KEL026 Seven-Eleven Japan Co

KEL026
Revised February 14, 2005
SUNIL CHOPRA
Seven-Eleven Japan Co.
Established in 1973, Seven-Eleven Japan set up its first store in Koto-ku, Tokyo, in May
1974. The company was first listed on the Tokyo Stock Exchange in October 1979. In 2004, it
was owned by the Ito-Yokado group, which also managed a chain of supermarkets in Japan and
owned a majority share in Southland, the company managing Seven-Eleven in the United States.
Seven-Eleven Japan realized a phenomenal growth between the years of 1985 and 2003. During
that period, the number of stores increased from 2,299 to 10,303, annual sales increased from 386
billion to 2,343 billion yen, and net income increased from 9 billion to 91.5 billion yen.
Additionally, the company’s return on equity (ROE) averaged around 14 percent between 2000
and 2004. In 2004, Seven-Eleven Japan represented Japan’s largest retailer in terms of operating
income and number of stores. Customer visits to Seven-Eleven outlets totaled 3.6 billion that
year, averaging almost 30 visits to a Seven-Eleven annually for every person in Japan.
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 and began
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 United States in 1961, Ito became convinced
that superstores were the wave of the future. At that time, Japan was still dominated by Momand-Pop stores. Ito’s chain of superstores in the Tokyo area was instantly popular and soon
constituted the 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 in
1973 to a licensing agreement. In exchange for 0.6 percent 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 immediate hit in Japan, and Seven-Eleven Japan experienced
tremendous growth. By 1979, there were already 591 Seven-Eleven stores in Japan; by 1984,
there were 2,001. Rapid growth continued (see Exhibit 1), resulting in 10,356 stores by 2004.
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 by
Seven-Eleven Japan (48 percent) and Ito-Yokado (52 percent). IYG acquired 70 percent of
Southland’s common stock for a total price of $430 million.
©2003 by the Kellogg School of Management, Northwestern University. This case was prepared by Professor Sunil Chopra. Cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
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SEVEN-ELEVEN JAPAN CO. KEL026
In 2004, convenience store operations from Seven-Eleven Japan and Seven-Eleven Inc. in the
United States contributed 48.2 percent of total revenues and 90.2 percent of total consolidated
operating income for the Ito Yokado group. Seven-Eleven Japan contributed 87.6 percent of the
total income received from convenience stores by Ito Yokado. Effectively, Seven-Eleven Japan
had become the dominant part of the Ito Yokado group.
The Convenience Store Industry and Seven-Eleven in Japan
As in the United States, convenience stores in Japan provided customers with a variety of
products carried by general retailers as well as food retailers. In Japan, the convenience store
sector was one of the few business areas that continued to grow during the prolonged 1990s
downturn. From 1991 to 2002, the number of convenience stores in Japan increased from 19,603
to almost 42,000. As a percentage of all retail stores in Japan, this represented an increase from
1.2 percent to 3.2 percent. During that period, annual sales at convenience stores more than
doubled from just over 3 trillion to 6.7 trillion yen. As a percentage of all retail sales in Japan,
this represented an increase from 2.2 percent to 5.0 percent.
Japan’s convenience store sector gradually consolidated, with larger players growing and
smaller operators shutting down. In 2004, the top 10 convenience store chains accounted for
approximately 90 percent of Japan’s convenience stores. As the chains improved their operating
structures and better leveraged economies of scale, smaller operators found it hard to compete.
Seven-Eleven Japan had grown its share of the convenience store market since it opened. In
2002, Seven-Eleven was Japan’s leading convenience store operator, accounting for 21.7 percent
of all convenience stores and 31.5 percent of total store sales. Seven-Eleven was very effective in
terms of same-store sales. In 2004, average daily sales at the four major convenience store chains
excluding Seven-Eleven Japan were 484,000 yen. Seven-Eleven stores, in contrast, had daily
sales of 647,000 yen—more than 30 percent higher than the competition. In 2004, SevenEleven’s operating income of 165.7 billion yen positioned it as a leader not only of the
convenience store sector but also of Japan’s retail industry as a whole. In terms of growth, its
performance was even more impressive. In 2004, Seven-Eleven accounted for 60 percent of the
total net increase in the number of stores among the top 10 convenience store chains in Japan.
