• Tesco launched its Clubcard, the UK's first nationwide supermarket-only loyalty card scheme, in 1995. Tesco's clubcard is the greatest proof of how customer intelligence can add significant value to a retail business.
• Without sufficient knowledge of their customers' behaviors and buying habits, many large scale retailers are doomed to failure. Retailers are continually recognising that customer intelligence is a key factor in differentiating winners from the losers in the retail sector.
• Information about what Tesco customers spend, what they eat and how they shop is being collected through Tesco's loyalty schemes in order to build up a profile of customer habits. This customer data has helped Tesco to understand what their customer is after, and replace intuition with actual data and actual facts. And it's those facts that are driving large retail chains decision making.

Everybody knows that knowledge is power so it seems strange that many retailers seem to have little insight into their customers. But their interest is growing as they increasingly recognise customer intelligence is now a key factor in differentiating winners from the losers in the retail sector. An example of how important it has become (in all parts of the business world) is the recent Business Week ‘Best Performers 2007' survey. This concluded that the key distinguishing factor of many companies in the top 50 was a deep understanding of their customers.

This gave them the competitive advantage to sell more goods and services than their rivals. And nobody would argue that the likes of Google, Goldman Sachs and Amazon, which finished high in the list, are exemplars in using customer knowledge to drive sales.

Nowhere is the increased desire for customer insight more evident than in the ultra-competitive food retailing sector. So much so in fact that even the mighty Wal-Mart is in the midst of jumping onboard.

As the creator of the long-standing Every Day Low Prices
(EDLP) strategy (that was pretty much adopted by all retailers around the globe in recent years) it believed that all it needed to attract customers was low prices.

But it now realises this view was wrong and that its myopic focus has limited its business development. For a company not keen on showing any signs of weakness it was pretty open in admitting that it had to become more
Customer-focused: "Broad stroke ‘Always Low Prices' has not allowed us to develop some of the businesses to their full potential, because that doesn't resonate with the customers."

Nowhere has Wal-Mart seen greater proof of how customer intelligence can add significant value to a retail business than with Tesco. For some years the Wal-Mart owned Asda has been losing ground to Tesco in the UK as it increasingly capitalises on its extensive customer knowledge to drive sales harder and move into new categories.

It's fair to say that Tesco's insight into its customers is regarded as second to none in the retail world. And what makes this possible is marketing data specialist Dunnhumby (of which Tesco owns 83%). So successful is it that the company has also sold its services to Kroger a US-based supermarket and general store business that operates over 2,500 outlets that trade under a variety of fascias including Fred Meyer, Kroger and Dillons and also to leading French supermarket operator Groupe Casino.

It has helped Kroger to stage a recovery against Wal-Mart after a long period of losing ground. Unsurprisingly, its smaller scale meant it was unable to fight on an equal footing with Wal-Mart using an EDLP strategy. It has been using Dunnhumby's expertise with customer data to segment
- or tailor - its stores to their specific local markets.

The Kroger chairman and chief executive David Dillon has described the data company as his secret weapon in fighting Wal-Mart: "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."

Dunnhumby analyses the sales data from stores to enable it to construct complex marketing strategies and promotional campaigns. This essential information on actual buying behaviour has guided most of the key decisions taken by the management team at Tesco in recent years (such as the launches of both Tesco.com and its financial services arm, and its entry into non-food categories such as clothing). It will increasingly have the same effect on Kroger and will likely do the same for Casino in the future (the link-up was only announced in October 2006).

What makes is possible to enjoy such customer insight from the data analysis at these retailers are their loyalty schemes through which they are able to collect personal details on their customers and to link this with the purchases that they make in-store. Such loyalty schemes have not been regarded as particularly good ideas to date and Tesco has received much criticism about its loyalty program since its launch in 1995. They were just seen as a cost on a business since they would reduce margin as customers collected points to redeem against goods or money off their shopping bills. David Sainsbury infamously dismissed it as "no better than electronic Green Shield stamps".

But he was to eat his words many times over because since the first customer signed up to the scheme it has provided much of the fuel that has powered Tesco to the top of the UK retailing tree. It is no coincidence that since Tesco launched the scheme it has overtaken Sainsbury's to become, by a long way, the UK's largest retailer.

