759 Marketing

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A MEMBER OFTHE UNIVERSITY OF HONG KONG GROUP

香港學機構員

AILIE TANGW H LO

AGAINST ALL ODDS: THE MARKETING PS OF759 STORES

759 Stores (“759”) were born in 2010 when Lam Wai Chun’s (“Lam”) manufacturing business was in trouble and he wanted to warn his staff about possible redundancy. He alsowanted to enrich their credentials by offering them exposure in retail business. He acceptedhis staff’s idea of opening a small tuck shop in a local shopping mall in August 2010. A few

more shops quickly followed. He later named these shops 759阿信屋 (1). In five years, 759

grew from a small shop to a chain of 249 outlets selling over 30,000 products (2). Its revenuehad grown from nothing to over HK$2.1 billion [see Exhibits 1 and 2 on shop and revenuegrowth of 759]. Obviously, Lam had found a successful formula to overcome all the oddschallenging 759’s sur vival, such as local-supplier boycotts, high rental and operating costs,and a Hong Kong taboo on independent pricing. Important aspects of Lam’s solution werereflected in 759’s marketing mix.

Positioning

Lam called his core consumer targets “kai-fong” – the local mass-neighborhood residents ofHong Kong. He had the everyday shopping wallets of these kai-fongs in mind when he set up759’s supermarket-style operation. This laid the foundation for its logical merchandise mix:expansion from snacks to other daily necessities, such as personal care and food and beverageitems, once the chain managed to get a foothold in Hong Kong’s retail scene. To competeagainst the wide product varieties of the two major supermarket chains (Park’n Shop andWellcome) and the convenience offered by the two neighborhood convenience store chains(7-11 and Circle K), 759 sought to provide kai-fongs with “an alternative and unique choice”(3) of a wide variety of products imported from as many as 63 countries (4) sold under the principle of “lower margin with high turnover” (5). As the retail chain grew, the size of shops

expanded, with a view to putting 759’s wide product range under one roof and offering kai -fongs a more leisurely shopping environment.

Products

759’s successf ul product strategy was the result of local-supplier boycotts in 2010. At thattime, 759 had only a few stores, and suppliers tended not to service them well.

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The case was supported by a grant (UGC/IDS12/14) from the Research Grants Council, HKSAR.

© 2015 by Centennial College, a member of The University of Hong Kong group. No part of this copyrighted publication may be

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This case was prepared for class discussion purposes and is not intended to demonstrate how business decisions or other processes are to be handled. Ref. 15/008CS Published: 12 October 2015

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Against All Odds: The Marketing Ps of 759 Stores (Ref.: 15/008CS)

CENTENNIAL COLLEGE Page 2

The industry also had a tight grip on the retail prices of different resellers, keeping themwithin a narrow range. When 759 tried independent pricing, the suppliers boycotted the chain.

Lam managed to defy the odds by successfully got support from a major Japanese supplier,who assembled a container-load of mixed snacks in Japan at unit costs lower than thewholesale cost of similar products in Hong Kong. Since then, “ parallel import mode in

container loads” (6) became 759’s merchandising approach. To reap the full benefits of thisapproach, Lam adopted an unprecedented expansion rate, and, in five years, he grew thenumber shops from zero to 249 (7). He also expanded the number of countries from which hesourced his stock from one, Japan, to 63 [see Exhibit 3 for more details]. Lam preferredsourcing from countries and regions, such as Japan and Europe, where supplies wereconsistent and high-quality. Over the years, 759expanded its variety of imported productsfrom snacks to cereals, oil, and other foodstuffs, as well as non-food items such as householdand personal care products [see Exhibit 4]. The chain targeted increasing the non-snackfoodstuff share of revenue from 36.5% to 38%, and that of non-food items from 9.2% to 26%.(8)

It is worth noting that Lam redeployed his manufacturing staff as merchandisers. In order tocompensate for their lack of experience, he took advantage of 759’s operating scale byimporting minimal container-loads of new products to test consumer response, which then became the key consideration in replenishment. The merchandisers’ manufacturing

background came in handy when 759 rolled out its branded products, a process that allowedthem to use their networks and experience in manufacturing-sourcing. According to 759, itsown branded products were among the chain’s top 500 best-selling items.

