REINVENTING CONVENIENCE

RANDY WEDDINGTON

DALLAS -- For 7-Eleven, the battle to grab the dashboard-dining crowd has never been tougher.

With convenience-store mainstays like the gasoline market -- and convenience itself -- becoming growth arenas for other food retailers, 7-Eleven here continues to be a c-store leader in working to minimize the impact from competitive retail formats. To help do so, it has added products and services associated with its new competitors -- and adopted some of their operational strategies as well.

This includes leveraging the chain's global scale to: drive down costs and boost its buying power; shift the supply chain to a demand-based system focused on consumers' needs; employ state-of-the-art information technology to improve operations and institute new Web-based services; and establish and grow a daily fresh-food delivery program. With such strategies in place in the convenience sector, competitive business models may be becoming less sharply defined. "We're seeing a continuation of channel blur," said Jeff Leonard, director of communications, National Association of Convenience Stores, Arlington, Va.

"Convenience stores have been looking to expand their offerings to compete effectively against all the retailers out there that are seeking the convenience dollar," he said. "There has also been a trend of other retail channels, such as supermarket and drug stores, to increasingly enter the convenience market.

"It has become less a hard-and-fast distinction among a lot of these retail channels. They are all adapting some of each other's best practices and really finding ways to serve the customer better."

These customers contribute to a growing market. According to NACS' 2001 State of the Industry Report, released last month, total U.S. convenience store sales hit record highs last year, topping a quarter-trillion dollars, or $269.4 billion -- an increase of 15.1% over 1999. Store units soared to 119,751.

Sales more than doubled from a decade ago ($109.7 billion in 1990), an eightfold increase from sales 20 years ago ($33.7 billion in 1980) and a nearly hundredfold increase from 30 years ago (about $2.9 billion in 1970), according to NACS.

Global Reach Advantage

7-Eleven, the largest chain in global convenience retailing, is a major force in this market. It operates or franchises over 5,700 stores in the United States and Canada, serving 6 million customers daily through 7-Eleven, IYG Holding Co., a subsidiary of Ito-Yokado Co. and Seven-Eleven Japan Co., both based in Tokyo. The holding company bought a majority stake in 1991, enabling the U.S. company -- which had filed for bankruptcy protection in October 1990 -- to emerge from bankruptcy the following March. Seven-Eleven Japan, meanwhile, operates over 8,000 stores, including those in Japan and Hawaii. In April, it became Japan's leading retailer in terms of sales overtaking the financially troubled supermarket chain Daiei, according to press reports.

The entire chain has over 21,000 stores located in roughly 20 countries and territories around the world. Last year these generated over $29 billion in total sales, serving more than 20 million customers daily.

The company's sheer size helps in its drive to distinguish its brand in targeted locales. "The critical mass of 7-Eleven in its key markets supports a proprietary infrastructure of fresh-food commissaries and daily distribution that separates 7-Eleven from all other convenience retailers," said Jim Keyes, 7-Eleven president and chief executive officer. This was in an announcement occasioned by the opening of the chain's 20,000th store, in Tokyo last July 11 (the company's "birthday" -- 7/11). Keyes was unavailable for comment to SN.

"The combined benefits of scale and infrastructure allow 7-Eleven customers worldwide to enjoy the highest quality, freshness and value," Keyes said.

In pursuit of these attributes the company has undergone geographic restructuring, downsizing in some national regions and expanding in others.

"We used to have 8,000 stores in the U.S. and Canada, yet those stores were scattered from the bayous of Louisiana to the mountains of North Dakota," said Keyes in an address earlier this year at a food and drug retailing conference, sponsored by Credit Suisse First Boston, New York. "They were everywhere. Even though we had tremendous store numbers, we didn't have a concentration of stores."

Since that peak in the mid-1980s the company has been realigning its stores within 100-mile radii of Combined Distribution Centers (CDCs) in about 20 key locations around the country, opening over 300 stores in two years after a decade of no store growth.

"There's a big checker game going on right now -- you sell me some of your stores and I'll sell you some of mine," said Dick Meyer, president of analysts Meyer & Associates, Neenah, Wis.

One impetus in terms of fresh-food delivery is the drive for more efficient distribution.

"Distribution is the key, and success will be defined by how well [convenience stores] concentrate their marketplaces," Meyer said. "The winning players from all this consolidation will be those who have channeled their energies to concentrated geographical areas, where they can focus supervision, etc."

