Franchisees, don’t be cut by 7-ELEVEn’s leeks

Japanese convenience store culture goes down the drain

Franchisees, don't be cut by 7-ELEVEn's leeks

For many years, slow work is a high-frequency word in 7-ELEVEn’s management philosophy.

Naturally, “the pursuit of speed” became one of the things that 7-ELEVEn “blamed” on local convenience stores.

But when the surrounding environment changed, 7-ELEVEn had no choice but to start a furious rush in second and third-tier cities.

The debut of a tiger’s head and a snake’s tail
Tangshan, Jinan, Changsha, Xi’an, Fuzhou, Yantai …… This is the new list of cities that 7-ELEVEn has taken over in the last two years. And almost in every city, 7-ELEVEn always set a new sales record.

The enthusiasm for 7-ELEVEn in the sunken market is nothing less than the queuing spectacle of Xi’an, Fuzhou, Changsha, Zhengzhou and Yantai’s first stores, which contributed 390,000, 420,000, 500,000, 650,000 and 750,000 respectively on the first day of opening, and 7-ELEVEn has thus repeatedly broken the global single-store daily sales record for convenience stores.

What is this concept? Uchida Shinji (executive director of Japan’s 7-ELEVEn Group, chairman and general manager of Seven Eleven (China) Investment Co., Ltd.) has revealed a figure: “The average daily sales of 7-ELEVEn in Beijing is 24,000 yuan, such daily sales are about three times that of other convenience store brands.”

A comparison of the two compartments, the record high data, not by astonishing. According to the China Chain Store Association’s convenience store report, the average daily sales of local convenience stores in China is only 4,936 yuan. Admittedly, this may also have something to do with the opening day promotions.

But what makes us wonder is that after the first day of operation, no more information is disclosed about the specific sales of these stores. As of now, 7-ELEVEn China has not announced any good news about its profit. Will these global record sales enable 7-ELEVEn’s stores in the cities where they are located to become profitable as a whole?

A public website called “Xijingclub” conducted a study on “Xi’an people’s attitude towards 7-ELEVEn”, and the results showed that “the popularity and disappointment coexist”, with positive reviews coming from the variety of products and bad reviews focusing on “expensive”, “average”, “not good”, and “poor service”.

The report was released in November 2019, while 7-ELEVEn entered the Xi’an market in August of that year, only three months before and after, 7-ELEVEn’s reputation has been challenged, and this is not unrelated to 7-ELEVEn’s adoption of the “franchise” approach.

Franchising is the main model adopted by 7-ELEVEn to accelerate its geographical expansion, in detail, it is to select local enterprises to contract with the Japanese side and obtain local management rights. The Japanese side provides business strategies and guidance, while the local company is responsible for store operations, recruiting franchisees, building a Japanese distribution supply chain, and providing fresh food factories.

In other words, the local companies are the OEMs who share the capital pressure and have no real say, the control remains in the hands of 7-ELEVEn. According to Future Consumer, food recipes at the factory end, store location guidelines at the store end, merchandise procurement and delivery times, and marketing and promotional activities are still in the hands of the Japanese headquarters.

Originally, Shinji Uchida hoped that this partnership would allow local companies to directly raise their opinions and problems when they have them, without regard to equity relations. However, it is clear that under this tight grasp model, the motivation of local companies will be suppressed, and it will be difficult to make substantial progress in the evolution of 7-ELEVEn’s localization.

More importantly, local enterprises will have to face: the dilemma of long return on store investment and distant profitability of a single store.

Self-built supply chain, fresh food factory, the initial is a considerable investment. In addition, 7-ELEVEn’s fresh food accounted for more than 50% of the initial inevitable need for a long period of time to break in, and high loss of fresh food, and low gross profit of long-preservation goods, if to achieve profitability, several years may be possible.

For reference, one data is that in the more mature Beijing-Tianjin market, 7-ELEVEn in the first store opened, it took 7 years to achieve profitability.

Even if a single store is profitable, there is a question mark over whether the scale effect can be achieved. First of all, 7-ELEVEn’s selection conditions for franchisees are extremely strict, and it is not difficult to find the right company.

On the official website of 7-ELEVEn China, four requirements for franchisees are marked: retail experience (department stores, supermarkets), financial strength (listed companies, etc.), basic hardware facilities or corresponding resources (logistics centers, food factories, etc.), and 7-ELEVEn has a common business philosophy.

Moreover, in the actual operation process, 7-ELEVEn’s franchise expansion road is extremely slow: in 2018, 7-ELEVEn added 238 stores throughout the year, and then the growth rate slowed down, spending 2 years to open only 255 stores.

From the store opening plan, 7-ELEVEn also dare not make a big push, to Hunan Youa previously announced store opening plans, for example: the first year in 2020 is expected to open 10 stores; 2021 increased to 25, including 5 franchise stores; 2022 opened to 55, including 30 franchise stores.

