Click to read the original article for details. "Alibaba and Tencent, these e-commerce giants, clearly do not yet understand the convenience store and retail industry, so they cannot provide us with all the information we want, and the price of their services is still high."
More than half of 2019 has passed, and the development of new retail seems somewhat awkward. Some traditional retail brands that actively embrace new technologies and seek transformation are still feeling their way forward. The "new species" failed to make a big splash this year, instead encountering some model difficulties. On the contrary, the traditional Japanese convenience stores, which are often criticized by industry insiders as "too slow" and "hitting walls in China," have developed "fairly well" in recent years.
Convenience stores are a business of "bending down to pick up steel coins" (laborious and low-margin), and among the many Japanese brands, 7-Eleven is always an unavoidable topic. Few people seem to praise 7-Eleven's development in China because its development in China is really "too slow." An industry insider told China Entrepreneur directly, "We learn from Japan's 7-Eleven, not China's 7-Eleven."
This perception comes from a judgment of store scale. For 7-Eleven, Beijing is its stronghold in the Chinese market. According to publicly available media data, 7-Eleven has been in Beijing for 14 years, with about 250 stores currently. In contrast, the new species "Bianlifeng" had nearly 100 stores within a year of its establishment, and Suning Xiaodian even claimed it would reach 1,000 stores in Beijing by 2019.
However, perhaps no one can gain an advantage in Beijing, the "death ground for convenience stores." In 2018, Linjia Convenience Store, known as the Chinese convenience store brand most like 7-Eleven, collapsed, closing 168 stores overnight. At the same time, Quanshi Convenience Store, with more than 320 stores, was sold off due to the capital chain rupture of its major shareholder, Fuhua Group, and was only acquired by Shanhai Lantu after shelves were empty for months. Behind the bankruptcy of many brands is insufficient blood supply capability. It cannot be denied that the convenience store industry is a business with extremely high cash flow, with high input but low output.
In contrast, 7-Eleven's development in China has been relatively "carefree." According to a report from Huxiu: In 2005, Beijing Wangfujing Department Store acquired a 25% stake in 7-Eleven (China) Investment Co., Ltd. Beijing Company. In 2014, Beijing 7-Eleven did not bring profits to Wangfujing Department Store, but starting from 2015, 7-Eleven's profits doubled.
A staff member of 7-Eleven China also provided a figure to reporters: In the Beijing market, 7-Eleven's average daily revenue per store is about 24,000 yuan. A reporter from China Entrepreneur learned earlier that the figure for a better-performing local convenience store brand in Beijing is around 11,000 to 12,000 yuan.
In other words, although 7-Eleven opens stores slowly, it can match two or even three competitors with one store.
Photo: Xiao Li
So how does 7-Eleven achieve such high per-store sales? In the view of Shinji Uchida, chairman of 7-Eleven (China) Investment Co., Ltd. (hereinafter referred to as 7-Eleven China), the main reason lies in the core of 7-Eleven's development: the franchise model and product development capabilities.
"In China, I am always asked about the number of stores, but few people ask me about per-store revenue. China's retail development is very fast, whether it's new species or food delivery platforms, but I always want to ask them whether they can actually make a profit." In addition to these two points, more industry insiders told China Entrepreneur that the key to 7-Eleven's success also lies in its supply chain, but building a strong supply chain requires brand effect and capital strength.
Uchida has the humility of a Japanese person, but he still exudes recognition and confidence in his own company. In his view, "Not only are Chinese convenience store companies learning from 7-Eleven, but also in Japan, but what everyone learns is only the surface of 7-Eleven."
"Retail is about details. A good convenience store gives people a bright and clean feeling upon entry, but not many companies can truly achieve this." An industry insider told reporters. As Uchida said, there are too few companies that can truly settle down to do retail, consider the interests of franchisees, and polish products, especially in a market like China where everything needs to be rapidly scaled.
In fact, in the domestic convenience store industry, there are many entrepreneurs with work experience at 7-Eleven: Wang Zi, CEO of Bianlifeng; Yang Bo, CEO of Quanshi; and Wang Lei, former CEO of Linjia Convenience Store, were all employees of 7-Eleven China. Therefore, these convenience store brands more or less have some shadow of 7-Eleven.
While more industry insiders are constantly examining 7-Eleven's development in China, Uchida is also observing changes in the Chinese market. In his view, China's retail industry is developing rapidly, but convenience store players should not pursue store scale first, and the number of directly operated stores also needs to be controlled.
"In fact, many traditional retail enterprises are undergoing bottom-up spontaneous reform, which is definitely better than top-down information reform." An industry insider who requested anonymity told China Entrepreneur that many new retail enterprises without retail genes cannot effectively apply and implement their digital systems in stores.
Tao Ye, CEO of Haolinju, also told reporters that traditional retail enterprises that do well are already doing backend systems, and their retail terminals have accumulated certain consumer data, but they still need to build membership systems. Uchida also said in an interview that at least in the Beijing market, 7-Eleven does not yet have a membership system.
As for development in the Chinese market and the ongoing changes, Uchida has his own choices and views.
