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Saturday, 28 September 2013

dunnhumby vs emnos (Tesco/Kroger vs American Express)

dunnhumby USA are suing emnos USA for patent infringement of their "Shop" analytical tool. dunnhumby have filed a lawsuit Civil Action No. 1:13-cv-00399;) in the U.S. District Court for the Northern District of Illinois although the case is yet to be heard. 

There's a lot of interest in the outcome not least as it pits two of the world's leading retailers (Tesco and Kroger - co-owners of dunnhumby USA) against American Express (owners of emnos).

dunnhumby's "Shop" enables subscribers to analyze a retailer's customer data - ie their epos sales data linked to a unique customer ID - via a web based portal.

The patent was granted in 2004 following the launch of The Shop to Kroger and their suppliers around the same time. "The Shop" was developed by dunnhumby UK ltd in 2001 as a way of automating the delivery of analysis to Tesco's suppliers following the launch of dunnhumby Retail in the same year. dunnhumby Retail was a new division which was set up and led by Steve Gray to enable dunnhumby to provide marketing services derived from Tesco's Clubcard data to Tesco's suppliers. 

In return for enabling dunnhumby to provide these services on an exclusive basis, Tesco took a 53% stake in dunnhumby which at the time had sales of £10m and profits of £0.5m. 

"The Shop" became a "must have" tool for Tesco's suppliers, enabling them to understand what types of shoppers were buying their products, in what store formats, at what frequency and with what other products. The tool was used to improve marketing,  promotional and NPD activity and to identify opportunities for personalised marketing via Tesco's Clubcard media platform. No other research tool provided the same level of granular insights and the ability to accurately track and measure the impact of retail media over such a wide user base. 

The use of Clubcard insights, linked to personalised marketing activity proved transformational for Tesco and over the next 10 years their share of the UK grew from around 20% to around 30%. Tesco's CEO, Sir Terry Leahy, has described Clubcard, which was launched in 1995, as the smartest idea he ever had "It transformed the prospects for Tesco and introduced a new way of managing our relationship with customers" (Market Leader Q4 2013). 

Similarly for dunnhumby. Tesco represented 40% of dunnhumby's £10m billings in 2001 but the deal to open up Clubcard data to suppliers enabled dunnhumby to grow sales to £65m and make profits of £13m by 2006. dunnhumby's founders sold an additional 30% of their shares to Tesco that year giving Tesco 83% of the equity. 

The business model that had been developed with Tesco and their suppliers in the UK was replicated by dunnhumby with Kroger, the USA's second biggest grocery chain, following the creation of dunnhumby USA (50% owned by dunnhumby UK Ltd and 50% owned by Kroger). The decision by the Kroger CEO, Dave Dillon, to bet the company on their "customer first" strategy also proved transformational for Kroger. At a time when many in the industry expected them to be crushed by Wal*Mart, Kroger's smart use of customer data enabled them to make better pricing, promotional and ranging decisions, understanding where expenditure was being wasted and re-targeting it on price sensitive products bought by price sensitive shoppers, optimising ranging and layouts and replicating Tesco's successful personalised marketing activity. Consequently Kroger have consistently grown sales, market share and their enterprise value. Dillon who became CEO in 2003 doubled Kroger's sales in the subsequent decade and attributes much of his success to dunnhumby. “dunnhumby has helped me reset my understanding of what the customer is after, and it helps replace intuition with actual data and actual facts. And it’s those facts that are driving our decision-making.” - David B. Dillon, Chairman and Chief Executive Officer (quoted on the dunnhumby website). 

Dave Dillon and his leadership team went to great lengths to ensure that their suppliers used dunnhumby's tools, coupons and processes and this created a profits bonanza for dunnhumby USA who were able to charge c. 4-5x the pricing realisable in the UK as a consequence of the market size, Kroger's share within it and the size of its active customer base.  

The profits enabled Kroger not only to cover all of the costs of the rapidly growing number of consultants and data scientists recruited into dunnhumby USA but to generate a significant surplus. 

50% of the profits meanwhile flowed back to dunnhumby UK Ltd and in addition they also recouped £ millions in IP and licencing fees payable into dunnhumby USA by Kroger and its suppliers. Tesco acquired the remaining 17% of dunnhumby shares in 2011 in order to own it outright and dunnhumby now delivers c.£70million of profits for Tesco - worth an estimated £1.5bn - should Tesco ever choose to monetise their ownership. 

Along the way there have been a number of spin offs from dunnhumby. The first of which, 5One, gave birth to emnos. 

emnos began life as 5One Germany - a JV with Loyalty Partner gmbh and 5One UK Ltd formed in 2004 but disbanded within a year. The founders of 50ne decided to focus on the UK and South African markets and the 5One Germany team rechristened themselves as "emnos" (taken from a hybrid of the latin words for shopper, emptor, and to know, noscere) and merging with the in house analytics team of PAYBACK gmbh (owners and operators of Europe's largest and most successful coalition loyalty programme).       

emnos followed a similar business model to dunnhumby partnering with amongst others Metro Group, Carrefour, Boots, Morrisons, Waitrose, Co-op, Woolworths Australia, Target and Walgreens. Interestingly emnos tried to buy 5One in 2007 but were outbid by BNP Paribas owned Laser.

emnos developed a look a like version of "The Shop" which is branded "Analyzer" in 2007 using a different underlying architecture and introducing a number of new features. They developed the tool working with Carrefour, although Carrefour did not own any IP and never showed the same enthusiasm for customer data led decision making as Tesco or Kroger. emnos entered the USA market in 2008 working with Target and subsequently Walgreens. 

emnos, PAYBACK and their holding company Loyalty Partner gmbh were sold to American Express for $660m in 2011 which makes the patent dispute more interesting as in effect it pits Tesco and Kroger against American Express. 

It will be interesting to watch the outcome.  



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