Back in the pre-internet days of the early 1990s, retail loyalty programs were prehistoric (Green Shield stamps anyone?) – until Tesco teamed up with plucky startup dunnhumbyIt leveraged the limited computing power around at the time to create a tech-based operation behind the Tesco Clubcard that reinvented loyalty and pioneered the field of customer insight.
Clubcard might be preparing to celebrate its 30-year anniversary on 13 February 2025, but the loyalty scheme is still having a major impact and continues to set the agenda. Tesco CEO Ken Murphy recently hit the headlines when he suggested the company could harness artificial intelligence (AI) alongside data from Clubcard to prompt recommendations to shoppers about making healthier choices.
“I can see it nudging you over time, saying: 'I've noticed over time in your shopping basket that your sodium salt content is 250% of your daily allowance. I would recommend you substitute this, this and this,” Murphy stated at a retail conference.
Such was the impact of Dunnhumby, then a little-known independent company, that its ground-breaking, data-driven approach very quickly propelled Tesco to become the UK's leading grocery business, overtaking its major rivals, including then-market leader Sainsbury's.
The business was founded by Edwina Dunn and Clive Humby after they had both worked at CACI on spatial targeting systems that led to the creation of a site location modeling tool. This involved mashing up CACI's Acorn – a geo-demographic segmentation of residential neighborhoods in the UK – with census data. This combination determined that neighborhoods were different and that the people living in them made different purchasing decisions,
“The lightbulb moment came when we considered that if this is good on census data, which is 10 years old, then just imagine what we could learn from customer data,” says Dunn. “Our idea was to analyze the customer data [from tills] and build it onto Acorn.”
Sounds good. But it was a hard sell because, at the time, data was not quite the thing it is today and computing was still in its infancy. Simon Hay, former CEO of Dunnhumby, says the company was really pushing the capabilities of the technology it was using, which he recalls was DEC AlphaServer kit – the “most powerful microprocessor at the time”.
“We were doing analysis on machines that people did not think it was possible to make it work on … and data was thrown away at that time because it was expensive to store. IT was monolithic,” he says.
Experimenting with data
At the time that Dunnhumby was working with its early customers, which included Booker Cash & Carry, Mercury Communications and Lotus Software, Tesco was experimenting with its fledgling Clubcard in a handful of stores. Hay says the retailer was bereft of insight on the impact of the nascent loyalty programme.
Dunnhumby's data-driven approach very quickly propelled Tesco to become the UK's leading grocery business
Although Tesco was initially unconvinced by Dunnhumby's overtures, it soon changed its mind. A fateful episode occurred when Grant Harrison from Tesco marketing heard Humby speak at a conference and referenced the tool he had built to analyze big data.
“It was fortuitous, and we were given some data from Clubcard and told to let him know what we found in it,” recalls Dunn. “Tesco had created the idea of Clubcard in nine stores – we didn't invent it, we made it work.”
The experimentation with Tesco sales data took place in 1994 over a three-month stretch, from which Dunnhumby concluded that people returned to stores more often and bought more when they were rewarded with money-off promotions. The real big breakthrough came when it presented the findings to the Tesco board. Then chairman Lord MacLaurin famously declared: “What scares me is that you know more about my customers after three months than I know after 30 years.”
It was then all systems go as the starting gun was rapidly fired on the roll-out of Clubcard to all Tesco stores. “The commitment to do something so big is lost today. For the 13 February 1995 launch, they printed 16 million Clubcards, closed every store the weekend before to dress it up with Clubcard. [promotional materials]put people in all the stores to sign up members, and there was national TV advertising,” says Dunn.
The impact on the business was monumental. In the first year after Clubcard's launch, Tesco overtook Sainsbury's, and in less than three years, the loyalty program had helped double the company's grocery market share. “It was all incremental business and we calculated that over the next 10 years Clubcard and Dunnhumby made an extra £60bn of sales for Tesco,” she says.
In these early days, only very modest amounts of data were being used. For analyzing the overall number of Tesco shoppers on a Saturday, for example, a 1% sample would be sufficient for satisfactory results, whereas looking at a single store would require 10%, according to Hay.
