Seminar 3

This seminar aims to explore the development and implementation of Relationship Marketing,
both from a holistic relational and customer focused relationship perspective.

Tesco - Relationship Marketing Retail Pioneers (adapted from case prepared by Mitchell & Peck
1997)

The 1990s FMCG retail sector was dominated (68.5%share) by a few key players. (Sainsbury’s and
Tesco lead the pack followed by ASDA and Safeway) Differentiation was limited as all sold the same
products at about the same prices with similar service standards. The only discernable
differentiation was in relation to demographics and subsequent positioning of the retail brands.

Sainsbury’s - Older / Up-Market customers with a quality image

Tesco – Families / classless image focusing on value for money

ASDA – Down Market / Families on a budget price focused

The major problem for Tesco is that they were being squeezed from both sides and losing
customers. They entered the 90s being value focused. 1993 introduced own label value lines. Mid
90s difficulties forced a re-evaluation of strategy. They needed to protect the customer base and re-
consolidate the business this required a focus on customers and keeping them rather than focusing
on products and prices which were impossible differentiate

Adding Value to the shopping Experience

Customer panels were introduced recruiting shoppers into half day sessions with managers and HO
to identify what they wanted from their shopping trip. A Tesco customer service strategy was
developed addressing core areas of Facilities, Standards and Culture. In other words they assessed
the processes from the customer perspective.

Facilities – Store up grades with tangible innovations to improve shopping experience e.g. Towels at
meat aisle, more checkouts and customer service desks are examples from over a hundred to be
selected at local level by local managers to suit customers in the local store.

Standards – e.g. No more than one person in front before more checkouts are opened.

Culture – Breaking down the command hierarchy to empower employees to look after customers in
the way they thought best on a mission to secure the estimated £90,000 lifetime value of the
average customer at Tesco. This included customer assistants in every store who would theoretically
‘get to know customers by name and seek out a one to one relationship’
February 1995 Tesco launched Club card which was the UKs first supermarket loyalty card as a
‘thank you’ to existing customers and recreate ‘traditional retailer customer relationships’. Market
leaders Sainsbury’s were critical suggesting this was a form of discount stamps adding to the
promotional war that could only lead to damaging margins in the sector. With an estimated cost of
administration of £10m the City of London financial analyst agreed and the Tesco share price fell.
Despite their grumbles major players Sainsbury’s and Safeway (now part of Morrison’s) both
introduced promotion based cards ‘Saver Card’ and ‘ABC Card’. ASDA did not follow focusing on best
prices.

Reflecting the growing academic development of relationship theory Tesco was seeking to develop
‘one to one’ corporate relationships with customers. During trials of Club Card high spending
customers were identified and given special treatment (e.g. event evenings). The card would record
details of individual customer sales and allocated reward points to customer accounts at 1% of
customer spend. Points were added quarterly and a minimum of 50 points were required to trigger a
mailing of voucher benefits. The cost of these mailings in year 1 was £11 million. However in
exchange the customer spend data (who / what / where / when) allowed a potential to segment on
known behaviour to an individual level. (Not restricted to demographic and social stereo types) By
March 1995 they had 5 million members and a 2.5% increase in market share and 200k new
households acquired from competitors. (33% of these from Sainsbury’s) However Sainsbury’s
continued to increase profitability over its rivals impressing the city and its shareholders. They
remained unconvinced by Tesco’s expensive scheme and preferred their own promotional tool
which awarded customers at point of sale i.e. the till.

Evolving the Club Card

Early Problems

Tesco failed to understand family shopping habits and the rise of males as secondary shoppers.
Additional cards per household required.

Entry levels of expenditure to earn rewards were set too high for low value but potentially loyal
shoppers upsetting customer segments like pensioners and students and damaging their potential as
supporters of the brand.

Initially the system of rewards was to simplistic with reward vouchers being untargeted. i.e.
everyone gets the same for example Coca cola to which a pensioner club card holder responded.
“what use is this to me, I’ve never drunk Coca cola and I’m not going to start now” Customisation
was the way forward using the data to give customers relevant promotions which reflected their
purchase habits. Data overload was a huge problem for Tesco. They had the shopping data for
7million customers but not the capacity to utilise it. If they were to offer true value exchange for this
customer commitment they would need to demonstrate respect, relevance and reward.

