DIVING FOR DATA

Lucia Moses

CINCINNATI -- Kroger has been learning a lot about the behavior of its 6 million-plus best shoppers.

Buy lots of scratch baking items, like flour and sugar? You might be classified "Traditional Home." Do baby items regularly show up in your basket? You could be "Family Focused."

Kroger has been sending many of those shoppers mailings with coupons for packaged goods that are designed to be relevant to them, using assumptions based on past purchase behavior. It's the fruit of its work with British loyalty marketing firm Dunnhumby. For the past two years, it has been analyzing years of Kroger's frequent-shopper data with the goal of segmenting its best shoppers and cooking up customized offerings for them.

No U.S. retailer as big as Kroger (6.5 million top shopper households) has undertaken a program this comprehensive and with such commitment. How Kroger exploits the analysis could save the United States' biggest traditional grocer from acquisition or irrelevancy. But the significance doesn't end there: Kroger also is leading the way for the rest of the industry to kick up its own targeted marketing efforts.

If Dunnhumby's track record is any indication, Kroger rivals have reason to take notice. Founded in 1989 by husband-and-wife team Edwina Dunn and Clive Humby, the London-based firm is most closely associated with its work for Tesco, and is credited with helping that retailer move from second to first place in the United Kingdom.

"They have managed to take this whole utilization of loyalty data to a very high-end and very practical and effective level," said Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill.

Ten years ago, Dunnhumby created the Tesco Club Card program. Today, it boasts 10 million households and captures 85% of weekly store sales, Steve Goodroe, former Dunnhumby USA chief executive, told a convention gathering in March. Coupons sent through the card program redeem at rates in the 20% to 40% range, vs. 1.2% for mass-marketed coupons. In the program's first five years, total Tesco U.K. sales increased 52%, while floor space increased 15%. It's reduced promotions by 60% by eliminating ineffective ones, Goodroe said. And Tesco has grown its share of food sales in the U.K. to 30% from 16% 10 years ago. Its success has even put Wal-Mart Stores in an unlikely defensive position; its chief executive, Lee Scott, told The Sunday Times of London recently that Tesco's increasing market share should prompt the government to intervene. (Wal-Mart's British retailer, Asda, has 16.7% of the food market, according to TNS figures.)

Now, Dunnhumby is putting its analytic expertise to work in the United States through Dunnhumby USA, which is half-owned by Kroger. Dunnhumby won't discuss its Kroger strategy, and the retailer didn't respond to an interview request. But a Dunnhumby presentation obtained by SN offers an overview of the plan.

Dunnhumby USA, also based in Cincinnati, is classifying shoppers according to three principles, according to the February presentation.

First, it identifies the 6.5 million households (a slice of the total 42 million households that visit Kroger stores) that drive more than 50% of sales.

Then, it looks at 27 sample products or labels by which to segment them. It looks at how often they buy bulk-sized, baby, home baking, organic, low-priced, ethnic and vegetarian items, to name a few. Using those 27 product types or characteristics, Dunnhumby develops a shopper's "DNA."

Based on their predominant characteristic, cardholders are then plunked into one of seven segments. They include Traditional Homes, characterized by scratch cooking and conventional fare; Budgeters, who are value-driven; and Finest, those with a preference for gourmet and fresh foods.

Finally, Dunnhumby groups people by seven interest groups that are independent of lifestage, such as Family Care, those who buy lots of kid- and sports-related products; Home Living, whose members tend to stock up on cleaning, paper and food-prep items; pet owners; and Specialty Tastes shoppers, who enjoy eating a variety of foods, such as ethnic and organic.

Using that research, Kroger is said to be mailing those households meaningful product offers. Four mailings were slated to go out this year, each consisting of two products, according to the presentation.

The first is a letter to the shopper and four branded coupons plus two coupons aimed at increasing her spending in the store. The second is a brochure designed for the interest group the household belongs to. It contains a vendor-sponsored page and three more branded coupons designed to be meaningful to members of that group.

But that's just the beginning of what Kroger is doing with its loyalty card data. The expectation is that the retailer will analyze customer response to the mailings and plow those learnings back into planograms, promotions, pricing, category management and the like, all with the goal of improving customer satisfaction.