"A company of our scale has no business buying from resellers," said Keyes in his address. "What we are doing now is driving the costs out of what was historically a very inefficient distribution system."

Fresh Linkup

7-Eleven's CDCs, owned and operated by third-party partners, began making daily deliveries of selected items in 1994. The company continues to add stores to this delivery network -- over 400 in 1999 and an estimated 800 last year, with another 800 planned for this year.

"It will take us two years to complete 90% to 95% of the chain," said Keyes recently, calling these goals the prerequisite for a network TV ad campaign touting the bread/milk freshness program. He views this as one way 7-Eleven stands above other convenience retailers.

Steering this distribution is the company's Retail Information System (RIS), which it calls "the central nervous system of our business." RIS is an integrated high-speed computer network that links point-of-sale scanning, credit authorization, and gas pumps and other internal operation functions through individual stores and to the corporate office. This proprietary system, "now in place in every store in the U.S.," he said, "allows retailers to place orders directly and better manage their product assortment, work their inventory levels and better satisfy the customer."

These components are adapted in part from the chain's operations in other countries.

"A lot of the basic distribution concepts are part of the thinking of their parent company," said Gene Gerke, president of analysts Gerke & Associates, Columbia, Mo. "For years I've been amazed at what Seven-Eleven Japan was doing with technology over there."

This substantial operation stands in impressive contrast to the chain's beginning as a c-store pioneer. Its first store, opened in Dallas in 1927, sold ice before adding bread, milk and eggs.

The 7-Eleven name came in 1946 when stores began operating daily from 7 a.m. to 11 p.m. And in 1999 shareholders voted to change the company's name from the Southland Corp. to 7-Eleven Inc.

One main goal of the developing system is the improvement of fresh-food delivery. According to Keyes, "Sixty percent of our sales represent food/drink in our stores ... 90% of those sales are packaged. So why can't we improve the quality of our products, leverage our skill and be able to provide fresh, daily-delivered products to 7-Eleven stores and create a better product for our customers?"

This approach breaks with c-store tradition.

"The convenience store industry has always been a second child when it comes to the quality of food service," said Gerke.

Such an approach may now be mandated, however.

"In fresh food and food-to-go, over the last seven years the supermarket industry has raised the bar on what people are looking for," Gerke said.

Deli Central

Seven years ago 7-Eleven rolled out the prototypes of its Deli Central fresh-food concept. This is its proprietary name for a line of ready-to-eat entrees, sandwiches, salads, fruits, vegetables, pizzas, Mexican foods and breakfast items that are prepared daily and delivered to over 3,500 U.S. stores each morning before dawn.

These items, based on orders from stores via the RIS, are prepared in commissary kitchens by partnering companies. Most of these centers have a USDA office and inspector on-site to guarantee safe food-handling practices, and all use ingredients from well-known companies such as Kraft Foods, Northfield, Ill. (for items like its Bakery Stix line and Oscar Mayer products). After preparation these products are delivered to CDCs for distribution along with other time-sensitive items.

Each Deli Central product bears a label with a shelf-life date. Items not sold prior to expiration are donated to area soup kitchens, pantries and emergency shelters. "While still nutritious and good-tasting," the company said, "the product doesn't meet the strict quality-control standards at 7-Eleven after that date." Last year the company donated some 780,000 pounds of food through its Harvest program.

Selections vary by national region, season and store. They also vary internationally, with empanadas (meat- or vegetable-filled pastry shells) stocked in Mexico and bento boxes (packaged lunch boxes) in Japan.

7-Eleven continually tests new and existing "dashboard dining" items during their development. Recent additions through this process include hot and grilled sandwiches and breakfast sandwiches on biscuits, croissants and English muffins. Other experiments have included burgers and tacos, each shaped like hot dogs.

Last year the chain debuted its "Take It & Shake It Garden Gulp" line of salad shakers in basic garden and Caesar varieties, partnering with Dole Food Co., Westlake Village, Calif. Other produce is also available. Bananas are merchandised at cash registers. Some locations have shrink-wrapped apples and oranges, as well as 8-ounce containers of cut fruits and vegetables.

Even old standards like the Slurpee frozen beverage, introduced in 1968, have seen new developments -- with the recent introduction of the Mountain Dew Slurpee. For many years, said Keyes, the chain had an exclusive U.S. agreement to sell only Coke products under the Slurpee name. "That contract expired this year; we now have dual agreements" with both Coca-Cola Co., Atlanta, and Pepsico, Purchase, N.Y.

