been more difficult in creating

and maintaining it for a couple of reasons (Jill Griffin, p.1). The change of

customer’s expectation due to the extensive use of Internet was the first. Through

internet, customers can now get any information they want at anytime, any when

and any how; without waiting for the company to give. Second reason would be

the technology advancement, which provides “new and innovative ways to nurture

customer relationships. (Jill Griffin, p.1)”

7

2.1.1. Importance of Customer Loyalty

Customer loyalty has become very important for many reasons. Observation

results by Reichheld and Sasser (1990) says that a 5 per cent increase in

customer retention can boost profits anywhere between 25 per cent, to an

astonishing 85 per cent. Based on this founding, companies have started to

see customer retention and loyalty as their responsibility. Customers who are

pleased will remain loyal and talk favorably to others not only about the

product but also about the company (Kotler, Armstrong, Ang, Leong, Tan, &

Hon-Ming, 2009, p. 16).

Customers who are loyal helps reduce marketing cost thus helping company

reach maximum profits (Uncles and Laurent, 1997). Loyalty reduces

customer acquisition cost (Reichheld, 1996). Moreover, not only loyal

customers are commonly less price-sensitive (Reichheld, 1996), they also

generate positive WOM, saving marketing costs on companies (Jones and

Sasser, 1995; Aaker, 1991; Arnold, 1992). Loyalty also helps company to

reduce risks of new product failure (Rundle-Thiele and Mackay, 2001).

Based on research, market share increases as loyalty rate increases while in

the end market share is associated with higher rates of ROI (Buzzell et al.,

1975; Buzzell and Gale, 1987).

Consumers can show loyalty to brands, stores, and companies; some are

completely loyal, others are somewhat loyal while some shows no loyalty

(Kotler, Armstrong, Ang, Leong, Tan, & Hon-Ming, 2009, pp. 171-172).

8

2.1.2. Stages of Customer Loyalty

Oliver (1999) introduces loyalty into four different stages: cognitive,

affective, conative and action. Through his analysis, he would like to imply

that different loyalty aspects appear consecutively over time, not

simultaneously. He argued that consumers can be loyal at each phase relating

to different elements of the attitude development structure, which could be

detected at each stage:

2.1.2.1. Cognitive Loyalty

This first loyalty stage is determined by information of the offering

(price, quality, features, etc.). This stage is considered as the

weakest loyalty stage since it is directed at cost and benefits of an

offering but not the brand itself. Thus, consumer would likely to

switch once they perceive alternative offerings as being superior

with respect to the cost-benefit ratio (Kalyanaram and Little, 1994;

Sivakumar and Raj, 1997).

2.1.2.2. Affective Loyalty

This stage of loyalty relates to a favorable attitude toward a specific

brand or product. Attitude itself is a function of cognition (e.g.

expectation). Once consumer’s expectation is fulfilled, consumer

will get a feeling of satisfaction, which in turn will generate

affective loyalty towards the product and/or brand (Bitner, 1990).

According to Oliver (1997), satisfaction is “consumer’s fulfillment

response, the degree to which the level of fulfillment is pleasant or

unpleasant” (p.28). Evanschitzky and Wunderlich (2006) define

9

satisfaction as “a global affect evaluation or feeling state that can be

predicted from perceived performance as the cognitive component

of the evaluation.” They also conclude that the level of loyalty in

this affective stage can be declining, mostly if consumer finds

competitors provide better, more attractive offerings (Sambandam

and Lord, 1995) and if consumer grows fond of the competitive

brands (Oliver, 1999).

2.1.2.3. Conative Loyalty

Evanschitzky and Wunderlich (2006) explained that in order for

(attitudinal) loyalty to exist, there should be an intention to do an

action (read: repurchase a particular product and/or brand). This

means consumer has a behavioral intention to continue buying in

the future, accompanied by a deep commitment to the product.

