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 1
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. 2
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: 3
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; 4
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 5
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 3 rd most valuable brand after Vodafone and HSBC and the 31 st 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 6
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 7
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. 8
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. 9
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 10
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, 8 th May 2009 Tesco plc, Annual Report & Review 2009 & 2011 Tesco trumpets strategic success overseas, Financial Times, 18 th /19 th April, 2009, p. 12 11
FT Global 500 2009, The FT Weekend Magazine, May 30 th /31 st 2009, p. 31 The Times, 16 th March 2012, p.39 The Sunday Times, 8 th April 2012, Section 3, p. 1 Marketing, 15 th February 2012, pp. 28-30 The Times 12 th April, 2012, p. 39 The Sunday Times, 15th February 2012, p. 5 Financial Times, April 21 st /22 nd, 2012 pp. 16 & 18 Professor Colin Gilligan (2012) 12