The company sells over half a million Slurpees per day in this country.

That's not much more than a drop in its bucket-sized Big Gulp, though, for another drink market.

Coffee Mania

"Coffee is king at 7-Eleven," said coffee category manager Alan Beach in a company release. "We sell more than a million cups a day."

For this market the chain -- which announced that it was "the convenience retailer that first came up with the innovative idea almost 40 years ago to sell hot-to-go coffee" -- added a French Roast whole-bean coffee in 1999 and a Dark Mountain Roast in February of this year.

"This new coffee is a blend of premium quality [Arabica] beans, and is roasted darker than any of our other coffees," said Beach, "providing a more full-bodied taste than our current Exclusive Blend regular and decaf coffees."

He added that "as coffee tastes change, we need to change with them."

Of course, 7-Eleven isn't alone in developing these programs. Other convenience store operators have focused on food and drink categories as well.

"Quality food service isn't necessary for a company's survival, but it is a growth opportunity," said Gerke. "I'm sure a lot of them will be looking at it," he said, even though it "can be complex and costly."

The program offers challenges, though, beyond traditional fare. "Most convenience stores can still do the frozen tacos and breakfast biscuits, things that are microwavable, hot dogs on a roller," he said. "But in terms of really high-quality food service, they have to figure out how to deliver a fresh product with consistent quality, and that's not easy."

Some have already faced such problems, he said. "Chevron [Chevron Corp., San Francisco] tried their Foodini's [program], but they never could figure out how to pull it off on a mass scale. It's tough for an oil company to do that."

Gerke cited Sheetz, Altoona, Pa., with its Made To Order sandwich concept, and Wawa Food Markets, Wawa, Pa., with its coffee and hoagie sandwich programs, as "examples of chains that have managed to brand the concept in regional areas."

Proprietary food programs in c-stores may not be heavy competition, though, for prepared foods in supermarkets.

Calling the two alternatives "different meal events," Gerke outlined the difference. "In the convenience store you just want to grab something and go; the supermarket product is often something you take home and heat or otherwise prepare for a meal."

At any rate, food is only one of the areas in which 7-Eleven is extending its branding.

Proprietary Thrust

"The size of 7-Eleven allows them to look at things like proprietary products to entice different customer sets into their stores," said Leonard. After introducing custom cosmetic [Heart & Soul] and panty hose [Heaven Sent] lines, he said, the chain "has also targeted some of its proprietary health-and-beauty products towards a younger set, and regularly mixes up or turns over its products so you're always having new offers at the store."

One advantage of such proprietary products is that they can be adapted more efficiently to their environment. That's an important factor for 7-Eleven, which has up to 2,500 products and services in a store that is typically 2,400 to 3,000 square feet. The chain's panty hose, for instance, comes in smaller-than-average containers, allowing stock to be more than doubled in existing space.

Like other c-stores, the chain is "reinventing convenience in everything they offer," Leonard said, "enhancing it and targeting it more towards what their customers are telling them they want."

"What we've done is turn the supply chain around and called it the 'demand chain,"' said Keyes. "We are managing the demand chain beginning with the customer."

This is possible by the company's use of technology and the development of its RIS network. During a keynote address during the Executive Technology/Supermarket News Summit in Pasadena, Calif., earlier this year, Keyes said, "Now the customer gets what he wants. We make decisions on ordering and product assortments based on what our data tells us customers want to buy. Distributors consolidate and distribute goods at the lowest costs and manufacturers collaborate with the company to develop new products." In other words, Keyes said, 7-Eleven is using technology to control its own destiny.

With smoke shops taking a share of tobacco sales and supermarkets taking an interest in gasoline, c-stores are strongly motivated to build existing categories and explore new ones.

"Convenience stores continue to sell the majority of the gas in this country, just over 60% now," said Leonard. "But other retail channels -- supermarkets, hypermarkets and the big-box retailers -- are increasingly looking to get into that. It's estimated that they could have as much as 15% of the market by 2005."

This market is considerable. In 2000, of the $269.4 billion in sales NACS reported for the national c-store industry, $165.3 billion, or 61.4%, came from gasoline.

Gasoline retailing has already reached some supermarket chains, including Kroger Co., Cincinnati; Albertson's, Boise, Idaho; Safeway, Pleasanton, Calif.; H-E-B Food/Drug Stores, San Antonio; and Meijer, Grand Rapids, Mich.

