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Winners

Seven-Eleven Japan Co., Ltd.

2003 3rd Porter Prize Winner Convenience store
Tenaciously working to create a mechanism that allows for the efficient provision of consistently high-quality items ? every little thing required between the time one wakes up in the morning and the time one goes to sleep at night, taking into account frequent variations in consumer preferences that are affected by geography, the season and the time of day.

Company Outline

Seven-Eleven Japan was established in 1973. Its average daily sales per store was the highest among the leading convenience store chains, with 10 million customers visiting Seven-Eleven stores in a single day, and each customer visiting one of its stores every two days on average.

Unique Value Proposition

Seven-Eleven Japan (hereafter Seven-Eleven) provides those "little necessities" in everyday life to the local customers of each store, one of 10,000 located all over Japan and open 24 hours a day, 365 days a year. "The convenience store is my refrigerator" is an often-heard expression that describes the nature of a Seven-Eleven store, where you can immediately get that little item you want at that moment. It's available at a store just around the corner. Quite simply, Seven-Eleven stores offer convenience. Seven-Eleven's average daily sales per store attests to the uniqueness of its merchandise and the degree to which it matches customers' preferences. Average daily sales per store for the Seven-Eleven chain is \650,000, which is \150,000 yen higher than the average of Japan's top five convenience store chains excluding Seven-Eleven.

Unique Value Chain

Ordering/merchandise selection/inventory management
The selection of merchandise to be placed in the store with a floor space measuring approximately 110 square meters is the result of efforts to precisely meet customer needs. In addition, merchandise selection and display locations are frequently varied according to local events, changes in season and weather, and customer preferences. As a result, 70% of the merchandise is replaced during the course of one year.

What makes it possible is firstly the proactive ordering undertaken by each store. To facilitate ordering, all employees, including part-timers (there are 20 part-timers per store on average), are responsible for placing orders, changing displays and stocking the shelves. Secondly, Seven-Eleven achieves extremely high accuracy in distinguishing between strong selling items and poor performers. Seven-Eleven has created a system to grasp in real time the inventory situation for each merchandise item in every store. It can identify those items that do not move at all, and can tell whether an item has sold out in two hours or eight hours, for example.

The third reason is ordering based on hypothesis formulation and verification. Store staff in charge of ordering (part-time staff included) are encouraged to talk with customers and find out about factors relating to the neighborhood in which a store is located that might affect the sales volume of a particular items in the immediate future. Details that might have an impact on products sales include the duration of construction work in town or an athletic meet among local schools. Seven-Eleven also provides easy-to-understand on-line graphic presentations of weather forecasts, publicizes major events in the region, and offers POS information and new merchandise information. Integrating all this information, the staff member in charge of ordering formulates hypotheses about what kind of customers buy which kinds of items under which circumstances. Orders are placed based on the hypotheses formulated. The staff member then reviews actual sales after the event, and revises his or her hypotheses for the next ordering opportunity. This cycle is constantly repeated in each store. The second factor in management via inventory information is a post-facto response, allowing the company to respond to changes that have already occurred. The third factor in ordering by hypothesis is forecasting changes that are likely to occur in the future.

Seven-Eleven thoroughly implements analysis of inventories and hypothesis formulation to constantly ensure that those little necessities are always available to every customer. As a result, its chain stores have continued to realize approximately 5% growth in aggregate sales amid the current deflationary economy. At the same time, Seven-Eleven stores have achieved a very low inventory ratio. Seven-Eleven's inventory turnover in FY2002, at 41.9 times, was significantly higher than that of any other retail business formats (cf. 12.2 times for a Japanese supermarket chain Ito-Yokado, and 7.9 times for a U.S. leading discount store chain).

Merchandise proposals
Ordering by franchisees is done from a list of recommended merchandise sent from Seven-Eleven headquarters, and new merchandise items are added to this list every week. The headquarters adds 80 new items a week, and a total of 4,000 new items are recommended each year. Furthermore, about half of these new items are original merchandise developed as part of merchandising team efforts described below.