AT and New Retail
CE (China Entrepreneur): Many local Chinese brands now hope to improve store operational efficiency through information technology such as big data, which also aligns with the current new retail trend. How do you view the booming concept of new retail?
Photo: Shi Xiaobing
Uchida: Actually, we have also communicated with Alibaba and Tencent. According to them, they will provide us with sales data at a certain time and place through interfaces like WeChat and Alipay.
For us, when opening a store, the first thing we want to know is the pedestrian flow around the location, such as how many residences are nearby and at what time the crowd gets off work. Then, we also want to understand deeper information, such as the gender ratio and income level of nearby residents. If we can grasp this information, we can order more accurately.
In 7-Eleven's product composition, fresh food accounts for more than 50%, but fresh food has a short shelf life, so we need to collect various user information. However, from the current communication with Tencent and Alibaba, artificial intelligence technology can indeed be applied, but these e-commerce giants clearly do not yet understand the convenience store and retail industry, so they cannot provide us with all the information we want, and the price of their services is still high.
In fact, we are currently using our accumulated terminal data to analyze, order, and place orders. Next, we will also build our own membership system. 7-Eleven does not yet have its own membership system, and we hope to catch up in the future and better achieve digitalization.
CE: If Alibaba or Tencent could one day provide a feasible cooperation plan, would 7-Eleven cooperate with one of them like Starbucks did?
Uchida: If there is a suitable price in the future and they can provide the data we need, cooperation is very possible.
CE: How do you view Hema?
Uchida: I think Hema is an attempt that Alibaba wants to make itself. It is also a challenge for Alibaba, and this spirit is very admirable.
But I think in China, when people do retail, they more often rent locations rather than independently develop products. In fact, worldwide, the department store industry is generally not doing well. I think the biggest reason is that everyone has not achieved differentiated operations. You will find that every declining mall is similar, with similar brands and products sold.
Japanese retail companies, especially 7-Eleven, do things completely differently. We independently develop products and then study how to display them on shelves based on the characteristics of the products. These are entirely independent actions, not passive. So compared to Hema, we understand and know the retail industry better. I think if we could cooperate, the effect would be better.
CE: China's internet is developing rapidly. Many people say that the biggest competitor of convenience stores is home delivery services. Do you feel competition from Ele.me and Meituan? Will 7-Eleven consider further online integration in the future?
Uchida: We will be affected to some extent, but if these food delivery platforms do not reduce delivery fees, they will find it difficult to develop further themselves. 7-Eleven will definitely strengthen its online presence in the future. We will make up for this area. Whether it is independent investment or cooperation with third parties has not been determined, but we will definitely do it in the future.
Core Competitiveness: Ultra-High Daily Sales Per Store
CE: Currently, there is regional competition in the Chinese market. In the past two years, many local brands have emerged, such as Bianlifeng and Suning Xiaodian, often under the banner of new species. Does this put pressure on 7-Eleven? How do you view the price war in the East China market not long ago?
Photo: Zeng Jing
Uchida: In fact, a price war is the most inappropriate strategy because lowering prices means lowering your gross margin and profits. What we should do is improve product quality.
As for the emerging brands now, like Bianlifeng and Suning Xiaodian you mentioned, they have been emphasizing technology and investing a lot, but we want to know in turn: have they actually made a profit? I think the ultimate goal of a company is to make a profit. If it cannot make a profit all along, at some point, the company will definitely disappear.
CE: Speaking of profitability, how does 7-Eleven achieve such high daily sales per store?
Uchida: I think this is inseparable from our core competitiveness. 7-Eleven's core competitiveness mainly consists of two things: the franchise model and product development capabilities.
First, the franchise model.
Currently in China, 7-Eleven has two main franchise models: One is consignment management, where the housing and store are leased by the headquarters, and the franchisee is only entrusted to operate. The other is where the franchisee leases everything themselves. Previously, there was discussion among local Chinese brands about direct operation versus franchising, but in my view, franchising is definitely the most suitable operating model for convenience stores. Of course, we also have directly operated stores, with the purpose of training employees.
But if it is franchising, only when it is their own store will the owner pay more attention to the store's profitability. So how do we control the store's operation and management? This is actually the same as running a business; the most important things are people, money, and goods.
Therefore, when opening a franchise store, we first consider whether the person has sufficient financial resources and whether they identify with 7-Eleven's business philosophy. In fact, everyone is driven by interests. As long as our daily sales are high, the store owner will do well. Of course, we also have certain assessments for merchants, judging their marketing growth, etc. If they meet our performance requirements, they are allowed to open a second and third store.
Second, 7-Eleven's other core competitiveness is the product innovation capability that has always been mentioned. For example, Ippudo and Nakamoto Mongolian Ramen are products we independently developed with manufacturers. Although shelf placement and ordering channels are also important, in my view, the above two points are the core of 7-Eleven and the guarantee of 7-Eleven's ability to achieve high sales.
CE: Speaking of the franchise model, how does China's franchise model differ from Japan's? How does 7-Eleven control store operations through franchising?
Uchida: There have always been three main ways to share franchise revenue in convenience stores: One is sharing based on sales amount, the second is sharing based on gross profit as just mentioned, and the third is sharing based on profit.
