CorpComms Magazine

When the results of the first trials of Clubcard were revealed to the executive board of supermarket giant Tesco more than 10 years ago, in November 1994, there was a prolonged and awkward silence.

After listening to a 30-minute presentation about customer response rates, the impact on like-for-like sales and a mind-boggling array of data collected from 14 stores, Sir Ian McLaurin, then Tesco chairman, appeared deep in contemplation. He finally broke the silence with a remark that has gone down in retail history. 'What scares me,' he said, 'is that you know more about my customers after just three months than I do after 30 years.'

Of all modern business stories, few can claim to be as successful as Tesco, and probably none other owes its success to such a modest-looking innovation - in physical terms, at least - as the Clubcard. Barely three inches long by one and a half wide (the size and appearance of a credit card), it's no exaggeration to say that this small strip of plastic has had an inordinate impact upon the supermarket's fortunes.

Before Clubcard's launch in February 1995, Tesco was languishing a poor second behind Sainsbury's in the grocery market and, no matter what it did, appeared unable to catch Britain's favourite supermarket. Since then it has nearly doubled its market share to 31 percent of the UK's £100 bn grocery market, making it by far the largest of the big four: Tesco, Sainsbury's, Asda and Morrison. No matter what they do, the others now appear unable to catch Tesco.

By any token the statistics are awesome. Tesco makes £2.2 bn profits a year, or £69 a second, and nearly £1 in every £7 spent in the UK's shops goes through its tills. Every four weeks, two thirds of British households shop at Tesco. As well as being Britain's largest grocer, it is also the world's most successful internet supermarket, one of Europe's fastest-growing financial services companies and, with more than 240,000 staff, the UK's largest private-sector employer.

About 80 percent of Tesco's customers - 13 mn people - are now act ive Clubcard members. They receive more than £300 mn every year to reward them for their loyalty. Four times a year, 6 mn different combinations of vouchers and coupons are sent to Clubcard members along with their account statements. Indeed, these massive quarterly mailshots represent 6 percent of the UK's annual post, and there is a noticeable rise in sales in the following weeks.

'Ever since Clubcard was started in 1995, this has been our way of saying Thank you to our customers and we've tried to keep it like that,' explains Andrew Mann, Clubcard marketing director at Tesco. 'It is very much in the tradition of Jack Cohen, who founded Tesco in 1919 on a market stall in London. He knew his customers - and he knew how to listen to them. Clubcard is just a 21st century way of doing the same thing.'

Humble beginnings

Although widely regarded as the most successful loyalty card, Clubcard was by no means the first. As far back as the 1840s the Co-operative movement in Britain was paying its members a dividend (or 'divi') according to how much they spent, and by the start of the Second World War the system had 11 mn members.

By the 1970s many retailers, including Tesco and the Co-op, rewarded customers for their spending with stamps that could be exchanged for a variety of goods - the same Green Shield Stamps famously abolished by Lord McLaurin when he replaced Cohen.

It was not until 1988 that the first modern-day loyalty programmes were introduced, with the launch of British Airways' Air Miles, inspired by similar airline schemes in the US. By the early 1990s, improvements in technology and growth in the IT industry meant it was now possible to make sense of the huge volumes of data a supermarket loyalty scheme would create.

Under Terry Leahy, then marketing director, Tesco set about a series of trials designed to establish whether a loyalty card scheme could be cost-effective and what benefits it might bring to the business. During the first trial, Project Omega, shoppers at three stores in the south of England were invited to join the Clubcard programme and offered rewards of either 1p or 2p for every £1 they spent. Within a week figures showed that, out of every £10 spent at the participating stores, Clubcard holders spent £6.

The following year the trial was extended to 14 stores, and less than a year later Clubcard, with an easy-tocomplete application form and the offer of a 1p reward for every pound spent, was rolled out across the UK.

Though initially limited to the amount each customer had spent and where and when he or she had spent it, the data from the cards became increasingly detailed. With the help of Dunnhumby, a start-up company founded by husband-and-wife team Edwina Dunn and Clive Humby that specialised in data analysis, Tesco begin to 'mine' the data to reveal precise patterns about its customers' behaviour. Through quarterly direct mail-outs, it was then able to offer specific vouchers and discounts based upon their spending habits.

The trials revealed, for example, that contrary to common assumptions, people didn't shop at a supermarket for everything. Often, they went elsewhere for fresh meat and bread. This presented Tesco with an opportunity to fill those gaps: customers who did not buy a certain item at Tesco were sent vouchers to encourage them to buy it there.

Spending patterns

'Clubcard allowed us to find out some very interesting things,' says Mann. 'For example, when you have a baby it transforms your life. As a result of Clubcard we were able to identify when people had a baby because they started buying nappies, so we set up the Tesco Baby Club and invited people to join.

'As part of Baby Club we give customers information about baby products, but we also give them information about other, seemingly unrelated stuff. We know, for instance, that people who have babies tend to buy more Dvds because they can't get out to the cinema as much, and more beer and wine because they can't go to the pub.

'About two years ago we noticed there were a lot of people who were saving their vouchers after being given them every quarter, and then waiting until Christmas to spend them. We talked to them and discovered that it was their way of saving for Christmas, so we started a Christmas savers' club. With this club, instead of members physically collecting their vouchers and putting them in a drawer, Tesco saves them for you and sends them out at the end of November. We launched the club two years ago and now we have 350,000 members.'

More recently, Tesco upgraded its wine stock after Dunnhumby revealed that at Christmas, for example, some customers were trading up from a £5.99 bottle to wines the supermarket did not offer. In short, it was losing customers to specialist wine merchants.

Every single basket of shopping that passes through Tesco's tills - what analysts call 'item-level data' - is logged in Tesco's own IT systems and those at Dunnhumby, which gathers 5 bn pieces of data every week from the chain's 2,300 stores. Each product has dozens of different values assigned to it, from price and size of packaging to whether it is an ethnic or a traditionally British food. Shoppers are divided into roughly 10 categories, from 'convenience' and 'price-sensitive' to more upmarket customers who buy 'finer foods'. In between are the midmarket group or 'mainstream' customers, including families and those who buy 'commonplace' brands. Dunnhumby can hone its analysis to distinguish singleton shoppers on Valentine's Day from customers who want the chain to do more environmental good.

Countless imitations

Since Clubcard was launched in 1995, virtually every large retailer has introduced its own loyalty card scheme. Some, such as Asda, part of the Wal-Mart Group, have not, insisting that their own customer loyalty programme is simply a commitment to low prices. But there are now rumours that Wal-Mart may actually be considering a scheme. In France, supermarket giant Casino has recently hired Dunnhumby's services and supermarket chains in Australia have conceded they are considering a similar initiative.

But despite countless imitations, Clubcard remains the industry standard. 'Tesco is the one that uses the information best to enrich the customer experience,' explains Richard.

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