Kroger considers the partnership critical to its business. "Although we are in the early states of utilizing this partnership, it is clear that customer data analysis is enormously important to Kroger's future. This is a unique competitive advantage for us," the retailer's 2004 Fact Book reads.

It's already begun to apply its findings. Steve Thornberry, senior vice president at Partners in Loyalty Marketing, a Chicago-based marketing firm, said a brand executive told him one of his products was dropped by Kroger as a result of analysis that showed high-potential customers alternated that item with a competing stockkeeping unit. "The data's being used for all levels of touch points," he said.

Kroger and Dunnhumby are tight-lipped about results, but sources who have talked to Kroger executives said they're encouraged so far. "From what I've heard from them, they're quite pleased," said Barry Kotek, managing partner at Retail Systems Consulting, a Naples, Fla.-based consulting firm. "They've done some trials and are starting to roll it out in their divisions." One source was told by Kroger insiders that some changes to sets have yielded sales gains of more than 10%.

Many retailers are sitting atop massive amounts of card data. While many are heading in the direction of customizing offers, only a few (Ukrop's and Wegmans are often cited) are operating at a high level of sophistication. What sets Kroger apart is the quantity of data at hand (Kroger has claimed that 40% of U.S. households hold one of its cards) and the scope of the commitment (it went into business with Dunnhumby in 2003, and no fewer than 50 analysts are believed to be crunching Kroger customer data).

Culture and tradition are oft-cited reasons. "It's the typical logic of the old way of thinking: 'I'm interested in customer count' instead of 'I'm interested in the 20% of customers that make up the majority of the business,"' Kotek said.

So, while a typical loyalty marketing scheme consists of identifying those who have bought dog food and giving them a coupon at the register for a product in the pet food category, that response doesn't take into account the shopper's past response to coupons and brand preferences, among other things. Dunnhumby does. Using its analysis, Kroger can deliver each customer specials on an array of items she buys by looking at such measurements as how often she comes to Kroger, how much of her shopping she does there, how receptive she is to promotions, which lifestage she's in and what her interests are.

"The difference between Dunnhumby and everybody else is, they know what you're likely to buy," said Chris Hoyt, president of Hoyt & Co., Scottsdale, Ariz., a marketing consulting company. "They actually analyze all that data and bring it down to a specific person. They're able to tell you which shoppers use which promotions, which shoppers like which promotions, what's the best way to focus promotions on which customer."

The list goes on. With Dunnhumby, he continued, a retailer can identify who's buying a particular product or combination thereof, pinpoint lapsed customers and isolate the impact of promotions, pricing and in-store media, among other things. Kroger will share findings with manufacturers, who can use the impact of promotions to inform packaging and new product decisions.

Dunnhumby's goal is to understand the customer better than anyone, Dunnhumby USA Chief Executive Simon Hay said. "I think generally, consumers are much more complex and much more discerning than they used to be, and they have much more choice," he said. "The irony is, as customers get richer, people are looking more aggressively at how they spend their money. And therefore you need to get closer to them."

According to Catalina Marketing, most retailers are stuck in the early or middle stages of loyalty marketing. If Stage 1 retailers are just offering a discount card, three-fourths are in the Thanksgiving turkey stage (where the retailer tracks spending and rewards big spenders with a free bird or ham) or starting to target their customers by segment. At the most advanced Stage 5, a retailer would be managing and tailoring promotions based on customer lifestage or lifestyle segments rather than by category. But, said Kimberly Coiner-Moyle, executive director of marketing at Catalina, "I do not know of one company that is truly doing this."

Investing in targeted marketing when the payoff isn't proven also requires financial risk. Retailers must ask them- selves, "If I've got only a 2% margin, do I want to risk it?" Coiner-Moyle said. "Usually, we go with the gut. 'Every time I put bananas on the front page, I get X dollars."'

She and others see signs of change, though, as the need becomes clearer and the analytical tools required come down in price. Safeway Chairman Steve Burd said earlier this month at an investor conference that the No. 3 traditional retailer is leveraging frequent-shopper insights and doing more customer research in the center of the store than ever before.