Wal-Mart, Bentonville, Ark., is also increasing its market presence.

These competitors could impact 7-Eleven less than they will other c-stores, however.

"7-Eleven is different from others in the market in that we have smaller reliance on gasoline," said Keyes. "Our industry today is dominated by gasoline retailers and gas is by far the biggest piece of their business. With 7-Eleven it's about 29% of total sales and 9% of gross profit."

Another compelling issue could be the "surge of international supermarkets and hypermarkets who are looking" into acquiring U.S. c-store chains, said Meyer.

Ahold, Zaandam, Netherlands, last year purchased two small convenience chains -- Sugar Creek Convenience Stores & Fuel, Rochester, N.Y., and Golden Gallon, Chattanooga, Tenn. -- besides its acquisition of U.S. Foodservice, Columbia, Md.

And U.S. grocery chains like Kroger are c-store operators as well.

Capturing the Last Mile

With increased competition on both these fronts, where do 7-Eleven and other c-store operators turn for new growth opportunities? Some analysts say it is leveraging their physical presence in extending the reach of other businesses.

7-Eleven is well on its way to doing this online through its Vcom (virtual commerce) initiative, seen as another potential growth area.

Keyes said at SN's Technology Summit that it traditionally sold money orders and made automated teller machines available. But now it is going the next step and will expand services "by creating virtual commerce malls in a 3-foot footprint that enables customers to hook up to an Internet portal."

Last year the company announced partnerships with American Express, New York, and NCR Corp., Dayton, Ohio, in the launch of ATM-based kiosks with touch-screen Internet access. These provide ATM and other financial services like check cashing, money order purchases and wire transfers.

In February of this year 7-Eleven announced an agreement with Atlanta-based First Data Corp. subsidiaries Western Union Financial Services and Integrated Payment Systems to facilitate these services.

In March, 7-Eleven named American Express as the primary provider of ATM Services for its Web-enabled kiosks. In May, Atlanta-based Equifax signed an eight-year agreement to verify the identity of check cashers that use the kiosks.

Event ticketing and online shopping are planned future additions.

74 Years of Retailing at 7-Eleven

1927-1946 Early Years

1927: Begins as Southland Ice Co.

1928 and into early 1930s: Ice docks begin selling bread, milk and eggs, giving rise to Tote'm (Tote Away) stores, the forerunner to 7-Eleven convenience stores.

1939: Sixty Tote'm stores are operating in Dallas and Fort Worth.

1945: The company becomes Southland Corp.

1946: Tote'm stores are officially named 7-Eleven.

1947-1960 Acquisition Years

For the next several decades, Southland Corp. and 7-Eleven pursue the acquisition of other businesses -- dairy, meat, candy and syrup companies -- as well as other retail establishments.

1950s: Services such as key making and money orders are introduced along with frozen meat.

1954: 7-Eleven ventures outside Texas for the first time, opening stores in Florida.

Late 1950s: Southland operates three divisions: 7-Eleven, Oak Farms, and ice production and sales.

1960-1980 Franchising and Global Expansion

1960s: 7-Eleven introduces prepared food, such as hot coffee, sandwiches and popcorn.

1964: Franchised stores begin with the acquisition of Speedee Mart, a franchised chain in California.

1968: The Slurpee originates with the advent of a frozen carbonated drink machine in 1965 and makes its store debut three years later.

1971: Microwave is used to prepare fast foods.

1974: Southland licenses 7-Eleven brand to Japanese retailer Ito-Yokado Co.

1980-Present Transition Years

1987: The Thompson family acquires control of Southland in a leveraged buyout that leaves company debt-ridden.

1987: Southland sells 58 convenience stores to Seven-Eleven Japan Co.

1990: Southland files for Chapter 11 bankruptcy.

1991: Ito-Yokado buys Southland Corp., taking control of 7-Eleven.

1994: 7-Eleven's combined distribution centers begin making daily deliveries of selected fresh food.

1999: Company name is changed from Southland Corp. to 7-Eleven Inc.

1999: Proprietary items such as Bakery Stix, co-developed with Kraft Foods, is introduced.

2000: Jim Keyes becomes 7-Eleven president and CEO.

2000: Garden Gulp is introduced in partnership with Dole Foods.

2001: Dark-roasted coffee blend is introduced as a Starbucks equivalent at less cost.