KelloggKellogg Graduate School of Management Northwestern University

OperationsLogistics an Supply Chain Management

SEVEN-ELEVEN JAPAN CO.1Established in 1973, Seven-Eleven Japan set up its first store in May 1974, 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 Southland, 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 Japans 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 ProfileBoth 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 Pop stores. Itos chain of superstores in the Tokyo area was instantly popular and still constitutes the core of Ito-Yokados 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-Yokados help and on March 5, 1991, IYG Holding was formed by Seven-Eleven Japan (48%)1

This description of Seven-Eleven Japan was written after discussions with executives at Seven-Eleven Japan. The time spent by them is gratefully acknowledged. Michael Kligers efforts in setting up the meeting with Seven-Eleven are gratefully acknowledged. Some of the information used in this case is from a report written by Michael Kliger for the GIM Japan class (1995).

This note was written by Sunil Chopra, Professor of Operations Management, Kellogg Graduate School of Management, Northwestern University. This writeup has been prepared as a basis for class discussion. Copyright 2000 by Kellogg Graduate School of Management. To order copies, call (847) 491-3603. No part of this publication may be reproduced without the permission of the Kellogg Graduate School of Management.

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and Ito-Yokado (52%). IYG acquired 70% of Southlands 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 the groups revenues from operations, it contributes over 47% of the groups operating income. Over the last ten years, Seven Eleven Japans 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-ElevenAs 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. Comparison of retail outlets by sales (billion Yen) Type of Retailer Retailer Food Retailer Convenience Store 7-Eleven Japan Annual Sales 140,633 41,452 3,050 1,081 Relative Annual Sales 100% 29.5% 2.2% 0.8%

Comparison of retail outlets by number of stores Type of Retailer Retailer Food Retailer Convenience Store 7-Eleven Japan Number of stores 1,591,186 622,751 19,603 4,629 % of total stores 100% 39.1% 1.2% 0.3%

While it is a small part of the overall retail outlets, Seven-Eleven Japan is a significant part of the convenience store outlets. Its share of this market has in fact grown since 1991. This growth has been very carefully planned exploiting the core strengths that Seven-Eleven Japan has developed in the areas of Information systems and Distribution systems.

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The Seven-Eleven Franchise SystemSeven-Eleven has developed an extensive Franchise network and plays a key role 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 Japans 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 it to operate an efficient distribution system. Seven-Eleven, in its annual report, lists the following as advantages of the market-dominance strategy: 1. 2. 3. 4. 5. 6. Boosts distribution efficiency. Improves brand awareness. Increases system efficiency. Enhances the efficiency of franchise support services. Improves advertising effectiveness. 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 to their 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. Forty five 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. 2. 3. 4. 5. 6. 7. Development of supply and merchandise. Providing the ordering system. Cost of system operation. Accounting. Advertising. Installation and remodeling of facilities. 80% of utility costs.

Franchise owner responsibilities: 1. Operation and management of store. 2. Hiring and paying staff.

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3. Ordering. 4. Maintaining store appearance. 5. Customer service.