Product development
In order to offer merchandise that responds to latent customer demand, Seven-Eleven works jointly with manufacturers to develop new products to be put on the store shelf. For example, in the case of development of a plastic container for an instant Chinese noodle ("Rahmen") served at a well-known and immensely popular noodle shop, a merchandising team was formed. This project team comprised representatives from noodle shops, a freeze-dried noodle manufacturer, a soup manufacturer, a manufacturer of the ingredients in the noodle dish, and a container manufacturer.

The activities of such a team are not limited to product development, but also cover detailed planning of sales promotion and the adjustment of commercial and physical distribution flows. One such team discovered that the taste of cooked rice dishes deteriorates faster at temperatures both above and below 20 degrees Centigrade. The team went on to develop special vehicles for transporting cooked rice dishes that allow the food to be kept warm at the specified temperature. This team merchandising approach has been utilized for a wide range of products, including boxed lunches, rice balls, sandwiches, packaged side dishes, snacks, soft drinks, beer, and toys. As a result, original products only available through Seven-Eleven currently account for 50% of the company's total sales.

Merchandise development activities at Seven-Eleven are not limited only to physical products but also include services, such as the collection of public utility charges, made possible through the leveraging of the store's three types of networks (information, transaction and physical distribution networks) as a platform.

Store network expansion
The opening of a Seven-Eleven store is based on a franchising system, and done through the intensive recruitment of franchisees within a limited geographic area (utilizing an area-dominant strategy). The total number of Seven-Eleven stores now exceeds 10,000 in Japan, which is the largest of the industry. However, the Seven-Eleven store network covers 32 out of the 47 prefectures (i.e., a coverage rate of 68%). This means there are twice as many Seven-Eleven stores as any other convenience store chain in those prefectures that the company has chosen to enter.

Outbound logistics
Seven-Eleven has built a dedicated physical distribution system that can carry and deliver the products of a number of manufacturers, and it includes specialized trucks equipped with temperature controls, so that frozen food can be transported at minus 20 degrees Centigrade, chilled goods and beverages at 5 degrees, and cooked rice dishes at 20 degrees. Deliveries are run three times a day for chilled and cooked rice items, so that deliveries arrive just before the peak of sales for such items. However, the total number of deliveries per day is kept below 10 times per store. Physical distribution management at Seven-Eleven has resulted in better temperature control, the shortest possible lead-times, and improved inventory efficiency, enabling the freshness of food products in the store to be ensured.

Store operation support
The FC (Franchisee) Meeting is held at Seven-Eleven headquarters in Tokyo every week, on Tuesdays. These meetings are attended by 2,000 people, including Operation Field Counselors (OFC or store management advisors) from all over Japan, Recruiting Field Counselors (RFC or store network development staff), and management at the headquarters, who gather together and listen to directives and policies from the top management, and share information with participants regarding products, markets and store management know-how. Each OFC visits assigned franchisees at a rate of more than two visits a week per store, and communicates company policy and shares information and know-how with franchisee personnel, face to face. Information provided in face-to-face meetings is combined with communications via IT systems. Store managers utilize this information to improve store operations and expand sales. OFCs relocate to the geographic area under their supervision, and they travel every week to Tokyo to participate in the FC Meeting. OFCs travel to Tokyo from all parts of Japan for these meetings. Consequently, the total costs incurred in the attendance of these weekly meetings, which includes transportation and lodging, add up to \3 billion a year.

Partner support
Seven-Eleven serves as the headquarters for franchisees, and works together with franchisee stores, physical distribution operators, information systems management and operating firms, and merchandise manufacturers to achieve smooth and efficient operations. Its role can be summarized as the accumulation and improvement of know-how and knowledge sharing. As an example, in the area of physical distribution, Seven-Eleven plays a key role in the development of dedicated delivery vehicles, providing logistics center management methods, and sharing physical distribution know-how with 294 distribution centers spread throughout Japan. Regarding the information system developed for interfacing with suppliers and business partners, Seven-Eleven not only offers an order and payment processing function for its stores, but also shares inventory and POS information at the store level so that such information can be directly fed and linked with each partner's inventory control, production management and purchasing systems.