Although this stage has a stronger commitment than attitudinal

loyalty, it still contains vulnerability; the fact that consumer may

still consider alternative offerings (Oliver, 1999), especially when

they are faced with repeated delivery failures (Evanschitzky and

Wunderlich 2006).

2.1.2.4. Action Loyalty

This last stage of loyalty should actually represent the final act of

the consumer loyalty: continuous purchase behavior of the

consumer. However, action control studies found that consumer

may have intentions toward a particular brand or product offering,

but they may not transform their intention into action (Kuhl and

10

Beckmann, 1985). Thus, a stream of research concludes that the

preceding loyalty stages only help consumers to be ready to act

(read: to buy) (Evanschitzky and Wunderlich 2006).

Solomon (2007) indicates that purchase decision based on loyalty may

become simplified and even habitual in nature, thus supports the perception

that it could be the result of satisfaction towards the current brand(s).

2.1.3. Attitudinal & Behavioral Customer Loyalty vs. Habitual Buying

Attitudinal loyalty is considered as an instrument that affects behavioral

loyalty (Gómez, Arranz and Cillán, 2006). Its measurement is usually utilized

to understand how stimuli may affect cognitive and affective development in

the mind of consumers that make them become and/or remain loyal in their

action (Noordhoff et al., 2004). Oliver (1980) defined attitude as “a

consumer’s relatively lasting affection towards an object or an experience.”

Since true loyalty is developed from repetitive behavior which is constructed

through consumers’ previous positive attitude, the role of attitude in customer

loyalty is very important (Day, 1969; Jacoby and Chestnut, 1978; Assael,

1987; Solomon, 1996; Huang and Yu, 1999).

From a behavioral standpoint, loyalty is seen as effective consumer behavior

toward a specific product, brand or establishment over time. In this approach,

loyalty is analyzed on the basis of repeat purchase or relative purchase

11

volume patterns for the same brands or establishments (Cunningham, 1961;

Frank, 1967; Dunn and Wrigley, 1984).

From the attitudinal standpoint, the behavioral approach is considered

insufficient to explain how and why true loyalty develops and is maintained

(Jacoby and Kyner, 1973; Jacoby and Chesnut, 1978; Dick and Basu, 1994).

These authors argue that loyalty can only be viewed as an attitude when

positive affects and feelings toward a product, brand or purveyor are

involved.

Schoenbachler, Gordon and Aurand (2004) states that repeat buying behavior

(behavioral aspects) is not a sufficient evidence of brand loyalty and that the

difference between repeat buying behavior and brand loyalty lays in the

psychological processes. Since true brand loyalty requires psychological

commitment and requires attitudinal aspect (Newman and Werbel, 1973),

Light (1997) warns marketers not to confuse repeat behavior with brand loyal

behavior.

They found that the promotional tools such as coupons, rebates, discounts,

bonus packs and gift premiums tend to only reward the behavioral aspect of

loyalty, but the effort did not build loyalty since no effort is being made

touch the psychological commitment of the consumer which actually is the

core of loyalty.

12

Through the preceding analysis, the writer would like to conclude that there

is little evidence for true (read: 100 percent) loyalty to exist in the hearts of

consumers. Many aspects (such as situational factor, consumers’ behavior

and characteristics) play important roles in affecting the level of loyalty of

consumers towards a products and/or brands.

2.2. Fast Moving Consumer Goods Industry

Fast Moving Consumer Goods (FMCG) are products that are invented to help

fulfill consumers’ daily needs in many possible aspects of life. While generally

divided into durable and non-durable products, the category varies from food and

beverages, toiletries, personal care, home and/or personal hygiene,

pharmaceuticals, consumer electronics, kitchen appliances and etc. Some

characteristics of this product are mass produced, has a short product life cycle

with a very high usage rate, quickly sold at a relatively low cost, usually large in

sales quantity thus generating large cumulative profit.