This growth had been very carefully planned, exploiting the core strengths that Seven-Eleven
Japan had developed in the areas of information systems and distribution systems.
The Seven-Eleven Japan Franchise System
Seven-Eleven Japan developed an extensive franchise network and performed a key role in
the daily operations of this network. The Seven-Eleven Japan network included both companyowned stores and third-party-owned franchises. In 2004, franchise commissions accounted for
over 68 percent of revenue from operations. To ensure efficiency, Seven-Eleven Japan based its
fundamental network expansion policy on a market-dominance strategy. Entry into any new
market was built around a cluster of 50 to 60 stores supported by a distribution center. Such
clustering gave Seven-Eleven Japan a high-density market presence and allowed it to operate an
efficient distribution system. Seven-Eleven Japan, in its 1994 annual report, listed the following
six advantages of the market-dominance strategy:
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1. Boosted distribution efficiency
2. Improved brand awareness
3. Increased system efficiency
4. Enhanced efficiency of franchise support services
5. Improved advertising effectiveness
6. Prevented competitors’ entrance into the dominant area
Adhering to its dominant strategy, Seven-Eleven Japan opened the majority of its new stores
in areas with existing clusters of stores. For example, the Aichi prefecture, where Seven-Eleven
began opening stores in 2002, saw a large increase in 2004 with 108 new store openings. This
represented over 15 percent of the new Seven-Eleven stores opened in Japan that year.
Geographically, Seven-Eleven has a limited presence in Japan. In 2004, the company had
stores in about 70 percent (32 out of 47) of the prefectures within Japan. However, within
prefectures where they were present, stores tended to be dense. As the 2004 annual report stated,
“Filling in the entire map of Japan is not our priority. Instead, we look for demand where SevenEleven stores already exist, based on our fundamental area-dominance strategy of concentrating
stores in specific areas.”
With Seven-Eleven franchises being highly sought after, less than 1 out of 100 applicants was
awarded a franchise (a testament to store profitability). The franchise owner was required to put a
significant amount of money up front. Half of this amount was used to prepare the store and train
the owner. The rest was used to purchase the initial stock for the store. In 1994, 45 percent of
total gross profits at a store went to Seven-Eleven Japan, and the rest went to the store owner. The
responsibilities of the two parties were as follows:
SEVEN-ELEVEN JAPAN RESPONSIBILITIES
• Develop supply and merchandise
• Provide the ordering system
• Pay for the system operation
• Supply accounting services
• Provide advertising
• Install and remodel facilities
• Pay 80 percent of utility costs
FRANCHISE OWNER RESPONSIBILITIES
• Operate and manage store
• Hire and pay staff
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SEVEN-ELEVEN JAPAN CO. KEL026
• Order supplies
• Maintain store appearance
• Provide customer service
Store Information and Contents
Seven-Eleven had 10,303 stores in Japan and Hawaii as of 2003. In 2004, Seven-Eleven
Japan changed the standard size of new stores from 125 square meters to 150 square meters, still
significantly smaller than the size of most U.S. Seven-Eleven stores. Daily sales at a store
averaged 647,000 yen (about $6,100), which was about twice the average at a U.S. store. (See
Exhibit 2 for other financial data.)
Seven-Eleven Japan offered its stores a choice from a set of 5,000 SKUs (stock keeping
units). Each store carried on average about 3,000 SKUs depending upon the local customer
demand. Seven-Eleven emphasized regional merchandizing to cater precisely to local
preferences. Each store carried food items, beverages, magazines, and consumer items such as
soaps, detergents, etc. Sales across product categories from 2002 to 2004 are given in Exhibit 3.
The food items were classified in four broad categories: (1) chilled items including
sandwiches, delicatessen products, and milk; (2) warm items including box lunches, rice balls,
and fresh bread; (3) frozen items including ice cream, frozen foods, and ice cubes; and (4) roomtemperature items including canned food, instant noodles, and seasonings. Processed food and
fast-food items were big sellers for the stores. In 2004, processed and fast foods contributed about
60 percent of the total sales at each store. Over one billion rice balls were sold in 2004; this
amounted to each Japanese citizen eating approximately eight Seven-Eleven rice balls a year. The
top-selling products in the fast-food category were lunch boxes, rice balls, bread-based products,
and pasta. As of February 2004, Seven-Eleven Japan had 290 dedicated manufacturing plants that
only produced fast food for their stores.
