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Tesco’s Clubcard Customer Relationship Management Programme

:
The challenges of coming to terms with a changing market

Synopsis
For almost two decades, Tesco was seen to be one of the most successful retail
organisations in the world, with a pioneering Clubcard-based loyalty scheme and the
development of a strategic CRM (Customer Relationship Management) programme
that provided the company with the basis for true customer insight and greater
brand engagement. However, in 2011 the company began to suffer as the result of a
more competitive environment and a series of internal pressures. In 2012, it issued its
first profit warning in 20 years and saw £5 billion wiped off its market value.

Within this case study, we examine Tesco’s spectacular growth, the development of
its highly successful Clubcard, and some of the problems that began to emerge after
the departure of its boss, Terry Leahy.

Background
In 2003 Management Today voted Tesco the UK’s Most Admired Company and its
boss, Sir Terry Leahy, Most Admired Leader. In 2005, the company again picked up
the two awards, a feat that had not been achieved since Management Today, in
conjunction with Mercer Consulting, launched the Most Admired Companies scheme
in 1989. In doing this, they also won outright two of the nine criteria used to judge
companies: Capacity to Innovate and Use of Corporate Assets. In 2009, the company
was ranked by The Financial Times as the 106 th most valuable company in the world.
However, in 2010, Terry Leahy, one of the principal architects of the company’s
success, announced that he would retire the following year and, within two days,
£778 million was wiped off the company’s stock market value.

Under Leahy’s leadership and the development of a strongly collegiate approach to
management, the company developed an ability not just to control costs and expand
cleverly and consistently, but also an extraordinary imagination in delivering change
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to the business. The results were seen in the way in which by 2011 Tesco’s operating
profits had more than tripled to £3.8 billion, with £1 in every £3 spent on groceries in
the UK going through the company’s tills.

But although the company’s growth and performance were widely applauded, the
issue of management succession was one that had preoccupied City observers for a
number of years. The announcement that Philip Clarke, a Tesco insider, would
succeed him as Group Chief Executive was therefore met with a sense of relief.
However, within a year, cracks in the previously impenetrable and seemingly
unassailable strategy had become only too visible and led to a slide in the company’s
market share to its lowest in seven years, something that triggered the company’s
first profit warning in 20 years. Shortly after this, it was announced that Richard
Brasher, the Head of Tesco’s UK operations was to leave the business and that Clarke
would take over the responsibility for the UK business.

Up until this point, the Tesco story had been one of sustained growth and financial
success. With more than 2,715 stores in the UK (5,380 + stores worldwide), 104
million square feet of selling space and group sales in 2010-11 of £67.6 billion, it was
with almost 300,000 employees in the UK and 493,000+ worldwide, the UK’s largest
private-sector employer and the world’s third largest grocery retailer. In 2010-11,
the company made in excess of £3.8 billion in profit (PBT) and accounted for more
than £1 in every £7 of UK overall high street consumer spending, whilst its internet
shopping arm had grown to become the world’s largest and most profitable online
retail grocery operation.

The background and the strategy
Founded in 1924, the company for many years pursued a largely price-based
strategy. However, at the beginning of the 1970s, with customers becoming
wealthier and less concerned with price, the company began to rethink its pile it high,
sell it cheap low cost / low price business model. Throughout the 1970s and 80s, the
management team restructured and began to focus upon superstores of 20-50,000
square feet, new store layouts, store ambience, and a far wider product range.
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During the 1990s they launched a series of new store formats, including Tesco
Express (up to 3,000 square feet), Tesco Metro (7-15,000 square feet) and Tesco
Extra (60,000+ square feet), as well as trialling Homeplus stores of 35-50,000 square
feet dedicated to non-food products (by 2009, non-food sales had reached £12.5
billion). At the same time, they began entering a series of overseas markets including
China, Japan, South Korea, Thailand, Malaysia, Hungary, Poland, Turkey, Slovakia,
the Czech Republic, Ireland, India and the United States. Speaking in 2009, when
overseas operations were generating almost £18 billion of sales and more than £700
million in profit, Leahy made the comment that the expectation was that by 2015
more than half of the company’s turnover would be generated outside the UK. As
part of this, the company’s plans for the next twelve months alone included 500 new
stores, 11.5 million square feet of new trading space (75% of this was to be outside
the UK) and 30,000 additional jobs worldwide.

However, at the beginning of the 1990s, the company’s management team had
begun to recognise that the key to future success would lie not just in pursuing an
aggressive and often very innovative strategy of growth, but must be based on
getting ever closer to the customer. It was this that led to the company’s
development of what has proven to be one of the world’s largest and most
successful CRM initiatives. Based on the company’s statement of its core purpose of
creating ‘value for customers (and) to earn their lifetime loyalty’ (author’s
emphasis), the CRM programme was seen by many to a model of best practice.

