Sainsbury's: Devil no longer in retail

case study Basic marketing theory, and common sense, suggest that price-sensitive customers will buy more of a product when it's sold in bulk, reducing the cost per unit. Imagine the surprise, then, when Sainsbury's, the UK's third-largest grocery chain, found that most of the buyers of its new line of lower-priced bulk goods were higher-income customers.

case study Basic marketing theory, and common sense, suggest that price-sensitive customers will buy more of a product when it's sold in bulk, reducing the cost per unit. Imagine the surprise, then, when Sainsbury's, the UK's third-largest grocery chain, found that most of the buyers of its new line of lower-priced bulk goods were higher-income customers.

The problem? -Market research found many people who would say 'I'm on social security and only have Ã,£50 a week and can't afford these packs'," recalled Alex Fovargue, head of customer analytics marketing at Sainsbury's. -Their values are completely different: it's just about low price, and they're not concerned about innovation. There's no point developing economy brands when customers don't want them."

Such insight, which often runs surprisingly contrary to the marketing strategies put forward by Sainsbury's marketing staff, used to be hard to come by: an analysis of sales alone would only have shown that the product was selling, but failed to show that it was not hitting its target market -- and in fact, was losing the company revenue since it was reducing expenditure by more-affluent customers who would normally have paid more for the products.

For a grocery chain that's been struggling to claw back market share in the face of competitors, such missteps are costly. Sainsbury's, which has around 16 percent of the UK's US$202 billion grocery market, has been steadily losing market share to competitors Tesco and Asda, a Wal-Mart-owned business that knocked Sainsbury's out of the number-two position in 2003 and hasn't looked back.

Since his installation last year, chief executive Justin King has pursued an aggressive plan to get Sainsbury's on track. Conventional cost-cutting strategies, like trimming prices and closing the least profitable of its approximately 500 outlets, have been complemented by a focus on areas such as revenue generation through store reconfiguration and targeted marketing.

Such changes require good intelligence about customer buying patterns, but this had been one of the company's weak points in the past: poor analysis processes meant that marketers could be working with data that was 14 months old.

We were in this continual cycle of not getting data when we needed it, and having to write campaigns when we didn't know what was going on.
-You would typically ask the IT department to extract data, and they would come back after six weeks with something that wasn't complete," Fovargue told 300 attendees at the Teradata Universe conference in Melbourne recently. -We were in this continual cycle of not getting data when we needed it, and having to write campaigns when we didn't know what was going on. We were very risk averse and were quite happy making whatever money we were making; there was no view of how much money could be made out of direct marketing. We were pretty much operating on gut feel."

Directed to improve Sainsbury's direct marketing (DM) techniques, Fovargue bolstered the customer data analysis team from five people to 16, and set them on the task of finding new ways to capitalise on the company's data warehouse -- a five terabyte database containing months' worth of information about purchases made by the company's eight million customers. Transactional details are tied to specific customers through the company's Nectar loyalty program, producing a goldmine of information about buying habits.

Better data analysis quickly showed Sainsbury's how ineffective its traditional mass-mailing approaches were -- where large numbers of coupons were widely distributed in an attempt to get customers through its doors. Rather than buying more, however, many customers would cherry-pick the specials -- visiting Sainsbury's only for its discounted items and going to its competitors for theirs. This meant that many advertising campaigns were running at a loss -- a relative return on investment (ROI) of 0.7, according to Fovargue, when ranked on a scale where 1.0 represents break-even.

Over the past three years, however, a concerted focus on timely data analysis and relevant marketing has helped Fovargue's analytical team design far more effective DM campaigns based on customers' actual purchasing habits. The ROI index has jumped to 1.6, boosting annual direct marketing revenues from Ã,£35 million (AU$84 million) to over Ã,£400 million (AU$955 million). -Direct mailing allows us to be really highly targeted and to respond to those issues that are important to a small group of customers in a way that you couldn't do in a store environment," he explained.

Better data analysis quickly showed Sainsbury's how ineffective its traditional mass-mailing approaches were.
Sainsbury's data warehouse is based on a Teradata data warehouse, business intelligence tools from MicroStrategy and SAS Institute, the Teradata TCRM customer relationship management suite, and Microsoft Access and Excel.

Taken together, these systems have provided the horsepower to let the team think far more laterally. Campaigns run using the data range from the conventional -- promoting new in-store brands based on past purchases, for example -- to the experimental, such as in one campaign in which Nectar customers were sent birthday cards offering discounts on frequently-purchased items.

The retailer has also been able to add customer survey results into the mix alongside transactional data. This capability has proved exceptionally useful in shaping business improvement strategies: for example, if a customer indicated he had a problem with the company's bakery, Sainsbury's would take note of that information. Enough complaints, and the bakery would be overhauled -- and, once refurbishment was finished, enticed back into the store by being sent a specific coupon for bakery goods.

In another campaign designed to increase the value of customers' shopping baskets, Sainsbury's analysed its members' purchases and identified the product category from which each customer purchased most frequently. A coupon for that category, along with five other coupons for areas in which it was hoping to boost sales, were also sent in order to encourage customers to buy other types of products. The response rate was 26 percent, which Fovargue called -a tremendous amount in retail."

-CRM has allowed us to operationalise all of our processes, and to produce standard reports which say how each campaign has done," he said. -You can look at real micro-levels in the data, and we wouldn't be able to do that if we didn't have the customer data linked into the data warehouse. Now that we know how individual campaigns are performing, we can start rewarding behaviour and decide what is the correct mix of campaigns. We're trying to get people into the habit of shopping Sainsbury's."