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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 Tescos 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 UKs 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 companys
success, announced that he would retire the following year and, within two days,
778 million was wiped off the companys stock market value.
to the business. The results were seen in the way in which by 2011 Tescos operating
profits had more than tripled to 3.8 billion, with 1 in every 3 spent on groceries in
the UK going through the companys tills.
But although the companys 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 companys
market share to its lowest in seven years, something that triggered the companys
first profit warning in 20 years. Shortly after this, it was announced that Richard
Brasher, the Head of Tescos 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 UKs largest
private-sector employer and the worlds 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 worlds largest and most profitable online
retail grocery operation.
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 companys turnover would be generated outside the UK. As
part of this, the companys 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 companys 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 companys
development of what has proven to be one of the worlds largest and most
successful CRM initiatives. Based on the companys statement of its core purpose of
creating value for customers (and) to earn their lifetime loyalty (authors
emphasis), the CRM programme was seen by many to a model of best practice.
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 companys 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
Tescos 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 Tescos offer, and third-party ads.
New product development: Tescos 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;
Inventory management;
Levels of customer service, with greater attention being paid to the stock
levels and promotions on those products bought by loyal customers;
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.
stores or on its websites, or could increase their value by up to four times by trading
them with Tescos 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 companys core UK market, the increasing migration of sales to the Internet, a
series of clever initiatives by competitors such as Morrisons, Sainsburys, 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 Britains 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 Groups US Fresh & Easy
operations. Leahys 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 companys 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 MillwardBrowns brand consultancy
BrandZ valuing the Tesco brand in 2011 at $22 billion, making it the UKs 3rd most
valuable brand after Vodafone and HSBC and the 31st most valuable brand globally.
Asda, by contrast, was valued at $4 billion and Sainsburys at $2.7 billion.
But although the Clubcard was undoubtedly successful and had made a major
contribution to the organisations performance, by 2011 the market had begun to
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At the same time, levels of competition within Tescos 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 Tescos
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 companys 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 Tescos 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, weve got this huge customer
base, lets 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 companys 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 Citys initial response to the announcements was unenthusiastic, with some
analysts arguing that the companys 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. Moodys the credit rating agency, was also unimpressed by the plans and
a few days later downgraded the companys 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.
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 Clubcards 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.
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 consumers 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, Sainsburys and
Waitrose. More broadly, there is the question of the balance between the UK
operation and the companys 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 companys 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 Sainsburys 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.
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
Newell, F. (2003), Why CRM Doesnt Work: How to Win by Letting Customers
Manage the Relationship, Kogan Page
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