Pricing

759 made a decision to keep its profit margin to around 3% for three major reasons. Firstly,this was the industry norm, that is, market leaders had similar margin percentages. Soconsumers tended to regard this margin as reasonable. Secondly, the delta between cost and

margin represented the capacity that 759 had to strengthen the other aspects of its marketingmix, including offering higher salaries to attract and retain employees, and more frequentdiscount promotions to achieve high turnover rates. Thirdly, low margins were a barrier toentry, as it would be hard for newcomers to survive on such low margins without 759’s purchasing power. This would also deter competitors from initiating of price wars..

759 deployed an IT system instead of human intelligence in its pricing. Products were divided

into five different categories: marked price (“正價”), fixed price (“公價”), “kai-fong” price

(“街坊價”), hot-selling price (“熱賣價”) and bargain price (“超抵價”). Each category had a

fixed gross margin. New products were assigned to a single product category by Lam and hismerchandisers. Then the IT system set the price according to cost.

Promotions & Packaging

According to 759, “around 480,000 customers shopped with store-cards more than once aweek, and about 1,150,000 customers shopped with store-cards once or more in every 4weeks” (9). The figure suggested that at least 20% of Hong Kong’s population had a 759 storecard. These cards were distributed almost for free by 759, which saw them as promotionleaflets that would stay in consumers’ wallets. The large number of cardholders, coupled withlow parallel-import costs, allowed 759 frequently and successfully to deploy straight-forwarddiscount promotions. In terms of joint-promotions with third-parties, Lam adopted onlymechanisms that would directly benefit customers. 759’sbest-received joint promotionsinvolved offers of subsidized product discounts by payment-solutions providers. This simpleand direct approach allowed for speed and reduced administrative issues for all parties

involved in such promotions. Similar principles applied to how 759 managed its packaging.

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The fact that 759 had only one graphic designer for its 249 shops reflected the chain’s no-frills approach to packaging costs.

Place

Good retail locations are a suppliers’ market. Placement decisions involve consideration of

customer traffic, which property developers were key in determining. Since some prominentHong Kong developers already had retail grocery chains as tenants, 759 had difficulty penetrating certain desirable shopping malls.

Over the years, Lam attempted to gain support from large property developers and major property agents. One of his focuses was finding retail spaces for larger shops, as revenue andshop size were positively related. Larger shops allowed 759 to place all its products under oneroof, which was key to higher revenue. 759 believed that customers would prefer to shop fortheir personal and household needs at larger 759 stores. Presently, only 40% of 759 storeswere larger than 1,500 square feet. Lam wanted to bring the percentage to 65%.

The high rental environment in Hong Kong meant 759 had to exercise stringent controls on

placement costs. Any location that failed to reach a minimum rent-to-turnover ratio would nothave its lease renewed. Lam also personally kept a close eye on the logistics costs of goodsdelivery, containing them to within 3% of turnover.

People

Consistent with his other marketing strategies, Lam followed a no-frills approach in managinghuman resources. He did not spend much in customer-service training. Instead, he paid hisstaff handsomely to incentivize results. For example, front-line staff was paid aroundHK$16,000 a month in fiscal year 2014-15, at least 20% higher than market rates. (10) Thisapproach seemed to be working:

759 surprised the industry in June 2015 when customers voted it an “excellent customerservice” award in the supermarket/convenience store category (11)

759 did not have a customer service department’ most customer queries and complaintswere answered and handled by front-line staff and their supervisors

759’s turnover rate stayed at a mere 10% of staff who had passed probation

Almost all staff regarded themselves as directly reporting to Lam, and Lam saw things thesame way. With 759 expanding at an extremely rapid pace while facing local-suppliers boycotts, a team without much retail experience, and operating costs increasing every year,stakes were high and the margin for error was low. Lam’s approach enabled him to overseeall the details of 759’s operations, keeping him in the driver’s seat, and enabling him to make

accurate decisions.

The Road Ahead

Entering its sixth year of operations, 759 launched an online store on August 8, 2015. Despiteexpected high logistics costs, Lam stated that the online store, like its brick-and-mortarcounterparts, had to break even in order to survive. In addition to expanding to online retail,759 was planning to begin wholesaling its best-selling products to small Hong Kong retailers.