This model of local companies bothering not to make money is hardly going to help 7-ELEVEn achieve sustainable expansion.

Franchisees reduced to workers?
Not only 7-ELEVEn, but also the whole family and Rosen, are doing everything they can to show their muscles in the Chinese market.

In order to dominate the market, the whole family also relies on the franchising model to run wild. The China Convenience Store Development Report 2020 shows that by the end of 2019, there were 2,801 family convenience stores in China, surpassing Rosen and 7-ELEVEn to become the top Japanese convenience store.

Looking at Rosen, in June 2019, Zhongbai Rosen opened five stores in a row in Changsha; in August 2019, the first three stores of Shenyang Rosen opened, while Shenyang Rosen and Dalian Rosen together to develop the market in the three northeastern provinces; in addition, the comprehensive strategic cooperation between Taizhou Hailing and Rosen (China) has been launched, which can be seen as the expansion of Shanghai Rosen in the eastern region of China.

Some informed sources have told Tiger, this round of Japanese convenience store expansion, in fact, and the local government’s impulse to attract investment has some connection. Compared to supermarkets, convenience stores are more popular among young people in cities and can add to the modern atmosphere and flavor of the city.

Admittedly, this is a favorable time for convenience stores to charge second and third-tier cities, but it is impossible to ignore that the business of convenience stores, which requires a high degree of refinement and management, will not be less difficult to operate with the support of the government.

On the contrary, because the full opening of the franchise in exchange for a small run, seems to be suffering from the repercussions of joining.

According to the China Chain Store Association, 7-ELEVEn and Rosen have 40.4% and 49.6% of franchised stores in mainland China, respectively, while Whole Family has more than 80%.

Uchida Shinji believes that the number of directly operated stores, preferably not more than 80, more than 80, headquarters control is more difficult. But the number of franchised stores within a certain range, but also did not let 7-ELEVEn management is much less worry.

The first problem is the tension with the franchisee. For example, the two sides often disagree on the order quantity of fresh food.

A franchisee once told First Financial Weekly that because of the high loss rate of fresh food, the franchisee needs to unilaterally bear all the labor and commodity loss costs, and sometimes has to give up some of the more niche flavors, but the store supervisor believes, based on past experience, that if the stores increase orders in moderation will not bring losses.

When the two sides do not communicate, the franchise owner is bent on the situation, “less product” “general” evaluation is inevitable, and this also directly affects the customer satisfaction of the store, as well as store sales.

In fact, because of the headquarters commission is too high, many franchisees do not make money, and eventually fell into the workers for nothing.

A local convenience store franchise employees have told the media, because 7-ELEVEn headquarters of high commission, so part of the potential franchisees discouraged, “many franchise owners are listening to the 7-ELEVEn instructions to choose us, they said that if you go to join 7-ELEVEn, like taking their own money to work for 7-ELEVEn. “

There 7-ELEVEn Beijing, a franchise owner has revealed that a month can share about 10,000 yuan of profits. According to the relevant information, the franchise model in Beijing is divided into two types: one is entrusted to join, and one is franchising.

Commissioned franchises, 7-ELEVEn take a progressive ladder commission method: gross profit in the stores below 40,000 yuan, the headquarters commission 52%, gross profit in the 40-100,000 yuan part of the commission 68%; gross profit of more than 100,000 less than 220,000 yuan part of the commission 78%. Even in the need to provide their own stores and equipment franchises, 7-ELEVEn also want to draw 38%.

Both models draw not low, the official will explain it as: the company needs to invest these costs in back office management, own commodity development and some unique equipment.

An industry insider, on the other hand, gave DoNews a calculation based on the profit model of the family franchise –

The return formula of the family franchise is roughly as follows: your profit = marketing amount * 25% (gross profit) * 38% (agreed commission when joining) – staff salaries and insurance – utilities (50% each for the family and franchisees) – scrapping losses.

Calculated on the basis of daily sales of 10,000 yuan (already considered very good), after deducting taxes, a month the franchisee to get a hand profit is 24,795, utilities equalization – 5000, leaving 19795.

Even if you do not pay taxes, do not scrap, do not hire people, cleaning losses are not counted, two people a month on 23,500, and there is no future growth is expected, purely equal to help the whole family work.

In fact, the Japanese convenience stores face a bigger problem is that the overall development of the bottleneck. In 2019, this bottleneck may be mainly competitive, and in 2020, also add the impact of the epidemic.

Affected by the epidemic, 2020Q2 7-ELEVEn profit margin is only 1.2%, while the previous decade of sales, gross margin is maintained at about 35%, net profit margin is maintained at about 3%. With the rise of new convenience stores, and the impact of the Internet, 7-ELEVEn faces predictable downward pressure.

When local convenience stores began to digitalize and revolutionize traditional convenience stores, 7-ELEVEn, which has not caught up, still needs manpower in many aspects; in the case of rising rent and labor costs, and fewer and fewer pits, 7-ELEVEn still strictly adheres to the template for opening stores, and even so, it is difficult to escape the fate of closing stores; and the competitiveness of the once-proud products now appears to be aging and mediocre, and the unresponsive 7- ELEVEn, is being caught up by other players.

