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1 Tesco's Clubcard Customer Relationship Management 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 106th 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.
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