Despite its different categories, world top players in the FMCG industry are

Unilever, Procter & Gamble, Kimberly-Clark, S.C Johnson & Son, Reckitt &

Benckiser, H.J Heinz, Nestlé, Sara Lee, Kraft, Coca Cola, Pepsi, and many more.

Those companies have also stepped their foot in the already-crowded market

Indonesia, while setting gauge for local competition in various categories. Unilever

Indonesia was chosen as the sample unit for many reasons: the company is one of

the noted FMCG corporations around the globe as well as its achievement as

13

Asia’s Leading Company (The Wall Street Journal, 2007) and Asia’s Best-

Performing Company (Business Week, 2007).

2.2.1. Unilever, A Global Company1

Through a merger of William Hesketh Lever’s soap factory (Sunlight, United

Kingdom) and the Van den Bergh’s margarine factory (Blue Band,

Netherlands) in 1930, Unilever established its first step in the industry by

producing products that simply made out of oils and fats: oils, margarines

and soaps. Before, the products have actually been established in the market

since 1890s. These two companies decided to joined force together since they

have similar purpose and mission: “to help make life be more enjoyable and

rewarding for the people who use the products.”

Surviving its seventy-five-years journey, throughout which they have created

products that provide social impact towards the community in many

countries in the world, Unilever has proven its ability to survive many

challenging events in the history: economic boom, great depression, world

wars, consumer lifestyle change, technology advancement, internet and

digital era, not to mention globalization. Unilever believes that its success in

coping with changes in the market demands and economic condition comes

from its highest standards of corporate behavior towards its employees,

consumers, societies and the world in which they live.

1 Taken from Unilever Indonesia’s homepage at http://www.unilever.co.id

14

2.2.2. Unilever in Indonesia2

The company of Unilever was first established in Indonesia on December 5th

1933 as Lever’s Zeepfabrieken N.V, but not until July 22nd 1980 was the

company named PT. Unilever Indonesia, Tbk. In the beginning, the company

produced only soaps, detergents, margarine, dairy-based foods, ice cream,

tea-based beverages and cosmetic products. Over the years of advancement,

Unilever Indonesia added more products such as food ingredients & spices,

snacks, personal care, home appliances, and just recently, fruit-based vitality

drinks.

Successfully set its heritage in Indonesia for seventy-five years, Unilever

Indonesia has been awarded with many prestigious awards; for the company

and its brands. In September 2007, Unilever Indonesia was ranked the first as

the Best Performing Companies in Asia (BusinessWeek Asia, 2007). Just

recently, Unilever Indonesia was also awarded for the third time as The Most

Admired Company 2008 in the toiletries category, based on surveys

conducted by BusinessWeek Indonesia in collaboration with Frontier

Consulting Group (Unilever Indonesia Magazine). Moreover, Unilever

Indonesia was also ranked the second, after Astra International, as The Most

Ideal Company in Indonesia, based on top-of-mind surveys by Warta

Ekonomi magazine on 1,000 respondents in Jakarta and Greater Jakarta.

2 Taken from Unilever Indonesia’s Annual Report 2007

15

Following the step of the company, seventeen (17) brands from Unilever

Indonesia were also awarded as Top Brand 2008, based on a survey

conducted by Marketing magazine collaborating with Frontier Consulting

Group. Being a top brand means that the brand reached at least 10% top

brand index and is the top three in each product category. The winning

brands are:

� Bango soy sauce,

� Blue Band margarine,

� Sariwangi teabag,

� Buavita fruit juice,

� Lifebuoy body soaps,

� Lux body soaps,

� Pond’s facial soaps,

� Citra hand and body

Lotion,

� Rexona deodorant,

� Sunsilk shampoo,

� Clear shampoo,

� Pepsodent toothbrush,

� Pepsodent toothpaste,

� Rinso detergent,

� Molto fabric softener,

� Super Pel floor cleaner,

� Wipol floor cleaner.

Another considerably important award that the company received was on one

of company’s Corporate Social Responsibilities campaigns, which is Jakarta

Green and Clean; a social campaign to help make Jakarta city becomes green

and clean.