Other products sold at Seven-Eleven stores included soft drinks, nutritional drinks, alcoholic
beverages such as beer and wine, game software, music CDs, and magazines.
In 2004, Seven-Eleven was focused on increasing the number of original items that were only
available at their stores. At that time, original items accounted for roughly 52 percent of total
store sales. The company aimed to grow the percentage to 60 percent in the medium to long term.
Store Services
Besides products, Seven-Eleven Japan gradually added a variety of services that customers
could obtain at its stores. The first service added in October 1987 was the in-store payment of
Tokyo Electric Power bills. The company later expanded the set of utilities for which customers
could pay their bills in the stores to include gas, insurance premiums, and telephone. With more
convenient operating hours and locations than banks or other financial institutions, the bill
payment service attracted millions of additional customers every year. In April 1994, SevenEleven Japan began accepting installment payments on behalf of credit companies. It started
selling ski lift pass vouchers in November 1994. In 1995, it began to accept payment for mail-
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KEL026 SEVEN-ELEVEN JAPAN CO.
order purchases. This was expanded to include payment for Internet shopping in November 1999.
In August 2000, a meal delivery service company, Seven-Meal Service Co., Ltd. was established
to serve the aging Japanese population. In 2001, IYBank Co. was established through a joint
investment with Ito Yokado. By April 2004, ATMs had been installed in about 75 percent of the
total store network in Japan, with the goal of achieving 100 percent ATM installation.
Other services offered at stores include photocopying, ticket sales using multifunctional
copiers, and being a pickup location for parcel delivery companies that typically did not leave the
parcel outside if the customer was not at home. The major thrust for offering these services was to
make Seven-Eleven stores in Japan more convenient places to shop. Several of these services
exploited the existing Total Information System (see next section) in the store.
In February 2000, Seven-Eleven Japan established 7dream.com, an e-commerce company.
The goal was to exploit the existing distribution system and the fact that stores were easily
accessible to most Japanese. Stores served as drop-off and collection points for Japanese
customers. A survey by eSBook, a joint venture between Softbank, Seven-Eleven Japan,
Yahoo!Japan, and Tohan, a publisher, discovered that 92 percent of its customers preferred to
pick up their online purchases at the local convenience store, rather than have them delivered to
their homes. This was understandable given the frequency with which Japanese customers visited
their local convenience store. 7dream hoped to build on this preference along with the synergies
from the existing distribution system.
Seven-Eleven Japan’s Integrated Store Information System
From its start, Seven-Eleven Japan had sought to simplify its operations by using advanced
information technology. Seven-Eleven Japan attributed a significant part of its success to the
Total Information System installed in every outlet and linked to headquarters, suppliers, and the
Seven-Eleven distribution centers. The first online network linking the head office, stores, and
vendors was established in 1979, though the company did not collect point-of-sales (POS)
information at that time. In 1982, Seven-Eleven was the first company in Japan to introduce a
POS system comprising POS cash registers and terminal control equipment. In 1985, the
company developed, jointly with NEC, personal computers using color graphics that were
installed at each store and linked to the POS cash registers. These computers were also on the
network linking the store to the head office as well as the vendors. Until July 1991, head office,
stores, distribution centers, and suppliers were linked only by a traditional analog network. At
that point in time, an integrated services digital network (ISDN) was installed. Linking more than
5,000 stores, it became one of the world’s largest ISDN systems. Seven-Eleven Japan spent 2.4
billion yen setting up this network.
The two-way, high-speed online communication capability of ISDN enabled Seven-Eleven
Japan to collect, process, and feed back POS data quickly. Sales data gathered in each store by
11:00 p.m. was processed and ready for analysis the next morning. In 1997, Seven-Eleven Japan
introduced its fifth generation of the Total Information System, which was still in use in 2004.
