The success of the Tesco Clubcard in winning customer

loyalty
An interview with Clive Humby by Sarah Powell, Editor of the “Spotlight” column in
Emerald Now, Published International Journal of Retail and & Distribution Management,
vol 32, issue 7, 2004

Clive Humby is chairman of dunnhumby, a customer insight specialist whose client list
includes Tesco, The Kroger Co. (USA), Barclaycard, Diageo, Gillette, lastminute.com,
BMW, House of Fraser and Procter & Gamble. Clive works with clients on the strategic
issues affecting their businesses while leading the company's work in the development of
innovative media measurement techniques. He is also Visiting Professor of Integrated
Marketing at Northwestern University, Chicago, IL.

Prior to founding dunnhumby, Clive Humby was chief executive of CACI Market Analysis.
There he was responsible for creating and introducing a number of major innovations in
marketing segmentation and retail marketing including the Acorn classification system and
several major retail location systems. In total Clive Humby has over 25 years' experience in
applying mathematical modelling methods to business, marketing and retail location. His
book Scoring Points, co-authored with Terry Hunt, was published in October 2003.

Spotlight: What were the main features of Tesco's loyalty programme that
enabled it to succeed when so many other loyalty schemes failed?

Clive Humby: Probably the main factor in Tesco's success has been the commitment to use
the data gained to drive the business. Many companies have used loyalty schemes as a sort of
quick fix, promotion tool. While, to a degree, a loyalty scheme is a form of promotion, it is an
expensive way of doing this. The real benefit of a loyalty scheme is the very rich data
obtained on customer behaviour. These data improve a retailer's ability to make the whole
shopping experience more compelling, with the right products on the shelves at the right
prices and with the right promotions. This use of data has been the major difference between
the Tesco scheme and other initiatives that were less successful.

The volume of data we collect is enormous. Tesco's sales run into tens of millions of items a
week. To make sense of all this means a total focus on using the data well. Many companies
collect this sort of information but fail to use it in a committed way every day of every week.
They spend tens of millions of pounds collecting the data but are not prepared to spend
millions of pounds analysing the information gained. What they attempt to do is to derive the
benefits from the sales and promotions effects of the loyalty programme, which will never
work. Simply measuring how much the scheme costs and what sales are made on it does not
tell you anything. If the sales achieved are not growing then the loyalty programme is not
doing its job and there must be far more analysis.

Spotlight: What risks did Tesco take in the launch of the scheme and were
there any features that were unsuccessful?

Clive Humby: Probably the biggest single risk taken was to go from the pilot of a few tens of
stores to full national roll-out. Then there were the sheer logistics of making it happen the
challenges faced in acquiring and distributing sufficient plastic cards and training till clerks
while keeping the details of the scheme under wraps.

One misjudgement was the original £10 pitch point for the scheme because many customers,
and particularly retired people, made frequent visits, spending small amounts each time. But
Tesco has always had what I would call a “test and learn” philosophy, trying out an idea in,
say, ten stores and, if this proves successful, rolling it out to the rest. While risk can never be
entirely eliminated, this approach mitigates the risk. It means Tesco is constantly learning,
constantly gaining new knowledge as it goes forward.

Spotlight: To what extent and how rapidly did the card promote behavioural
change among customers and how did this become evident?

Clive Humby: Prior to the launch, of course, we didn't know what individual customers did
so we could not see any immediate behavioural change. However, a post-launch sales uplift
in stores was an indication of incremental sales and thereafter we looked for consistency of
behaviour, such as how long customers who had joined the scheme remained loyal to it.

While, on a week-by-week basis, there are inevitably shopping peaks and troughs, there are
also underlying trends which can be recognized over time, such as family changes which lead
to increasing and then decreasing baskets. For example, data analysis can reveal when
children have left home, perhaps for university, because purchases of, say, pizza stop.
Clubcard data offer many such pointers but the original measure of success is incremental
sales, or “like-for-like” as we call it, i.e. how was the store doing a year ago? How is it doing
now? Has there been a change since the launch of the scheme? Then the key measure over
the years is the share of spend on the Clubcard, which indicates how well accepted the
scheme is.

We cannot know for certain the percentage of customers who have a card, because we do not
know exactly how many customers we have. What we do know is that 80% of total spending
in our stores is made on the loyalty cards and this has been the case almost since day one.

Spotlight: What is the role of dunnhumby in the Clubcard scheme and in

what way is Tesco's data analysis different from that of competitors?