2.3. Customer Loyalty in FMCG Industry

In FMCG markets, consumer loyalty is even harder to win and retain. Celebi

(2007) mentioned that “as FMCGs are found at supermarkets, they are purchased

regularly and, therefore, very little thought and efforts are spent on purchasing

them; they can be classified in low-involvement products.” Ndubisi and Moi

16

(2006) defined low-involvement products as “products that are bought frequently,

with a minimum of thought and effort because they are not of vital concern nor

have they any great impact on the consumer’s lifestyle

(www.marketingprofs.com).”

According to Wells et al. (1995), “in the consumer decision-making process,

consumers spend less time, effort, and energy for inexpensive and less exciting

products which are called ‘low-involvement products’ (e.g. soft drinks, cereals,

and washing powders); they spend a lot of time, effort, and energy for more

expensive and personal products which are called ‘high-involvement products’

(e.g. computers, automobiles and medical care).”

Considering the afore-mentioned facts, product and/or brand switching are

inevitable in FMCG industry due to the nature and characteristics of the products.

Binninger (2008) mentioned in his paper journal that “consumer loyalty in the

context of retailing is a complex issue.” Consumer may switch to other brand or

product variant simply because they want to try something new and different or

because they are bored with current products they use (Kotler, Armstrong, Ang,

Leong, Tan, & Hon-Ming, 2009, p. 130). In such case, brand and/or product

switching occurs for the sake of variety rather than because of dissatisfaction

(Kotler, Armstrong, Ang, Leong, Tan, & Hon-Ming, 2009, p. 130).

17

2.4. The Need to be Unique

Today, companies live in an era where rapid technology growth and product

similarity have made the range of options for companies to attract consumers

decreased. In order to survive the competition, most companies have come to

realize that there is a need for a value-adding strategy (Norman and Ramirez,

1994). Many brands, such as Mars, Lux Toilet Soap, etc. have been built and

sustained around consistent and ever-evolving functional and emotional value

propositions, not only focusing on brand-building activities, pushing consumers to

purchase a good/service (King, 1991).

Companies realize that intangible values such as corporate credibility, integrity and

corporate expertise provide a significant influence on how consumers respond

toward brands (Merrilees and Fry, 2002).

2.4.1. Company Added Value: A Shift from Brand Value to Customer Value

According to De Chernatony and McDonald (1998) and Urde (2003),

company added value is created through consumer association with or

without appreciation of the company’s desired brand values. Customer value

is created when the perceptions of benefits received from a transaction

exceed the costs of ownership as mentioned by Christopher (1996). He

simply put this concept into a ratio:

Customer value = . Perceptions of benefits .

Total cost of ownership

18

He also says that it is the marketing task in improving the perceived benefits

and/or reducing the total costs of ownership in order to find ways to enhance

customer value. One way to significantly deliver superior customer value, he

suggested that marketer must clearly define, communicate and deliver an

eminent “value proposition” than those presented by competitors.

2.4.2. Brand and Corporate Attributes as Added Values in Maintaining

Customer Loyalty

Binninger (2008) mentioned that “from the early 1990s on, customers’

loyalty has come to be a key concept again associated with many others

including satisfaction, commitment, trust, identification and the relationship

with or attitude toward the brand,” while satisfaction is actually closely

related with customer value and quality (Kotler, Armstrong, Ang, Leong,

Tan, & Hon-Ming, 2009, p. 205).

Quality itself is actually one of the attributes provided from a product and/or

brand. “Developing a product or service involves defining the benefits…

these benefits are communicated and delivered by product attributes such as

quality, features, style and design” (Kotler, Armstrong, Ang, Leong, Tan, &

Hon-Ming, 2009, p. 205). On the other hand, Silva and Alwi (2008)

identified brand attributes to be related with physical aspects, product related

information, reliability and personal interaction. In her paper journal,

Anisimova (2007) translated, elaborated, extended and confirmed these

attributes of a product and/or brand as functional benefits, emotional benefits

19

and symbolic benefits. The following table explains how Anisimova

constructed her (product) brand attributes and how those attributes have

similarities and consistencies with what have been mentioned by other

researchers.

