What Tesco dumping Dunnhumby would mean for its Clubcard and other brands

The retail market is undergoing significant change. The recession has created an environment that allows discount supermarkets, such as Aldi and Lidl, to significantly cut into traditional supermarkets' market share. In response Tesco, like many other outlets, has focused much more on in-store and fuel price cut promotions, resulting in loyalty scheme investment being placed further down the priority list. The possible sale would represent a dramatic strategy change, which could not only bring the future of loyalty schemes in the grocery retail market in the UK into question, but also provide an opportunity for other brands to take advantage.

With a £263m hole to fill, the sale of Dunnhumby, which is mooted to be worth between £2-3bn, would raise a lot of capital for Tesco. However, selling such a valuable asset is likely to dramatically alter the way it approaches customer understanding in the market.

Dunnhumby expertise has been on the whole exclusive to Tesco in the markets it wishes to operate. A sale could potentially result in other retailers being able to draw on Dunnhumby’s expertise in loyalty, and therefore pose further threats to Tesco’s dominance. Alternatively, if Tesco wanted to continue its exclusive relationship with Dunnhumby, maintaining this within a potential deal could reduce the sale price.

By no means do I think that Tesco will simply give up on Clubcard, especially with a third of the UK population (17 million people) signed up, even with standard price cuts prioritised. Understanding your customers has always been critical to success in retail, and in the past those holding data have traditionally beaten those who don’t. ‘Data is King’.

Tesco needs to decide which part of its marketing strategy to prioritise. Clubcard, Fuel Save and Price Promise are all costly vehicles, with Clubcard alone estimated to cost over £500 million to operate each year.

However, with Aldi and Lidl continuing to take market share with a low cost strategy, the argument for diverting funds away from loyalty to price cuts may continue in the current ‘race to the bottom’. Interestingly, our data at Shopitize has suggested that loyalty is becoming less important to shoppers as competition has increased. Despite five of the ‘big six’ retailers (the exception being Asda) now having loyalty cards, just 40 per cent of supermarket shopping is currently done using one.

As part of Tesco’s announcement regarding Dunnhumby, CEO Dave Lewis announced that it would be closing underperforming stores, reversing the store opening ‘space race’ of recent years. This reflects the growing trend amongst shoppers away from making decisions about where to shop based on loyalty. With so many supermarkets across the country, increasingly time, convenience and price are becoming much more important.

The real winners will be the brands. Brands have always been happy to support loyalty cards – not only to reward their most valuable customers, but also out of fear that their competitors will win if they choose not to. If you are a large FMCG brand with a presence across the main retailers, the more loyalty you build, the greater chance you have to increase your sales. Well-known estimates that one loyal customer is worth the same as 12 uncommitted customers back this up.

However, the big difference is that for brands, it doesn’t matter nearly as much where their customers buy their products. The key is simply that shoppers are aware of brands' products, and then go on to buy them at any retailer they like.

Also, technological advances, in particular smartphones, and changes to CRM on mediums like social media, mean that shoppers can now have a direct dialogue with brands and vice versa. This in effect means that brands can now start to cut out the middle man, the retailer, and focus more on brand loyalty as opposed to traditional retailer loyalty. Supermarkets have until recently built their success on one to one loyalty schemes, but now is the time for brands to start to take back control and build true shopper loyalty.

It will be interesting to follow the outcome of a sale of Dunnhumby, as there are sizeable pros and cons both for Tesco and for Dunnhumby. When speaking to the husband and wife team behind Dunnhumby, then Tesco CEO Lord MacLaurin, said: “What scares me about this is that you know more about my customers after three months than I know after 30 years.”

The power of understanding your shoppers is still true to this day, but by using the latest technologies and catering for the evolving market trends, this power is now dramatically in the favour of brands.

Chris Newbery is director of sales at Shopitize