Clive Humby: Our role as data analysts is to make the data tell the story that Tesco needs to
hear, i.e. highlighting patterns in the data that give Tesco a commercial advantage over its
competitors, such as buying trends and the results of promotions. Traditionally we could look
at a promotion to see the sales uplift, but we would be unable to tell whether an uplift was the
result of more people buying the same number of products, or the same people stocking up
while the promotion ran, or new customers to the product category, completely new
customers, or those switching from one brand to another. Understanding all of this is
fundamental to working out which promotions work and then looking at other factors that we
could build into the scheme, such as identifying brand-loyal people to see what can be done
for them, or customers who like experimenting, others who focus on quality food, or those
who have a tight budget, to see what can be done for all these categories of customers.

We can compare the Clubcard scheme to having a panel of ten million people whose buying
habits we can analyse; as such it is invaluable to manufacturers. If, for example, a food
manufacturer launches a new flavoured product, Clubcard data can show, for example, who
buys the new product and whether they were already customers of the manufacturer's other
products. The data also show repeat purchase rates, which indicate whether the new product
can be considered a success. And because purchasing data are collected in real time from
such a huge number of customers, they give manufacturers an immediate and greater insight
into their products and range performances than could be offered through traditional, initial
market research. The only question our data are unable to answer is “why?”. To answer this
question we use panels of customers who have consented to take part in market research.

In recognition of the value of Clubcard data to product manufacturers and their different
information requirements, we offer manufacturers and other interested organizations an
independent commercial service that competes with traditional sources of market
intelligence. We have, for example, conducted some interesting data analysis into the
immediate impact on sales of product advertising on breakfast television or local radio. This
sort of information cannot be collected through market research.

This arrangement means we are in effect data salesmen for Tesco and we also sell space in
Tesco's media. This commercial arrangement helps subsidize the cost of the main process
while aiding manufacturers to use Tesco media to best advantage and measure results.

Spotlight: How can Tesco determine the return on investment of its loyalty
programme?

Clive Humby: We know how much money we give back to Clubcard customers, how much it
costs to run the programme and what behaviour we get from those customers. We can
estimate what behaviour we get from non-Clubcard customers through market research. Then
we can look at the difference to work out whether customers with cards remain more loyal to
Tesco and whether they redeem the offers we send them, and spend more when we give them
money-off vouchers. We effectively come up with a series of conclusions which tell us what
we can expect from the investment that Tesco makes in the programme.

Spotlight: What changes have been made to the scheme since launch?

Clive Humby: Apart from making the scheme simpler, introducing a straightforward £1 per
point, we have developed a number of clubs within the club to respond to particular interests.
While the general Clubcard is fine, for a young mother, for example, the baby club and
targeted offers are far more engaging than a general communication from Tesco about
everything in the store. Tesco has a number of such clubs within the club focusing on such
areas as wine, organic and healthy foods as well as baby products.

All of these are “opt-in” clubs which customers can elect to join. They offer additional
communications and are focused on a dedicated website. If, for example, you sign up to join
the baby club, you will receive some £150-worth of vouchers for items that you would not
normally buy from Tesco, such as prams, cots and so on, which are offered through the club
via Tesco's dotcom business. This widens the appeal of Tesco, making its service particularly
relevant to that customer's stage of life and interests. The birth of a first child marks a
significant period of change in a customer's life and possibly the biggest change in family
food shopping patterns until children are fully mature and “fly the nest”. So this is a fantastic
point to engage with the customer and the retailer can make the engagement extremely
relevant, supportive and focused through communicating baby-oriented information and
special offers.
These clubs are part of the one big picture as Tesco simultaneously analyses data derived
through the Clubcard and a customer's engagement with Tesco personal finance products. All
this information enables Tesco to understand a customer's individual requirements and to
respond to these with relevant offers.

Spotlight: To what extent has the loyalty programme aided Tesco's growth
(i.e. to become the largest UK supermarket chain, the world's largest internet
grocery supplier and one of Europe's fastest-growing financial services
companies)?

Clive Humby: The Clubcard has been the technical tool to enable Tesco to build up a
considerable insight into customer shopping behaviour. This insight includes knowing when
and where consumers shop, which tells us something about how an individual or a family
lives, and this in turn helps in terms of determining a launch strategy for financial service
products. Most of these products are sold through in-store promotions with Clubcard point
offers.

Meanwhile the Tesco brand is very strong and this image is reinforced because Tesco is
perceived through Clubcard as being relevant, offering value for money and giving the
impression of caring about customers. The points gained through the Clubcard are a
compelling part of the proposition. In addition, Clubcard data can also help the customer
wishing to buy online from Tesco. By giving a Clubcard number, items purchased on the
customer's most recent visits to Tesco stores will be listed as a useful memory jogger.

Spotlight: What are the most challenging aspects of running the Tesco
programme?

