Shopper Secrets

Fifteen years ago, the Kroger Company introduced the Plus loyalty program to shoppers in its grocery stores across the United States.

On the surface, the program was simple: Sign up for a card and receive discounts on various products throughout the store.It was an easy way to keep customers loyal to the chain. But forKroger, the program offered a treasure trove of customer-specificdata, providing information about what shoppers buy and when.Kroger was then able to use this information to target coupons and promotions to particular customers.

Today, an estimated 90 percent of Kroger shoppers use the card. It's a huge investment, but it seems to pay off for the largestsupermarket chain in the country, as well as for its customers. Ina nutshell, Kroger's customers are more loyal because they save money on items they care about, among other benefits.

But Kroger appears to be in the minority when it comes to investing in customer analytics. Odd, considering that retailingis the most likely industry to profit from such information. "Whileretailers seem to benefit tremendously from using analytics, manydon't seem to realize its value," says Frank Germann, an assistantprofessor of marketing at the Mendoza College of Business, whospecializes in marketing strategy and customer analytics. "The bigretailers get it, but many smaller ones haven't seen the potential."

This subject is the focus of new research titled "Do RetailersBenefit from Deploying Customer Analytics?" conducted byGermann, Gary Lilien, a marketing professor at Penn State, as wellas Lars Fiedler and Matthias Kraus, both consultants at McKinsey& Co. The study was published in the December 2014 issue ofThe Journal of Retailing. With the sponsorship of McKinsey &Co., Germann and his team surveyed 418 high-ranking managersand executives worldwide from eight industries, askingthem about their company's spending on customer analytics,as well as their views and experiences on the value of suchdata on the bottom line.

The study found that increasing a company's investment in analytics translated into performance gains in each of the industries. According to the data, on a one-to-seven rating scalerepresenting the use of analytics, an increase of one ratingpoint — from four to five, for instance — accounts for a 0.29 unitincrease in a company's overall performance across all industries.On the low end of the scale was the banking and securities industry, which realized an uptick of 0.183. Retailing was at the top, with a gain of 0.468, distantly followed by media entertainment and information, with a gain of 0.327.

While retailing is the industry with the most to gain from studying its customers, Germann found that, among respondents,retailers are below average when it comes to actually investing in analytics. "Our results clearly suggest that retailers are making amistake," Germann says.

Why aren't more retailers investing in customer data? Germann believes it's because the results aren't guaranteed. "In retailing, the margins are very small," he says. "Any investmentthat they make needs to produce a positive return. Otherwise theycan't afford it. I think because the margins are so small, many feel uncertain in investing in analytics because they aren't sure that they'd actually get that positive return."

From Germann's perspective, this mindset is shortsighted and could even lead to failure for many retailers. "I wouldn't besurprised if using analytics in the retailing space will becomeincreasingly prevalent to the point where it will be a prerequisiteto play," he says. "If you don't do it, you're not going to be able to survive because it's going to play such a big role."

Germann notes the use of customer analytics data may be even more useful to online retailers. "They can essentially customize theirwebsite so that two shoppers will encounter different layouts anditems based on their past browsing behavior and what the onlineretailer infers about their respective preferences," he says.

Overall, "I think analytics is here to stay," he says. "A lotof retailers don't yet understand that it has such tremendousperformance implications. I'm hoping with this study we're goingto convince retailers that it's really an area they need to look intoand invest in."