Tesco: Every Little Bit (of Customer Data) Helps

When Sir Terry Leahy joined the now-huge UK-based supermarket chain Tesco in 1992 as its first-ever marketing director, he was tasked with transforming sales for a dwindling company.

At the time two other supermarket giants, Sainsbury and Marks & Spencer, dwarfed Tesco, which was half the size of each of its competitors.

“These were outstanding brands,” Leahy said during a keynote at the SAS Premiere Business Leadership Series in Orlando. “And when you get that far behind, it’s very hard to close that gap. That’s why brands last a long time.”

Yet by the time Leahy left Tesco in 2011—after 14 years as its CEO—Tesco was doing 10 times better than its two major competitors.

“These are slow-growing industries,” Leahy said. “The difference was in the use of data, in the way Tesco learned about its customers. And from that, everything flowed.”

Leahy’s tenure saw the development of major programs and initiatives that pushed the supermarket forward. The most significant of which was the launch of the Tesco Clubcard in 1995, made possible by the increased processing power of computers, which could finally hold the data needed to manage customer transactions. Through this loyalty program, the supermarket was able to transition from mass marketing to personalized marketing.

Other data-driven initiatives followed. The development of an online food business at Tesco.com; an initiative to sell services, as well as products; and the development of shopper data research house Dunnhumby as a Tesco subsidiary.

Tesco’s expansion, above a bedrock of customer data, was not easy—especially initially, when Leahy served as Tesco’s marketing director.

“The marketing role was not a strong role,” he recalled. “Buying and retail operations and finance were stronger. But the voice of the customer was hard to argue with at the boardroom table. I had to gain credibility by demonstrating that this was really the voice of the customer.”

Later, at a journalist roundtable, Leahy reflected on his career and the future of retail.

As Tesco began its data-driven policy, what did you learn about customers that you didn’t know before?

The first thing was that we realized we didn’t know our customer at all.

In a way, many companies have research and feel they know something, but when you get real data on all of your customers, you realize how little your sample data is.

We also realized that customers actually like to belong to things, they like to be recognized, they like to be valued, and they’re very responsive. They want to be involved in a relationship or give information or give feedback. And we learned that you have to be relevant. One of the traditional marketing techniques is that if someone buys Coke, you give them an incentive to buy Pepsi—on the basis that they already buy Coke, how do you persuade them to buy Pepsi?

Actually, you should incent them to buy Coke. It sounds obvious, but that’s how the whole industry is set up, to incentivize people to do what they’re not already doing when actually you should reward and reinforce what they’re already doing.

What I learned was the value of creating and reinforcing loyal behavior.

Why have traditional brick-and-mortars struggled online?

Becoming multichannel is difficult because there’s a different culture involved.

So it’s easier for pure e-commerce businesses to expand because they understand how search data and purchasing data is the basis of their relationship. Now some [traditional] retailers [are] becoming successful with multichannel. [Retailer] John Lewis in the UK is a good example. Tesco is a good example.

The technology platforms are becoming more available so it’s easier now for traditional retailers to develop a multichannel strategy. There is the difficulty between moving between the different platforms, online and offline.

The advantage that multichannel retailers have is personality and convenience. They’re very visible, front-of-mind, which is helpful. But if you’re pure online, keeping visibility is still a challenge.

How do you combat internal resistance toward innovation?

In most organizations people are fearful for their jobs and are more worried about doing the wrong thing than the right thing. If you can remove fear and encourage people to take risks, you can get more innovation. And if you can accept failure, you get more innovation. The hardest thing is that when something goes wrong, not to punish and react badly.

Clearly risk has its limits and you want to not risk the whole organization’s future. But you can take a lot of risks in an organization and survive. That’s how you get innovation.

Did you make many mistakes?

I made a lot of mistakes and I think I probably got more things wrong than right. The good news is that in business you don’t have to get everything right, just a few things.

