by Glynn Davis
Everybody knows that knowledge is power so it seems strange that many
retailers seem to have little insight into their customers. But their
interest is growing as they increasingly recognise customer intelligence is
now a key factor in differentiating winners from the losers in the retail
sector. An example of how important it has become (in all parts of the
business world) is the recent Business Week 'Best Performers 2007' survey.
This concluded that the key distinguishing factor of many companies in the
top 50 was a deep understanding of their customers.
This gave them the competitive advantage to sell more goods and services
than their rivals. And nobody would argue that the likes of Google, Goldman
Sachs and Amazon, which finished high in the list, are exemplars in using
customer knowledge to drive sales.
Nowhere is the increased desire for customer insight more evident than in
the ultra-competitive food retailing sector. So much so in fact that even
the mighty Wal-Mart is in the midst of jumping onboard.
As the creator of the long-standing Every Day Low Prices
(EDLP) strategy (that was pretty much adopted by all retailers around the
globe in recent years) it believed that all it needed to attract customers
was low prices.
But it now realises this view was wrong and that its myopic focus has
limited its business development. For a company not keen on showing any
signs of weakness it was pretty open in admitting that it had to become more
customer-focused: "Broad stroke 'Always Low Prices' has not allowed us to
develop some of the businesses to their full potential, because that doesn't
resonate with the customers."
Nowhere has Wal-Mart seen greater proof of how customer intelligence can add
significant value to a retail business than with Tesco. For some years the
Wal-Mart owned Asda has been losing ground to Tesco in the UK as it
increasingly capitalises on its extensive customer knowledge to drive sales
harder and move into new categories.
It's fair to say that Tesco's insight into its customers is regarded as
second to none in the retail world. And what makes this possible is
marketing data specialist Dunnhumby (of which Tesco owns 83%). So successful
is it that the company has also sold its services to Kroger a US-based
supermarket and general store business that operates over 2,500 outlets that
trade under a variety of fascias including Fred Meyer, Kroger and Dillons
and also to leading French supermarket operator Groupe Casino.
It has helped Kroger to stage a recovery against Wal-Mart after a long
period of losing ground. Unsurprisingly, its smaller scale meant it was
unable to fight on an equal footing with Wal-Mart using an EDLP strategy. It
has been using Dunnhumby's expertise with customer data to segment
- or tailor - its stores to their specific local markets.
The Kroger chairman and chief executive David Dillon has described the data
company as his secret weapon in fighting Wal-Mart: "Dunnhumby has helped me
reset my understanding of what the customer is after, and it helps replace
intuition with actual data and actual facts. And it's those facts that are
driving our decision making."
Dunnhumby analyses the sales data from stores to enable it to construct
complex marketing strategies and promotional campaigns. This essential
information on actual buying behaviour has guided most of the key decisions
taken by the management team at Tesco in recent years (such as the launches
of both Tesco.com and its financial services arm, and its entry into
non-food categories such as clothing). It will increasingly have the same
effect on Kroger and will likely do the same for Casino in the future (the
link-up was only announced in October 2006).
What makes is possible to enjoy such customer insight from the data analysis
at these retailers are their loyalty schemes through which they are able to
collect personal details on their customers and to link this with the
purchases that they make in-store. Such loyalty schemes have not been
regarded as particularly good ideas to date and Tesco has received much
criticism about its loyalty programme since its launch in 1995. They were
just seen as a cost on a business since they would reduce margin as
customers collected points to redeem against goods or money off their
shopping bills. David Sainsbury infamously dismissed it as "no better than
electronic Green Shield stamps".
But he was to eat his words many times over because since the first customer
signed up to the scheme it has provided much of the fuel that has powered
Tesco to the top of the UK retailing tree. It is no coincidence that since
Tesco launched the scheme it has overtaken Sainsbury's to become, by a long
way, the UK's largest retailer.
Within only a few months its impact was obvious. Research showed that
customers spent 28% more at Tesco while cutting their spending at
Sainsbury's by 16%. This had a major effect on the market shares of the two
companies with Sainsbury's having a 19.4% share in January 1995 compared
with Tesco on 18.1% but by May of that year the former's share had slipped
to 18.8% while the latter had grabbed a 19.4% share. This trend has
continued to this day and Tesco now commands a 31.3% share against the 16.5%
of Sainsbury's.