Clive Humby: The answer has to be the sheer scale of the operation. When we started out we
were breaking the mould as regards what computers could do with the sheer volume of data
we had and you are talking about tens of millions of transactions every week. Even today, it
is a huge challenge to make the data available quickly, usefully and at a price that's
affordable, and to get great insights from this information. In the UK alone there are probably
some 25 million Clubcard holders, which is equivalent to some 14 million homes.
Approximately 10 million of these cards are probably active.

Spotlight: How does Tesco determine whether shoppers are “loyal” to Tesco
or primarily “loyal” to Air Miles?

Clive Humby: That's easy. There are a substantial number of customers who joined the
Clubcard scheme long before Tesco introduced Air Miles, which were previously offered by
Sainsbury's. We know the people we attracted to Tesco when we won Air Miles from
Sainsbury's. We know whether people convert their money offers to Air Miles or whether
they use them for cash, spend them on treating themselves to holidays or other offers. We
also know how involved customers are in the broader Tesco brand such as clubs and financial
services. In addition we have a “share of shopping” model which predicts how much of their
shopping basket we win. All of this added together gives us an excellent picture of general
loyalty and loyalty to Tesco.
Spotlight: You note in Scoring Points that the customer relationship
management (CRM) boom faltered in 2002. Why was this?

Clive Humby: I believe it is still faltering and I also believe CRM is built on a fallacy because
customers don't want a relationship with their bank or their grocer or their supermarket. I've
been in this game a long time and I remember back in the 1970s when store credit cards first
came out and pundits forecast a “revolution” with customers using, for example, their Next
fashion store credit card to buy all sorts of unrelated goods and services. Well, this didn't
happen. The reality is that Next group is a fashion retailer and that's what customers want
from it.

Tesco does not have a CRM programme. Tesco has a loyalty scheme and what this is saying
is, “we get your data for giving you money back, and with the data we will give you a more
relevant experience in our shops because you choose to shop there”.

Much of the hype surrounding CRM overlooked the customer. There was nothing in it for the
customer. CRM became a means of doing things more cheaply such as introducing a
paperless relationship and offering the customer a £5 discount for signing up online. And
many customers were underwhelmed by such propositions.

Customers will rebel when they see personal data being used against their personal interests,
with offers made that are not relevant, or with offers made to new customers while
longstanding customers are ignored. Where is the relationship in that? Customers will
instantly recognize if they are being manipulated and this is something Tesco will not do.
Tesco's aim is quite simply to do a great job for the customer.

(This interview was first published in Emerald Now, www.emeraldinsight.com/now).

THE MANAGEMENT TODAY INTERVIEW: Sir Terry Leahy

By Chris Blackhurst Sunday, 01 February 2004

Starting as a shelf-stacker, Britain's Most Admired

business leader has spent his whole career at Tesco, lifting
it to fearsome market dominance.
Extract from interview ..............

Leahy's bosses, from the word go, rated him very highly indeed. It's too easy to knock his
control, his attention to detail, his permanent seriousness, but numerous masters down the
years have spotted something they like and want, and that sets him apart from the herd.

Leahy's colleagues clearly rate him. He's a combination of the very smart - 'He's always
seeing over the hill' was one description - and the very simple. There's no fuss with him, they
say, he's the sort of employee who would be a manager's dream: you give him a problem and
he'll go off and work until he's solved it. His co-workers respect him for his decision-making,
but he doesn't make his moves on a whim. At the top of Tesco, he's gathered round him
senior managers who've been with him and the group for years. Everything is analysed, taken
apart, discussed and put back together. He's in charge, but he's also collegiate.

What's his leadership style? 'I spend a lot of my time working on how I manage, I'm like
Martin Johnson driving at the bottom of a ruck. It's that, I hope, that makes the difference.'
Leahy may sometimes speak straight from the retail manager's phrasebook, and you may find
yourself wishing you had a dictionary to translate, but, contrary to appearances, he's not big
on statistics. 'I'm not a numbers junkie, I'm not one of those who can keep up with the takings
on a mobile phone.' Instead, he likes to walk around, to talk and to listen.

He meets with his executive committee every Monday and Wednesday morning for two
hours, but what makes Leahy different is the extraordinary degree to which he chats with
junior staff and absorbs their views, and the attention he pays to customers.

In Leahy's Tesco, the two - staff and customer - have become blurred.

Tesco, he says, has always prided itself on being an 'egalitarian organisation'.

It's a philosophy he's scrupulously followed. 'There are only six levels between me and a
check-out assistant.' Every member of staff has the opportunity to train and rise up the ladder.
This year, 10,000 Tesco staff will undergo training to move upwards.