Fit among Activities

By pursuing an area-dominant strategy, Seven-Eleven gains such benefits as higher brand/store recognition in the area, more frequent customer visits, efficiency in physical distribution, enhanced efficiency of services to support franchisee stores, and more effective advertisement and sales promotion activities.

As a result of efficient physical distribution, namely due to an area-dominant strategy and the communal use of physical distribution channels by suppliers, Seven-Eleven can schedule deliveries at precisely controlled temperatures. Strict temperature control means that Seven-Eleven's food items do not need to use preservatives or synthetic coloring additives, which enhances the attractiveness of the company's merchandise. Furthermore, the creation of a physical distribution network that allows for strict temperature control has enabled the development of original merchandise, such as beer, to be delivered directly from the factory and chilled foods such as freshly boiled noodles that can be warmed and served in a few minutes at home. All of these are unique to Seven-Eleven and cannot be copied by other competitors. (Please refer to the attached "Activity System Map" for a more detailed account of the relationship between these activities.)

Innovations that Enabled Strategy

  • With a hypothesis-formulation approach to ordering, stores can anticipate the constantly changing customer needs, and keep the required merchandise always on the shelf prior to the occurrence of anticipated events. Every member of the ordering staff in each store is trained and shares this know-how.
  • Since the introduction of the POS system in Seven-Eleven in 1982, the company has used the system not only to reduce its manpower, improve information accuracy, and prevent theft, but also used it to access sales information per item for marketing purposes. The company has developed a real-time inventory management system that can account for each piece of stock keeping unit (SKU) in cooperation with its partners. Most of these information systems are the first ones of their kind in Japan and unique to Seven-Eleven.
  • Shared physical distribution, optimum temperature control in distribution, deliveries three times a day, and an area-dominant strategy contribute to Seven-Eleven's efficient logistics system.

Consistency of the Strategy Over Time

The key elements of Seven-Eleven's strategy have been in place since the company's establishment in 1973, including its policy of offering every little thing required between the time one wakes up in the morning and the time one goes to sleep at night, a franchising approach, an area-dominant store network development strategy, a policy of refusing to handle projects that fall outside the scope of the franchiser headquarters role but agreeing to work together with partners in different industries, and inventory management by each SKU item.

Trade-offs

  • Seven-Eleven Japan refused to appeal to customers with low prices. Unlike many private-brand products sold through other retail chains, even the original merchandise developed through the team merchandising process is not sold at a price that undercuts those of comparable national brands. In principle, neither does it practice discount sales.
  • In order for each store to offer merchandise that meet customer needs with limited shelf space and the stockyard inside the store, Seven-Eleven emphasizes the selective screening of merchandise that sells, rather than offering customers a broad selection. For example, it allocates more shelf space to the best selling canned coffee products, even if it means reducing the number of different brands to be sold. The company does not add variety just to fill up shelf space.
  • Seven-Eleven does not expand its store chain network through directly operated stores.
  • The company does not sacrifice efficiency in physical distribution by expanding the geographic scope of its operations.
  • It does not design and open a store with a big floor space beyond what can be managed by a store manager and a few part-time staff.
  • Seven-Eleven only performs tasks consistent with its role as core headquarters for convenience store franchisers. Its activities are mostly limited to franchisee support, merchandise development, information sharing and IT infrastructure development and maintenance.

Profitability

Seven-Eleven Japan consistently surpasses by a wide margin the average for the convenience store and supermarket chain industry, in terms of both Return on Invested Capital and Return on Sales.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
1998 1999 2000 2001 2002
16.1%P 14.3%P 15.3%P 16.2%P 17.3%P 14.6%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
1998 1999 2000 2001 2002
38.3%P 36.1%P 39.4%P 39.2%P 39.0%P 36.0%P
Return on sales =Operating income / Net sales

Activity System Map

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