"Over the last five years, many retailers have begun to realize the true value of the data they possess," Coiner-Moyle said. That's spurred firms like Catalina, which started as a data warehousing company, to try to drum up more business from retailers using their marketing and analytical smarts.

The anticipated payoff for the retailer is that the better the offer matches the customer, the greater the upside in trips and spending, particularly in those areas where most of the promotional dollars flow. "I think that ultimately, this will strengthen the center of the store," Bill Bishop said, "because instead of having just one shoe fits all, it's going to tailor the center of the store much more closely to the requirements of the shoppers."

Observers expect that as retailers move from a mass to one-to-one marketing strategy, retailer-vendor dynamics also will improve. "They ultimately want to sell more product. I think they will also begin to see, by working together, they can build better promotions than by working separately," Coiner-Moyle said.

"It can be a win-win situation for the manufacturers, too, because they can figure out who's loyal to their products and spend their money in the right way," Kotek said.

Others foresee tensions, too, when the old promotional model is upended.

"One of the major hurdles is that supermarkets have historically depended on and responded to manufacturers' merchandising programs, and those have been somewhat broad-based," Bishop said. "And those promotions really are the octane in a lot of retailers' tanks. Inevitably, some manufacturers are going to say, 'You want me to give you as much, but you're not doing as much."'

Thornberry pointed out that the Kroger model may not align with manufacturers' wants. Say Metamusil wants to market to heavy buyers of its brand, he said, offering a hypothetical scenario. By being lumped in Kroger's co-op mailing, it's paying to reach all top Kroger shoppers -- many of whom aren't its heavy buyers. "I'm not sure that this is viewed as the exact iteration of where you have to go in loyalty marketing," he said. "From the brand participants' perspective, they don't have the ability to target content for any given brand."

Bishop agreed that the manufacturer becomes less important as retailers shift from a product sales to a market share focus. "You're not going to sell more razor blades, but you might sell more grooming tools." Still, he believes targeting is "a more cost-effective way to connect with your most important consumers."

Retailers also will have to weigh the importance of rewarding their top shoppers vs. trying to improve loyalty among the next-best group of customers. On one hand, it's easiest to get more business out of people who already are highly loyal. On the other hand, pointed out Coiner-Moyle, "You have to grow your base."

There also are risks in execution. Clive Humby, in a 2004 article, warned how pressure to meet quarterly financial goals has companies scrambling to acquire customers in great numbers without regard to their value to the business. "The obsession with short-term has, without doubt, undermined the value of consumer marketing," he wrote.

By treating customers like assets, retailers can reverse that trend, he wrote. Targeted mailings to groups of 100,000 Tesco customers get response rates of up to 30%. There's no churn because the mailing is relevant and reflects the needs of the targeted customer segment, he wrote.

It's too early to tell if Kroger's plan will lead customers to do more of their grocery shopping there, and if it will prove to be a financial success. It seems inevitable that other retailers will have to follow Kroger's lead, though. For the best way to compete with Wal-Mart, with its enormous, to-the-bone pricing efficiency, may be a customer data-driven model that gives Kroger the ability to distinguish itself to consumers.

Where They Stand

Most retailers haven't advanced past the basics stages of loyalty marketing, according to Catalina Marketing.

Stage: % of retailers; Description

Stage 1: 10; Retailer offers two-tier pricing through discount card.

Stage 2: 41; Retailer uses continuity programs to reward shoppers. Examples: holiday ham, savings certificates.

Stage 3: 34; Retailer uses behavioral and/or supplemental data to segment customers and market to them by segment and household.

Stage 4: 14; Retailer has integrated loyalty data into category management processes to make better decisions about assortment, store sets, allocation of product, pricing and promotions. Retailer may personalize e-circular front pages based on shopper history and customize front pages of circulars by market.

Stage 5: 1; Retailer no longer manages by product category but by customer segment. Loyalty data, advertising and category and space management are fully integrated. Promotional offers vary by household depending on such factors as lifestage, tendency to use coupons, brand affinity, importance of quality and service.

Source: Catalina Marketing