In the opinion of Wen Zhihong, a partner and head of chain management at Hejun Consulting, although the requirements of 7-ELEVEn in health and safety management are relatively strict, there are still some problems in food safety as well as health environment, which also reflects that there are certain loopholes in the daily management of the enterprise, and the enterprise should further improve. However, the requirements for the entire management system, including staff awareness, management systems, franchise management, training and other aspects, are very high if a company is to do a really good job in food safety.

The whole family is also frequently on the “blacklist” due to quality control problems. There have been numerous negative comments on the hygiene environment, poor product quality, food poisoning, etc. Complaints and exposures about plastic in buns, hair in noodles, spiders in cakes, and the sale of expired food also abound.

Previously in China, Japanese convenience stores had enough signage, strength and operational advantages to open profitable stores. But now, the problematic Japanese convenience stores are beginning to fall from grace, and their reputation and uniqueness are becoming devalued.

Wipe your eyes before you buy
The factors behind the fall of Japanese convenience stores are complex. Once the “trust” is broken, it is not easy to rebuild, and the most difficult to control is often the consumer.

When Japanese convenience stores first entered the Chinese market, the products and services they offered, as well as the warm atmosphere they created, were scarce and unique during a period of relative material scarcity, and people voluntarily took pictures and shared them. But over time, the content of Japanese convenience stores has slowly lost such appeal.

In the words of Wei Guoxing, partner of Tiantu Investment, many users are just your purchasers, not your fans, and if he is your fan, it only means your brand really has a cult following. Only if you achieve the rate of becoming a picture and a fan, then you have the degree of admiration.

To put it another way, “In the industrial era, people are relatively passive, people are defined by brands, channels and manufacturers. By giving users a stable expectation of product quality, a stable expectation of product form and a stable expectation of delivery efficiency, the brand can gain trust, which means that consumption is standardized in bulk”, this is the view of He Yu, the managing partner of Black Ant Capital.

In his opinion, in today’s information age, everything is reversed. Consumers need individuality, precision, and even customization, and consumer brands need to help users reach out to possibilities they could not reach in the past, help them realize their emotional expression, and help them enrich their lives and experience the world.

Looking around, especially in the past few years, new technologies and new channels have been improved, and the return or revival of the “national trend” has been overwhelming, international brands are no longer the main factor for young people to consider, they are also willing to pay for the emerging domestic brands, and domestic brands have precisely grasped the dividends of the new era.

Yuanqi Forest opened a new trend of “0 sugar, 0 fat, 0 card”, helping users to reach the possibilities they could not reach in the past; Bubble Mart created the blind box game, stimulating the desire to collect and social currency, helping users to achieve their emotional expression; three and a half as “mini coffee cup “, is to attack the aesthetic dividend, help users to enrich their life experience.

Even some domestic brands, already have a world-class influence. SHEIN exploded across the ocean and now replaces Amazon as the most downloaded shopping app in the U.S.; the new star of domestic products, Perfect Diary, in the Southeast Asian e-commerce platform Shopee, bagged Singapore and Vietnam makeup TOP1, and got on Malaysia lip makeup category TOP1 and Philippines loose powder category TOP1.

Looking back at the convenience store industry, although China’s local convenience store chains are just budding, the innovative attempts of China’s local convenience stores are quietly driving the tradition in terms of digitalization and data technology, and have even spread their fame overseas as well.

Not long ago, representatives from dozens of Japanese companies visited Convenience Bee’s Beijing headquarters for a study tour and exchange. It is understood that these companies are involved in various fields such as software and hardware R&D, IT, trade, fund, financial investment, etc. Their focus is on how to apply digital core technologies to traditional convenience stores.

In an interview with Beijing Business News, Masatsugu Iwanaga, director of the Japan-China Economic Association’s Beijing office, said bluntly, “Japan is not as fast as China in terms of digitalization, so Japanese companies are interested in a model that can drive traditional convenience stores with digitalization.”

According to Masazu Iwanaga, Convenience Bee’s digitalization attempts are based on the unique environment, conditions and technology in China, and these unique model innovations cannot be experienced in Japanese convenience stores.

The concept of “branding” originated in the West, and in the early days of brand building methodology, we followed the same path as the West. Today, however, China’s new consumer brands have been slowly figuring out their own new path.

7-ELEVEn, Rosen, the whole family, although known as the “originator” of convenience stores, but now the name of the originator, has obviously been challenged. What’s more, the Chinese market is undoubtedly a unique existence, both in terms of cultural connotations and regional differences, and consumer habits vary greatly from place to place, so copying the Japanese experience will only make it difficult to move forward.

From this point of view, we are looking forward to the new surprises brought by the national trend of convenience stores.

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