The CRM initiative
Tesco’s move into customer relationship management began in the early 1990s
when the company started working with dunnhumby, a marketing services firm, and
led in late 1994 to the preliminary test launch of a loyalty card scheme in six stores.
The move was driven partly by an awareness of this sort of initiative in other parts of
the world, but also by the results of some analysis which highlighted two significant
facts:

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1. In many of their stores the top 100 customers were worth as much in terms
of sales as the bottom 4000.
2. The top 5% of the company’s customers accounted for 20% of sales, whilst
the bottom 25% accounted for just 2%.

The scheme, which was underpinned with a major launch to the staff and the
distribution of 140,000 educational videos, is based upon the Tesco Clubcard which
rewards customers by giving them one loyalty point for every £1 spent with the
company. These points can then be redeemed either for products in store or with a
wide range of other organisations including leisure attractions, hotels, museums,
zoos, holiday and travel companies, and restaurants.

However, the Clubcard scheme, which by 2012 had been rolled out to twelve of
Tesco’s markets, was always far more than a simple customer reward programme.
From the outset, the company focused upon capturing, analysing and then, most
importantly, using the data and information generated by the twelve million +
transactions made each week. The starting point for this involves each of the
transactions being linked to individual customer profiles. Data mining techniques are
then used to pinpoint when and where purchases are made, the amount that
customers have spent and the types of products that have been bought. These
purchasing habits & behaviour patterns are then used as the basis for segmenting
customers on the basis of need segments and for targeting them with tailor-made
campaigns and advertisements, as well as regular mailings of a mass-customised
magazine related to Tesco’s offer, and third-party ads.

Internally, the information generated is used by the company’s management teams
as the basis for making a series of decisions about:

The day-to-day management of the product range

New product development: Tesco’s Finest, for example, was launched when
analysis showed that some customers were defecting to Marks & Spencer for
high(er) quality foodstuffs;
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Pricing strategies that more precisely meet the needs and price sensitivities
of different target groups;

Merchandising so that the product portfolio is based on detailed insights to
customer profiles and purchasing patterns;

Inventory management;

Promotions, with greater rewards being offered to loyal customers;

Levels of customer service, with greater attention being paid to the stock
levels and promotions on those products bought by loyal customers;

Measures of promotional and media effectiveness;

Customer acquisition by matching new products such as the entry to financial
services and the launch of Tesco.com to specific customer types; and

Targeted communications (20% of Tesco’s coupons are redeemed against an
industry average of 0.5%).

But as well as using the information that the Clubcard generates as the basis for
decisions about how best to manage the business, the company also uses it as a
means of generating additional revenue by selling to their suppliers the sales and
promotional performance of their brands.

In commenting in 2012 on the success of the Clubcard, Terry Leahy suggested that
amongst the biggest benefits was the way in which it allowed the retailer to treat
customers as individuals and, through its mailings, gave customers a sense of being
recognised. “They loved that they were known”, he suggested.

The changing marketing environment and the 2009 Clubcard re-launch
Despite the undoubted success of the Clubcard, in mid-2009 the company
announced the re-launch of the scheme. Designed to attract at least one million
more customers to the card’s existing base of 15 million (one in two UK households
were by this time members of the scheme) and underpinned by a £150 million
investment, the revised scheme allowed customers to double the value of their
Clubcard vouchers against a range of Tesco products both in-store and online.
Previously, customers could spend Clubcard vouchers at face value across Tesco’s
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stores or on its websites, or could increase their value by up to four times by trading
them with Tesco’s partners in the scheme such as restaurants and theme parks.

But although the re-launch was promoted as stage two of an already enormously
successful strategy, a variety of commentators suggested that this was a largely
defensive move that had been forced upon the company during a period of
fundamental structural market changes. These included the growing saturation of
the company’s core UK market, the increasing migration of sales to the Internet, a
series of clever initiatives by competitors such as Morrison’s, Sainsbury’s, Asda, and
Waitrose, and the rapid growth of discount retailers such as Aldi, Netto and Lidl. In
an attempt to compete with the aggressive discounters like Aldi, Tesco introduced a
new advertising campaign calling itself Britain’s biggest discounter, a move which led
to around 30% of customers buying something from the ‘Discount Brands at Tesco’
range each time they shopped, and a £500 million Big Price Drop campaign. Some
commentators, though, were not impressed, suggesting that such a heavy emphasis
upon price was a sign of lazy retailing.
At the same time that these pressures were building in the UK, analysts had begun
pointing to the disappointing performance of the Group’s US Fresh & Easy
operations. Leahy’s stated ambition had been to build a chain of 1,000 outlets across
California, Nevada and Arizona, but by the end of 2011 just 164 had been opened
and, despite £800 million of investment in the first five years, accumulated trading
losses amounted to more than £500 million.