From day one Tesco knew that the scheme would provide a whole lot more than
simply allowing people to collect loyalty points to reduce their shopping
bill. In fact this was never the point of the exercise because the
point-accrual mechanism was simply the carrot to customers that would get
them to dig out their loyalty cards whenever they visited a Tesco store,
thereby enabling Tesco to collect data on them.
But as other retailers launched their own loyalty programmes they soon
recognised that collecting data is one thing but making sense of it and
transforming it into customer intelligence is a completely different matter.
It was an inability to overcome this problem that prompted Sainsbury's (yes
it did ultimately launch a loyalty card despite David Sainsbury), Safeway,
Somerfield, Asda and Waitrose to abandon their schemes one-by-one.
Just consider that even when Clubcard had a mere five million cardholders,
during a three-month trial of the scheme, Tesco had to deal with 50 million
shopping trips that comprised 50 billion purchased items. What made the
analysis of this data mountain possible was the decision by Dunnhumby to
only analyse 10% of the data and then apply the findings back to the other
90%. It realised that even a 10% sample could give 90% accuracy whereas the
massively more complex and expensive task of analysing a much larger
percentage of data might only deliver 95% certainty so it came to the
conclusion that crunching any more than 10% of the numbers was simply not
worth the cost or effort.
So powerful were the findings from this trial period that the then Tesco
boss Ian MacLaurin said: "You know more about my customers in three months
than I know in 30 years." The belief at Tesco was that if Dunnhumby could
replicate the success from the trial across the whole business then there
was a chance that it could propel the company to become the UK's number one
food retailer - displacing Sainsbury's. Since this has come to pass
Dunnhumby has played a serious part in customer intelligence creeping up the
agenda of an increasing number of retailers. They have come to realise that
without sufficient knowledge of their customers'
behaviour and buying habits then they are doomed to failure.
A number of years ago I spoke with a former chief executive of Wal-Mart and
asked him whether the company - and its UK arm Asda - would be likely to
introduce a loyalty scheme to learn more about its customers and he gave a
categorical 'no'. Although he was right and neither company has launched
such a scheme this is not to say that they won't in the future. Especially
as Wal-Mart will soon find itself competing directly with Tesco on US soil
as the UK supermarket will shortly be opening a chain of 'Fresh & Easy'
shops on the West Coast.
Ominously for Wal-Mart, the Tesco boss Sir Terry Leahy recently stated that
the company intended to roll out its Clubcard scheme to each of the
countries in which it operates thereby throwing up the scenario where
Wal-Mart could be facing the might of Tesco's customer insight on its own
doorstep.
But even if Wal-Mart resists committing to a scheme there is little doubt
that it is increasingly looking to learn more about its customers having
recognised that price in no longer the be-all-and-end-all for consumers.
To this end last year it appointed a new head of marketing who had
previously spent 19 years at Target - which is recognised as very proficient
in targeting segments of customers through focused marketing made possible
by customer insight. Target has proved itself particularly adept at
extracting more money out of its customers by targeting them more
effectively through knowledge of their behaviour, thereby achieving higher
profits out of its existing stores. Target's business is regarded as the
'upmarket discounter' in the US.
Wal-Mart is now attempting to follow the same path. Its new marketing man
has set up a market research and consumer insights competency that is
intended to help the company adopt a marketing approach that focuses on
specific categories. This will help it to introduce new categories and
better tailor the mix of goods in each of its stores so they are better
suited to their location and customer bases.
There is evidence that retailers are using various methods to boost their
customer knowledge without necessarily running their own loyalty scheme. The
multi- retailer loyalty programme Nectar is one example of how retailers
have been able to increase their customer knowledge without running their
own scheme. In the UK Nectar has signed up some serious retail names
including Sainsbury's, Debenhams and Dollond & Aitchison but although it
provides the mechanism for cardholders to collect and redeem points it is
nowhere near as effective at providing customer insight as Dunnhumby is for
Tesco and Kroger.
