Loyalty Cards Not in Tesco's Initial U.S. Plans

MICHAEL GARRY

El Segundo, Calif. — Although Tesco's loyalty card marketing has been fundamental to its success as the leading food retailer in the United Kingdom, it does not appear that Tesco will be running a loyalty card system right away when it launches its 10,000-square-foot Fresh & Easy Neighborhood Market stores in Southern California on Nov. 8.

Tesco “has no plans at present” to offer loyalty cards, said Martin Hayward, director of consumer strategy at London-based Dunnhumby, Tesco's loyalty marketing partner, which is 51% owned by Tesco. Greg Sage, Tesco's international corporate affairs manager, told SN that “we haven't said if we're using [a loyalty card]. We're not disclosing it.”

But that stance could well change. In an interview with the U.K publication Retail Week earlier this year, Tesco chief executive Terry Leahy vowed to launch Tesco's Clubcard loyalty card in all of the 12 countries outside the U.K. where the retailer operates, including the United States. The card is currently used in the Republic of Ireland and South Korea, in addition to the U.K.

Nonetheless, Leahy cautioned that Tesco needed to have “scalable” operations in a country before launching the Clubcard. “You need to be of a certain size to make good use of Clubcard, because you have to develop quite expensive insight teams that can properly analyze the data and respond to the information,” he said to Retail Week. “It is important that it does not just end up being a cheap promotional tool.”

The company's loyalty card marketing system is only part — though a big part — of the substantial collection of technology and supply chain programs that the U.K.-based retailer brings to its worldwide operations. In Tesco, whose U.S. operations will be based here, U.S. retailers will be competing with a retailer that invests in and makes use of technology like few other retailers outside of Wal-Mart Stores.

In its home market, Tesco has also enjoyed notable success with its Tesco.com online shopping business. And it has shown a penchant for being among the first to apply such innovations as RFID, infrared sensors that enable it to minimize checkout waiting time, and even a DNA-based tracing system for meat products.

As it has expanded its presence outside the U.K. across 12 countries, Tesco has applied a strategy called “Tesco in a Box,” which is a common suite of processes and systems it can roll out anywhere. But in an interview last month on Silicon.com, Colin Cobain, Tesco's group IT director, said the strategy, renamed “the Operating Model,” is being updated and will now be based on the systems and processes developed for the U.S., which will be replicated in other global markets.

This should put even greater focus on which technologies Tesco will employ in the U.S., where it will open 30 stores this year in the Los Angeles area, San Diego, Phoenix and Las Vegas, followed by 20 more by the end of February and 100 additional outlets that are in the pipeline.

Industry observers still expect one of those systems to be the Clubcard loyalty program. “I'd be very surprised if there's no card presence shortly after they launch,” said Mike Griswold, research director, AMR Research, Boston. “It gives them a gold mine of data, and they're excellent at mining that data for customer insights.” Moreover, the CEO of Tesco's U.S. operation, Tim Mason, was one of the architects of Tesco's U.K. loyalty program.

According to London-based consultant Tim Phillips, writing on CustomerThink.com, Tesco focuses its loyalty promotions on “the most loyal 40% of customers,” who generate 88% of its revenues. It also uses Clubcard data, he said, as “the driver behind the products it stocks,” especially in the small-format neighborhood stores, which are the model for its U.S. stores.

Tesco is also using Trade Dimensions, a service of the Nielsen Co., New York, to access data on the locations of supermarkets and other retail locations.

Should Tesco bring its Clubcard program to the U.S., it will find itself competing with Kroger divisions like Ralphs and Fry's, which also have loyalty cards. As it happens, Kroger has a 50-50 partnership with Dunnhumby USA, Dunnhumby's U.S. subsidiary. But Sage said that Tesco and Kroger both having ownership stakes in the same loyalty marketing company would not be a problem. “Dunnhumby has measures in place to ensure that the confidentiality of its clients is maintained,” he said.

If Tesco starts an online business in the U.S., it won't have any potential conflicts, having sold its share of GroceryWorks, a U.S. online grocery business, to Safeway. Safeway purchased the balance of the equity in GroceryWorks it did not already own from Tesco and a private equity firm a year ago.

One application that Tesco will be using right away in the U.S. is a time-tested continuous replenishment program developed in the U.K., where it runs on an IBM mainframe. The program allows Tesco to generate orders for its stores based on each store's point-of-sale data — what is known as computer-generated ordering. “It's a key part of Tesco's competitive advantage in the U.K.,” said Stuart McGill, chief technical officer, Micro Focus, Newbury, U.K.

Private label, a major part of Tesco's product offering in the U.K., will also be prominent in the U.S., especially for fresh and prepared items. In the U.K., Tesco employs a private-label development system called Creations, from RedSky IT, which was acquired by Micros Systems, Columbia, Md., in January. Last November, Red Sky IT said it won a contract to supply Tesco's U.S. operation with the Creations system. Micros declined to confirm or deny the project without Tesco's permission to do so.