Store Information and ContentsAs mentioned in Table 1, Seven-Eleven had 5,523 stores in Japan and Hawaii, as of 1994. In Japan, each Seven-Eleven store has an average area of 100 square meters. This is about a third the size of most US Seven-eleven stores. Daily sales at a store average 700,000 Yen (about $8,000), which is about twice the average at a US store. Seven-Eleven offers its stores a choice from a set of 5,000 SKUs. Each store carries on average about 3,000 SKUs depending upon the customer demand in the local area. Each store carries food items, beverages, magazines, and consumer items such as soaps, detergents etc. Sales across product categories from 1990 to 1994 are given in Figure 3. Almost 90% of Seven-Eleven stores in Japan operate on a 24 hour basis and about 40% sell liquor. Food items can be classified in four broad categories: (i) Chilled temperature (5C) items including sandwiches, delicatessen products, and milk; (ii) Hot temperature (20C) items including box lunches, rice balls, and fresh bread; (iii) Frozen items (-20C) including ice cream, frozen foods, and ice cubes; (iv) Room temperature items including canned food, instant noodles, and seasonings. Fresh food and fast food items from categories (i) and (ii) have been very big sellers for the stores. Towards the end of 1993 Seven-Eleven held a 20th anniversary sale over four stages, to appeal to price conscious customers and publicize the excellent value of the fresh and fast food products. In 1994, Seven-Eleven saw double digit increases of 12.6% for rice products and 10.5% for sandwiches. In 1994 fresh and fast foods contributed about 40% of the total sales at each store (contrast with a convenience store in the US). In fact rice products alone (rice balls etc. included in fast foods) were sold worth 208.9 billion Yen in 1994 (this is equivalent to the sales of Japans leading fast food chain!). In 1994, there were 32 companies with 72 dedicated plants producing original rice dishes and prepared bread products for Seven Eleven Japan. In addition there were 120 companies with 129 dedicated plants producing original delicatessen items. Seven-Eleven plans to introduce oven-fresh bread products which are also expected to perform well. Seven-Eleven will be the first convenience retailer to introduce such products. In the beverage category, all stores sell soft drinks. This includes both brand names as well as private label items (developed for Seven-Eleven). Because of the recent liberalization of liquor license laws in Japan several Seven-Eleven stores also sell alcoholic beverages (currently 41.1% of the stores sell liquor). Private label soft drinks and alcoholic beverages (here also Seven-Eleven plans to develop a private label beer with Philip Morris) have seen an increase in sales. Magazines have also seen a significant growth in sales of 12.7% in 1994. Seven-Eleven expects this pattern to continue in the near future.

Bill Payment ServiceFor customers who choose to pay their utility bills in person each month, rather than relying on the automatic debit system, Seven-Eleven provides a utility bill payment service. With more convenient operating hours and locations than banks or other financial institutions, the bill payment

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service attracts millions of additional customers every year. This service was started in 1987 and more than 10 million bills were paid using this service in 1994. In April 1994, Seven-Eleven began a service to accept installment payments on behalf of credit companies. The major thrust for offering these services is to make Seven-Eleven stores more convenient places to shop. The Integrated store information system at Seven-Eleven allows it to offer such information and accounting based services.

Seven-Elevens Integrated Store Information SystemFrom its start, Seven Eleven Japan sought to simplify its operations by using advanced information technology. Seven-Eleven Japan attributes a significant part of its success to a comprehensive store information system installed in every outlet and linked both to suppliers and the Seven-Eleven distribution centers. The first on-line network linking the head-office, stores and vendors was established in 1979. There was no point-of-sales (POS) information collected at his 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. Up to 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 is today one of the worlds largest ISDN systems. Seven Eleven Japan spent 2.4 billion Yen setting up this network. ISDN uses digital technology to send voice, data and graphic information through a single optical fiber line. The fiber optic line greatly increases the capacity and speed of the transmission as compared to traditional copper cable. The 64-kilobit ISDN that Seven Eleven uses can send, for example, 4,000 Chinese characters per second, 30 times faster than he old analog network. The twoway, high speed on-line communication capability of ISDN enables Seven Eleven to collect, process, and feed back POS data quickly. Sales data gathered in each store by 11 p.m. is processed and ready for analysis the next morning. The current hardware at a store is as follows: 1. 2. 3. 4. Graphic order terminals for placing orders linked to the store computer. Scanner terminals to scan deliveries from the distribution center. A store computer that links to the ISDN network as shown in Figure 4. POS registers linked to the store computer.

The role of each piece of hardware is detailed below. The Graphic Order Terminal is a hand held device, and has a wide screen graphic display that is used by the store owner/manager to place orders. The items are recorded and brought up in the order in which they are arranged on the shelves. The store manager/owner walks down the aisles and places orders by item. When placing this order the store manager has access to detailed analysis to POS data related to the particular item (from the store computer). A listing of the analysis available is given in Table 5. The store manager then uses this information when placing this order. The order is directly entered into the terminal. Once all the orders are placed, the terminl is returned to its slot, at which point the orders are relayed by the store computer to both the appropriate vendor and the SevenEleven distribution center.