To address the increasing demand for such insight Nectar is now working on
creating a data analytics division (a la Dunnhumby) that will enable it to
make much better sense of the mass of data that it collects each day on
behalf of its retail clients. Tesco has successfully used market
intelligence to steal a march on its competitors who are now belatedly
waking up to its potential.
Regards,
Glynn Davis
For the Daily Reckoning
We open the papers this morning and find the same two- headed schizophrenia
we have been watching for so many, many months.
One head proudly announces that not only is everything doing well - it is
doing better than ever in history. The Dow hit a new record yesterday. The
funds are flush with cash. Takeovers...Mergers and Acquisitions...new
IPOs...are all headline news. Rupert Murdoch is bidding for Dow Jones,
Microsoft is working on a major purchase.
Money...money...money! Deals...deals...deals..!
It is glorious to get rich...as Deng Tsaio Ping put it.
And many people, all over the world, think they are bound for glory.
Meanwhile, the other head hangs down in despair. "Actual underlying
conditions of the world economy continue to deteriorate," it mumbles.
Larry Fink, CEO of Black Rock, a trillion-dollar fund management company,
spoke out last week and said that all these mergers and acquisitions were
going to cause "tomorrow's problems." Why? Because they are all funded with
debt. And lending standards for big, commercial deals have gone the same
way as the lending standards for people buying trailers.
"Standards have deteriorated to a level that we never even dreamed we would
see," said Fink.
Almost on the very same day, the Bank of England said almost the same thing.
Loose credit standards have "increased the vulnerability of the [global
financial] system."
The Boston Globe helpfully provides
more detail:
"Private equity firms are raising gigantic new funds, which in turn are
buying companies on an unprecedented scale. The targets are bigger than
ever, and the deals are gushing at fire-hose volume. But that isn't just a
function of all the billions raised from limited partner investors. Borrowed
money is the real fuel driving an overheated market.
"I think of this as a debt bubble, not a private equity bubble," says Kevin
Landry, chief executive of the Boston private equity firm, TA Associates.
"Debt markets that finance private equity transactions have changed in three
important ways. They are charging lower interest rates, reducing the premium
normally charged for greater risk. They are lending more money for the
purchase of an operating company, exceeding normal caps based on the cash
generated by the acquired business. Finally, debt markets are reducing or
virtually eliminating covenants and other rules that now make it almost
impossible for private equity investors to default on loans used to buy
companies.
"Got that? Low rates, more leverage, practically no conditions. How do you
think that story is going to end?
"The reality is the markets are willing to provide extraordinary amounts of
debt, almost indiscriminately,"
says Scott Sperling, co-president of Thomas H. Lee Partners, the big Boston
private equity firm. "It's hard to put these companies into default. I can't
think of the last time we had a real covenant in one of our deals."
In the financial deal business, it is still like the middle of the property
boom, when householders practically couldn't default, because lenders
wouldn't let them. As soon as they got into trouble, the lenders would give
them more money.
Landry explained that in a deal his company made recently, he didn't even
have to make the scheduled payments. If he ran into trouble he could make a
"toggle payment," or "payment in kind," essentially borrowing more to make
the regularly scheduled loan payment.
"How do you default?" asks Landry. "You used to say,
'Can I pay down enough of this debt so if a recession
hits I can get through it?' Now it doesn't matter even if a recession hits
next week."
"Investors stretching for yield are making all kinds of markets do strange
things. Look at the sub-prime mortgage market to see how that practice can
end badly. Private equity's debt bubble could become another story with a
very ugly ending."
The bubble in sub-prime lending ended when the value of its collateral -
housing - stopped rising in price. The bubble in Private Equity financing
will pop too when its collateral - ultimately, the stock market - ceases to
go up.
Then, over-stretched lenders will go broke. A few high- profile hustlers,
prosecuted for financial hanky-panky, will go to jail. And, like soldiers
tripping over the bodies of their dead comrades, the survivors will have to
find some other route to glory.
More news:
*************************
Rob Mackrill pondering some very big numbers:
Accountability. Integrity. Reliability.
- These three words grace the web pages at the US Government Accountability
Office (GAO), formerly the General Accounting Office. They might strike some
of a cynical disposition as a tad ironic, not for the organisation itself,
but for the charges over which they must cast their analytic eye.