Table 2.4.2.1 Brand Attributes Construct

Kotler et al. Anisimova Silva and AlwiFUNCTIONAL BENEFITS

Consistent quality

Quality Value for Money

Efficiency Reliability, Product Information

Appealing features

Features Individuality

Practicality

EMOTIONAL BENEFITS

Pleasure

Serenity

Style & Design Youthful spirit Personal Interaction

Adventure

Sense of oneness

SYMBOLIC BENEFITS

Style & Design Smart choice Physical aspects

Style & Design Stand out in a crowd Physical aspects

Style & Design Enhancing image Physical aspects

Style & Design Social approval Physical aspects

Style & Design Express personality Physical aspects

Style & Design Sophisticated Physical aspects

Style & Design Status symbol Physical aspects

Moreover, Binninger (2008) found that “the concepts of satisfaction and

loyalty are measures undoubtedly related to a company’s performance

(Bearden and Teel, 1983; Anderson and Sullivan, 1993).” Moreover,

Souiden, Kassim and Hong (2006) explained that corporate attributes

encompass corporate name recognition, corporate image, corporate

reputation and corporate loyalty/commitment,” which explained through the

following points:

20

2.4.2.1. Corporate Name Recognition

According to Kowalczyk and Pawlish (2002), corporate name has a

certain influence on consumers and can add value to the company’s

product. They also mentioned that corporate name has a positive

and significant impact on the corporate image. In line with the

previous statement, Souiden, Kassim and Hong (2006) mentioned

that corporate name has a direct, positive and significant effect on

consumers’ product evaluations. These findings support Gregory

and Wiechmann (1999) who claimed that a positive corporate

image was led by a positive corporate name.

2.4.2.2. Corporate Image

The most effective differentiation strategy according to Balmer and

Wilkinson (1991) is a strong corporate image. Not only corporate

image has a positive impact on consumer loyalty (Andreassen and

Lindestad, 1998; Aydin and Ozer, 2005; Dick and Basu, 1994;

Ngueyen and Leblanc, 2001), it also serves as an important factor

influencing the perception of quality, consumers’ evaluation of

satisfaction and customer loyalty (Andreassen and Lindestad,

1998). In line with the previous statement, Bhattacharya and Sen

(2003) claimed that a good corporate image helps making the

consumers more attached to the company (i.e. corporate

commitment). Supporting the afore-mentioned findings, Nguyen

and Leblanc (2001) found that when consumer favorably perceived

an organization/company, the degree of loyalty has a tendency to be

21

higher. Dick and Basu (1994) also found that a favorable image

could influence repeat consumer patronage.

2.4.2.3. Corporate Reputation

The study by Souiden et al. (2006) also revealed that corporate

image has an indirect impact on consumers through corporate

reputation. Their study showed that corporate image can directly

and indirectly (via corporate reputation) affect consumers’ product

evaluation, although several studies (e.g. Hsieh et al., 2004; de

Ruyter and Wetzels, 2000) claimed that consumers’ behavior and

their perceptions of the company’s product quality and credibility

are affected by corporate image.

2.4.2.4. Corporate Commitment/ Loyalty

The impact of corporate commitment on its business activities are

reported in many studies. Bhattacharya and Sen (2003) found that

corporate commitment/loyalty can lead to consumer loyalty for all

the products of the company. Rust et al. (1995) showed that an

increase in customers’ satisfaction leads to an increase in their

loyalty to the firm and that this loyalty leads to an increase in their

purchases from the company.

In another study conducted by Anisimova (2007), corporate attributes were

elaborated and confirmed as corporate activities, corporate associations,

corporate values and corporate personality.

