Triange 7-11

Information Technology Strategies: How Leading Firms use IT to gain an Advantage William V. Rapp

Print publication date: 2002 Print ISBN-13: 9780195148138 Published to Oxford Scholarship Online: Oct-11 DOI: 10.1093/acprof:oso/9780195148138.001.0001

Retailing: Ito-Yokado, Seven-Eleven Japan William V. Rapp DOI: 10.1093/acprof:oso/9780195148138.003.0009

Abstract and Keywords

Ito-Yokado (IY) and Seven-Eleven Japan (SEJ) has contributed in many ways to the contribution of retailing as utilizing IT made it possible for the two companies's stores to react more effectively to demand fluctuations that are brought about by local events, weather changes, shift in tastes, customer demographics, and other such spot causes. This improvement in their processes has not only reduced inventory costs but also facilitated the increases in the sales revenue per square meter. These companies have established allies with suppliers over different goods and services, thus encouraging others to form strategic alliances to gain more profit with the help of IT systems. This chapter looks into the retailing areas wherein IY operates, how IT is used in retailer-supplier relations, the measures taken which made SEJ Japan's leading fast food provider, and IY's e-commerce projects.

Keywords: Ito-Yokado, Seven-Eleven Japan, e-commerce, retailing, retailer-supplier alliance, IT systems

Ito-Yokado and Seven-Eleven Japan (SEJ), which IY controls, have used information technology to dramatically change many aspects of the way retailing is done. IT has enabled the companies' stores to respond more effectively to demand fluctuations from spot causes such as local events or variations in the weather, as well as to longer-term changes brought on by shifts in tastes and demographics. This has increased sales revenue per square meter and reduced inventory costs, probably the two most

Page 1 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

important metrics in retailing. To accomplish this, the companies have formed alliances and combinations with suppliers and others across a wide range of products and services. This, in turn, is motivating other Japanese retailers and suppliers to form strategic alliances to realize more profit from IT systems.

After an overview of the areas of retailing that IY is involved in, this chapter examines its use of IT and its supplier relations, including some innovative ways that have made SEJ Japan's leading purveyor of fast food, even ahead of McDonald's. IY's ventures into e-commerce are then taken up.

Japanese Retailing

This section outlines general trends in the two retailing sectors in which Ito-Yokado (IY) is involved: general-merchandise superstores (GMS) and convenience stores (CVS). Table 8.1 lists Japan's six largest retailers; note the absence of any traditional department stores.

General Merchandise Stores (GMS)

Two annual rates of growth show the performance of GMS: sales and floor space. Reflecting the decade's vibrant economic conditions, sales in the 1980s grew between 2% and 5% annually, while floor space grew between (p. 164 )

Table 8.1 Japanese Retailers, ranked by Size, 19991 (in billion yen)

Revenue2 Name and Category

3,224 Ito-Yokado Ltd. (diversified) [8264]3

2,847 The Daiei Co. Inc. (diversified) [8263]4

2,522 Jusco Co. Ltd. (supermarkets) [8267]

1,856 Mycal Corp. (supermarkets) [8269]5

1,155 Uny Co. Ltd. (diversified) [8270]7

1,120 The Seiyu Ltd. (supermarkets) [8268]6

Note: Ticker symbols for Tokyo Stock Exchange-listed companies given in brackets.

(1) Fiscal 1999, which ended during first quarter of 2000. (2) Consolidated revenue.

Page 2 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

(3) Includes Denny's restaurants, Seven-Eleven Japan, and 7-Eleven Inc. as consolidated subsidiaries, and York-Benimaru Co. Ltd. supermarkets under the equity method. Non-Japan revenue is about one-third of total, mostly from 7-Eleven Inc.

(4) Includes Lawson, the second largest CVS.

(5) Goldman Sachs Group owns 15.2% (as of May 2001). Goldman typically does not invest its own money in such situations, but is not required to disclose the ultimate owner. Formed as Nichii Co. Ltd. in 1963 by mergers of many small and medium supermarkets in the Kansai area. The name was changed in 1996.

(6) Once part of Seibu-Saison group, which included Seibu Department Stores Ltd. The department stores declared bankruptcy in 2000. A chatty account of the sgroup, which began in the 1920s with railroads, is Havens (1994).

(7) Also sometimes spelled Unyu. Its group includes convenience store operators Circle Κ Japan and Sunkus & Associates.

Sources: Company reports and Ito-Yokado Group Investors' Guide 2000, p. 14, which provides additional revenue and balance sheet data for fiscal 1998 and 1999.

2% and 4%. Then the bubble burst and things changed: 1991 was the last year that GMS had a positive spread between sales and floor space growth. Sales growth decreased rapidly in 1992, actually becoming negative, while floor space increased at a rate over 4%, and then jumped above 10% in 1993.

The reason was the liberalization under the Large Scale Retail Store Act, which began in 1990. In the 1980s the number of large retail stores grew slowly from 400 to 700. However, the number jumped above 1500 in 1990, and then rose steadily, reaching 2269 in 1996. With more large stores, individual stores began to experience heavy competition even as a weak economy was restraining sales.

In response, the firms have had to develop new strategies. There have been four aspects to this: pricing and merchandising, reducing operating costs, using information technology, and strategic site selection.

