Tesco knows loyalty like no other
In fall 2007, the United States will have its first experience of Tesco. After more than 10 years of rising market share and profits, Tesco dominates the British retail business so thoroughly that out of every $7 spent on retail in the United Kingdom, $1 is spent at its stores. Today Tesco is one of the world’s top five retailers. Back in 1995, Tesco wasn’t even the largest British supermarket.
The exact schedule for the launch of between 100 and 300 Tesco Fresh & Easy Neighborhood Market stores is a secret so closely guarded that Tesco pretended its prototype U.S. store was a film set. Competitors who want to know what the layout will look like have to play secret agent. If they want to know how Tesco plans to win over the U.S. consumer, that’s not a mystery.
Retail analysts at JP Morgan Cazenove released a detailed analysis of Tesco in 2005 concluding that “Tesco’s most significant competitive advantage” was not its scale, its buying power or its range—it was its loyalty program.
In the United Kingdom, Tesco builds loyalty most visibly by using its Clubcard, which gives shoppers approximately 1% of their spend back in vouchers, plus a set of targeted coupons, in a mailing every three months. The customer data from Clubcard users helps decide ranging, opening hours, which products to promote, who to promote them to, even where to site new stores.
For Tesco, customer loyalty is not primarily about plastic cards. Only in South Korea and the Republic of Ireland has Tesco launched a loyalty card outside the United Kingdom. The loyalty program that Tesco exports everywhere else isn’t a piece of plastic, it’s an approach to customers that’s profoundly different from that of most retailers.
The first element: Short-term goals must always align with (and be subservient to) the long term. Look on the back of a Tesco exec’s card and you may see the “core purpose” written there: “To create value for customers to earn their lifetime loyalty.” Note that it’s a lifetime, not just the next quarter. So every activity should enhance loyalty first; in turn, this creates sales. For example, sometimes Tesco offers vouchers for a popular product for free, but it measures the success or failure of the investment by tracking those customers over months, not simply on the spend from a single shopping trip.
The second—and related—element: Discounts offered are a “thank you” for loyalty first, a sales driver second. So, Tesco doggedly refuses to take supplier marketing money to promote products if it thinks the benefit is skewed too far to the supplier. Loyalty marketing is not a tool to help the sales team make its bonus, and that means sometimes saying no to cynical sales-driving promotions which coerce the customer.
The third element: In promotions, less is more. For example, Tesco’s principle of “Air Traffic Control”means customers don’t get mailed more than once a month, and all mailings must pass a committee of Tesco execs. If they decide it’s all about profit for Tesco, the mailing gets trashed. The number of in-store promotions have been cut to focus on quality, emphasizing underserved customer needs, and so driving long-term sales growth. Price cuts are often targeted on products that only price-conscious customers buy, not products everyone buys.
The fourth element: Customers aren’t fools and they don’t like being duped. So talking yourself up and not delivering in-store is worse than not saying anything at all. A good “customer journey” creates trust, and a bad one destroys it; without trust there can be no loyalty.
The fifth element: Think the unthinkable and act on the result. Tesco uses customer data to challenge conventional wisdom. For example, often CPG suppliers target promotions to attract new customers to the brand. Tesco’s response might be: Why should we help you do this? The reasoning is that most of the people who don’t buy the brand don’t buy because the brand is wrong for them in some way. Tesco’s sales data shows that promotions often have no long-term effect if this is the case. So instead, why not promote your product to customers that buy your brand already, deepening their loyalty?
Memo to supplier reps: Put long-term customer relationships first when you meet Tesco’s combative senior management or you’ll have a difficult meeting. Tesco marketers have a motto: “Reward the behavior you seek.” Corollary: Don’t ask us to reward the behavior we don’t seek.
Tesco is starting at a disadvantage in the United States because it doesn’t know nearly as much about American consumers as it does in Europe, mostly because it doesn’t have any yet. Also, it can’t target specific offers to customer segments as it does in the United Kingdom, where there are 5 million variations of the quarterly coupon mailing and half the country has a Clubcard. On the other hand, it has a history of relentless focus, creative culture and unorthodox problem solving. Tesco management also knows its customers: C-level executives spend a week every year working in a store; it’s no coincidence that Tesco’s ceo started out stacking shelves.
Will Tesco launch Clubcard U.S.? Probably not in the near future. Card-based loyalty programs are expensive, and Tesco U.K. has the luxury of operating margins five times the average in the United States. But building lifetime loyalty will still be Tesco’s core purpose—not least because its first U.S. chief is Tim Mason, who as a young marketing exec in 1989 helped his director to create Tesco’s loyalty strategy. That marketing director was Terry Leahy, and he’s still Mason’s boss, because since 1997 he has been ceo of Tesco. And as Leahy says, “A good company is run on principles and values; it is not run on last week’s results…Clubcard is entirely consistent with that.”