KelloggOperationsKelloggGraduateSchoolofManagement■NorthwesternUniversityLogisticsanSupplyChainManagementThisnotewaswrittenbySunilChopra,ProfessorofOperationsManagement,KelloggGraduateSchoolofManagement,NorthwesternUniversity.Thiswriteuphasbeenpreparedasabasisforclassdiscussion.Copyright2000byKelloggGraduateSchoolofManagement.Toordercopies,call(847)491-3603.NopartofthispublicationmaybereproducedwithoutthepermissionoftheKelloggGraduateSchoolofManagement.SEVEN-ELEVENJAPANCO.1Establishedin1973,Seven-ElevenJapansetupitsfirststoreinMay1974,inKoto-ku,Tokyo.ThecompanywasfirstlistedontheTokyoStockExchangeinOctober1979.ItisownedbytheIto-YokadogroupwhichalsomanagesachainofsupermarketsinJapanandownsamajorityshareinSouthland,thecompanymanagingSeven-ElevenintheUS.ThelasttenyearshavebeenaperiodofphenomenalgrowthforSeven-ElevenJapan.Between1985and1994,thenumberofstoresincreasedfrom2,299to5,523;salesincreasedfrom386billionYento1,282billionYen;Netincomeincreasedfrom9billionYento46billionYen.In1994,Seven-ElevenJapanrankedfirstamongJapaneseretailersintermsofordinaryprofit.Thereturnonequity(ROE)hasaveragedwellover20%overthelasttenyears.Seven-ElevenJapaniscurrentlyJapan’slargestretailerintermsofoperatingincomeandnumberofstores.In1994,customervisitstoSeven-Elevenoutletstotaled1.8billion,whichtranslatestoeverypersoninJapanvisitingaSeven-Elevenonaverage15timesayear!CompanyHistoryandProfileBothIto-YokadoandSeven-ElevenJapanwerefoundedbyMr.MasatoshiIto.Hestartedhisretailempireafterthesecondworldwar,whenhejoinedhismotherandelderbrothertoworkinasmallclothingstoreinTokyo.By1960hewasinsolecontrolandthesinglestorehadgrownintoa$3millioncompany.AfteratriptotheUSin1961,Itobecameconvincedthatsuperstoreswerethewaveofthefuture.AtthattimeJapanwasstilldominatedbyMomandPopstores.Ito’schainofsuperstoresintheTokyoareawasinstantlypopularandstillconstitutesthecoreofIto-Yokado’sretailoperations.In1972,ItofirstapproachedtheSouthlandCorporationaboutthepossibilityofopeningSeven-ElevenconveniencestoresinJapan.Afterrejectinghisinitialrequest,Southlandagreedtoalicensingagreementin1973.Inexchangefor0.6%oftotalsales,SouthlandgaveItoexclusiverightsthroughoutJapan.InMay1974,thefirstSeven-ElevenconveniencestoreopenedinTokyo.ThisnewconceptwasaninstanthitinJapanandexperiencedtremendousgrowth.By1979therewerealready519Seven-ElevenstoresinJapan.By1984therewere2001stores.RapidgrowthhascontinuedsincethenasdetailedinTable1,resultingin5,523storesbytheendof1994.OnOctober24,1990,theSouthlandCorporationenteredintobankruptcyprotection.SouthlandaskedforIto-Yokado’shelpandonMarch5,1991,IYGHoldingwasformedbySeven-ElevenJapan(48%)1ThisdescriptionofSeven-ElevenJapanwaswrittenafterdiscussionswithexecutivesatSeven-ElevenJapan.Thetimespentbythemisgratefullyacknowledged.MichaelKliger’seffortsinsettingupthemeetingwithSeven-Elevenaregratefullyacknowledged.SomeoftheinformationusedinthiscaseisfromareportwrittenbyMichaelKligerfortheGIMJapanclass(1995).SevenEleven2andIto-Yokado(52%).IYGacquired70%ofSouthland’scommonstockforatotalpriceof$430million.FinancialdataforthedifferentsegmentsoftheIto-YokadogroupdemonstrateswhySeven-ElevenJapanisworthadetailedstudy.Eventhoughitcontributesunder7%tothegroup’srevenuesfromoperations,itcontributesover47%ofthegroup’soperatingincome.Overthelasttenyears,SevenElevenJapan’srevenuehasgrownonaverageby12.6%annuallyanditsnetincomehasgrownby20.9%annually.Seven-ElevenJapanhasmanagedtoimproveitsreturnonsales(RoS)from11.7%in1984to25%in1992.Overthelasttwoyears,theRoShasdecreasedsomewhatto23.8%duetotheeconomicrecessioninJapan.Basedonitsannualsales,Seven-ElevenJapanisthethirdlargestretailerinJapan.However,measuredbyordinaryprofits,Seven-ElevenJapanisthelargestretailerinJapan,evenlargerthanitsparentcompany,Ito-Yokadoitself.Withits5,523stores,Seven-ElevenisthelargestconveniencestorechaininJapan.ItiscloselyfollowedbyDaieiCVSwith5,045stores.TheConvenienceStoreIndustryand7-ElevenAsintheUS,conveniencestoresinJapanprovidecustomerswithavarietyofproductscarriedbygeneralretailersaswellasfoodretailers.Asof1991,theretailstructurewasasshownbelow.Comparisonofretailoutletsbysales(billionYen)TypeofRetailerAnnualSalesRelativeAnnualSalesRetailer140,633100%FoodRetailer41,45229.5%ConvenienceStore3,0502.2%7-ElevenJapan1,0810.8%ComparisonofretailoutletsbynumberofstoresTypeofRetailerNumberofstores%oftotalstoresRetailer1,591,186100%FoodRetailer622,75139.1%ConvenienceStore19,6031.2%7-ElevenJapan4,6290.3%Whileitisasmallpartoftheoverallretailoutlets,Seven-ElevenJapanisasignificantpartoftheconveniencestoreoutlets.It’sshareofthismarkethasinfactgrownsince1991.ThisgrowthhasbeenverycarefullyplannedexploitingthecorestrengthsthatSeven-ElevenJapanhasdevelopedintheareasofInformationsystemsandDistributionsystems.SevenEleven3TheSeven-ElevenFranchiseSystemSeven-ElevenhasdevelopedanextensiveFranchisenetworkandplaysakeyroleinthedailyoperationsofthisnetwork.TheSeven-Elevennetworkconsistsofbothcompanyownedstoresandthirdpartyownedfranchises.In1994thepercentageofcompanyownedstoreswas29.2%.Toensureefficiency,Seven