Within only a few months its impact was obvious. Research showed that customers spent 28% more at Tesco while cutting their spending at Sainsbury's by 16%. This had a major effect on the market shares of the two companies with Sainsbury's having a 19.4% share in January 1995 compared with Tesco on 18.1% but by May of that year the formers share had slipped to 18.8% while the latter had grabbed a 19.4% share. This trend has continued to this day and Tesco now commands a 31.3% share against the 16.5% of Sainsbury's.
From day one Tesco knew that the scheme would provide a whole lot more than simply allowing people to collect loyalty points to reduce their shopping bill. In fact this was never the point of the exercise because the point-accrual mechanism was simply the carrot to customers that would get them to dig out their loyalty cards whenever they visited a Tesco store, thereby enabling Tesco to collect data on them.

But as other retailers launched their own loyalty programs they soon recognised that collecting data is one thing but making sense of it and transforming it into customer intelligence is a completely different matter.

It was an inability to overcome this problem that prompted Sainsbury's (yes it did ultimately launch a loyalty card despite David Sainsbury), Safeway, Somerfield, Asda and Waitrose to abandon their schemes one-by-one.

Just consider that even when Clubcard had a mere five million cardholders, during a three-month trial of the scheme, Tesco had to deal with 50 million shopping trips that comprised 50 billion purchased items. What made the analysis of this data mountain possible was the decision by Dunnhumby to only analyse 10% of the data and then apply the findings back to the other 90%. It realised that even a 10% sample could give 90% accuracy whereas the massively more complex and expensive task of analysing a much larger percentage of data might only deliver 95% certainty so it came to the conclusion that crunching any more than 10% of the numbers was simply not worth the cost or effort.

So powerful were the findings from this trial period that the then Tesco boss Ian MacLaurin said: "You know more about my customers in three months than I know in 30 years." The belief at Tesco was that if Dunnhumby could replicate the success from the trial across the whole business then there was a chance that it could propel the company to become the UK's number one food retailer – displacing Sainsbury's. Since this has come to pass Dunnhumby has played a serious part in customer intelligence creeping up the agenda of an increasing number of retailers. They have come to realise that without sufficient knowledge of their customers' behaviour and buying habits then they are doomed to failure.
A number of years ago I spoke with a former chief executive of Wal-Mart and asked him whether the company – and its UK arm Asda – would be likely to introduce a loyalty scheme to learn more about its customers and he gave a categorical ‘no'. Although he was right and neither company has launched such a scheme this is not to say that they won't in the future. Especially as Wal-Mart will soon find itself competing directly with Tesco on US soil as the UK supermarket will shortly be opening a chain of ‘Fresh & Easy' shops on the West Coast.

Ominously for Wal-Mart, the Tesco boss Sir Terry Leahy recently stated that the company intended to roll out its Clubcard scheme to each of the countries in which it operates thereby throwing up the scenario where Wal-Mart could be facing the might of Tesco's customer insight on its own doorstep.
But even if Wal-Mart resists committing to a scheme there is little doubt that it is increasingly looking to learn more about its customers having recognised that price in no longer the be-all-and-end-all for consumers.

To this end last year it appointed a new head of marketing who had previously spent 19 years at Target – which is recognised as very proficient in targeting segments of customers through focused marketing made possible by customer insight. Target has proved itself particularly adept at extracting more money out of its customers by targeting them more effectively through knowledge of their behaviour, thereby achieving higher profits out of its existing stores. Target's business is regarded as the ‘up market discounter' in the US.

Wal-Mart is now attempting to follow the same path. Its new marketing man has set up a market research and consumer insights competency that is intended to help the company adopt a marketing approach that focuses on specific categories. This will help it to introduce new categories and better tailor the mix of goods in each of its stores so they are better suited to their location and customer bases.

There is evidence that retailers are using various methods to boost their customer knowledge without necessarily running their own loyalty scheme. The multi- retailer loyalty program Nectar is one example of how retailers have been able to increase their customer knowledge without running their own scheme. In the UK Nectar has signed up some serious retail names including Sainsbury's, Debenhams and Dollond & Aitchison but although it provides the mechanism for cardholders to collect and redeem points it is nowhere near as effective at providing customer insight as Dunnhumby is for Tesco and Kroger.

To address the increasing demand for such insight Nectar is now working on creating a data analytics division (a la Dunnhumby) that will enable it to make much better sense of the mass of data that it collects each day on behalf of its retail clients. Tesco has successfully used market intelligence to steal a march on its competitors who are now belatedly waking up to its potential.

By Glynn Davis for The Daily Reckoning. You can read more from Glynn and many others at www.dailyreckoning.co.uk

Editor's note: Glynn Davis is retail and leisure correspondent for The Fleet Street Letter. He also writes for The Grocer magazine, Retail Week and several national newspapers.