Tesco, the world’s second-largest retailer by profit, is set this year to become the second in sales also, behind only Wal-Mart. An alumnus of The Boston Consulting Group, Michael Holmes led Tesco’s M&A and strategy activities and established its Group Corporate Finance function before taking on his current position, which involves setting up a division that will lead Tesco into new sectors where its capabilities can add value—with or without the Tesco brand.
Key to Tesco’s success in the past two decades has been its ability to achieve a deeper understanding of the customer through innovative, data-driven approaches—such as its groundbreaking Clubcard loyalty program—and through its early investment in and subsequent acquisition of Dunnhumby, the world’s leading retail data-mining and data-analysis business. This ability to achieve a “signal advantage”—to capture, interpret, and act upon signals from rich, dynamic data—is essential in today’s unpredictable retail environment. Martin Reeves, a senior partner and managing director in the New York office of The Boston Consulting Group, recently spoke with Holmes about how a data-driven customer focus helps Tesco maintain a competitive edge in a changing industry. The following are excerpts from their conversation.
Retail has always been a somewhat unpredictable business dependent on consumer behavior. And it seems to become more so with the influence of technology and the economic turbulence. How does a large retailer like Tesco stay agile?
When we succeed and we’re at our best, we look at the customer before we look at the numbers. When we’re less good, we chase numbers and the customer gets left behind. And when you chase numbers, you try to build on last year’s numbers. We’re a growth-driven organization with growth targets. But if that’s all we’re focusing on in any particular category, in any particular business, then people tend to say, “Well, I got X last year. This time I need to get X plus 5 percent.” And that incrementalism actually hurts agility. Whereas when we stay close to the customer, trying to think ahead and focusing on how we deliver value, and think about what’s happening to customers and what’s changing in their lives—that’s when we get it right.
Last year, we had the worst floods in a generation in Thailand, and they were such stupendously environment- and business-affecting floods that the numbers went out the window. The business stopped thinking, “Are we going to be judged on our numbers?” because all of our distribution centers were underwater, we had crocodiles in our stores, we had 20,000 employees without housing, and our customers couldn’t drive around. All the business was thinking about was: “How do we feed our customers? How do we get food? How do we help them get to the stores?” It was remarkable and probably, in many ways, our most successful ever few months in Thailand competitively because we were relieved of that chasing-numbers pressure and were just thinking about our customers there. Market share went right up and, funnily enough, we had our best year ever in Thailand.
It’s interesting that you point to customer-centricity as being central to agility. And of course, Tesco is very famous for its customer analytics and the depth of its customer insights. How do you cultivate an organization that is agile enough to respond to those real-time, granular customer insights?
Tesco has Britain’s biggest loyalty program, so we do collect more data about customers. When we use that data to help the customer and when the customer recognizes that we are using data in their service rather than trying to make more profit from them, we do well. When we can use data to provide the customer with an offer that is relevant to him or her, and the customer feels, “This is something that I really want,” that helps. But when we use data to try and pull customers in that have been disloyal to us, for example, and other customers get wind of the fact that we seem to be rewarding disloyalty rather than loyalty, it works against us. So using the data to better serve customers in a way that seems to reward loyalty and sticking with the Tesco relationship is the key thing.
We’ve got a relationship with Dunnhumby, which does data mining. We remain their biggest and longest-served customer, so we’re probably further up the curve than anyone else. And we’ve got a very good marketing department. But I think, particularly with the advent of the Internet, we’re going to have to stay on our toes because the type of data which is relevant is changing. The availability of data and the ways that people get data are changing, so although it’s an advantage that’s served us very well for a few years, it’s one that we’ll have to work quite hard to maintain.
You mentioned the changing data landscape and the advent of the Internet changing the intersection between analytics and retail. What do you as see being the next frontier of competitive advantage in retail?
The Internet has brought with it an increasing awareness by customers and people on the street of the fact that companies collect huge amounts of data about them. And we see story after story about privacy—Facebook and Google—and retail will get caught up in that as well, especially when they move a very substantial proportion of their business online and then use data collected online to direct activity to the store.
So I think a new angle to our brand will have to be: we can be trusted with your data, there’s a confidential part to this relationship which we’re both going to use to our advantage. But it’s confidential, it’s between us, between Tesco and you.
The ability to collect data becomes less and less of a competitive advantage than the ability to direct, filter, work out what you’re going to do with it and then to fulfill on whatever proposition to the customer the data and the subsequent analysis recommends. So being able to fulfill on the basis of data is going to be pretty important—and not an easy challenge.
Finally, much has been made recently of big data—the promise of very large data sets and new, powerful analytics. What do you think is missing from that conception? Where do you think that conception leads?
Big companies like Tesco that traditionally operated with a very central nervous system are going to become like dinosaurs with the brain at the end of a very long neck if they don’t develop more distributive nervous systems. More distributive nervous systems mean more collaborative ways of working and responsibilities distributed differently around the organization. They will demand a combination of flexibility about where decisions get made and clear protocols about what information goes where. I don’t know how we’ll develop that, but it will be a key challenge for us and our competitors.