{"id":2255,"date":"2015-11-20T14:41:34","date_gmt":"2015-11-20T19:41:34","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/dunnhumby-how-tesco-destroyed-1-3bn-of-value-in-9-months\/"},"modified":"2015-11-20T14:41:34","modified_gmt":"2015-11-20T19:41:34","slug":"dunnhumby-how-tesco-destroyed-1-3bn-of-value-in-9-months","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/dunnhumby-how-tesco-destroyed-1-3bn-of-value-in-9-months\/","title":{"rendered":"dunnhumby: how Tesco destroyed \u00a31.3bn of value in 9 months"},"content":{"rendered":"<p>Founded in 1989 by a husband and wife team, dunnhumby has been the customer analytics engine behind the success of many retailers, including supermarket giants Tesco and Kroger. dunnhumby originally gained notoriety for helping Tesco establish its Clubcard loyalty program and using the insights generated from the data collected to propel Tesco to overtake its rival Sainsbury in the 1990s to become the UK\u2019s largest supermarket. Tesco recognized the value of deeply knowing your customer and bought a 53% stake in dunnhumy for \u00a330 million in 2001 in order to maintain this competitive advantage. Tesco later increased its stake to 84% in 2006 and eventually purchased the remaining shares in 2010. \u00a0In the years that followed,\u00a0dunnhumby continued to be a bight spot for Tesco by\u00a0becoming a sizeable profit center in its own right. Today, dunnhumby works with nearly 40 retailers and 50 manufactures, netting Tesco $151 million in profits in 2014.<\/p>\n<p><em>How they capture value:<\/em><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-2253 alignleft\" src=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-12.46.59-PM-300x170.png\" alt=\"Screen Shot 2015-11-20 at 12.46.59 PM\" width=\"300\" height=\"170\" srcset=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-12.46.59-PM-300x170.png 300w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-12.46.59-PM-1024x579.png 1024w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-12.46.59-PM-600x339.png 600w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-12.46.59-PM.png 1612w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/>dunnhumby collects data on nearly one billion customers worldwide, mostly through its loyalty programs with retailers. More recently dunnhumby supplemented its offline, in-store purchase data with real-time data from online consumers via the acquisitions of <a href=\"http:\/\/techcrunch.com\/2011\/05\/23\/tescos-dunnhumby-buys-bzzagent-for-60-million\/\" target=\"_blank\">BzzAgent<\/a> in 2011 and <a href=\"https:\/\/www.dunnhumby.com\/dunnhumby-acquires-sociomantic-revolutionise-digital-advertising\" target=\"_blank\">Sociomantic<\/a>\u00a0in 2014. The \u2018customer science\u2019 company uses its proprietary analytic approaches and tools to translate this wealth of data into insights and actions that help its retail and manufacturer clients build loyalty with their customers.\u00a0\u00a0 dunnhumby then captures value by collecting fees as part of their long-term relationships with retailers as well as by reselling retailer data (and add-on analytics\/services) to the manufacturers.<\/p>\n<p>&nbsp;<\/p>\n<p><em>How they create value:<\/em><\/p>\n<p>dunnhumby creates value through a \u2018win-win-win\u2019 approach:<\/p>\n<ul>\n<li>Retailer value creation through growth in like-for-like sales and net margin via customer-centric, data driven decisions<\/li>\n<li>Supplier\/manufacturer value creation through deepened engagement from loyal customers supported by unique customer data and more targeted communications and promotions<\/li>\n<li>Consumer value creation through improved customer experience including better\/more relevant promotions, products, prices, communications and channels<\/li>\n<\/ul>\n<p>Let\u2019s look at an example of how this win-win-win works in reality. In addition to helping Tesco overtake Sainsbury in the 1990s, dunnhumby is also widely recognized for helping Kroger enjoy sustained success from the implementation of their customer-centric strategy in the early 2000s. Like many other retailers, Kroger had been collecting reams of data on its customers convinced there was value in it. However, they struggled to unlock this value until launching dunnhumbyUSA as a joint venture in 2003. Since then, Kroger has been using dunnhumby\u2019s analytic approach and tools to deeply understand their customer and design more personalized offerings. The most obvious example of this can be seen in the 11+ million pieces of direct mail the retailer sends to its customers each quarter. Each mailer includes 12 coupons targeted and designed specifically for the household that receives it. In fact, Kroger compares these mailers to snowflakes because if any two are the same, it is a complete fluke. The extreme personalization pays off as Kroger enjoys a 70% redemption rate and has generated $10 billion in revenue from the coupons according to <a href=\"http:\/\/www.forbes.com\/sites\/tomgroenfeldt\/2013\/10\/28\/kroger-knows-your-shopping-patterns-better-than-you-do\/\" target=\"_blank\">Forbes<\/a>.