TESCO'S U.S. ENTRY RAISES QUESTIONS

MICHAEL GARRY

LONDON - In the wake of Tesco's recent announcement that it will open a new, small-format retail food concept on the West Coast next year, questions are being raised about a possible conflict of interest involving the British supermarket giant's loyalty program.

Tesco, based here, built its highly successful Clubcard loyalty program during the 1990s in close partnership with Dunnhumby, a loyalty marketing firm also based here. Tesco now owns 51% of Dunnhumby. Meanwhile, in 2003 Dunnhumby opened a U.S. subsidiary, Dunnhumby USA, which is half-owned by Cincinnati-based Kroger. Dunnhumby USA has helped Kroger refine its loyalty marketing strategy in the U.S.

Would there be a conflict for Dunnhumby and the retailers if Tesco competes directly with Kroger on the West Coast? In California, for example, Kroger operates Ralphs, Food 4 Less and Cala Foods/Bell Markets. It also runs convenience stores under the Quik Stop Markets banner in California and Nevada. Tesco said its U.S. stores will draw from the Tesco Express convenience banner in the United Kingdom.

"On a broad level, yes, this would be a conflict," said Neil Saunders, consulting director, Verdict Consulting here. "Kroger operates on the West Coast where Tesco is going to enter and, furthermore, [Kroger has] convenience stores, which is precisely the format Tesco has said it is going to develop."

Saunders noted that it is possible - and commonplace - for an external firm such as Dunnhumby to work with more than one retailer at a time, even when those retailers compete. "The complication, of course, is that Tesco, Kroger and Dunnhumby are all tied together through joint ownership, partnership, etc., and unraveling this will be extremely difficult." A potential solution, he added, may be for Tesco to create a completely separate operation with Dunnhumby in the United States.

Martin Hayward, Dunnhumby's director of consumer strategy, offered that it is "incredibly early to make a comment on what happens next." He added that Dunnhumby was not privy to Tesco's decision to enter the U.S. market prior to the announcement, and "we're still digesting the news like everyone else."

Neither Tesco nor Kroger responded to a request for comment.

Tesco has another connection to the U.S. market - its partnership with Pleasanton, Calif.-based Safeway on a Web-based grocery service in several markets, mostly in the West. Online grocery sales represent another arena in which Tesco has excelled in the U.K.