U.K.-listed retailer Tesco (TSCDF, TSCDY) plans to offer free delivery to members of its paid loyalty program, a step seen as bringing it closer to Amazon Prime. This could be a good move, but I see it primarily as defensive and don’t expect it to help grow the Tesco business substantially, rather just to help defend it against Amazon (AMZN).
About Tesco Clubcard Plus
Clubcard is Tesco’s loyalty program, widely regarded as gold standard in its effectiveness.
Launched in 1995, it now has over 16 million members. The card is free and operates as a loyalty program on the customer side and a data gathering program on the retailer side, in common with many loyalty programs. Purchases accrue points and they can be redeemed in a variety of ways, including discounts on shopping. The data gathered from the program is used to drive customer-specific direct mail with straightforward promotions such as money off vouchers. From personal experience I would say that some of these vouchers seem a bit untargeted strategically, offering a straight price discount above a certain basket size rather than driving new behavior, but I expect that there is method behind this even if it is not apparent to me.
It has been instrumental in Tesco’s success, being credited for Tesco displacing Sainsbury (JSNSF, JSAIY) as the U.K.’s biggest retailer in 1995. The retailer bought the company which ran the program, giving it even more insight. While competitive cards such as the Nectar card launched by Sainsbury’s have worked across a variety of retailers, Tesco has focused on its own estate for Clubcard usage.
Membership of Clubcard Plus costs £7.99 a month. For that, shoppers can get a 10% reduction on shops up to twice a month, capped at a maximum discount of £20 per shop. That applies to grocery and select other categories, instore. There are ancillary benefits for customers who use Tesco’s mobile phone service.
So, shoppers who do two shops monthly of £40 or above will save money under the program. Even for single person households, that likely means that they can save money if they concentrate their shopping on a couple of shops monthly at Tesco. For families, it would definitely represent a saving. Kantar pegs average basket spend at £26.02, but I don’t think that captures the number of more expensive baskets well, as it contains a lot of smaller shop formats and also people popping in just for a newspaper or sandwich. At my local Tesco, the people queuing at the checkout are typically spending £40, £60 or £80 even on medium-sized shops, and the total often goes into three figures for large family shops. The COVID-19 has seen a return to the traditional approach of less frequent, larger ticket shops on a monthly basis. The company previously reported that shopping frequency fell 32%, but basket size was up 64%.
So, the value proposition for most Tesco customers seems pretty clear (although for an opposing view, read this article).
However, signup seems to have been sluggish. I saw one figure of 1m members but cannot find hard data anywhere for now. So, customers may not be seeing the program’s value proposition clearly. Or, it may be that they are distracted by COVID-19 or the program has not yet had time to bed in – it only launched in November, in fairness.
From the company side, the scheme seems to have been a success. It said in June that the pre COVID-19 impact of Clubcard Plus on buying behavior was circa 3x the level anticipated pre-launch. It didn’t reveal the anticipated level, but taking that statement at face value, clearly it is excellent news for the retailer.
Tesco is Expanding the Role of Clubcard Plus
With its focus on instore sales, the role of Clubcard Plus to date has been driving footfall instore, driving loyalty and driving basket size.
The company boss said in an interview published last weekend that it plans to add free delivery to Clubcard Plus, as a way to combat Amazon’s Prime offering. The Prime program is well-known, though for a primer (groan) read the Seeking Alpha piece Amazon Prime Reveals A Big Success.
Free Delivery Might Not Help Tesco Like it Helps Amazon
I think this move is positive in some ways.
It is a substantial additional benefit to Clubcard Plus, which should help drive membership, with the concomitant business benefits.
Additionally, it shows that the pandemic has not stopped Tesco from focusing on returning its business to long-term, sustainable health. I would expect that from a company of Tesco’s caliber, so it is not a surprise, but it is still good to see.
However, the Tesco and Amazon businesses have some significant differences, so whereas Prime has been a boon to Amazon, I don’t think the same logic necessarily carries over to Tesco.
First, Amazon is primarily a logistics business. It does have a very small physical retail footprint, but it basically has to ship what it sells. So getting people to use more of its logistics lowers its unit cost. Whereas Tesco is primarily a retail business with a large store estate. Home delivery incurs additional costs which eat into margins. During the pandemic, Tesco did ramp up delivery slot availability dramatically, so it may be that this new initiative is a way of spreading the excess capacity over a wider customer base as some who ordered online during the lockdown return to shopping instore not online. Even so, the additional cost point still applies.
Secondly, online shoppers who are savvy enough to sign up for Clubcard Plus to save money would also likely sign up for Amazon Prime, for the same reason. If delivery from both platforms is free of charge, they can more easily comparison shop. Amazon has a far wider offering than Tesco. So, Clubcard Plus may stop Amazon eating more of Tesco’s lunch, but I don’t see how it would help Tesco steal market share from Amazon. It’s primarily a defensive move whereas at Amazon, Prime has been a rocket engine for growth.
Conclusion: Clubcard Plus is Positive But It’s Defensive not Offensive
I think Clubcard Plus is working out well so far based on what little data Tesco has released. Adding in free delivery will make it more attractive and should drive further purchases. However, it will not stop Tesco losing its Amazon fight in areas where Amazon has advantages, which is a lot of the retail landscape outside of groceries. So while it is a good defensive move, stopping Tesco’s business hurting more from Amazon in the short-to medium-term, I don’t see it delivering sustainable substantial incremental profits which would justify an upwards rerating of Tesco shares at this point.
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