Tesco, Dunnhumby and WPP speculation: Is Sir Martin Sorrell about to pull off a mega deal with a big data buy?
Of all UK business that have come under the spotlight in the past 12 months or so, none has been as closely scrutinised as Tesco.
Could a deal for Dunnhunby be on the cards?
The retailer’s (the country’s biggest and the world’s third largest) travails have been well documented: falling sales, wobbly margins, declining market share (a crucial measure for all supermarkets), an accounting scandal and pressure from the upstart discounters like Aldi and Lidl.
Following a management cull, new CEO Dave Lewis, a former Unilever man, has confounded City sceptics and acted quickly and decisively. Overseas expansion has halted, unprofitable stores are to be closed, future developments put on ice; cost-cutting has begun with the planned closure of the Cheshunt HQ and a raft of redundancies threatened.
Lewis has also started a clearout of non-core assets by flogging the loss-making Blinkbox video streaming and Tesco Broadband services to TalkTalk. But for the purposes of this column, we’re most interested in one of Tesco’s crown jewels – Dunnhumby.
Founded by Clive Humby and Edwina Dunn in 1989 in the kitchen of their West London home (and later sold to Tesco), the business now employs more than 2,000 people in 30 countries, selling information from its 40-terabyte customer insight database.
It also works with 400 of the largest retailers and brand-owners across the world, including Tesco of course, but also Procter & Gamble, Coca-Cola, Diageo, GlaxoSmithKline and Mondelez International. It’s important because it was probably the first company to spot the potential of big data, and Dunn and Humby helped develop the Tesco Clubcard loyalty scheme, now regarded as one of the foundations upon which Tesco’s dominance was built in the 90s and noughties.
It’s an incredibly valuable company – some estimates put its worth at several billion, others at £1bn (it’s difficult to know, as Dunnhumby is wholly owned by Tesco). This will represent a real coup for Lewis. Tesco paid a total of just £100m or so for the company between 2001 and 2010, as it acquired an increasingly large stake in the data house.
Who would want to buy it? I’d imagine, given Dunnhumby’s size, experience, expertise and track record, that the line of suitors would be long. An IPO is a possibility, but I think a sale would be quicker. Several private equity groups, including US buyout specialist TPG and Clayton Dubilier & Rice, which is advised by former Tesco chief Sir Terry Leahy, are said to be eyeing up the data giant.
But by far the most intriguing potential buyer is Sir Martin Sorrell’s WPP. Sorrell has of course made it known that he is a fan of data, and that it is the way forward for his marketing services empire.
“We are now Maths Men not Mad Men,” he famously said back in 2013, in a reference to the acclaimed US TV show about 1960s adland.
Sorrell has reportedly been running his slide-rule over a deal for Dunnhumby. Such a large deal (his biggest since he bought digital agency AKQA for £350m back in 2012) would mean a major reversal of his avowed strategy to make small but strategic acquisitions in fast-growing channels like mobile and digital and in growth territories like Asia-Pacific, Africa, Eastern Europe and Latin America.
My guess is that he’ll want to go for it. For starters, it’ll give his marketing group’s data operations a major shot in the arm.
In December last year, WPP strengthened its commitment to data-driven marketing by signing an £800m big data deal with IBM to transform the group’s global technology platform and launch new digital services to help its clients get closer to their customers. And WPP already brings in more than £10bn in revenue from its data marketing operations – that’s over 25 per cent of WPP’s annual income.
And Dunnhumby is a very good operation, close to best-in-class. It’s a near-perfect fit with the Kantar market research arm, as well as WPP’s big data-driven networks like OgilvyOne, its shopper marketing agencies and media networks such as Mindshare.
But there are caveats. Some observers see Dunnhumby as past its best, and that really the Clubcard is its best product. And there’s a feeling that loyalty schemes are falling out of fashion, with consumers attracted by clear and visible benefits offered by the no-frills low prices of Aldi, or by the superior customer experience of Waitrose/John Lewis rather than the less tangible benefits of loyalty cards. The question many are asking: do loyalty schemes add customer value?
I think they still have a role to play, and as technology develops, offers can be better targeted and thus more attractive. 'Decisive Dave', as Lewis is aptly known, has already made it clear that Clubcard will play a part in Tesco’s future. This makes sense, because Tesco can collect the raw data through the cards, and an outside agency can make sense of the numbers and develop strategies.
And it’s likely that Tesco would retain Dunnhumby as the agency to do just this – thus providing an acquirer with a ready-made giant client, as well as the blue-chip FMCG brands mentioned above.
Although he seems to relish battles with, and besting, rivals like IPG, Omnicom and – especially – Publicis, Sorrell has always steered clear of battling private equity companies; they have the advantage of being able to load a company with debt. That’s not an option for a trade buyer like WPP, with stockholders to satisfy.
Would WPP’s shareholders back a bid for Dunnhumby? WPP’s shares fell slightly last year and Sorrell has been telling analysts and the media that clients are getting tougher on costs and payment terms while declining to spend big on marketing. So he will need all his considerable skills to persuade investors that shelling out several billion for a data house is a good idea.
Many stakeholders are still unhappy about the $1.9bn hostile acquisition of market research firm TNS back in 2008; some thought he’d overpaid, and TNS’s integration within Kantar has proved complex and costly.
Some have speculated that shareholders might be more supportive if Sorrell promised to float off his (possibly enlarged) data business at some point in the future as an IPO could deliver a premium in the right market conditions.
But I can’t see that happening. Sorrell is a very driven individual who loves a deal, especially a limelight-stealing deal. A multi-billion bid for Dunnhumby would be a career-topper, the biggest deal in WPP’s history..
Finally, there’s another argument he may use to bring shareholders round to the idea, and that’s the fact that he will be acquiring a competitor.
"We compete against Dunnhumby," he told the IAB MIXX conference back in September 2013. He asserts, quite correctly, that researchers (Nielsen), web giants (Google, Facebook) and data houses are as big a threat to his business as Publicis and Dentsu – after all, Kantar is now by far the largest component within WPP.
Buying Dunnhumby may just help to secure WPP’s future in the coming decade and beyond.
Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector