The 'Cracker' of Clubcards: Tesco's trolley psychologist

One secret of the supermarket's success is its ability to get into the minds of shoppers. And bestowing this gift is the data-analysis team of Dunnhumby

What, do you suppose, is behind the phenomenal growth of Tesco, the supermarket giant that reported interim pre-tax profits of £1.2bn last week and a 7 per cent surge in second-quarter sales?

Is it the relentless squeezing of suppliers to ensure prices undercut rivals - as the cynic would argue? Is it simply Tesco's sheer size? Or is it the wide range of products - from tomatoes to trousers to credit cards? Or perhaps the convenience, the different formats, the catchy slogan?

The answer is probably all of these. But there are two other, often-overlooked reasons: the husband-and-wife team of Edwina Dunn and Clive Humby.

The story starts 16 years ago when the couple set up a business in the back-bedroom of their west London home, with the aim of exploiting their expertise in processing large amounts of data. At first, the operation was modest - client meetings were held round the dining table - but Dunnhumby wasn't feeding off crumbs and the company grew steadily.

Then, in 1995, things really took off.

Tesco, just an also-ran to J Sainsbury at the time, had recently launched Clubcard - a loyalty scheme where shoppers were rewarded for their spending by being allocated points, which could then be converted into cash or vouchers. The problem was, the retailer didn't have the analytical know-how to tell whether or not the scheme was working. "Tesco was testing the Clubcard in nine stores," recalls Ms Dunn. "But it was really hard to quantify if it was making a difference."

So the call went out to Dunnhumby, which took the information and boiled it down to simple facts. Presenting the findings to the board was, says Ms Dunn, "a magic moment".

"There was a long silence and nobody said anything. Then Sir Ian MacLaurin [at that point, Tesco's chairman] commented: 'That's really amazing: you know more than I have learnt about my customers in all my time here.' "

And so, a partnership was struck. The Clubcard was used to build up a picture of Tesco's customers and their likes and dislikes, meaning the chain was able to adapt quickly to any shift in shopping habits or trends.

Tesco was also able to target customers individually. Say, for example, you buy Pedigree Chum dogfood, collecting reward points on your Clubcard each time. The use of the card tells Tesco that you buy dogfood, so the chain may then send you details of pet insurance, or a money-off voucher for own-brand dog biscuits.

Sir Terry Leahy, who took over as chief executive of the group in 1997, evidently saw the value of Dunnhumby. Tesco now owns 84 per cent of the business, with Ms Dunn and Mr Humby holding the other 16 per cent. "Tesco is about growth through serving customers," Sir Terry said when reporting the results last week. "We're winning customers from most of the food retailers, so our competitive position is quite strong."

Dunnhumby has also gone from strength to strength. It is expanding overseas and is already in the US, working with a retailer called Kroger. Rumours have abounded that Kroger is not happy with Dunnhumby's links to Tesco, now that the UK giant is to open on its American doorstep next spring, but Ms Dunn dismisses such talk.

"We have done 12 quarters of like-for-like growth for Kroger. The directors, like anyone, always keep a healthy interest in what is going on. We're not working with Tesco in America, so at the moment we support Kroger. If there does come a time, there will be a big, grown-up conversation about it. But it's not a problem at the moment. They are all very grown-up."

And so they will have to be, for Tesco is not the only retailer to have cottoned on to the importance of customer data. Insiders at Sainsbury's, which fell down the rankings as Tesco ascended them, admit that using loyalty cards well has long been a weakness. At first, Sainsbury's offered shoppers the Reward card before scrapping that and signing up to Nectar, its current scheme, four years ago. But until 12 months ago, Nectar was rarely used to its full potential. "We have really developed it over the past year and are using the data better," says a source. "It's been a real step up. It's all part of the recovery."

The Nectar scheme, run by Loyalty Management, is shared with other, non-competing retailers such as BP and Debenhams. Sainsbury's, under the leadership of Justin King, is halfway through its turn-around programme and the steps taken in its management of the loyalty card have been substantial.

"We're getting close to the nirvana of one-to-one marketing, where we're pretty much guaranteeing that [the offers] you get won't be the same as your neighbour," says Leigh Rengger, who has the somewhat Orwellian title of head of loyalty at Sainsbury's.

Nor is the chain, which will provide a trading update to the City this week, stopping there. Mr Rengger talks about using the card data to help "stretch" customer spend, and confirms that the group has recently started sharing information with selected branded manufacturers "to enable them to give targeted offers" to customers.

Loyalty cards do, however, have their critics. For a start, some feel that analysing our shopping habits is too intrusive. Do the likes of Ms Dunn and Mr Rengger have the right to pry into the contents of our trolleys for the enrichment of their companies and clients?

"Customers have a choice," retorts Mr Rengger. "If they don't want supermarkets to have that data, they will stop using the card. The wording on the sign-up form is quite clear and we do have some people who opt out - who want to be part of the scheme but aren't comfortable with their data being used in this way."

And Ms Dunn points out that customers become angrier "when they are ignored".

"More and more people are becoming savvy about their data," she says. "They will end up being their own data managers: 'I will give you my details if you promise only to send me things that I'm interested in.'

"It's right to be nervous if the wrong data is stored or if it's managed irresponsibly. But the perception of nervousness is far greater than the reality."

Not all retailers use loyalty cards. Asda, for example, has long viewed them as gimmicks and says it focuses on keeping prices low instead. Certainly, they are expensive to run, with Tesco thought to be spending around £20m a year on its scheme, which boasts more than 11 million members.

Yet as far as Tesco and Sainsbury's are concerned, the more tools you can use to attract customers - and then the more information you can garner about them - the better. After all, as Tesco says, every little helps.