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The Scanner Terminals read bar code and record inventory. They are used to receive product coming in from a distribution center. This is then automatically checked against a previously placed order and the two are reconciled. Before the scanner terminals were introduced, truck drivers waited in the store till the delivery was checked. Currently, the driver simply drops the delivery in the store, and a store clerk receives it at a suitable time when there are few customers. The scanner terminals are also used when examining inventory at stores. The Store Computer is linked to the ISDN network, the POS register, the graphic order terminal and the scanner terminal. It communicates between the various input sources, tracks store inventory and sales, places orders, provides detailed analysis of POS data (see Table 5), and maintains and regulates store equipment. In 1993, Seven Elevens ISDN network handled 200 million bits of sales data per day or 7 billion bits over the year. The network completely integrates information among stores, distribution centers, suppliers, and the headquarters (see Figure 4). The information network further improves the ordering process, inventory control, merchandising mix, and the efficiency of store operations as well as the distribution system. To better understand the functioning of this information network, consider a sampling of daily operations. As soon as a customer purchases an item and pays at the POS register, the item information is retrieved from the store computer and time of sales automatically recorded. In addition the cashier inputs the age and sex of the customer. To do this (s)he has five register keys for the categories: under 13, 13-19, 20-29, 30-49, 50+. This POS data is automatically transmitted on-line to a host computer. All sales data collected by 11 p.m. is organized and ready for analysis by next morning. The data is analyzed on a company wide, district, and store basis. The analyzed and updated data is sent back to the Seven Eleven stores via the ISDN. Each store computer automatically updates its product master file to analyze its recent sales and stock movements. The main objective of the analysis is to improve the ordering process. Table 5 gives a complete overview of the results of the analysis provided by the store computer. All this information is available on the Graphic Order Terminal used for order placement. A major benefit of the information system is that it has allowed Seven Eleven stores to better match supply with demand. The information system has allowed store staff to adjust the merchandising mix on the shelves according to consumption patterns in the course of the day. For example, popular breakfast items are stocked earlier during the day while popular dinner items are stocked later in the evening. The identification of slow and non-moving items allows a store to free up shelf space that can be used to introduce new items. Over 50% of the items sold at a Seven Eleven store change in the course of the year. Part of this relates to seasonality of demand and part to new products. When a new product is introduced, the decision whether to continue stocking is made within the first three weeks. Each item on the shelf contributes to sales and margin and does not waste valuable shelf space.

Seven-Elevens distribution systemThe strength of the Seven-Eleven distribution system has been to tightly link the entire supply chain for all categories of products. The Seven-Eleven distribution centers and the information network play a key role in this regard. The major objective is to carefully track sales of items and

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offer short replenishment cycle times. This allows a store manager to accurately forecast sales corresponding to each order. Seven-Eleven currently offers the stores three times a day delivery of all rice dishes (which comprise most of the fast food items sold). Bread and other fresh food are delivered twice a day. The distribution system is flexible enough to alter delivery schedules depending on customer demand. For example ice cream is delivered daily over the summer but only thrice a week at other times. The replenishment cycle times for fresh and fast food items have now been shortened to under 12 hours. A store order for rice balls by 10 am is delivered before the dinner rush. As discussed earlier, the store manager uses a graphic order terminal to place an order. All stores have been given cut-off times for breakfast, lunch and dinner ordering. When a store places an order it is immediately transmitted to the supplier as well as the distribution center. The supplier gets orders from all Seven-Eleven stores and starts production to fill the orders. The supplier then sends the orders by truck to the distribution center. Each store order has been separated so the distribution center can easily assign it to the appropriate store truck using the order information it already has. The key to store delivery is what Seven-Eleven calls the Combined Delivery System. At the distribution center, delivery of like products from different suppliers (for example milk and sandwiches) is directed into a single temperature controlled truck. There are four categories of temperature controlled trucks: frozen foods (-20C), chilled foods(5C), room temperature processed foods, and hot foods (20C). Each such truck makes deliveries to more than one retail store. The number of store per truck depends on the sales volume. All deliveries are made during off-peak hours and are received using the scanner terminals. The system works on trust and does not require the delivery person to be present when the store personnel scan in the delivery. This has cut down on the time spent at each store during delivery. This distribution system has 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 is quite high. In 1974, 70 vehicles visited each store every day. Now only 11 are necessary. This has dramatically reduced delivery costs and enabled rapid deliver of a variety of fresh foods. Seven-Eleven has a total of 45 distribution centers (DCs) for combined delivery of rice dishes (20C) and 38 distribution centers for refrigerated items (5C). These DCs handle all the fast food and fresh items. None of these DCs carry any inventory. They merely transfer inventory from supplier trucks to Seven-Eleven distribution trucks. These items are delivered from a total of 152 companies and 201 plants. The transportation is provided by Transfleet Ltd., a company for the exclusive use of Seven-Eleven Japan, set up by Mitsui and Co. The outline of the combined distribution system is shown in Figure 6.

