Ask any traveler to Japan and they will tell you mouthwatering tales of what they found in convenience stores (called konbini in Japan) no matter where they go. In fact, tons of posts have been written about konbini food selections and how different they are from convenient stores elsewhere. These konbinis have,
- huge variety of products, from over 20 flavors of rice balls, sushi, noodles, salad, bento, sandwiches, mixed drinks, fried food, chips and cup noodles to fancy desserts, to daily essentials such as soap, shampoo, toothbrush, magazines, to emergency needs such as underwear and umbrella (I have bought so many transparent umbrellas over the years). In my last trip in Mar 2023, I found an even bigger selection of microwavable tapas-style packets, all in 1-2 person servings ready to be assembled into a very decent meal
- high quality and cheap products, specifically private brands that are often highly anticipated collaboration projects with famous shops and chefs
- healthy selections unlike the typical junk food image that is associated with convenience stores
- good inventory level, which is replenished several times a day
- convenient services such as ticketing, scan/photocopying, bill pay, bank transaction, send/receive package
- fierce competition across brands, with several on the same street in major cities
- different inventories even for the the same chain, all customized by store staff
In this post, we will look at 7-11 Japan as an example for the successful operation of convenience stores. As of 2023, 7-11 is the largest convenience store chain in Japan with more than 21000 stores, and with the highest annual net revenue at 211 billion yen. We will examine the following driving forces behind their success,
- IT system with “Tanpin Kanri” model to enable inventory ordering based on data and hypothesis
- agile product research and dvelopment to meet customer demands quickly
- logistic breakthrough by building many small distribution centers and factories around closely clustered stores, and replenishing stock several times a day
Tanpin Kanri (single item management)
During my trips to various Japanese cities, I noticed that even 7-11s in adjacent streets stock different items. It’s an interesting experience to study the differences and extrapolate what’s behind them. Is it the micro-demographics (e.g., a school nearby drives sales of snacks in late afternoon)? Adjacent shops (e.g., will a bar next door increase the sales of something at late night)? Some temporary projects going on (e.g., a construction site around the corner might increase the sales of thirst-tempering drinks)? The possibility for observation is endless and fascinating, so I began to dig deeper into what’s going on.
As I researched with books written by 7-11 Japan’s founder and ex-CEO Suzuki Toshifumi and other business news sites, I found out that Japanese convenience stores are very quick at adapting to consumer changes. This all began with Suzuki’s introduction of the Point-of-Sale system to each store in early 1980s. The system digitalized sales data, connecting stores to headquater’s analytics system, suppliers and distribution centers. It tracks when/what are sold and received, and allows store managers to inspect sales data and place new orders. A direct connection between seller and supplier also enables more transparent and precise supply chain management.
Today we might take big data for granted, but in the 80s, what Suzuki did was pioneering work in the retail industry. He turned retail into a data and customer driven business, orchestrated mostly by those in the front line. In addition to IT investment, Suzuki’s other breakthrough was to grant autonomy to each store, so that the store owner/staff is the sole decision maker for inventory type and level. This reduces inventory overrun from a “unified inventory list” mandated by headquarter disregarding local requirements, and gives each store a stronger sense of ownership in business results. Let’s look at how that’s done.
Big data + local insight + experimentation
Each store manager has the full autonomy of predicting and ordering using the store’s POS data. Each day, store employees look at the previous day’s sales data and “sniff out” any anomaly or things that look interesting. They will then make their own prediction as a hypothesis based on future needs (e.g., tomorrow’s weather, nearby events, any changing demographics, upcoming holidays, etc.). Orders placed will be delivered several times a day or week depending on item type. Staff will then evaluate sales data next day to verify the hypothesis and revise tactics by making another hypothesis. Such daily iterations ensure that any changes in customer trends are caught in time to adjust the business accordingly.
Store employess are in a unique position for local insight as they interact with and observe customers on a daily basis and are much more in tuned with what customers want. Their predictions are more precise than that of a corporate leader far away from the area.
For example, if a summer festival in a local shrine is coming up this weekend, the store-driven hypothesis approach allows the staff to order more drinks, snacks, fans, independent of other stores that are far from the shrine. Or if there is a kindergarten around the corner, the staff can stock more stuff catering to caregivers and infants by the time when kids are picked up. This flexibility improves sales and reduce waste. It also allows for more agility and shorter shelf turnaround by only keeping cyclical items in stock when they are needed.
Another example is a predominated assumption that frozen food is only consumed at home. Suzuki said in one of his interviews that one store with a nearby school found out that a frozen fried rice packet was extremely popular. The store staff interviewed students and found out they liked how cheap the product was and they often microwaved and ate in store after school to satisfy their hunger. As a result of this local insight that contradicted with a previous assumption, the company developed more frozen food to be sold near school and business districts to provide a quick meal.
Tanpin Kanri turns a seller’s market (e.g., the industry-wide assumption that frozen food is only eaten at home) to equip stores with a buyer’s mentality (POS reveals high sales near school consumed by kids in store) and develop products and sales strategy accordingly. In such cases, data alone won’t tell you the “why” behind things. It’s only when you combine data with a humble desire to understand customers and test your hypothesis iteratively will you turn it into insight. Suzuki always encourages store owners to question their hypothesis and ask themselves what customers want in the future.
I didn’t find any reference to the Deming Cycle (aka PDCA) in Suzuki’s book but what he did with Tanpin Kanri is very similar in theory and practice for continuous improvement in lean project management. It’s quite interesting to know that 7-11’s hypothesis-driven model for experimentation, which is so similar to agile software development, was introduced in the 1980s, way ahead of other retail companies.