The hardware system at a 1994 Seven-Eleven store included the following:
• Graphic order terminals for placing orders were linked to the store computer
• Scanner terminals scanned deliveries from the distribution center
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• Store computers were linked to the ISDN network
• POS registers were linked to the store computer
Each piece of hardware had a role.
Graphic Order Terminal. This was a handheld device with a wide-screen graphic display,
used by the store owner/manager to place orders. The items were recorded and brought up in the
order in which they were arranged on the shelves. The store manager/owner walked down the
aisles and placed orders by item. When placing an order, the store manager had access (from the
store computer) to detailed analysis of POS data related to the particular item. (Exhibit 4 gives an
overview of the results of the analysis provided by the store computer.) The store manager used
this information when placing the order, which was directly entered into the terminal. Once all
the orders were placed, the terminal was returned to its slot, at which point the orders were
relayed by the store computer to both the appropriate vendor and the Seven-Eleven distribution
center.
Scanner Terminal. These scanners read bar codes and recorded inventory. They were used to
receive product coming in from a distribution center. This was then automatically checked against
a previously placed order and the two were reconciled. Before the scanner terminals were
introduced, truck drivers waited in the store until the delivery was checked. After they were
introduced, the driver simply dropped the delivery in the store, and a store clerk received it at a
suitable time when there were few customers. The scanner terminals were also used when
examining inventory at stores.
Store Computer. This linked to the ISDN network, the POS register, the graphic order
terminal, and the scanner terminal. It communicated between the various input sources, tracked
store inventory and sales, placed orders, provided detailed analysis of POS data, and maintained
and regulated store equipment.
POS Register. To better understand the functioning of this information network, one needs to
consider a sampling of daily operations. As soon as a customer purchased an item and paid at the
POS register, the item information was retrieved from the store computer and the time of sale was
automatically recorded. In addition, the cashier recorded the age and sex of the customer. To do
this, the cashier used five register keys for the categories: under 13, 13–19, 20–29, 30–49, and 50
and over. This POS data was automatically transmitted online to a host computer. All sales data
collected by 11:00 p.m. was organized and ready for analysis by the next morning. The data was
evaluated on a company-wide, district, and store basis.
The analyzed and updated data was then sent back to the Seven-Eleven Japan stores via the
network. Each store computer automatically updated its product master file to analyze its recent
sales and stock movements. The main objective of the analysis was to improve the ordering
process. All this information was available on the graphic order terminal used for order
placement.
The information system allowed Seven-Eleven stores to better match supply with demand.
Store staff could adjust the merchandising mix on the shelves according to consumption patterns
throughout the day. For example, popular breakfast items were stocked earlier during the day,
while popular dinner items were stocked later in the evening. The identification of slow and nonmoving items allowed a store to convert shelf space to introduce new items. More than 50 percent
of the items sold at a Seven-Eleven store changed in the course of a year. Part of this related to
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KEL026 SEVEN-ELEVEN JAPAN CO.
seasonal demand and part to new products. When a new product was introduced, the decision
whether to continue stocking it was made within the first three weeks. Each item on the shelf
contributed to sales and margin and did not waste valuable shelf space.
Seven-Eleven’s Distribution System
The Seven-Eleven distribution system tightly linked the entire supply chain for all product
categories. The Seven-Eleven distribution centers and the information network played a key role
in that regard. The major objective was to carefully track sales of items and offer short
replenishment cycle times. This allowed a store manager to accurately forecast sales
corresponding to each order.
Since March 1987, Seven-Eleven had offered three-times-daily store delivery of all rice
dishes (which comprised most of the fast-food items sold). Bread and other fresh food were
delivered twice a day. The distribution system was flexible enough to alter delivery schedules
depending on customer demand. For example, ice cream was delivered daily during the summer
but only three times a week at other times. The replenishment cycle time for fresh and fast-food
items had been shortened to less than 12 hours. A store order for rice balls by 10:00 a.m. was
delivered before the dinner rush.
As discussed earlier, the store manager used a graphic order terminal to place an order. All
stores were given cut-off times for breakfast, lunch, and dinner ordering. When a store placed an
order, it was immediately transmitted to the supplier as well as the distribution center. The
supplier received orders from all Seven-Eleven stores and started production to fill the orders.