- The GAO changed its name almost three years ago. It wanted to clarify
things for the benefit of dim job hunters and journalists, that they weren't
just a bunch of nerdy bean counters poring over the government's books.
- These days they do so much more they say. But when all's said and done, it
remains by its own admission the lead auditor to the US government's
consolidated financial statements.
- If you feel your eyes glazing over at this point, you're not alone but
bear with me. The GAO is not the sex and violence of government. It's the
chronicler of the consequences of sex and violence...or as an old saying
would have it 'an auditor is someone who goes onto the battlefield after the
battle has been fought and shoots the survivors'. Whatever your definition
its recent report makes for some eye-popping reading.
- In February bean-counter in chief, Comptroller General David M. Walker,
amongst other representations, wrote a letter to Congress. We've got a
problem he tells them and we need to change our ways was the general
gist...oh, and by the way, I have prepared a little report that's easy to
read - even for those not good with numbers - and is near enough guaranteed
to ruin your day.
- The title of his report gives us a clue as to its nature:
Fiscal Stewardship: A Critical Challenge Facing Our Nation.
- Here we offer up a few choice excerpts from Mr Walker's assessment:
"We are failing to properly discharge one of our biggest stewardship
responsibilities to our children, grandchildren, and generations of unborn
Americans: fiscal responsibility.
"The federal government's financial condition and fiscal outlook are worse
than many may understand...in fiscal 2006...its costs exceeded its revenues
by $450bn...
"As at 30 September 2006, the US government reported that it owed more than
it owned by almost $9trn.
"In addition, the present value of the federal government's major reported
long-term 'fiscal exposures'
- liabilities (eg debt)... contingencies (eg insurance), and social
insurance and other commitments and promises (eg Social Security, Medicare)
- rose from $20trn to about $50trn in the last six years.
"GAO is responsible for auditing the financial statements included in the
Financial Report [prepared by the US Treasury], but we have been unable to
express an opinion on them for the 10th year in a row because the federal
government could not demonstrate the reliability of significant portions of
the financial statements...
- Not signed off for 10 years on the trot. Wow! Sounds bad, like the US is
just some giant Ponzi scheme waiting to tumble, but then the EU accounts top
that achievement.
They have not been signed off for 11 years. Reasons for which is now
engaging the attentions of a House of Lords Sub-Committee on Economic
Affairs.
- Maybe a nation's, or block of nations', accounts are just too complicated,
convoluted and twisted for even the boldest to dare putting a signature to?
We don't know, but certainly wouldn't relish the task.
- But wait there's more, how about those Social Security and Medicare
promises?
"...one would need approximately $39trn invested today to deliver on the
currently promised benefits for the next
75 years."
- Okay so Uncle Sam is rich. At $13trn it accounts for over a quarter of
global GDP, but even this vast wealth looks pretty puny against the job in
hand. Living beyond your means is ruinous whatever the scale. Time to wheel
out Dickens's timeless advice courtesy of Mr Micawber:
"Annual income twenty pounds, annual expenditure nineteen pounds, nineteen
shillings and sixpence, result happiness. Annual income twenty pounds,
annual expenditure twenty pounds and sixpence, result misery."
- So if the US is looking at misery what's the GAO got in mind? Well its
bitter medicine. To sort out the mess would require either spending cuts or
tax increases equal to 8% of the entire economy for the next 75 years.
- Try selling that to an electorate Messrs Guiliani, McCain, Clinton, Obama!
A critical challenge indeed...
For interested readers the full report can be found via this link:
http://www.gao.gov/fiscalstewardship.html
*** There may be considerable anxiety about the rise of China in many parts
of the world, not least the US, but a note from a reader tells us
Nostradamus - as ever - was on the case and provided a forecast long ago as
to who should be most worried.
'The Complete Prophecies of Nostradamus' by Henry C.
Roberts reportedly predicts that by the year 2025, by ritual, China, having
completed her industrial and economic expansions, will absorb almost the
whole of Northern Russia and Scandinavia.
So now you know...in advance.
