Case study 5.2 Seven-Eleven Japan (This case study was written by Yim-Yu Wong and Edwin Duerr, both of San Francisco State University.) Introduction This case describes how America's innovative Seven-Eleven stores ended up being acquired by a Japanese company and how, through continuing innova- tions under Japanese management, it became the world's leading conven- ience store chain. It opens with a discussion of current and past actions by the Japanese company that have contributed to its success. The final section cov- ers the insights of that led to the development of a new type of retail store by an American company, and the subsequent events that led to the change in ownership of the company from American to Japanese. Throughout the discussion, it will be seen that the company has benefited from its ability to: (1) recognize opportunities where others may see potential problems; and (2) continue to lead the industry in innovations. The resulting company policies have led to its becoming the leading convenience store chain not only in Japan, but also in the US and in the world as a whole. In 10, the company 12,553 stores Japan, 6,515 in the United States, 15,841 in the rest of Asia, 1,177 in Mexico, 457 in Canada, 446 in Australia, 191 in Norway, 177 in Sweden, and 129 in Denmark: a total of 37,486. The parent company has no presence in Europe outside of Scandinavia. As discussed in the final section of this case, Seven-Eleven Japan began as a joint venture started by America's pioneering Seven-Eleven and a Japanese part- ner. While the Japanese joint venture grew rapidly in size and profitability, Seven- Eleven's American parent company, The Southland Corporation, encountered serious financial difficulties. Southland then sold Seven-Eleven Japan to the Japanese parent's company, Ito-Yokado. Southland's financial difficulties contin- ued, and eventually it was acquired by Ito-Yokado. With the growth of Seven- Eleven Japan, it eventually became larger than its Japanese parent. In a series of reorganizations, the name of Ito-Yokado disappeared and its various compo- nents were brought together under a holding company, Seven & i Holdings. Insights and innovations In 2009, Seven-Eleven Japan Co. Ltd. saw an opportunity rather than a threat in the depressed US economy. While most other American companies were still in the process of cutting workers and plant capacity, Seven-Eleven Japan embarked on a major expansion program in its US subsidiary. The program, which will last into 2012, will add 100 new stores in Southern California plus additional new stores in Metro New York, the Dallas-Fort Worth area, Washington, D.C., Baltimore, Northern California, and the Puget Sound area in the state of Washington. With the severely depressed US real estate market, properties for new stores can be acquired at what Seven-Eleven viewed as bargain prices. The company will also benefit from the strong value of the yen against the dollar, making the acquisitions even cheaper in terms of funds from the parent company. At the same time, the parent company is reducing the number of its outlets in Japan. There, the real estate market has been depressed for 20 years, and an overall economic malaise has kept consumer spending low. Therefore, in Japan the opportunity lies in increasing earnings per store through continu- ing innovations in introducing new products and services, increased distribu- tion efficiency, improved information systems, and more efficient store operations while eliminating stores where there is inadequate local market potential. The growth of shopping via the Internet was viewed by Japan's Seven- Eleven convenience store chain as an opportunity rather than a threat. Because of conditions in the Japanese marketplace, Seven-Eleven Japan was not likely to be able to sell its own food and other products over the Internet. The company could, however, provide a service for the large number of Japanese who did not have credit cards or who did have strong aversion to providing credit card information over the telephone. With over 11,750 out- lets in Japan at that time Seven-Eleven has stores within a short distance of most of its customers and, in fact, of most Japanese. Their customers tend to visit the stores frequently for relatively small purchases. Thus Seven-Eleven Japan developed a plan to serve as a distribution point for the products of other companies that were selling over the Internet. Cus- tomers who wanted goods from an Internet marketer could order the goods over the Internet, and the Internet marketer would ship the goods to a Seven- Eleven store near to the customer. The store would then give the goods to the customer when he or she came in, accept payment in cash (as most Japanese customers prefer) or by credit card, and remit the money to the shipper. The ubiquitous and efficient delivery services available in Japan would facilitate quick delivery to the stores, which would, in fact, be easier than locating the often difficult-to-find address of individuals. Seven-Eleven would collect a small fee