The supplier then sent the orders by truck to the distribution center. Each store order was
separated so the distribution center could easily assign it to the appropriate store truck using the
order information it already had. The key to store delivery was what Seven-Eleven called the
combined delivery system. At the distribution center, delivery of like products from different
suppliers (for example, milk and sandwiches) was directed into a single temperature-controlled
truck. There were four categories of temperature-controlled trucks: frozen foods, chilled foods,
room-temperature processed foods, and warm foods. Each truck made deliveries to multiple retail
stores. The number of stores per truck depended on the sales volume. All deliveries were made
during off-peak hours and were received using the scanner terminals. The system worked on trust
and did not require the delivery person to be present when the store personnel scanned in the
delivery. That reduced the delivery time spent at each store.
This distribution system enabled Seven-Eleven to reduce the number of vehicles required for
daily delivery service to each store, even though the delivery frequency of each item was quite
high. In 1974, 70 vehicles visited each store every day. In 1994, only 11 were necessary. This
dramatically reduced delivery costs and enabled rapid delivery of a variety of fresh foods.
As of February 2004, Seven-Eleven Japan had a total of 290 dedicated manufacturing plants
throughout the country that only produced fast food for Seven-Eleven stores. These items were
distributed through 293 dedicated distribution centers (DCs) that ensured rapid, reliable delivery.
None of these DCs carried any inventory; they merely transferred inventory from supplier trucks
to Seven-Eleven distribution trucks. The transportation was provided by Transfleet Ltd., a
company set up by Mitsui and Co. for the exclusive use of Seven-Eleven Japan. The outline of
the combined distribution system is shown in Exhibit 5.
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Seven-Eleven in the United States
Seven-Eleven has expanded rapidly around the world (see Exhibit 6). The major growth has
been in Asia, though the United States continues to be the second-largest market for SevenEleven. Once Seven-Eleven Japan acquired Southland Corporation, it set about improving
operations in the United States. In the initial years, several Seven-Eleven stores in the United
States were shut down. The number of stores started to grow beginning in 1998. Historically, the
distribution structure in the United States was completely different from that of Japan. Stores in
the United States were replenished using direct store delivery (DSD) by some manufacturers,
which accounted for about half the total volume. The remaining products were delivered by
wholesalers.
With the goal of introducing “fresh” products, Seven-Eleven introduced the concept of
combined distribution centers (CDC) around 2000. By 2003, Seven-Eleven had 23 CDCs located
throughout North America supporting about 80 percent of the store network. CDCs delivered
fresh items such as sandwiches, bakery products, bread, produce, and other perishables once a
day. A variety of fresh-food suppliers sent product to the CDC throughout the day where they
were sorted for delivery to stores at night. Fresh-food sales in North America exceeded $450
million in 2003. During this period, DSD by manufacturers and wholesaler delivery to stores also
continued.
In 2003, revenue in the United States and Canada totaled $10.9 billion with about 69 percent
coming from merchandise and the rest from the sale of gasoline. The North American inventory
turnover rate in 2003 was about 17 compared to over 50 in Japan. This performance, however,
represented a significant improvement in North American performance.
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Study Questions
1. A convenience store chain attempts to be responsive and provide customers what they need,
when they need it, where they need it. What are some different ways that a convenience store
supply chain can be responsive? What are some risks in each case?
2. Seven-Eleven’s supply chain strategy in Japan can be described as attempting to micro-match
supply and demand using rapid replenishment. What are some risks associated with this
choice?
3. What has Seven-Eleven done in its choice of facility location, inventory management,
transportation, and information infrastructure to develop capabilities that support its supply
chain strategy in Japan?
4. Seven-Eleven does not allow direct store delivery in Japan with all products flowing through
its distribution center. What benefit does Seven-Eleven derive from this policy? When is
direct store delivery more appropriate?
5. What do you think about the 7dream concept for Seven-Eleven Japan? From a supply chain
perspective, is it likely to be more successful in Japan or the United States? Why?