That’s why I feel sorry for people in public office; the public is less tolerant of failure and expects officials to get everything right, and that tends to make them very risk adverse.

What did you get most wrong?

I should have pushed harder into e-commerce and new technology, having made an early start.

I think I should pushed harder to develop a different blend of management skills, to be more able to use new technology and be more objective. I think they were two areas I struggled to get right.

Why did Tesco not follow through with its initial e-commerce push?

Tesco still has the world’s largest food business online. So it’s been successful, and it’s highly profitable. But we started the business in the mid-90s. [During] the TMT [Technology, Media, and Telecommunications AKA Dot Com] bust in the early 2000s, we wondered for a while how big e-commerce penetration would be so we paused. When it suddenly surged back on again, we were possibly—not slow to react—but if we’d kept going through the TMT bust, we’d be further ahead.

Also internationally, we concentrated on building out our physical stores when possibly…we could have gone to e-commerce. You never know with these things, but those are two [areas] that could have been different.

How is the online customer relationship different from the in-store relationship?

In a traditional [business relationship], a customer would have a restricted universe: hinterland is the right word. You’d be in your local village or town and that is as far as you’d look. If you were a retailer and you were present in that town, you could own that customer.

Nowadays a customer has a hinterland that’s global and online. How do you own that customer? That is, in a digital world, the challenge. How do you develop that relationship with the customer?

Will product pricing become personalized?

In theory you could move to pricing the customer instead of the product. That could be possible. There are certain natural constraints to that in terms of social policy and transparency and so on. You can already see in some areas where customers are content to be priced as customers: risk pricing with insurance and so on.

It makes a lot of sense in health pricing, but there will be certain social policy restriction in terms of fair access and so on.

But if you look at the statistics, they’re compelling because different customer behaviors have very different profit outcomes. You should reward the behaviors that are most profitable, and that would speak to customer behavior pricing.

Are pure online players like Amazon judged differently by the general public in terms of data use?

I do worry that some of the technology companies in the first generation have not thought enough about data privacy. I always felt that Tesco set a good standard in terms of data privacy, but some of the stories that you hear where they’ve sold data or not told customers how they’re using data is troubling.

I think that will change. There needs to be more transparency in how data is used and ownership of data. In another sense, customers are probably more tolerant of e-commerce businesses than they are of traditional businesses in terms of standards of service and behavior. I think that will change. The delivery experience is not good in e-commerce businesses.

That will be passing; people will expect much better service, which is why Amazon is building out physical distribution points.

Multichannel is the fastest growing form of e-commerce at the moment, faster than pure online as people try to address practical problems in terms of delivery experience.

What role will mobile have?

A lot of UK businesses I look at might have anywhere from a low of 10 to a high of 40 or 50% online [revenue]. Within that figure, mobile might be 15 or 20%, but the growth rate is what’s startling. I see growth rates of mobile between 50-100% year-over-year growth and what that suggests is that, before very long, most e-commerce will be conducted on mobile devices.

And the interesting thing is that it seems to be fashion products people buy on mobile, what people thought would struggle on mobile. What that reveals is consumers would like to manage their relationship with the outside world through their mobile device. They’d like to consume through their mobile device.

There are practical restrictions in terms of how good the devices are in transacting information and payment, but as those things come, people will mostly shop through mobile.

How do retailers combat showrooming and price comparison habits?

I don’t think they can [fight this]. In the end, a transactional relationship is not that satisfying for a consumer. If you go online, you have to 38 different places to buy your shoes from. People will tire quite quickly from that behavior and will seek out trusting relationships where a retailer understands them.

The extra-rich relationship that can happen online creates a more trusting relationship.

Is that really enough? Consumers are very price-conscious.

They have to be. But consumer benefit isn’t just in price. I can see a situation where how you deliver a benefit is more than just price-comparison based. People are still looking for the value of benefits, but it will come in a different package.

It’s interesting when you look at coffee bars. The middle class are very constrained, but will pay more for coffee.

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