for this service. More importantly, the stores would bring in additional potential customers, or bring in regular customers for additional visits. These customers might buy some of Seven-Eleven's own products in addition to picking up their Internet order. In November 1999, the company started this system of handling merchan- dise for Internet marketers, delivering goods to customers from their stores, accepting payments from the customers, and remitting the payments to the sellers. They entered into agreements with Softbank Corporation, Tohan book wholesalers, Yahoo Japan, and others to create a venture to sell books and videos using a website on Yahoo Japan. In February 2000 Seven-Eleven part- nered with seven others, including Sony, NEC, Mitsui trading company, and Japan Travel Bureau, to distribute a wide range of products, to provide music and photos online, and to handle book and ticket sales. In another venture, they are involved with Internet automobile sales agencies. In July 2000 they opened a virtual mall named 7dream.com, allowing customers to order goods online and pick them up at the Seven-Eleven store of their choice. The serv- ices proved to be a great success, increasing the sales of their own products while they also collected small fees from the sellers. The company has continued to build on its innovations. Seven-Eleven Japan was the first marketer in Japan to introduce a point-of-sale system (POS) for merchandise control. The company continually upgrades its infor- mation systems, introducing satellite communications in its fifth generation system and now in its sixth generation system. It was also the first to start ac- cepting payments for utility companies, a service now earning commissions on US$6 billion per year. It subsequently started handling insurance company payments for NHK (the national broadcasting company), and many others. Seven-Eleven Japan also introduced refrigeration and control systems to keep prepared rice food products at 20 degrees centigrade (68 degrees Fahrenheit) through factory, delivery, and in display cases a feature much desired by Japanese consumers to preserve the flavor of the cooked rice while inhibiting spoiling With the company's wide range of services combined with continuing up- dating of its product line, on average each store in Japan attracts 950 customer visits per day. In 2007, Seven-Eleven Japan's parent company became the first Japanese retailer to issue an 'e-money card.' This name is given to cards in Japan issued to specific organizations for use at designated outlets. They may be either pre- paid cards or cards linked to a bank account from which money can be imme- diately withdrawn (like a debit card but it can only be used at designated outlets). The cards have been a success and now other retailers are offering the same type of card. For people with properly enabled cell phones, the phones can be used to make purchases. It is estimated that over 40% of cell phones now have this capability. Seven-Eleven Japan continually tracks sales data so as to determine the best mix of products, and make changes in 70% of their products each year. The company develops tie-ins with manufacturers where mutual advantage can be attained in advertising or offerings. It is increasingly looking overseas for suppliers where superior products or lower prices can be attained. Using its market analyses and expertise in merchandise development, mate- rial procurement, and quality control, Seven-Eleven Japan developed a range of products combining high quality and value pricing, to be sold under a new pri- vate label brand, Seven Premium. It introduced a line with 49 items offered in 2007, and plans to have over 1,000 in this line by the end of February 2011. How Seven-Eleven became a Japanese company The Seven-Eleven chain has a long history of innovation and growth. It was originally a US company that was subsequently acquired by Japan's Ito-Yokado Co., Ltd. The original US Seven-Eleven, owned by Southland Corporation of the United States, was designed to meet the needs of the growing number of dual wage-earner families and single workers in the United States who worked non- standard hours. These people often had difficulty in getting to large grocery stores and supermarkets during the hours that they were open. The increasing affluence in the United States, particularly among the target customers, sug- gested that they would be willing to pay something extra for the convenience of being able to shop at other times, and preferably 24 hours per day. The company opened a number of outlets, carefully selecting the items to be carried, used cen- tralized purchasing to obtain low prices, monitored sales to improve the mix of products offered, carefully controlled inventories, and used frequent delivery to achieve high turnover in limited spaces. In 1973 Seven-Eleven's parent company, Southland Corporation, saw an opportunity in the Japanese market where many other companies saw only potential problems. The Japanese distribution system was very complex with multiple