In the supermarket's lousy first half results posted Wednesday, in which its interim profits halved, Tesco said it would retain Dunnhumby following a "comprehensive strategic review."
Dunnhumby runs Tesco's loyalty card programme, which tracks customers' shopping habits to build up profiles of consumers and target them with relevant offers. The Clubcard was credited with helping Tesco overtake Sainsbury's in the 1990s to become the UK's biggest supermarket.
Tesco first announced it was putting Dunnhumby up for sale earlier this year as part of plans to slim down its business and recover from a disastrous accounting scandal.
Sources told Reuters earlier this year the sale could reach a value of up to £2 billion. Potential buyers included WPP, the largest
However, talks with potential private equity bidders stalled, and the price of the unit fell to £700 million, Sky News reported. WPP was reported to be the final bidder left in the sale, but that left Tesco with barely any room to negotiate over the value of the deal, according to Sky News' Mark Kleinman.
Business Insider has contacted WPP for comment, and we'll update this article once we hear back.
Another issue reducing the value of the Dunnhumby unit was a restructuring of its relationship with US retailer Kroger. The two companies previously had a 50/50 marketing partnership, but Kroger bought up the remainder and formed a new data and loyalty unit called 84.51°. Dunnhumby still continues to operate in the US, with clients including Macy's, and 84.51° will receive service and maintenance on its Dunnhumby systems for a further five years. But it meant Dunnhumby no longer had access to Kroger's data.
Any buyer of Dunnhumby would suffer the loss of Tesco
Data contracts are at the heart of the issue that saw the reduction in Dunnhumby's value over the course of the sale negotiations. If Tesco were to shed Dunnhumby 100%, it would then need to become a client of Dunnhumby (or another supplier) for the supply of data and marketing services for Clubcard. Yet the majority of Dunnhumby's profit is understood to come from re-selling Tesco's insight and data to consumer packaged goods (CPG) companies like Coca-Cola and Diageo.
Stuart Evans, director of global loyalty practice at ICLP, told Business Insider: "Dunnhumby is like the right hind leg of a donkey: whilst in place it is a valuable asset but once cut off from the mothership it's value boils down to the intrinsic assets of the data it holds and contracts with the CPGs for insight, which are all founded on and fed by its live support for Tesco's ongoing operations."
The due dilligence process would have looked hard at what price Dunnhumby could charge its major "client" Tesco for services and who shares which packaged good companies' revenues once that amputation had happened, Evans said. Tesco wouldn't have wanted to pay much (not least because it's trying to slim down its outgoings) and Dunnnhumby's potential purchasers would have wanted a big guaranteed revenue stream in exchange for their cash.
Evans added "The remaining value of Dunnhumby outside of the Tesco's contract, its people, technology and IP in loyalty will be attractive to the likes of WPP but that will be nothing like the £1 billion to £2 billion price tag that was mooted. Even £700m seems way over the top for the 'meat' value of donkey leg once cut off."