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TABLE 1

Financial Figures for Seven Eleven Japan (1985-1994)

For fiscal years ended February 28/29 Net Sales (Billion Yen) Revenue (Billion Yen) Ordinary Profit (Billion Yen) Net Income (Billion Yen) Net Income per share (Yen) Dividends per share (Yen) Number of stores

1985 386.7 69.8 20.0 9.1 29.9 23.0 2,299

1986 453.6 83.7 25.5 11.6 38.2 28.0 2,651

1987 521.9 94.7 31.2 14.4 47.1 23.0 2,964

1988 559.1 94.0 37.9 18.4 59.9 26.0 3,304

1989 686.3 100.2 45.2 22.3 72.7 26.0 3,653

For fiscal years ended February 28/29 Net Sales (Billion Yen) Revenue (Billion Yen) Ordinary Profit (Billion Yen) Net Income (Billion Yen) Net Income per share (Yen) Dividends per share (Yen) Number of stores

1990 780.3 113.8 53.0 26.2 83.8 26.0 4,012

1991 931.9 137.2 66.9 33.1 106.1 29.0 4,328

1992 1081.8 162.8 77.6 40.6 129.9 32.0 4,687

1993 1194.9 181.9 85.1 45.0 143.8 34.0 5,106

1994 1281.9 195.7 88.1 46.5 148.7 35.0 5,523

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Figure 2 Geographic Coverage of Seven Eleven in Japan

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Figure 3: Sales by Product Category1990 334.4 148.6 111.5 185.8 780.3 1991 394.3 179.2 143.4 215.1 931.9 1992 447.6 223.8 167.9 242.5 1081.8 1993 604.8 229.5 163.9 196.7 1194.9 1994 648.3 231.8 154.5 247.3 1281.9

Processed Foods Fast Foods Fresh Foods Nonfoods Total

1400

1200

1000

800

Processed Foods Fast Foods Fresh Foods Non Foods Total

600

400

200

0 1990 1991 1992 1993 1994

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Figure 4 Seven-Eleven Japans Information NetworkTo improve the efficiency of operations among franchises, distribution centers and manufacturers, Seven-Eleven established an unrivaled, fully integrated information network. In 1991, to enable the rapid dissemination of important information at low cost, they installed one of the worlds largest capacity store information systems using ISDN. Sales data gathered from all stores can be analyzed the following day. This information enables them to constantly revise their merchandise mix and develop appropriate new products, thereby boosting sales.

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TABLE 5: 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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Figure 6

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Figure 7

Trend of Inventory from 1984-94

Year Inventory

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 12.3 11.1 10.9 10.6 10 9.4 8.8 7.9 7.7 7.8 7.7

Days of Inventory14 12 10 8 6 4 2 0 1984 1985 1986 1987 1988 1989 Year 1990 1991 1992 1993 1994 Average Inventotry

Inventory

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Figure 8 Trend of Sales

Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Sales/store 485 502 506 508 524 545 564 629 669 682 669

Average Daily Sales per Store ('000 Yen)800 700 600 500 400 300 200 100 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Sales/store

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