Six months after the launch Tesco continued to see the benefits with 7million club card holders and
with sales up 10% against sales down 2.2% at Sainsbury’s Tesco were now committed to listening to
their customers rather than their competitors. In fact Tesco had entered into more 2 way
communications with 30K calls each week (Dialogue rather than one way monologue) They sought
to strengthen customer commitment by cross selling products through points promotions e.g.
Petrol. This would strengthen the bond and commitment from customers as they committed a
greater share of their expenditure (Share of wallet/purse) to Tesco. These bonds were potentially
further strengthened through strategic alliances with other non competitor businesses. Tesco Club
Card points could be accumulated with Thomson Holidays and B&Q (DIY retailer) which increased
customer bonding with the card and Tesco.

By 1996 Club Card was accredited with increasing Av spend to £75 each visit from £26 as a result of
micro marketing and customer focus. Tim Mason Tesco’s recently promoted Marketing Director said
“I believe the key to the future is an individual response to individual customers” The Club Card now
had a targeted magazine in 5 formats based on life stages identified by segmenting real data. (Young
Families / Older Families / Young married without children / Pensioners / Students) Each carried
articles specific to group plus appropriate product advertising from suppliers, promotions and
competitions. This was highly successful with high redemption on money off tokens reflecting
targeted value and relevance.

Meanwhile the competitors looked to respond. Safeway recruited half of its customer base onto its
ABC card (awarding customer expenditure at point of sale which was instant rather than quarterly
but no behavioural data) and had offers for free carwashes, cinema tickets and dry cleaning. ASDA
refused to participate in loyalty based schemes but promised to honour club card vouchers in its
stores in the run up to Christmas 1996. (Tesco complained to Advertising Standards) Sainsbury’s
started talking loyalty cards after huge criticism that they had run out of ideas and were losing out to
Tesco. Subsequently they extended trials on Saver Card saying they would benefit from being second
into this market and not copy but lead with superior benefits linked to Air miles, however this
scheme would later be quietly withdrawn after Sainsbury’s felt unable to justify the projected £30
million set up cost.

Tesco moves on – Beans to Banking

Club Card Plus June 96 Added to the services offered to customers by including banking products.
Essentially, a current account at 5% interest which was 20 times higher than any high street bank at
this time and included the cheapest overdraft rate of 9%. The bank would be managed by NatWest
on behalf of Tesco who would be the branded face of the bank. Described by Tesco as own label
banking however NatWest a leading high St bank labelled it co-branding. The press suggested ‘better
financial deals from a more trusted source than banks”

This time Sainsbury’s were quick to respond with full cheque book based accounts and telephone
banking. This was a joint venture with the Royal Bank of Scotland who would own 45% and were
keen on the alliance as they were weak on bank accounts in the south of the UK where Sainsbury’s
had a huge customer base. Banking at Sainsbury’s was not tied to the stores or restricted to
Sainsbury’s customers. They also raised issues relating to contracts for ATM machines at their stores
suggesting these might not be favourable to NatWest.

Sainsbury’s also upped their game with Saver Card points with the best deal in retail promotions to
reward high spenders with a return trip to Paris or equivalent for an annual £75 weekly spend. They
also announced direct marketing campaigns to target high value promiscuous reward card
customers to tempt them to spend more in store.
Meanwhile Safeway developed banking based products with Abbey National and ASDA remained
distant to these developments secure with findings from Checkout Magazine research that
customers preferred low prices to loyalty cards.

By 2000 5 years after the launch all performance indicators were positive and they had successfully
overtaken Sainsbury’s in 1997. Tesco celebrated Club Cards 15 th birthday in February 2010 with ever
increasing customer focus and the adaption of the scheme to fit perfectly with on-line strategies and
direct marketing to individual customers through on-line shopping. The customer segmentation
based on a myriad of key characteristics allow for what is described as working out a shoppers DNA.
This has resulted in increasing allocation of expenditure away from mass communication to direct
and interactive marketing dialogue. Although ASDA holds its position on not entering the loyalty card
arena, Sainsbury’s were instrumental in developing the Nectar card which is the basis of its approach
to loyalty cards and customer data management. Sainsbury’s have been unable to catch market
leaders Tesco, slipping into third position just below ASDA.