Dunn concurs: “It was just [analysing] some of the data some of the time. We'd get an overnight stream by polling all of the stores' [transaction data]We could only analyze groups of products weekly and on 10% of the data. We could look at frozen versus fresh and soft drinks versus carbonated. We could not analyze to the detail of Coke versus Pepsi. It was only modest, but some knowledge is an advantage. It had not been done before.”
Data-driven strategy
A vital component of Clubcard was the money-off vouchers and promotional offers posted to its millions of members. By 1997, Hay says these personalized coupons were down to a one-to-one level because of the in-depth segmentation that Dunnhumby was able to undertake. Customers would be in various segments, and Venn diagrams across these would determine the specific vouchers and promotions they each received.
Crucial to the success of the vouchers was the involvement of the major brand owners that were benefiting greatly from the insights. Interestingly, Dunn reveals they were very much focused on driving brand switching away from their rivals: “Coke wanted us to coupon Pepsi buyers. We said they could only send promotions to their existing customers. We had a big fight over this and today it's still in CPG [Consumer Packaged Goods] DNA to brand switch.”
Clubcard was not solely restricted to the marketing function within Tesco. Hay says the insights derived from the data have very much driven strategic thinking within the business. It led to the launch of the Finest own-label range, for example, which is currently worth an impressive £2bn in annual sales. Clubcard has also helped with deciding on store locations, the creation of the Metro convenience format, Tesco Bank, Tesco Mobile and the online business.
The hard data helped allay fears, bust myths and move the business away from gut instinct decision-making. “The assumption was that online would cannibalise store sales, but we showed it was incremental sales and that it attracted new customers. Our IP showed it as a growth strategy,” recalls Hay.
Tech advances make for deeper insights
In 2001, Tesco became an investor in Dunnhumby, rather than simply a client, when it took a 53% stake. It went on to increase this to 84% in 2006. This was a boost to the co-founders, but the downside was a reluctance by Tesco rivals to work with Dunnhumby.
I'd never bet against Tesco to deliver with AI
Edwina Dunn, co-founder of Dunnhumby
The solution was to go international and seek retail clients overseas. Helping this important move was the decision to sell its data (initially just from Tesco) to the CPG providers. Dunnhumby created an analytics platform (The Shop) that enabled them to analyze the customer data themselves – with customers' personal details hidden – which could be sold to them.
This became 80% of the company's revenues as Dunnhumby tapped into the global scale of the top CPGs in the primary markets. Only 12 countries represent the majority – in terms of revenues and profits – of the market share in fast-moving consumer goods products. It was an objective to obtain their data.
Dunn recalls that the logistics of data crunching became increasingly easier as the underlying technology advanced. The business was soon crunching 100% of the data and the frequency of the reports it could produce was increased to daily. “Marketing could be long term, but which sales were hurt by competitors' pricing meant there was a need for daily analysis. The tech galloped ahead. We could also deal with all the data down to the EEAN [European Article Number] for each individual product,” she says.
When the Dunnhumby co-founders stepped back in 2011, Dunn says there was a fall-off in the disruptive nature of the business. Hay became CEO of the business and recognizes there was undoubted value in Tesco owning the business, but acknowledges “it's harder to be a disruptor when you are in the family”.
Although Dunn holds some reservations about Dunnhumby's power to still set the agenda within Tesco, she remains very positive about the prospects of these combined forces as AI increasingly impacts on all elements of the retail landscape. This is underpinned by her belief that Tesco has some of the best data in the marketReferring to Murphy's AI comments, she says: “I'd never bet against Tesco to deliver with AI.”
This represents a powerful legacy for Dunn, Humby, Hay and the many other people who have contributed to the Dunnhumby story. This is made all the more powerful by Dunn's view that despite the 30 years of pioneering work undertaken by Dunnhumby in delivering incredible value from data, many companies still have very weak datasets, seriously diminishing their prospects of leveraging any value from AI in the future.
