Data Analysis Guides Kroger's Marketing, Merchandising

GLYNN DAVIS

CINCINNATI — Kroger Co. here, the largest traditional supermarket chain in the United States, knows its customers — perhaps as well as the mom-and-pop operators who can greet their shoppers by name.

The company owes this knowledge to its partnership with British customer insight specialist Dunnhumby, which is now owned by U.K.-based supermarket giant Tesco.

Dunnhumby played a significant part in helping Tesco overtake Sainsbury's as the U.K.'s leading supermarket, and since officially setting up a joint venture with Dunnhumby in October 2003, Kroger has managed to deliver positive identical- supermarket sales for 15 consecutive quarters (excluding fuel), leading David Dillon, Kroger's chief executive officer, to refer to Dunnhumby as its “secret weapon.”

In a nutshell, what the organization is doing for Kroger and Tesco is analyzing the mass of data that their loyalty programs create in order to gain some insight into the behavior and buying patterns of their customers. This information is then applied to their merchandising and promotional activities to help drive sales.

“Kroger has lots of data, as it has had a loyalty card [the Kroger Plus Card] since 1999, but it did not have the skills and resources to exploit it,” Simon Hay, CEO of DunnhumbyUSA, told SN in a recent interview in London. “Lots of people lay claim to having expertise in data analysis, but who has actually used it to change their stores and what the customer sees?”

This rich data source of 43 million cardholders, combined with the willingness of Kroger management to question almost everything about their business, has provided the ideal platform for Dunnhumby to help engineer change within the organization. “Dunnhumby data has actually helped me to reset my understanding of what the customer is after. And it helps replace intuition with actual data and actual facts. And it is those facts that are driving our decision making,” Dillon said in a prepared statement.

Although much of the work with Kroger is similar to what Dunnhumby has done with Tesco, there are fundamental differences, according to Hay, who said Dunnhumby has “used the Tesco experience to do it quicker and better, where possible,” with Kroger. But whereas marketing was the initial focus at Tesco, it has been more about improving the merchandising and pricing strategy at Kroger.

“It's about making every store relevant to the customers that shop in it. It's very hard to know what should be stocked from the 2 million SKUs that you have on your books. You could put any items in the store, and at any price, and near any other product, so the number of decisions is absolutely huge,” said Hay.

Overcoming this problem involves many of the joint venture's 185 employees in Cincinnati. This number will grow to 200 by the end of the year, and the company will also be able to call on some of the personnel at its newly opened Atlanta office, chiefly set up to service Dunnhumby's newest U.S.-based partner, Home Depot.

As an example of how customer data is benefiting merchandising, Dunnhumby has shown Kroger that it is often possible to offer a smaller range of certain products without damaging customer loyalty. Cutting the number of pack-size variations not only has reduced out-of-stocks, but it has also freed up shelf space for other, more exciting, and possibly more profitable, items.

The analysis by Dunn-humby also helps to determine what future extensions outside the core food proposition are possible. This helped Tesco make the decision to open up its Tesco.com online store and venture into financial services. Kroger has also recently launched a range of financial products, although Hay would not elaborate on whether this was a result of specific insights provided by Dunnhumby.

Better customer know-ledge has also improved the shopping experience at Kroger, as it can now be proved by hard data how best to position goods for maximum potential sales in a store.

“A lot of retailers will make it easy for themselves to run their business rather than doing what's best for their customers, so most supermarkets are laid out in a way that is best suited to the way a retailer buys its products and not the best way for how its customers shop the store,” suggested Hay.

The knowledge Dunn-humby has been able to pass on to Kroger is therefore helping it to rethink some of the long-held tenets of supermarket shopping, such as the belief that placing staples such as milk at the back of the store, so customers have to walk through the outlet, increases impulse sales of other items. “If it's inconvenient, then they'll not go back to the store again,” Hay said.

Alongside these merchandising and in-store changes, Dunnhumby has also been delivering insight to the marketing and promotional activity at Kroger. A key component of this is the direct mailings that are created on a tailored basis for groups of cardholders that have been segmented as a result of the information Kroger has collected on them through their purchasing patterns and behavior. This determines exactly what money-off coupons are included in their mailing.

Although Dunnhumby uses core segmentation into seven types of customers, when it creates its direct mailings there is a much greater degree of classification. As an example, when Kroger mails out to its top-spending 7 million cardholders, there is a different piece of collateral for every 1,000 customers, Hay said.

“We do very sophisticated direct-to-consumer messaging that is tailored to the customers, and as many U.S. consumers are promotion-sensitive, when you target them, they notice a difference,” Hay said. “Because most advertising and promotions are only for new customers, when Kroger says, ‘Here's some money off [some relevant products] and thanks for being a good customer,’ then the customer feels good.”

In addition to including money-off coupons for products that the customer has previously bought, or associated items, the mailings also provide an opportunity to promote new products. For this latter activity, Dunnhumby works particularly closely with Kroger's key suppliers.

This link with suppliers represents one of the key aspects of the Dunnhumby business model. In the case of Kroger, it sells customer insight data from the Plus Card to the supermarket chain's major suppliers so that they can not only improve the knowledge about their brand and their customers, but also between them and Kroger so that through collaboration more products can be sold.

To date, Dunnhumby works with more than 50 U.S. consumer packaged goods companies, including Coca-Cola, Kellogg's, Kraft, PepsiCo and Procter & Gamble. “With 43 million cardholders, this is a large sample size that provides them with fast and accurate data,” Hay said. “They use it for brand measurement, new product development, and for connecting their brand decisions to the reality of what customers do in-store.”

Although Dunnhumby has already helped Kroger benefit greatly from being able to understand its customers better, there is still much more to come, according to Hay. And Dillon agrees. On Kroger's fourth- quarter 2006 earnings conference call, he said: “We're bullish on the use of our customer data and customer loyalty data to determine what paths we ought to take in the future in marketing and in advertising and in store mix, products, pricing, all of those areas. I think in two or three years, it will be more significant than it is today. We certainly expect it to be.”