22

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The following table explains the constructed items from A

nisim

ova and also shows the consistency of her

constructs with what have been m

entioned by other researchers.

Table 2.4.2.2 Corporate Attributes Construct

23

Considering the latter fact, modern organizations (such as Unilever

Indonesia) nowadays put together such tremendous effort on their strategic

positioning (on a corporate level) in relation to various consumer groups

(Dacin and Brown, 2006) through many ways, such as corporate activities.

2.4.3. Unilever Indonesia Corporate Activities3

Unilever’s mission is to be the first choice of consumers, customers and

communities. Every day, Unilever aims to add vitality to life and meet

everyday needs for nutrition, hygiene, and personal care with brands that help

people feel good, look good and get more out of life. Unilever considers

Corporate Social Responsibilities (CSR) activities as its sustainability

development strategy and believes that it is the impact of the whole company

business operation to the community. These are some of campaign and/or

activities performed by Unilever Indonesia:

� Unilever Indonesia Peduli Foundation

� Green & Clean Campaign (Jakarta, Jogjakarta and Makassar)

� Mallika, Black Soya Bean Development

� Yogyakarta Integrated Health Promotion Program

� Lifebuoy Berbagi Sehat (Lifebuoy Shares Health)

� Senyum Indonesia Senyum Pepsodent

� Rinso “Berani Kotor itu Baik”

� Dove “Campaign for Real Beauty”

� Close-Up HIV/AIDS Campaign

� Bango “Cita Rasa Nusantara”

3 Taken from Unilever Indonesia’s Sustainability Report 2007

24

2.5. Proposition

2.5.1. Summary/Conclusion of the theory

As mentioned in her journal, Anisimova (2007) stated that companies put

chunks of efforts in building consumer loyalty due to many reasons:

� Lower costs of serving loyal consumers,

� Lower consumer price sensitivity, and

� Favorable word of mouth.

Back then, the concept of consumer loyalty has only been seen in terms of

multiple aspects of purchase behavior (Ehrenberg, 1988; DuWors and

Haines, 1990). Nowadays, the aspect of attitudinal factor is taken into

account. The concept of attitudinal loyalty captures the affective and

cognitive components of brand loyalty (Gremler and Brown, 1998; Kumar

and Shah, 2004; Traylor, 1981), which represents a longer consumer

commitment to a company (Shankar et al., 2000) and indicates a tendency of

favorable word of mouth (Reichheld, 2003).

Furthermore, the empirical support into the relationship between corporate

attributes and consumer loyalty has been scarce. Thus, a comprehensive

measurement framework was adopted in this paper to enhance the validity

and practical utility of consumer perceptions.

25

2.5.2. Research Questions Development

Sweeney and Soutar (2001), who prepared a combination of functional,

emotional and social components as a consumer value construct, found that

multiple value dimensions account for consumer choices better than single

attributes. This paper would like to find out:

RQ1a. Do brand attributes have a direct influence on attitudinal consumer

loyalty?

RQ1b. Do brand attributes have a direct influence on behavioral consumer

loyalty?

According to Sen et al. (2006), consumers who were aware of corporate

social initiatives significantly hold more favorable views of the given

company in terms of their associations, attitudes, and behavioral intentions.

Additionally, players in the industry may also consider corporate values as

primary importance. As Aaker (1996, p. 113) maintains: “using personality

as a general indicator of brand strength will be a distortion for some brands

particularly those, that are positioned with respect to functional advantages

and value.” Therefore, this paper would like to find out:

RQ2a. Do corporate attributes have a direct influence on attitudinal

consumer loyalty?

RQ2b. Do corporate attributes have a direct influence on behavioral

consumer loyalty?

26

As additional findings, the author would also like to investigate:

RQ3a. Do corporate attributes have a direct influence on non-consumers

attitude towards the corporate?

RQ3b. Do corporate attributes have a direct influence on non-consumers

purchase intention?