'There's one bonus scheme for managers, all managers, including me. That's 3,000 managers.
Our Save As You Earn scheme is open to the whole business and has created 100,000
shareholders in Tesco - more than any other company.' He wants Tesco staff to take 'four
things from the job: they find it interesting, they're treated with respect, they have the chance
to get on, and they find their boss is helpful and not their biggest problem'.
That spills over into how Tesco sells its brand. 'We're all things to all men, all women.
Everybody is welcome in any of our stores. Some businesses are stronger in one section of
society and weaker in another; not us.

Being like that chimes with our values for the business. Customers know everybody will be
treated the same. They also know that we care about our staff.'

By now, Leahy is positively boiling over. 'There's no officer class at Tesco, we don't have a
graduate elite intake, there's no fast-track.' So speaks the chief who followed a girlfriend to
London, got a casual job stacking shelves in the local Tesco and never left. There can't be a
store he hasn't visited, a job he doesn't know.

The people he started out with back then in 1979 are his friends still today, many of them at
senior levels in the business. 'I must have spoken to thousands of staff - I've grown up with
many of them,' he says. His whole working life, and much of his social life, is Tesco. It's no
use him talking about any other business. Tesco is all he knows. It's what makes him appear
unreal and unworldly - a bit like the main character in The Truman Show.

In June, he went to a store in Royston and mucked in as a general assistant.

Come on, this sort of thing - it's all for show, isn't it? 'Not at all, I enjoy it, I find it very
satisfying. I'm learning as well. I want a better understanding of how these jobs are done.'

Leahy makes all his senior staff do it. Last year, 1,000 store managers worked in other stores
and 1,000 staff from head office did the same.

Top retailers will tell you how they visit stores and not just theirs but those of rivals, but
Leahy takes trading places to a different level.

Each week, he swoops on Tesco stores, wandering round, talking to staff and customers. And
each week he tours a competitor. Does he ever go into the big Morrison's down the road?
'Every week. I talk to their staff.

Some of them know me and show me round.'

Why can't he just put his feet up on his desk and bask in the glory of the soaring sales chart
and the awards that adorn his office? 'I don't go to check on things. I talk to people - I can
smell how things are.' It's a party piece of his to tell you to brace yourself for the secret of
successful retailing and then to say: 'It's this: never stop listening to customers and giving
them what they want. It's that simple.'

On his way up the executive pole, he commissioned a survey of 250,000 Tesco customers,
who said they wished Tesco would stop following Sainsbury and carve out its own identity. It
was a pivotal point in Tesco's history, the moment when Tesco struck out on its own and left
the rest of the industry trailing. It led to the Tesco Clubcard and Tesco Metro, the brand of
smaller, high street stores, and to offering just about anything in the stores.

The sea change propelled Leahy to the top job. 'We've worked very hard over the years to
organise ourselves from A to Z so we listen to customers.' Whether it's the Clubcard loyalty
scheme or focus groups in stores or letters to him, Leahy puts them first. He answers every
customer letter he gets personally. 'They really do matter. It's their values we live by.'

It's those values that tell him he's right to fight the farming and corner-shop lobbies, that
Tesco customers vote with their feet. Some farmers who can't match the quality he demands
and some corner shops that can't compete may go out of business, but so what? 'We're selling
50% more food than we did five years ago; we're the biggest customer of British farming
there is and we've created 100,000 jobs in the last five years.'

There can't be a more grounded senior manager in Britain than Leahy.

There's his roots, the working up from the bottom, the ethos of the firm.

Then there's his family: away from work it's his pride and joy. He plays with his children,
aged 11 to 15, watches football with them. His wife is a GP. They sound like classic Tesco
customer material.

People get him wrong, he says, when they assume he could never walk away from the job.
'I'm not obsessional about it, so it's not as if I can't give it up. My family matters to me a
tremendous amount.' But he stresses that he has no plans to quit.

Not even to run the NHS, where his wife works? 'I'm determined to achieve much for Tesco.'
He's been in charge for only six years, there's plenty still to do. 'Our market share of UK
retailing is 12.5% - that leaves 87.5% to go after,' he says, grinning.

You know that where Leahy's concerned, there's no such thing as an idle boast. Behind the
smile, he's deadly serious.

...but four tough issues confront Leahy

1 How long will it be before J Sainsbury finally fights back? And will Wal-Mart move to
check Tesco's global ambitions?

2 With an all-powerful, apparently unassailable CEO aged only 47, how does Tesco hang on
to its talented senior management?

3 What of the famously difficult relationship with suppliers? What can be done to make these
less oppressive and one-sided?

4 And will a reinvigorated Safeway under Sir Ken Morrison - more than 30 years Leahy's
senior and with a wealth of retail experience - eat Tesco's lunch?