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Friday, 29 August 2014

What to do with Clubcard and dunnhumby ?

Dave Lewis, Tesco's new CEO,starts on Monday and amongst the many questions he needs to consider, one will be "What to do with Clubcard and dunnhumby ? "

Clubcard launched in 1995 was a key factor in Tesco's rapid growth through the late 1990's and 2000's. It immediately added lfl sales growth of around 4%-5%, attracted £100's of millions of incremental marketing support from major brands and enabled Tesco to improve site location planning, store ranging, pricing and promotions effectiveness.  

Their long term partnership and subsequent acquisition of dunnhumby, who provide analytics and marketing service support to Tesco, but also their suppliers and other retailers around the world, has created an asset worth £1.5bn

Nevertheless Clubcard is highly expensive. The key cost is the points. Tesco give away c.1% of sales -  c25% of total company profits. In addition there the 100's of million of bits of paper that have to be printed, posted, collected and counted and the incremental staff costs required to man call centres, run the IT systems, distribute rewards and brief the various agency partners. 

c12-14 million shoppers regularly scan their Clubcard and carry it in their wallet or on their key fob. Customers like the little bit extra, the something for nothing that comes from swiping their cards, as well as the personalised offers and the ability to trade points for 2 or 3x their value for a meal out, holiday, family leisure activity or petrol. 

Despite its cost it would be unthinkable to take Clubcard away. The subsequent loss of business would be catastrophic  - greatly outweighing any potential cost savings. When Sainsbury's gave up the far less popular Air Miles programme in 2001 they lost 1% lfl overnight.

Evolving Clubcard is the better option. A number of choices stand out, virtually all of which should have been in place by now. It reflects poorly on the Clubcard team that there has been next to no significant innovation on Clubcard for over 10 years. 

Here are 5 ideas to consider : 

1. Extend the collection opportunities beyond Tesco
Tesco could enable many non competing retailers and service providers to offer Clubcard points to their customers, and could make a tidy profit from doing so. Esso and E-on are a good start but there are many more unrealised collection opportunities particularly on-line. 

2. Make Clubcard a payment vehicle  
Clubcard points are a already medium of exchange but  they could evolve into a currency usable to pay for a wide range of products and services. Tesco's ability to validate customer ID, trusted processes to keep data safe and secure and financial services capability, enables them to become a payment service provider to rival Paypal in the UK.

3. Go Digital 
Its a crime against innovation that Tesco still require customers to scan a piece of plastic and to carry and redeem 100s of millions of pieces of paper, when digital coupon redemption has been around for many years. They have made decent progress on the digital redemption of leisure vouchers (eg with Pizza Express), the majority of which are now sent by phone. Progress in their own stores has been virtually non existent. Solutions exist that would enable customers to scan their phone or simply  register their debit or credit card in order to have their purchases tracked and points allocated or redeemed without the need for a separate card. Better for customers, simpler for staff, cheaper for Tesco. 

4. Lead the newly emerging market for Personal Data Clouds
Most customers trust Tesco to look after their data and to keep it secure. They understand the implicit contract that comes from swiping a card - "you give me points" - "I tell you about my shopping habits" - "you use that information to send me useful stuff". Tesco could use this trust to navigate the internet to search, qualify and source the information, products, services and offers that would help customers to get more of the things they want more easily and cheaply. PDC's are expected to emerge as a multi £billion market opportunity, Tesco should seek to become market leader 

5. Unleash dunnhumby 
Tesco performed better when dunnhumby was at arms length as a semi independent service provider than they have since they owned it outright. They could sell some or all of dunnhumby - particularly the vast majority that serves 3rd party companies - (whilst keeping all that they need to service their own requirements). Generating profits of £70+m with high growth rate and a reputation as a leader in the burgeoning world of "big data" -  dunnhumby is likely to attract a valuation north of £1.5bn (almost 10% of Tesco's market capitalisation). Tesco could retain a golden share and key IP whilst allowing dunnhumby to  to partner with some combination of a major private equity fund, a global marketing services provider (eg WPP) or global consulting entity to enable it to properly compete as a serious player in the digital and data services space. 







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