levels of wholesalers and many very small 'Mom and Pop' stores. Compared to the United States there were twice as many wholesalers per capita and over twice as many retailers per capita in Japan. Though many of those in the distribution chain in Japan operated on very small margins, the multiple levels resulted in high distribution costs. Additionally, all partici- pants in the distributions system were notoriously reluctant to change distrib- utors or suppliers. While many foreign marketers viewed the Japanese market as too difficult to penetrate, Southland felt that they could set up their own marketing chain and operate it more effectively than Japanese competitors who retained their existing systems. Japanese society appeared to be ripe for the Seven-Eleven concept. The number of women in the workforce had increased, and most men worked such long hours that they could not visit stores during the regu- lar hours of operation. The typical neighborhood food stores were small and carried a limited range of products, often specializing in only one type of food (fish, or vegetables, or rice, etc.) Traditional housewives were accustomed to visiting local shops once per day to get fresh foods, but the number of house- holds where women had the time to do so was decreasing. Japan was becom- ing increasingly affluent and people had always been willing to pay extra for convenience. The concentration of the population in a few metropolitan areas, and the widespread use of trains and buses for commuting to major business districts, meant that there were many locations with high traffic volumes. Japan was still viewed as a very difficult place in which to do business if you did not have the right connections plus detailed knowledge of the legal, political, and social environment. Southland therefore formed a strategic alliance with Ito-Yokado, a large Japanese supermarket chain operator. The joint venture was highly successful, with Seven-Eleven becoming the largest convenience store operator in Japan. In an attempt to avoid being acquired by a Canadian company in 1987, Southland sold its shares of Seven-Eleven Japan to Ito-Yokado. Seven-Eleven Japan thus became Japanese owned. Subsequent financial problems at Southland in 1990 led to the US company selling 75% of its stock to Ito-Yokado. In doing so it turned its approximately 7000 company- owned stores in 21 countries over to the Japanese company. The name of Southland Corporation, now Japanese-owned, was changed to Seven-Eleven, Inc. Subsequently, as Seven-Eleven stores became the major part of Ito- Yokado, the latter changed its name to Seven & i Holdings. The chains in each country are still named Seven-Eleven. Under Japanese leadership at home During the period of Japanese ownership from 1987 to the present, the com- pany has enjoyed remarkable further growth and increasing profitability in Japan, and has expanded its overseas operations. The number of its stores in Japan has grown from 3304 in 1987 to over 12,553 in 2010. Sales per store have steadily increased, market share has increased, and earnings have grown rap- idly. On average, each store in Japan now attracts 950 customer visits per day. Continuing expansion abroad Seven-Eleven Japan's profitable expansion in Japan led to its entering a num- ber of markets abroad. One of its early moves was in to Taiwan Taiwan has a high population density, even greater than that in Japan and also concen- trated in cities, thus giving easy access to Seven-Eleven stores for most of the population. Like the Japanese, Taiwanese have an aversion to giving out in- formation over the Internet. They also cannot, or do not want to stay at home waiting for delivery services. Thus it is easier for them to pick up items at the convenience stores. Seven-Eleven Japan adapts its system to each nation into which it expands, adjusting products, services and distribution systems to meet local requirements and tastes. In 2001, Seven-Eleven Japan expanded its virtual mall system to Taiwan. Thailand's rapid economic growth in recent years, and its concentration of population around Bangkok, made it another attractive market. Seven-Eleven Japan's subsidiary there now has the third-largest number of stores in the world. In spite of its low per-capita income, China's enormous population, with large concentrations in major cities and very rapid economic growth that cre- ated large numbers of people with higher incomes, made its market poten- tially attractive to many companies. However, government regulations, concerns about their application and potential changes, and differences in market structure caused Seven-Eleven Japan to take a conservative approach in entering the market. They first determined market potential through licensing agreements with a Hong Kong firm that then opened stores in Shenzhen and Guangzhou. When they decided to make an equity investment, they did so in the capital city with local companies as partners. (The great majority of European, American and Japanese companies already in China had entered with local partners.)