*************************
And more views from Bill:
*** How time flies! It is already May...the 5th month of the 7th year of the
21st century. Who'd have thought?
We remember back in the 1950s...we wondered what it would be like in the
year 2,000. Flying cars...regular commutes to the moon...we imagined all
sorts of things that turned out to be farther in the future than we had
thought.
What really changed in the last half century?
Cars...airplanes...skyscrapers...golf...hamburgers...
TV...air-conditioning...antibiotics...nuclear bombs - all the big things
that shaped our lives had already been invented. What has been invented
since then?
Hmmm...the Internet?
We can't think of anything else.
Of course, the Internet is changing the world. It is part of the reason real
estate prices are going up faster in desirable resort locations than
elsewhere - so many more people can live in these places and still continue
working. It is also changing the way we get information and ideas...never
before have so many people had such ready access to so many bad ideas.
In today's headline news is a report from New York, where Rupert Murdoch has
just offered to buy Dow Jones. He's offered a 65% premium over yesterday's
share price. Major shareholders are said to be considering it.
Elsewhere is news that the New York Times has sold its flagship building in
Manhattan to a diamond merchant.
And everywhere traditional news media, in which the lies are printed on the
pulp of trees, is giving way to the new news media, in which the drivel
comes to you electronically.
Through no fault of our own, we have occasionally been the victim of news
stories, in which the 'news' differed dramatically from what we knew to be
true - often to such a degree that the reader would come away with the exact
opposite of the truth. But what would you expect? The fourth estate is no
less self-interested than the other three. And it is dominated by a class of
people who are particularly dull-witted and lazy. Generally, they have 'the
story-line' already in mind - because it has been written hundreds of times
already - before they ever take a single note or look at a single fact.
"But it's really gotten a lot worse in the last few years," explained a
journalist friend. "The newspapers used to spend a lot of money on
investigative journalism...to come up with facts that would keep readers
interested. But now, they don't want to spend any money on research or
investigating. They don't even want the facts, because they might interfere
with the story- line. They spend all their money hiring pundits..."
*** Our old friend Ron Paul is running for President.
Poor Ron. He is much too honest and thoughtful for a career in politics. We
are sure the press will trip over itself in its rush to ignore him. He will
get in the way of their story line.
*** Meanwhile, in London, global warming seems to having a delightful
effect. The trees are green. The wisteria is blooming a month early. The sun
is out all day long. It
is not spring at all; it more like midsummer.
The ocean is so warm, icebergs are melting faster than ever. Dry areas seem
to be getting drier.
Is Global Warming real? We don't know... all we know is that it seems
unusually warm and pleasant here in Europe.
"Winters have been milder than they used to be," said a couple from Nova
Scotia, with whom we lunched on Monday.
We were in Paris. The flowers were out. The smell of blooming things was in
the air. The sidewalks were crowded with tables. People were out...
walking...
sitting... sunning themselves in the parks.
*** And last night, we almost had a chance to sample urban poverty for
ourselves, when we had a brief brush with the life of the homeless.
Economists and investors should always remember to eat at regular intervals.
Otherwise, their blood sugar level is likely to drop to such dangerous
levels that they will do something stupid.
So it was, that upon entering our hotel, we got into an argument with the
desk clerk and at midnight proudly marched out of the hotel in 'high
dudgeon,' as they say...only to find ourselves with nowhere to stay.
We wandered the streets of South London for a while, wondering about the
life of the homeless. How did they support themselves? Where did they eat?
What did they do all day? They were beginning to bed down. A group of young
bums spread out filthy sleeping bags under a bridge An old man lay down on a
piece of cardboard in a doorway, covering himself with newspaper. A mental
defective sat in a dark corner, asleep, but still holding a cup and a
sign: Please Help.
We considered the choices. We could lie down with the young whelps under the
bridge. Or we could grab a piece of cardboard from a dumpster and join the
old dog in the doorway. Or, we could just sit in a corner until daybreak...
perhaps muttering to ourselves in order to look like we belonged there.
Instead, we checked into the Hilton...
The Daily Reckoning PRESENTS: Glynn Davis identifies the secret edge that
helped transform the British supermarket group Tesco, from high street dog
to retail superstar...
