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November 7, 2014

Tesco’s Collapse is a Cautionary Tale for Big Data

There is a tendency to view big data analytics as a magic bullet that can transform any company using it into a market leader. For some, however, the “magic bullet” has turned into what looks to be a self-inflicted wound.

Case in point is the sudden downfall of the British retailer Tesco, ranked by some as the second largest retailer in the world after Wal-Mart. The U.K. chain was considered a pioneer in the use of customer loyalty programs intended to gather data on consumer preferences. As recently as this past spring, Tesco was scooping up leading edge big data practitioners like Berlin-based digital ad specialist Sociomantic Labs to help it make sense of customer data.

Since the Sociomantic acquisition by Tesco subsidiary Dunnhumby Ltd. in April, Tesco’s fortunes have headed south. An accounting scandal prompted Tesco to write off an astounding $416.7 million in profits.

The scandal also led to the resignation of Tesco Chairman Sir Richard Broadbent late last month.

While it’s clear that shady accounting and cutthroat retail competition played the primary role in Tesco’s downfall, observers note that the retailer’s foray into big data also backfired.

Tesco’s customer loyalty program had been widely seen as a model for data-driven retailing. Writing in the Harvard Business Review, Michael Schrage noted: “Tesco’s decline presents a clear and unambiguous warning that even rich and data-rich loyalty programs and analytics capabilities can’t stave off the competitive advantage of slightly lower prices and a simpler shopping experience.”

According to reader comments published in the U.K. press, consumer sentiment turned against Tesco as customers chafed at data collection efforts like the loyalty program that were increasingly perceived as gimmicky. The loyalty program appears to have been undone by consumer perception that Tesco got far more in the bargain than did shoppers.

In less than a decade, Shrage noted, “the driver and determinant of Tesco’s success has devolved into an analytic albatross. Knowledge goes from power to impotence.”

The cautionary tale that is Tesco’s data downfall reflects growing concerns not just in Europe but also in the U.S. about the how personal data is being swept up and used by businesses. A full-fledged backlash in underway in the U.S. against unscrupulous data brokers dealing in everything from health records to credit scores.

U.S. regulators recently cracked down on a pair of data brokers for violating consumer protection laws. The Federal Trade Commission announced legal settlements in September with two data brokers for violations of the Fair Credit Reporting Act. The web site Instant Checkmate and InfoTrack Information Services both agreed to pay civil fines and permanent injunctions against continuing their alleged illegal practices.

Earlier this week, the Washington-based Electronic Frontier Foundation posted a blog detailing wireless giant Verizon’s use of “perma-cookies” to track customers’ web visits from mobile phones. That consumer data “allows third-party advertisers and web sites to assemble a deep, permanent profile of visitors’ web browsing habits without their consent,” the privacy group claimed.

These real and potential abuses, along with the downfall of a data-driven retailer like Tesco, serve to underscore growing consumer worries about how big data technology is being used. As a result, FTC Chairwoman Edith Ramirez has said the agency is examining how existing privacy and other laws apply to big data practices and whether gaps exist in the current privacy law framework.

As big data practices come under closer scrutiny in the U.S., British consumers have already rendered their judgment about data-driven retailers like Tesco: they are abandoning it in droves.

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