But despite the company’s disappointing performance in the States, few would
argue that the organisation had established a track record of sustained and enviable
success, something that was reflected in MillwardBrown’s brand consultancy
BrandZ™ valuing the Tesco brand in 2011 at $22 billion, making it the UK’s 3rd most
valuable brand after Vodafone and HSBC and the 31st most valuable brand globally.
Asda, by contrast, was valued at $4 billion and Sainsbury’s at $2.7 billion.

But although the Clubcard was undoubtedly successful and had made a major
contribution to the organisation’s performance, by 2011 the market had begun to
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change in a variety of significant and far-reaching ways. Driven partly by the
economic downturn and the pressures under which many consumers found
themselves, the market had begun to see the rise of the professional shopper whose
behaviour was often very different from that of the past and who now not only
shopped more frequently for smaller quantities, but who searched actively, often
through the Internet, for bargains and special offers and who then use social media
to broadcast best value deals to their friends.

At the same time, levels of competition within Tesco’s core market of the UK (in
2010-11 this accounted for 66% of turnover and 68 % of the trading profit) had
become increasingly intense, one consequence of which was that Tesco's share of
the supermarket trade slid slightly and, in the first quarter of 2012, dropped below
30% for the first time in seven years. Commentators began to suggest that Tesco’s
offer was looking tired, the stores were too cluttered and that the overall shopping
experience had dropped below that of its competitors. It was also being argued that
the Clubcard had led the company’s management team to focus to too great an
extent on sales data rather than engaging in a conversation with the consumer. This
was neatly summed up by Kate Walsh of The Sunday Times who said that, “Tesco
became enthralled by its success – and the propagation of it – at the expense of the
shopper.” Quoting one of Tesco’s rivals, she went on to say. “They started to think
they were clever. They thought the science, from data to process to new formats,
was the new model for success. They started to think, we’ve got this huge customer
base, let’s sweat the wallets. They forgot about Every Little Helps.”

Faced with criticisms such as these and a 20% drop in its share price, the company
announced in April 2012 a review of its strategy. Included within this was a dramatic
scaling back of new store openings and a £1 billion investment in the existing store
portfolio in an attempt to “warm them up and make them less clinical.” The new
strategy also involved recruiting 8,000 new staff across the UK to improve service, a
doubling of its ‘click and collect’ service to 1600, and the rebranding of its £1 billion
cheaper Value range of own-label food products as Everyday Value. The changes also
included a review of the company’s advertising and brand communications, a move
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that was seen by many to be further evidence of the way in which the company was
fundamentally reappraising how it engaged with customers and how it was intent on
forging a warmer brand image that was less focused on price and more focused
upon customer service and the overall shopping experience.

The City’s initial response to the announcements was unenthusiastic, with some
analyst’s arguing that the company’s problems were more fundamental and could be
seen to be the legacy of years of under-investment in the core UK market, something
that in turn had led to the company being unsure of its identity and too reactive to
what its competitors were doing. In terms of the brand, it was being suggested that
the company had size, but no soul and that although the brand was admired, it was
not loved. Moody’s the credit rating agency, was also unimpressed by the plans and
a few days later downgraded the company’s long-term senior unsecured rating by
one notch from A3 to Baa1 on the grounds that the £1 billion of proposed
investment would weigh on future earnings.

So what next for Tesco and the Clubcard?
But although Tesco was faced with a series of problems and a certain loss of faith on
the part of the market, it needs to be remembered that the company is still the UK
market leader, has a huge international presence with more than £22 billion of sales,
and has consistently out-performed its rivals. In 2010-11, it increased its revenues by
7% and its pre-tax profits by 5%. However, given the challenges that the company
was facing in 2012, there is the question of why the Clubcard and the detailed
customer insights that it generates had seemingly failed to alert the management
team to the problems that were starting to emerge. Although the Clubcard is widely
recognised to have been a significant market breakpoint in that it helped Tesco to
influence customers’ shopping and buying habits and decide what products to stock,
commentators have pointed to the way in which within a rapidly changing market
environment, the role that the Clubcard has to play is also very different from when
it was launched, but that this was not really being reflected in how it was being
managed.

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At the heart of these problems is the way in which an increasing number of products
throughout the UK market are now being sold on promotion, with some estimates
being as high as one-third of all grocery items. Because of this, Clubcard mailings and
the benefits that they offer are simply drowned out by the sheer noise of
competitive coupon activity. In an environment like this, loyalty schemes are an
expensive way to run sales promotions. At the same time, customers today are far
more demanding, much more discriminating and infinitely more brand and supplier
promiscuous than in the past. Faced with a discount in-store, they are much more
likely to take it there and then rather than waiting to build up their loyalty points
totals.

