Putting the customer at the heart of the business

If ever you find yourself at a conference feeling less than inspired, it might be worth remembering the origins of Tesco Clubcard. The loyalty scheme has become one of the most successful retailing ideas of the past 20 years, making Tesco the one of the biggest retailers in the world and spawning dozens of imitators, and yet the spark was ignited during one short industry conference speech when one of Sir Terry Leahy’s marketing team heard Clive Humby talking about his data analytics business.

Data firm Dunnhumby turned up at just the right time. Tesco was trialling a loyalty scheme in nine stores in 1994 and Leahy, marketing director at the time, had asked his staff to look for ways to analyse the data it was generating. Dunnhumby’s approach to data, coupled with Sir Terry’s unwavering focus on the customer, led to what would become one of UK retail’s most lucrative partnerships.

Leading the way

Tesco’s current marketing director Carolyn Bradley worked with Sir Terry to launch the scheme, watching it grow from a tiny, top secret trial to a giant that welcomed millions of users within the first few days. “When we launched Clubcard a lot of people said we wouldn’t be able to handle the amount of data it generates,” she says. “One of our competitors said it would be like trying to drink from a fire hydrant. But they ended up having to do the same thing as us.”

Bradley says it was Sir Terry who was really behind the drive to investigate loyalty schemes at Tesco. But while the company had the ideas, it couldn’t quite manage the data at first and brought in Dunnhumby to help with the technical side. Dunnhumby co-founder Edwina Dunn says: “Tesco had the data, but it couldn’t work out whether it was working or not. It didn’t know whether it made a difference. This kind of work was what we started Dunnhumby to do, but we never thought it would be a supermarket that did it best.”

The results of the trials showed two things. First, the scheme did encourage customers to stay loyal. Second, it told the business all sorts of things it had never known about its customers before. Bradley says: “Clubcard was launched as a loyalty tool but we knew it would come back to us as a business benefit.

A huge part of the thinking upfront was the quality of the insight it gave us into our customers and how we could use that to improve the business.”

After presenting the results to the board, the team got the go-ahead to roll it out nationally in 1995 and Bradley says the response was positive right away. “We launched it on a weekend and six million people joined within the first week. It was phenomenal.”

Computing power

One of the earliest challenges in the mid-1990s, according to Dunn, was the lack of computing power available to allow analysis of the huge amounts of data produced. She says some companies in the technology industry told Tesco it would cost between £40m and £50m just to provide the computing capacity needed. “We were a bit radical in our approach and came up with something affordable,” she says. Dunnhumby’s first bill to Tesco was £750,000, a figure they managed by approaching the problem differently, says Dunn. “Technologists always work on the assumption that you have all the data all of the time. Our approach was more like a statistician - assuming you will have only some of the data some of the time. So it was more like a study. That’s what madeit affordable.”

Great leap forward

Tesco was doing well before Clubcard came along, but the scheme catapulted the retailer into another league. Before it started, Tesco was the second biggest retailer in the UK behind Sainsbury’s, and earned £551m in pre-tax profits the year the scheme opened in 1995. Fast forward 16 years and it’s now the second biggest retailer in the world in terms of profit, which was £3.2bn before tax in 2010.

Bradley says the insights gleaned from Clubcard run very deep through the business. “It’s used all over the business, not just in marketing but in the property programme, decisions on which product ranges to stock and in understanding how different types of customers are responding to what we do,” she says. But Bradley says Tesco’s success relies on lots of things. “Clubcard is one of the things that’s given us the edge but there are all sorts of things you’ve got to get right. Price, product range, service, well-run shops - once all of those things are in place you can ask what else you can do.”

Dunnhumby, meanwhile, now holds data on 350 million customers belonging to retailers across 30 countries, although the market “wasn’t large enough” to work with another retailer in the UK. Its clients in the US include Macy’s and Best Buy, but Dunn says the grocer that started it all is one of the best.

“It’s amazing how similar retailers are,” she says. “But the big difference with Tesco is it is the best at execution we’ve seen anywhere in the world. When it decides to do something it is exceptional.”

It was Leahy’s idea to introduce double points in 2009, which encouraged hard-pressed customers hit by the recession to stay loyal to Tesco. As he takes a step back, Clubcard will need to continue evolving as Tesco moves further into non-food retailing, and customers’ buying habits become more reliant on the web.

Digital dreams

Bradley says the scheme is set to get more digital - customers can already go online to see which of their vouchers they haven’t spent yet, and she says there are plans to make it more “interactive and exciting”.

She notes: “We’re making it more modern and easy to use - that part will only expand. It will get more digital, but we will alwys make sure it’s very protected.”

Dunn, meanwhile, predicts a new approach for non-food shopping. The current system relies on using purchasing history to predict future consumption - if someone buys apples one week, they’re likely to buy them the next. This logic doesn’t work so well for products like cameras, coats and kettles, which don’t get replaced often.

Dunn says: “The insight is completely different. You need to ask people for permission to share what they’re searching for, and start to understand how people think and how they buy. It’s a really new area and no one’s cracked it.”

Whatever the changes end up being, Tesco is likely to be at the forefront.

Sir Terry’s legacy is not just a business with customer focus at its heart, but a company with both the cash and confidence needed to constantly innovate and stay relevant. “Sir Terry’s philosophy of rewarding people for returning was a game-changer,” says Dunn.

“It was way ahead of its time and enormously exciting. Tesco has stayed very true to that belief, and the fact that nothing it has done since has undermined that is a phenomenal achievement.”