Approaching the U.S. Market, Global Retail Giant Tesco Will Continue to Build Loyalty Through Research

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Many executives like to tell us how complex their jobs are. Spend a day in Tesco’s headquarters on the outskirts of London, however, and you’ll hear quite the opposite. Tesco espouses the idea that marketing strategy should be simple. At its core, an equally simple idea that’s written into its marketing manuals: Reward the behavior you seek.

During a period of sustained growth, Tesco has been seeking one thing: long-term loyalty. Its “core purpose,” as stated on the backs of the business cards of many of its executives, is “to earn the lifetime loyalty of our customers.” Seeking and rewarding that behavior is a principle that has led Tesco to make some tough choices. It is the ability to make those choices that characterizes Tesco’s expansion through Europe and Asia”and will undoubtedly be the cornerstone of its expansion into the United States in late 2007.

In 1995, Tesco wasn’t even the largest supermarket in the United Kingdom. Today it is not only the United Kingdom’s largest retailer but also its largest non-government employer, accounting for one dollar in every seven dollars spent retail in the United Kingdom. It also has overseas business in 12 other countries, from Poland to China, generating $15 billion of sales and $700 million profit.

Tesco probably will approach the American consumer in the way it has expanded in Eastern Europe and Asia. First, Tesco does more in-depth, and broader, research into customer behavior than any other retailer. In the United Kingdom, insight from data that Tesco has gleaned from its Clubcard loyalty program is the driver behind the products it stocks (especially in small-format neighborhood stores), its opening hours, its product launches, its promotions, the pricing strategy and even where Tesco management decides to site new stores. Tesco’s U.S. CEO, Tim Mason, was one of the architects of Tesco’s loyalty program, and he proudly claims that today there is some Clubcard data analysis in every internal Tesco meeting. In countries where there is no card-based program, Tesco will send its executives to live with consumers, watching them shop but also watching them cook and eat; finding how they spend their leisure time, what they worry about, even how they get around (in the United Kingdom, every Tesco executive”including the CEO”must work a junior job in-store for one week every year).

Adaptability

Second, Tesco performs radical surgery to its business plan based on what it finds. Store layouts and stock are virtually unrecognizable from country to country. In Thailand, Tesco shops look like a series of market stalls. In China, live fish are offered for sale. In South Korea, a giant Tesco outlet is more like a department store than a traditional supermarket, and the loyalty program offers vouchers for adult education classes. And when I visited Tesco in Prague in the spring, 50 shoppers stood in line at a concession that recalled the smaller independent stores that Czechs valued: the fresh sausage counter.

Tesco performs radical surgery to its business plan based on what it finds.

Third, Tesco recruits as many locals as possible. With half of Tesco’s floor space now outside the United Kingdom, fewer than 100 of Tesco’s 100,000 international employees have been relocated from the United Kingdom.

Finally—and most importantly for the U.S. market—Tesco looks toward market leadership as its goal, but it doesn’t attempt to “buy” market share using traditional sales-driving techniques. Most supermarkets worldwide (Wal-Mart’s “everyday low prices” strategy is an exception) use the sales promotion budget to reward disloyal customers using a “hi-lo” principle: Deep discounts on some popular items attract customers to the store. But the discounts will be clawed back if the customers’ weekly shopping incorporates higher-priced items.

Eighty-eight percent of Tesco’s revenue comes from the most loyal 40 percent of customers. Using Clubcard data, the company has concentrated promotions on rewards on those customers and the products they buy, attempting to deepen these relationships rather than indiscriminately recruiting new customers. That strategy sometimes means saying “no” to suppliers who are offering promotions that Tesco thinks will destroy long-term loyalty. In 2003, Tesco spent $300 million of its sales promotion budget on incentives for “opportunity” customers. By 2004, after using its loyalty card data to predict customer loyalty—and sales growth—long term, Tesco switched almost the entire budget to rewarding long-term loyal customers.

In Europe and the Far East, Tesco has concentrated on raising standards in store and using its research to refine the range and quality of products to accurately reflect the customers who visit the store. Where Tesco uses a formal loyalty program—in the United Kingdom, the Republic of Ireland and South Korea—it targets discounts and promotions primarily at long-term loyal customers.

Tesco’s dedication to “long-termism” will face its sternest test in the United States, where competition is much stronger than in any of Tesco’s other overseas markets; no other European supermarket has managed to successfully adapt to U.S. retailing conditions. Superficially, Tesco in the United States won’t look like Tesco anywhere else, but while the appearance of the store may change, Tesco U.S. will still be “rewarding the behavior it seeks”—not least because the architect of its loyalty program now runs the company. Tesco CEO Terry Leahy is a Tesco lifer who started out at Tesco stocking the shelves. As he says: “A good company is run on principles and values; it is not run on last week’s results. … Our loyalty strategy is entirely consistent with that.”

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