The data environment has also changed dramatically over the past few years. At the
time of Clubcard’s launch, the nature and volume of the data and information that
the scheme generated was unlike anything that a retailer had had available before.
Today, not only is online retailing capable of generating large amounts of customer
information – and a customer fan base – without the expense of an underpinning
loyalty scheme, but the number of firms in the market which are able to supply and
interpret data has also increased enormously. The returns that loyalty data generate
also tend to decline over time. In the early days of the Clubcard, the insights that
were generated provided huge new insights to the ways in which customers behaved.
Once, though, a firm has these insights, anything that follows tends to be
operationally useful rather than strategically valuable.

There is also a problem in that although the sorts of data generated by a loyalty
scheme such as Clubcard provide the basis for very clever personalisation of mailings
to customers, this personalisation is not then necessarily or easily reflected in the instore shopping experience, something that was highlighted in a comment by Martin
Hayward, the former strategy director at dunnhumby and one of the architects of
the Clubcard scheme: “the sensitivity of the insight vastly exceeds the sensitivity of
the store to act on it.”

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The technological environment within which Clubcard operates is also developing in
a variety of dramatic ways. One of the biggest changes that we are likely to see over
the next few tears is the widespread use of e-receipts. These will provide the basis
for data to be gathered from all retailers and, in this way, allow for a far more
holistic buying picture than is generated by an individual loyalty scheme which, by its
very nature, captures data from just one source.

The legal environment within which loyalty schemes operate is also changing rapidly.
The EU currently has in draft form a new set of data protection regulations which, if
accepted, will radically increase a consumer’s rights to gain access to any data that a
company holds on them. It would therefore be possible for the consumer to ask
Tesco for their Clubcard data and profile with a view to using it as and where they
want, including selling it to a retail competitor. Tesco would therefore no longer
have a monopoly on the data and the insights that the Clubcard scheme is capable of
generating.

For Tesco, though, there are several arguably more fundamental issues that
underpin all of this and revolve around the question of where the organisation goes
next. The Clubcard has undoubtedly been successful and made a major contribution
to the business. It is also the major reason given by consumers for switching from a
competitor to Tesco. However, for the management team today, the priorities within
the core UK market include the development of the in-store experience, the brand,
how best to manage the customer relationship, and how to operate within a far
more competitive environment with, at one end of the spectrum, the highly
aggressive discounters such as Aldi and Lidl and, at the other, Sainsbury’s and
Waitrose. More broadly, there is the question of the balance between the UK
operation and the company’s expansion overseas. There is also the issue of the
organisational culture and managerial mindset which, having been accustomed to
dominating the market, now has to come to terms with the gap between Tesco and
its competitors having become smaller. Much of the company’s success throughout
the 1990s and up until 2010-11 was based upon very clever thinking and how it
reinvented the ways in which it interacted with its customers. The challenge now is
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how it might do this again. However, whatever is decided, one thing is certain and
that is that, as Justin King the CEO of Sainsbury’s has pointed out, the divide between
the data-haves and the data have-nots will grow ever wider. Recognising this,
Clubcard-style loyalty schemes will undoubtedly continue to play a pivotal role in the
digital eco system.

Questions for discussion

1. Evaluate the strategy pursued by Tesco both before and after the review in
2012 and, in doing this, show how the company has redefined the markets in
which it operates and patterns of marketing thinking across the retail sector.
2. The majority of CRM programmes fail to deliver what is promised or expected
when they are introduced. Why was the Tesco scheme been so successful
when so many others have failed to meet expectations?
3. Given how the UK grocery retailing market has changed and is continuing to
change, what role do you believe should be played in the future by loyaltybased schemes such as Clubcard?

Sources

Gwyther, M. & Saunders, A. (2005), Another Twin Win for Tesco,
Management Today, December, pp 35-43

Mukund, A. (2003), Tesco: the Customer Relationship Management
Champion, ICFAI Centre for Management research, Hyderabad, India

Newell, F. (2003), Why CRM Doesn’t Work: How to Win by Letting Customers
Manage the Relationship, Kogan Page

Off-colour Tesco is still world class, Daily Mail, 22 nd April 2009, p. 61

Tesco in £150 million Clubcard re-launch, www.tescoplc.com, 8th May 2009

Tesco plc, Annual Report & Review 2009 & 2011

Tesco trumpets strategic success overseas, Financial Times, 18th/19th April,
2009, p. 12
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FT Global 500 2009, The FT Weekend Magazine, May 30th/31st 2009, p. 31

The Times, 16th March 2012, p.39

The Sunday Times, 8 th April 2012, Section 3, p. 1

Marketing, 15th February 2012, pp. 28-30

The Times 12th April, 2012, p. 39

The Sunday Times, 15th February 2012, p. 5

Financial Times, April 21st/22nd, 2012 pp. 16 & 18

© Professor Colin Gilligan (2012)

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