Dunnhumby Complicates Outlook for Tesco, Kroger, Wal-Mart

Tesco is a mighty retailer, fourth largest in the world, but, even with its expansion in the United States continuing, it might not turn out to be the nightmare for Wal-Mart that some, particularly observers in Britain, expected it to be. Kroger, however, could turn into a nightmare.

One of the major weapons Tesco employs in its United Kingdom home market is a loyalty card program developed with data mining firm Dunnhumby. Tesco has used data it gleans from loyalty cards to target promotional offerings, to drive sales and to expand its range of service as far as automobile insurance. By doing so, it has become the leading supermarket chain in the U.K., well ahead of Wal-Mart's ASDA division and holding on despite a sour British economy that is making price-oriented retailers such as ASDA more attractive. A challenge that Tesco faces in establishing its Fresh & Easy stores in the United States is that it lacks the range of Dunnhumby services. In the U.S., the researcher operates in a joint venture with Kroger. The supermarket chain is making the most of its partnership with the research firm and getting recognition for it. Dunnhumby combines loyalty card information, sales data and more traditional market research to pinpoint exactly which consumers will be motivated to purchase by what offers. With its partner's help, Kroger has developed a targeted coupon program that is getting redemption rates as high as 50%, the supermarket chain contends. Redemption rates for traditional coupons can be as low as one percent, and the more popular reach three percent.

In its information gathering and analysis, Dunnhumby has become a leader in one of retail marketing's grand crusades, using technology to boost coupon redemption. In competing with Wal-Mart, which emphasizes having the best price every day, Kroger has a greater chance of impressing a customers with a well-targeted coupon that proves a great deal on a single cherished item than with many that provide cents off on lots of things a shopper doesn't care much about.

Don't think, though, that Tesco is entirely alienated from Dunnhumby USA. The British retailer has been majority owner of the Dunnhumby U.K. parent company for some time and just raised its stake to more than 80%.

Tesco has demonstrated a willingness to do what it has to get its minimum daily data requirement. Tesco ran Safeway's home delivery program for awhile before annoying the U.S. supermarket chain by announcing it would launch Fresh & Easy in just the markets it served â€" and learned about â€" with Safeway. Naturally, Tesco departed thereafter and Safeway developed a smaller format store to compete with Fresh & Easy. Kroger operates chains such as Ralphs and Smith's out west. It's hard to imagine the Dunnhumby fraught relationship between Tesco and Kroger remaining civilized as the retailers become bigger competitors. If things turn contentious, Kroger and Tesco might wind up becoming nightmares for each other.