If sharing is based on sales amount, it is actually beneficial to the headquarters but not to the franchisee. Why? Because if you pursue sales, the headquarters will recommend products with high sales but not necessarily meeting consumer needs. If it is profit sharing, the franchisee may control costs too low, which is not conducive to the headquarters' brand management. So the best way is gross profit sharing.
Whether in Japan or China, 7-Eleven's franchise model uses gross profit sharing, but the sharing ratio is different and has been adjusted according to China's actual situation. Because rents, labor, and costs are relatively high in China, we need to consider reducing the burden on franchisees.
CE: In your view, how does 7-Eleven differ from other companies in product development? How do you choose suppliers?
Uchida: First, our private brand development concept may be different from general companies. Most companies pursue low prices, with quality similar to ordinary products. But we pursue high quality and more reasonable prices. In fact, for retail companies, the hardest thing to imitate is quality.
As we just mentioned, fresh food products account for more than 50% of 7-Eleven's sales, but this category has a relatively high spoilage rate, so it must be combined with operations. Take the most basic product display as an example: our shelves generally have six to seven layers. We will judge whether to place a product in the most prominent position or display it on multiple layers based on the product's development reason and advantages.
On the supply side, when selecting factories, we try to choose factories that only cooperate with 7-Eleven. That is, if they cooperate with 7-Eleven, they cannot cooperate with other convenience store brands. With exclusivity, we can provide technical support to the factories.
CE: How does 7-Eleven select products? This also involves localization.
Uchida: 7-Eleven's headquarters recommends about 3,000 products to each store. Each store will decide which products to choose based on its trade area, actual sales situation, and terminal sales data. At the same time, we also have dedicated store operation instructors. Product selection is actually a very tedious job. Stores in residential areas are definitely different from those in office areas. Residential areas will have more daily chemical and life products. We also have our own information analysis system.
Moreover, because the Chinese market is relatively large, different regions have different eating habits, which is very different from Japan. But I believe that no matter how the region changes, people's desire for good products and trying new products is the same.
7-Eleven's "Speed" in China
CE: There are many imitators of 7-Eleven in the Chinese market. How do you view the results of their imitation? In your view, what aspects of 7-Eleven are difficult for others to learn?
Uchida: In fact, it's not just in China that people imitate 7-Eleven. Even in Japan, FamilyMart and Lawson are imitating. But in Japan, FamilyMart and Lawson are also inferior to us in terms of store count and daily sales. So imitation can only learn the surface at most.
In my view, 7-Eleven has at least two points that other companies cannot learn. The first is the ability to cooperate with large enterprises. Worldwide, we can cooperate with large companies like Coca-Cola to develop products. In the Chinese market, we can also cooperate with Master Kong and Uni-President. The second is our pursuit of product quality.
I also found that many convenience store brands in the Chinese market collect various fees from manufacturers, such as entry fees and merchant fees. Many convenience store brands themselves have low profits, but they still want to take a share from the brands they stock. Because of this, many local Chinese convenience store brands can only improve their revenue by expanding the number of stores, so they can collect more fees from manufacturers. I think this is also the reason why many local Chinese brands emphasize store count.
The most frequently asked question we get in China is: How many stores do you have? But few people ask about our daily sales. Because we want to ensure the income of franchisees, this is also the reason we focus on daily sales.
Many people criticize 7-Eleven for opening stores slowly in Beijing and Tianjin, but in fact, 7-Eleven achieved profitability when it opened 100 stores. It is impossible for many local Chinese brands to achieve profitability with 100 stores.
CE: Actually, it's not just 7-Eleven; Japanese brands like Lawson and FamilyMart also seem to develop relatively slowly in China.
Uchida: I will only talk about 7-Eleven. Actually, our slow store opening speed before was because our costs were too high. Previously, we may have used more Japanese enterprise equipment, so costs were high. In the future, we may need to use more Chinese-made equipment and cooperate with local enterprises. In this way, our costs can be reduced. We have such high daily sales per store. If our costs can be reduced further, I believe the store opening speed will become faster and faster in the future.
CE: During the expansion process, how does 7-Eleven cope with the rising rents and labor costs in big cities?
Uchida: To increase sales, we can only increase revenue and reduce expenditure. When there is no way to reduce expenditure, we can only increase revenue.
CE: Speaking of increasing revenue, that brings us back to store expansion. Does 7-Eleven have a clear store opening plan currently?
Uchida: This is not convenient to disclose at the moment, but we will increase the speed of store opening while ensuring that service quality is not reduced. Currently, our plan is still to expand into more regions. 7-Eleven has entered 11 regions with more than 1,800 stores.
CE: How do you view the changes in China's retail market over the past decade?
Uchida: The development speed of the Chinese market is astonishing, especially e-commerce. But the reason why China's e-commerce has developed so rapidly is also because the physical retail is too weak. I think China must strengthen its physical retail development next. As long as our physical retail does better, it will be like the United States. The current domestic consumption ratio in the United States is 70%, while China has just exceeded 50%.
Source: China Entrepreneur Magazine (ID: iceo-com-cn)