Tuesday, June 3, 2008

Seven eleven - Japan - Story


Established in 1973, Seven-Eleven Japan set up its first store in May1974, in Koto-ku,Tokyo.

The company was first listed on the Tokyo Stock Exchange in October 1979. It is owned by the Ito-Yokado group which also manages a chain of supermarkets in Japan and owns a majority share in South land, the company managing Seven-Eleven in the US. The last ten years have been a period of phenomenal growth for Seven-Eleven Japan. Between 1985 and 1994, the number of stores increased from 2,299 to 5,523; sales increased from 386 billion Yen to 1,282 billion Yen; Net income increased from 9 billion Yen to 46 billion Yen.

In 1994, Seven-Eleven Japan ranked first among Japanese retailers in terms of ordinary profit. The return on equity (ROE) has averaged well over 20% over the last ten years. Seven-Eleven Japan is currently Japan's largest retailer in terms of operating income and number of stores. In 1994, customer visits to Seven-Eleven outlets totaled 1.8 billion,which translates to every person in Japan visiting a Seven-Eleven on average 15 times a year!

Company History and Profile

Both Ito-Yokado and Seven-Eleven Japan were founded by Mr. Masatoshi Ito. He started his retail empire after the second world war, when he joined his mother and elder brother to work in a small clothing store in Tokyo. By 1960 he was in sole control and the single store had grown into a $3 million company. After a trip to the US in 1961, Ito became convinced that superstores were the wave of the future.

At that time Japan was still dominated by Mom and Popstores. Ito's chain of superstores in the Tokyo area was instantly popular and still constitutesthe core of Ito-Yokado's retail operations. In 1972, Ito first approached the Southland Corporation about the possibility of opening Seven-Eleven convenience stores in Japan. After rejecting his initial request,Southland agreed to a licensing agreement in 1973. In exchange for 0.6% of total sales, Southland gave Ito exclusive rights throughout Japan.

In May 1974, the first Seven-Eleven convenience store opened in Tokyo. This new concept was an instant hit in Japan and experienced tremendous growth. By 1979 there were already 519 Seven-Eleven stores in Japan. By 1984 there were 2001 stores. Rapid growth has continued since then as detailed in Table 1, resulting in 5,523 stores by the end of 1994.

On October 24, 1990, the Southland Corporation entered into bankruptcy protection. Southland asked for Ito-Yokado's help and on March 5, 1991, IYG Holding was formed bySeven-Eleven Japan (48%) and Ito-Yokado (52%). IYG acquired 70% of Southland's common stock for a total price of $430 million.

Financial data for the different segments of the Ito-Yokado group demonstrates why Seven-Eleven Japan is worth a detailed study. Even though it contributes under 7% to thegroup's revenues from operations, it contributes over 47% of the group's operating income.

Over the last ten years, Seven Eleven Japan's revenue has grown on average by 12.6% annually and its net income has grown by 20.9% annually. Seven-Eleven Japan has managed to improve its return on sales (RoS) from 11.7% in 1984 to 25% in 1992. Over the last two years,the RoS has decreased somewhat to 23.8 % due to the economic recession in Japan.

Based on its annual sales, Seven-Eleven Japan is the third largest retailer in Japan. However, measured by ordinary profits, Seven-Eleven Japan is the largest retailer in Japan, even larger than its parent company, Ito-Yokado itself. With its 5,523 stores, Seven-Eleven is the largest convenience store chain in Japan. It is closely followed by Daiei CVS with 5,045 stores.

The Convenience Store Industry and 7-Eleven

As in the US, convenience stores in Japan provide customers with a variety of products carried by general retailers as well as food retailers. As of 1991, the retail structure was as shown below. While it is a small part of the overall retail outlets, Seven-Eleven Japan is a significant part of the convenience store outlets. It's share of this market has in fact grown since1991. This growth has been very carefully planned exploiting the core strengths that Seven-Eleven Japan has developed in theareas of Information systems and Distribution systems.

The Seven-Eleven Franchise System

Seven-Eleven has developed an extensive Franchise network and plays a keyrole in the daily operations of this network. The Seven-Eleven network consists of both company owned stores and third party owned franchises. In 1994 the percentage of company owned stores was 29.2%. To ensure efficiency, Seven-Eleven Japan's fundamental network expansion policy is based upon a market dominance strategy.

Entry into any new market is built around a cluster of 50 to 60 stores. Such clustering gives Seven-Eleven a high density market presence and allows itto operate an efficient distribution system. Seven-Eleven, in its annual report, lists th efollowing as advantages of the market-dominance strategy:

1. Boosts distribution efficiency.
2. Improves brand awareness.
3. Increases system efficiency.
4. Enhances the efficiency of franchise support services.
5. Improves advertising effectiveness.
6. Prevents competitors entrance into the dominant area.

Adhering to their dominant strategy, Seven-Eleven opened the majority of the 417 new stores in areas with existing clusters of stores. However, geographically Seven-Eleven Japan has a limited presence.They have stores in less than half (21 out of 47) the prefectures within Japan. However within prefectures where they are present, stores tend to be dense. The distribution of Seven-Eleven stores within Japan is contained in Figure 2.

Less than 1 out of 100 applicants is awarded a franchise (a testament totheir profitability) .The franchise owner is required to put 3 million Yen up front. Half of this amount is used for preparation of the store and training of the owner. The rest is used for purchasing the initial stock for the store. Seven-Eleven has an active ongoing relationship with the franchises.

Fortyfive percent of total gross profits at a store go to Seven-Eleven with the rest going to the store owner. The responsibilities of the two are as follows:Seven-Eleven Japan responsibilities:

1. Development of supply and merchandise.
2. Providing the ordering system.
3. Cost of system operation.
4. Accounting.
5. Advertising.
6. Installation and remodeling of facilities.
7. 80% of utility costs.

Franchise owner responsibilities:
1. Operation and management of store.
2. Hiring and paying staff.
3. Ordering.
4. Maintaining store appearance.
5. Customer service.

Kellogg Kellogg Graduate School of Management, Northwestern UniversityOperations Logistics and Supply Chain Management

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