How loyalty scheme pays rich dividends for Tesco

As Britons face the worst hit to their disposable income in 30 years, Tesco is outstripping rival retailers by tempting more of them through its checkouts with a money-saving loyalty scheme.

Tesco's Clubcards are held by more than 20 million British households, 8.5 million of them via an app, boosting sales and helping Britain's biggest retailer strike better deals with suppliers in one of the world's most cut-throat grocery markets.

Tesco, a pioneer in customer data science and analytics, launched Clubcard in 1995 to track shopping trends and reward loyal customers.

After offering discounts of up to 50 per cent on some products to holders in 2020, it aggressively promoted the scheme last year, adding 1.9 million app users between October and December.

"Great value matters to our customers more than ever before," Tesco's Chief Customer Officer Alessandra Bellini told Reuters of the scheme, which is a first for a big British supermarket chain.

As retailers around the world grapple with rapidly rising inflation, Tesco has put Clubcard at the heart of its strategy, enabling the 103-year-old group to pull ahead of Sainsbury's, Asda and Morrisons and confront the deep discounting of German-owned chains Aldi and Lidl.

Backed by a TV, radio, newspaper and online marketing blitz Clubcard Prices now make up more than 95 per cent of Tesco's promotional sales.

Clubcard holders pay up to a half less than non-holders across some 3,000 products both in-store and online, while any hit to Tesco's margins are offset by sales volume gains. Last month the company raised its 2021-22 profit outlook for the second time in four months.

Current Clubcard Prices top picks include £1 for a twin pack of McVitie's Jaffa Cakes for a Clubcard holder versus £1.6 for those without, £10 for a 20 bottle pack of Coors beers versus £14, while a pack of nine strawberry yogurt Frubes is half price.

With British inflation forecast to reach 7.25 per cent in April, the approach is resonating with consumers.

Elizabeth Petch, a 54-year-old lawyer from Sawbridgeworth, south east England, is a regular Tesco shopper who said the "substantial" reductions had won her round.

"They also apply regularly to items I am buying anyway, so all in all it has definitely made a difference to my bill."

Although Tesco's shares have risen 29 per cent over the last year, 17 out of 22 analysts who cover the stock still rate it a "buy", Refinitiv data shows.

"The benefits of scale and momentum in food retail are chronically underestimated by the market," HSBC analyst Andrew Porteous said of the Tesco share price.

Under Ken Murphy, who became its chief executive in October 2020, Tesco has gained momentum through the Covid-19 pandemic, hitting a four-year UK grocery market share high of 27.9 per cent.

YouGov Brand index says Tesco's rating for offering good value improved by a market leading 199 basis points in the 12 weeks to Jan. 2 year-on-year.

"Crucially compared to many other loyalty schemes it's really easy for shoppers," Fraser McKevitt, Kantar's head of retail and consumer insight, said.

"You don't have to do anything, you get the great price just by turning up with your Clubcard," he added.

Clubcard Prices complement the other elements of Tesco's pricing strategy - "Everyday Low Prices" on more than 1,600 items and "Aldi Price Match", which matches prices on 650 key goods with those of the discounter, something Tesco says removes an incentive for customers to shop elsewhere.

The net result, Tesco says, is a higher volume of goods being sold to more shoppers. Total UK sales hit £14.8 billion in the 19 weeks to Jan. 8, reflecting 7.5 per cent organic growth on a two-year basis.

That has helped Tesco agree better deals with suppliers, placing larger orders on favourable terms, thereby enabling more customer offers and further volume growth, which consequently means even better supplier deals.

"Comparing yourself to the Tesco Clubcard Prices file is tough," one veteran grocery retailer who has competed with Tesco for decades said. "Tesco is in a virtuous circle now and I can't see them messing it up from here, it looks really strong."

As suppliers also face inflationary pressures, not fully passing on a legitimate cost price increase to Tesco means pursuing it from rivals, leading to a "double whammy".

"A major supplier to Tesco would give Tesco preference every time," he said.

And while inflation has added tension to negotiations, Tesco's supplier relationships have been transformed since a 2014 accounting scandal, with the independently run supplier Advantage Report ranking it as the best supermarket group to deal with for the last five years.

Clubcard Prices is also set to be improved further, with analysts predicting it could be personalised, something Sainsbury's is also pursuing.

"We're in the early stages of that initiative, we have a lot more to do," Murphy said last month.