Isn't marketing wonderful. Here you are comfortably assured that you saved $1000 over the "normal retail price" and are gladly loyal to this store.

By this one ruse (raising their "normal retail price by say 2% and then providing a gimic loyalty card with a 5% discount) they have established a loylty relationship with you that you are happy to rationalize and protect - even if you are dishonest about your identity. They no longer need worry about the competition because you are "their loyal customer". They don't worry about their variety and selection, their quality or their prices as much as they used to because they are your friend and you are happy to save $1000 over their inflated "normal retail" price. Once established, this relationship completely undercuts competition and reduces the pressure to innovate, supply better products or wider selections. Why should you bother even going into a competitors store to discover the new items "your" store doesn't carry? - After all you have this nice discount card from "your" store and you get a great price because of it.

In reality, you may be getting a decent price against the actual market beyond "your" store but you have no incentive to go out and investigate it and discover the truth. Grocery stores normally run at margins less than 10% so no matter what your store isn't giving you that sort of a break with their loyalty card. But having established the loyalty relationship they have less incentive to control their costs and keep you prices down.

Another result of loyalty programs is that the store knows with statistical certainty what is bought without regard to price. Since they know that the individuals who will buy the pricy cuts of meat undiscounted will also buy (for example) organic wheat thin crackers they can easily say" we don't need the bottom customers so we won't market the inexpensive alternatives since we can sell primarily high margin alternatives and still make the same money. By knowing with greater certainty the relationships between the items that they sell they can cater more specifically to the folks with bigger wallets - good for them! I'd do the same in their position. Unfortunately for all customers, rich and poor, this limits the variety in the store. By limiting the variety in the store there is a limitation on the value of innovation at the Mfg. Etc.