\u00a0The insights have led to a number of other subtler changes as well including store location, design, assortment, etc. Small changes in these areas can have a big impact on the customer. Dave Palm, dunnhumbyUSA\u2019s SVP of operations, provides an example: the \u201ccustomer who buys peanut butter and jelly every week also regularly buys juice boxes\u2014which used to be located on the other side of the store. That\u2019s inefficient, given that customers spend an average of 16 to 17 minutes shopping. Kroger now stocks peanut butter, jelly and juice in the same aisle, or adjacent aisles.\u201d By keeping the customer at the center of all decisions small and large, Kroger has been able to achieve remarkable success amid intense competition and a rapidly changing landscape.\u00a0\u00a0 The store has experienced <a href=\"http:\/\/247wallst.com\/retail\/2015\/06\/18\/kroger-keeps-same-store-sales-streak-alive\/\" target=\"_blank\">46 consecutive quarters<\/a> of positive same-store sales growth, starting in the quarter following their initial partnership with dunnhumby.<\/p>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-1.32.51-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-2254\" src=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-1.32.51-PM-300x198.png\" alt=\"Screen Shot 2015-11-20 at 1.32.51 PM\" width=\"300\" height=\"198\" srcset=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-1.32.51-PM-300x198.png 300w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-1.32.51-PM-1024x677.png 1024w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-1.32.51-PM-600x397.png 600w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2015\/11\/Screen-Shot-2015-11-20-at-1.32.51-PM.png 1410w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p><em>Where to next?<\/em><\/p>\n<p>Earlier this year, Tesco\u2019s new CEO Dave Lewis, put dunnhumby up for sale as part of a strategy to strengthen the companies balance sheet and reverse its recent \u2018junk\u2019 rating from Moody\u2019s. Given dunnhumby\u2019s successful track record it came as no surprise that Tesco was hoping to fetch as much as \u00a32 billion when they appointed Goldman Sachs to explore options in January.\u00a0\u00a0 However, Tesco announced just last month that it was taking dunnhumby off the market as buyers (rumored to include at different points the likes of Google, TPG, and WPP) cut their bids to as low as \u00a3700 million. So the \u00a31.3 billion questions is how did Tesco manage to destroy over half of dunnhumby\u2019s market value in just nine short months?<\/p>\n<p>The answer is simple: they forgot that the value you can create and capture from data is dependent upon the quality of the data in the first place. In haste to ready dunnhumby for sale, Tesco made two critical errors that left the company unsellable:<\/p>\n<ul>\n<li>First, Tesco terminated its 50\/50 joint venture with Kroger, instead restructuring in such a way that Kroger bought out Tesco and formed a new wholly-owned data company called 84.51\u00b0. In this new arrangement, dunnhumbyUSA retained its other clients and was now free to pursue new business with Kroger competitors, but no lost its access to Kroger\u2019s customer data.<\/li>\n<li>Second, Tesco capped the length of time that dunnhumby would have exclusive rights to use the data from the 16 million Tesco Clubcard users. As outlined above, dunnhumby relies on this data not only to derive profits from its partnership with Tesco but also from reselling this data to the manufacturers.<\/li>\n<\/ul>\n<p>By cutting dunnhumby, and the potential acquirer, off from two of its biggest data sources, Tesco effectively broke the company\u2019s operating model and destroyed what was once an extremely valuable asset that will take years to rebuild.<\/p>\n<p>&nbsp;<\/p>\n<p>__<\/p>\n<p>References: dunnhumby.com, tescoplc.com, forbes.com, businessinder.com<\/p>\n","protected":false},"excerpt":{"rendered":"<p>For years, dunnhumby has been the secret link between retailers, manufacturers and customers. Their model of translating customer data into actionable insight has delivered significant value to all parts of the chain. So why, then, was Tesco unable to sell the big data pioneer this year?<\/p>\n","protected":false},"author":74,"featured_media":2256,"comment_status":"open","ping_status":"closed","template":"","categories":[29,776,62,321],"class_list":["post-2255","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-big-data","category-data-analytics","category-value-capture","category-value-creation"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/data-driven-value-creation-value-capture-and-operating-models\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>dunnhumby: how Tesco destroyed \u00a31.3bn of value in 9 months - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/dunnhumby-how-tesco-destroyed-1-3bn-of-value-in-9-months\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"dunnhumby: how Tesco destroyed \u00a31.3bn of value in 9 months - Digital Innovation and Transformation\" \/>\n<meta property=\"og:description\" content=\"For years, dunnhumby has been the secret link between retailers, manufacturers and customers. 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