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Notes:

(1) In a radio program, Lam recounted that he named his shops 759阿信屋 before meeting

with one of the top ten Japanese suppliers, so that the supplier would know instantly what business and target customers the shops aimed for. RTHK News Archive (2 August 2015)“A Conversation with CEO, RTHK Channel 1”, www.759Store.com,

http://www.759store.com/video2.php (accessed 10 August 2015).(2) CEC International Holdings Limited (30 July 2015) “2014-2015 Annual ResultsAnnouncement”,http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10August 2015).

(3) Ibid.(4) Ibid.(5) The group first used the description “lower margin and high turnover” as its principal

strategy on page7 of its 2011-12 annual report. CEC International Holdings Limited (27August 2012) “2011-2012 Annual Report”, CEC International Holdings Limited,http://www.0759.com/CECWEB/FinancialReport.aspx?lang=en (accessed 10 August2015).

(6) CEC International Holdings Limited (30 July 2015) “2014-2015 Annual ResultsAnnouncement”, p. 16,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf. (accessed 10August 2015).

(7) Ibid.(8) Ibid.(9) Ibid, the quote was from p.23. CEC International Holdings Limited (30 July 2015)

“2014-2015 Annual Results Announcement”, p. 23,http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf. (accessed 10August 2015).

(10) Next Magazine:黃菲菲 (18 June 2015) “服務第壹大獎, Next Magazine”, 759store.com,

http://www.759store.com/video2.php (accessed 10 August 2015).

(11) Ibid. 759 STORE was awarded the excellent customer service award(supermarket/convenience store category) by Next Magazine in June 2015.

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/CECWEB/FinancialReport.aspx?lang=enhttp://www.0759.com/CECWEB/FinancialReport.aspx?lang=enhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.759store.com/video2.phphttp://www.759store.com/video2.phphttp://www.759store.com/video2.phphttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/CECWEB/FinancialReport.aspx?lang=enhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdf

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EXHIBIT 1: 759 RETAIL REVENUE 2011-2015*

* Refers to financial year ending 30 April 2011 to financial year ending 30 April 2015

Source: Investor Information (n.d.) “Announcement” and “Financial Report”, CEC

International Holdings Limited, http://www.0759.com/CECWEB/investorinfo.aspx?lang=en

(accessed 10 August 2015).

HK$'000 2015 2014 2013 2012 2011

Revenue 2,133,805 1,442,981 812,150 241,158 16,661Operating Profit 68,637 51,157 11,617 3,101 -3,748

http://www.0759.com/CECWEB/investorinfo.aspx?lang=enhttp://www.0759.com/CECWEB/investorinfo.aspx?lang=enhttp://www.0759.com/CECWEB/investorinfo.aspx?lang=enhttp://www.0759.com/CECWEB/investorinfo.aspx?lang=en

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EXHIBIT 2: GROWTH OF 759 STORE: NUMBER OF SHOPS AND FLOOR AREA

Source: Investor Information (n.d.) “Announcement” and “Financial Report”, CEC

International Holdings Limited, http://www.0759.com/CECWEB/investorinfo.aspx?lang=en

(accessed 10 August 2015).

2015 2014 2013 2012 2011

No. of shops 249 192 134 71 11

Total Floor Area (sq. ft.) 431,000 271,000 146,000 57,000 N.A.

Average Floor Area Per Shop (sq. ft.) 1,733 1,411 1,090 803 N.A.

http://www.0759.com/CECWEB/investorinfo.aspx?lang=enhttp://www.0759.com/CECWEB/investorinfo.aspx?lang=enhttp://www.0759.com/CECWEB/investorinfo.aspx?lang=enhttp://www.0759.com/CECWEB/investorinfo.aspx?lang=en

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EXHIBIT 3: 759 PRODUCT MIX - COUNTRY OF ORIGIN

Source: Announcement (30 July 2015) “2014-2015 Annual Results Announcement”, CEC

International Holdings Limited,http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015).

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdf

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EXHIBIT 4: 759 PRODUCT MIX - PRODUCT CATEGORY

Source: Announcement (30 July 2015) “2014-2015 Annual Results Announcement”, CEC

International Holdings Limited,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015).
http://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdfhttp://www.0759.com/doc/art/announce/2015073001/201507300001.pdf

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