Product Excellency
limited releases
The other thing I really enjoy browsing Japanese convenience stores is their vast selection of products. Very tough competition among the top 3 konbini chains means that each is always trying to outdo the other by introducing new products (40-100) weekly and completely changing offerings (50-70%) every year. These chains work hard to get customers hooked to keep checking stores for new discovery, and employ various channels to drive anticipation for new arrivals. In fact, one thing travelers often notice is how completely different a store can be in a year’s time. Your favorites might all disappear when you hit Japan next year!
In addition to the weekly new releases, konbini chains also put a lot of R&D money to develop items that coincide with the Japanese appreciation of seasonal changes. These include new tea season in late spring, sakura blossom, autumn (chestnut, pumpkin), christmas (cakes), new year (osechi).
Some products are even locale-specific meaning that you won’t find it outside a region, enticing some savvy shoppers trying to pick up such limited release products (both in terms of time and location) during travels.
branded collaboration
7-11 Premium Gold series, its top-tier private label products featuring collaboration with famous chefs. Image from 7-11 official website
Konbini chains all develop their own private brands with national food manufacturers, and collaborate exclusively with industry leading brands. In 7-11’s case, Suzuki has differentiated the chain from others by developing a “ premium” private brand that prices similarly to or sometimes higher than national brands, but claims to offer a higher cost performance value. The 3500-item lineup has reached annual sale of 1,380 billion yen in 2022. They also collaborate with famous shops (e.g., Michelin ramen shops to create cup noodles, highly reviewed Tonkatsu restaurants to create bento, matcha producers in Uji for mouthwatering desserts). Such premium products improve both branding and profit margin.
breaking the status quo
Suzuki shared the massive internal backlash when he wanted to sell rice balls in store in the late 1970s. It was from the deep seated assumption that only housewives made rice balls in the morning at home at daystart, for the family to consume at lunch, and no one would buy it in a store. Suzuki firmly believed in the value of convenience provided to customers, so he went against the headwind to produce various kinds of rice balls to be sold around the clock, challenging the status quo for both a fixed time (produced in the morning, consumed at lunch only) and location (homemade). It has been a huge success (each store sells around 200 a day) and become the symbol of konbini food. Many foreign travelers now make a specific trip to check out the different rice ball flavors. It is now customary for people to buy a rice ball with tea to consume in a long train ride. Even for those who are not traveling, with the rising number of dual-income households, more and more people are grabbing inexpensive and portable food on the way to and from office to avoid cooking.
Logistics
7-11’s distrubution centers maintain a delivery schedule based on product temperature. Deli food that are either cold or warm are delivered 3 times a day to meet demand for the meal times, allowing more flexibility to meet demand curve throughout the day. Store staff can adjust the merchandising mix on the shelves according to consumption patterns throughout the day. For example, popular breakfast items are delivered earlier during the day, and popular dinner items are stocked later in the evening. Sales data is also relayed to suppliers and distributors to reduce loss from overproduction of perishable items.
The goal is to be extremely responsive to customer demand by maintaining a just-right inventory level, with no overstocked item but not running out of stock when customers hit the store. Suzuki believed that if a customer is coming in to grab lunch and sees an empty shelf for bento, sandwich and salad, he/she will think that the store is not well prepared and will jump to another chain due to the zero cost of switching.
With new labor laws governing trucking operation time, Lawson, another popular konbini, is cutting back delivery frequency by pushing more frozen food to be heated and consumed in store. It will be interesting to see how 7-11 will respond to this challenge.
Value-added services
Convenience stores in Japan don’t just sell product but services, making them very different from their US counterparts. This was particularly groundbreaking before the day of ecommerce, e-banking and online payments. For example, with the in store kiosk, you can pay all your bills, send and receive deliveries, buy event/transportation tickets, print documents. You can also perform bank transactions with their ATMs since 7-11 also operates its own bank (the first among konbini chains). Even today when everything can be done via mobile phone, some people like the elderly who don’t trust online transactions or lack the equipment or skill can still do everything in store.
Before Ghibli Museum sells tickets via their own website, buying ticket in a konbini kiosk remained the only option for foreign tourists. These was the same for many performance venues who mandated either a Japanese mailing address for physical tickets, or konbini kiosk pickup/print with code. To say that konbini stores reduced a lot of traveler’s headache wasn’t an overstatement.
7-11 operates its own bank and installs ATMs in each store
The 24hr konbini ATM is another marvellous creation that liberates people from bank ATMs that closed with the bank after business hours. Not only does it solve a common painpoint but it also succeeds in drawing more traffic in store to increase sales. In my last trip, I picked up my Amazon package in the 7-11 next to my hotel. In it I found a coupon for free coffee, which I promptly redeemed together with some other desserts that caught my eyes.
Convenience store ATM also solved my biggest problem when cash was still the only way to pay in Japan. When I first travelled to Japan in the early 2000s, cash was king and foreign debit cards were not accepted except by Citibank ATMs that have just several outposts in Tokyo (Narita, Otemachi, Ginza) during specific hours. in the 2010s, the Japan Post offices enabled their ATMs to take foreign debit cards but these outposts still had limited hours. Only when 7-11 opened their own bank (after numerous fights per Suzuki)and installed ATMs in all their stores did it liberate me from the fear of being cashless. Now, with wider acceptance of credit card and electronic wallets, this issue wasn’t as big as before. Still, many traditional restaurants (even in Tokyo) remain cash-only, and seeing a convenience store around the corner reduces unnecessary stress a lot.