6. Seven-Eleven is attempting to duplicate the supply chain structure that has succeeded in
Japan in the United States with the introduction of CDCs. What are the pros and cons of this
approach? Keep in mind that stores are also replenished by wholesalers and DSD by
manufacturers.
7. The United States has food service distributors like McLane that also replenish convenience
stores. What are the pros and cons to having a distributor replenish convenience stores versus
a company like Seven-Eleven managing its own distribution function?
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EVEN-ELEVEN JAPAN CO. KEL026
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Exhibit 1: Stores and Annual Sales for Seven-Eleven Japan
Year Number of
Stores
Annual Sales
(¥ in billions) Year Number of Stores Annual Sales (¥ in billions)
1974 15 0.7 1989 3,954 780.3
1975 69 4.8 1990 4,270 931.9
1976 199 17.4 1991 4,629 1,081.8
1977 375 39.8 1992 5,058 1,194.9
1978 591 72.5 1993 5,475 1,281.9
1979 801 109.8 1994 5,905 1,392.3
1980 1,040 153.6 1995 6,373 1,477.1
1981 1,306 202.1 1996 6,875 1,609.0
1982 1,643 256.5 1997 7,314 1,740.9
1983 2,001 319.0 1998 7,732 1,848.1
1984 2,299 386.7 1999 8,153 1,963.9
1985 2,651 453.6 2000 8,602 2,046.6
1986 2,964 521.9 2001 9,060 2,114.0
1987 3,304 599.1 2002 9,690 2,213.2
1988 3,653 686.3 2003 10,303 2,343.2
Exhibit 2: Financial Figures for Seven-Eleven Japan (2000–2004)
For Fiscal Years Ended February 28/29 2000 2001 2002 2003 2004
Net Sales (¥ in billions) 1,964.0 2,046.6 2,114.0 2,213.3 2,343.2
Revenue (¥ in billions) 327.0 346.9 365.9 400.7 445.4
Ordinary Income (¥ in billions) 140.2 147.2 153.8 159.6 168.9
Net Income (¥ in billions) 68.2 78.4 83.2 86.5 91.5
Number of Stores 8,153 8,602 9,060 9,690 10,303
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ELLOGG SCHOOL OF MANAGEMENT 11
0
500
1000
1500
2000
2500
2002 2003 2004
Processed Foods
Fast Food
Daily Food
Nonfood
Total
Exhibit 3: Sales by Product Category Between 2002 and 2004
2002 2003 2004
Sales
(¥ in
billions)
Gross
Margin
(%)
Percent
of Total
Sales
Percent
Increase
from Prior
Year
Sales
(¥ in
billions)
Gross
Margin
(%)
Percent
of Total
Sales
Percent
Increase
from Prior
Year
Sales
(¥ in
billions)
Gross
Margin
(%)
Percent
of Total
Sales
Percent
Increase
from Prior
Year
Processed Foods 681.5 34.4 32.0 5.3 696.0 34.9 31.2 2.1 725.4 36.0 30.8 4.2
Fast Foods 642.2 32.3 30.2 3.1 674.7 32.4 30.3 5.1 704.4 32.2 29.9 4.4
Fresh Foods 264.9 30.5 12.4 3.3 284.0 30.9 12.7 7.2 305.0 31.1 12.9 7.4
Nonfoods 540.2 22.9 25.4 1.7 573.6 22.6 25.8 6.2 624.0 22.1 26.4 8.8
Total 2,128.7 30.4 100.0 3.5 2,228.2 30.5 100.0 4.7 2,358.8 30.6 100.0
S K
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Exhibit 4: Information Analysis of POS Data
• Sales analysis of product categories over time
• SKU analysis
• Analysis of waste or disposal
• Ten-week sales trends by SKU
• Ten-day sales trends by SKU
• Sales trends for new products
• Sales analysis by day and time
• List of slow-moving items
• Sales analysis by product categories
• Analysis of sales and number of customers over time
• Contribution of product to sections in store display
• Sales growth by product categories
• Evaluation of merchandising
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Exhibit 5: Combined Distribution System
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Exhibit 6: Global Store Distribution for Seven-Eleven in 2004
Country Stores

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