Page 3 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

Pricing and merchandising strategies include efforts to sell more imported and private-label products. For example, imports accounted for 17.8% of IY's sales in 1996 and 19.5% at Jusco, while at Daiei, private brands accounted for 12.8% of revenues in 1995.

It has been more difficult to lower operating costs compared to convenience (p. 165 ) stores (CVS) or the discount centers that have moved into rural areas starting in the 1980s. This is because GMS have to bear almost all the initial investment cost of opening new stores, compared to CVS or discount stores, which generally are franchises and often are existing stores that have joined a chain. GMS also require relatively larger inventories. The primary cost-reduction strategy that remains is to find the best way for each store

to control inventory. In particular, attention has been given to avoiding non- availability (opportunity loss)—that is, losing a sale because something is out of stock or not carried at all. This is why good IT is so important to retail profitability and success.

Point of sale (POS) information has been available in Japan for some time; what is important now is how to design a system that covers all aspects of a firm's business activities. Stores have found that such thorough command of IT systems can help avoid having shelves stocked with unpopular goods, as well as better identify what merchandise consumers really want at a given time. For example, demand at a specific store can vary depending on the time of the day and the weather. This information also can be

used to identify the best time to order from producers or wholesalers. Just as manufacturing has moved to being “lean,” so too is there “lean retailing.” (For an insightful analysis of lean retailing and lean manufacturing in apparel and textiles, see Abernathy et al 1999.)

Good IT systems can help achieve the best balance among low inventory, high turnover, and few lost sales (low opportunity losses). Optimally managing these variables is the key to a GMS firm's success, and explains why IY's leading-edge IT strategies have contributed to its success in this highly competitive market despite Japan's economic malaise.

Convenience Stores (CVS)

CVS in Japan generally enjoyed relatively better performance than GMS in the 1990s. Sales rose from ¥3.89 trillion in fiscal 1993 to ¥6.18 trillion in fiscal 1998, according to Japan Franchise Association data. However sales fell

Page 4 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

slightly in fiscal 1999, to ¥6.13 trillion. The major players are listed in table 8.2.

While the GMS experienced declining sales due to increased competition and the economic downturn, sales at existing CVS dropped only 0.4% in 1995 compared to 1994. However, competition among CVS and against other retail sectors has been increasing, and the time is gone when the whole sector could enjoy huge growth opportunities. Now, only the better-managed CVS have a chance to grow faster. Several factors are important. First is merchandising strategy, including the services offered; second is the use of IT; third is strategic site selection; and fourth is owner development. In this regard, further deregulation definitely will increase the kinds of merchandise and services CVS can and will offer.

(p. 166 )

Table 8.2 Japanese CVS, Ranked by Size, 20001

Sales2 Stores 2,046 8,661

1,275 7,683 960 5,812

497 2,826

478 2,693 337 2,407 232 1,469 6,737 35,693

Name

Seven-Eleven Japan [8183]3

Lawson Inc. [2651]4

FamilyMart Co. Ltd. [8028]5

Sunkus & Associates [755 7]6

Circle Κ Japan [7437]7 Daily Yamazaki8 MiniStop [9946] Total9

Ticker symbols for Tokyo Stock Exchange-listed companies are in brackets. There are two other publicly traded CVS chains: Kasumi Convenience Network [7454] and Three F Co. Ltd. [7544].

(1) Fiscal years ended during first quarter of 2001.

(2) In billion yen. These numbers may differ from those reported for accounting purposes.

(3) Owned 50.7% by Ito-Yokado Ltd.

Page 5 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

(4) Controlled by the Daiei Co., of which it was a 100% owned subsidiary until 1998, when shares began trading publicly. Daiei currently owns 21%.

(5) C Itoh group purchased 50.2% from Seiyu Ltd. in 1998. Through a subsidiary it currently controls 30.6%. Before 1998 FamilyMart was part of the Seibu-Saison Group. A brief history of the company is in Havens (1994, pp. 161–62).

(6) Part of the Uny group. Owned 25.54% by Uny Co. Ltd. and 25.53% by Circle Κ Japan Co. Ltd. (itself controlled by Uny; see note 7).

(7) Uny group owns 52.6%. (8) A member of the Yamazaki Banking group [2212].

(9) The total is for the 12 months ending 31 March 2001 and thus does not exactly correspond to the individual company data because their fiscal years usually end in February.

Sources: Sales and store data for specific companies are from a survey of CVS companies by the Nihon Keizai Shimbun reported in the Nikkei Weekly, 30 July 2001, p. 2. Other data are from Ministry of Economy, Trade and Industry, Monthly Report on the Current Survey of Commerce, April 2001, p. 64. Ownership data from company filings.

The number of different products at a CVS are far fewer than at a GMS: over the course of a year a typical CVS has about 5,000 SKUs versus over 100,000 at a GMS. At any one time a CVS stocks about 4500 SKUs. (An SKU [stockkeeping unit] is a unique product as regards manufacturer and such characteristics as size, color, flavor, and the like. Visitors to 7-Eleven's web site will find the statement “2,500 different products” at its U. S. stores, but that is fewer than the number of SKUs, because size matters: 2% milk is a product, but quart and gallon containers each have a different SKU.)

According to SEJ the total number of SKUs it tracks for all its stores over a year is 30,000. This reflects a large number of seasonal and promotional items, geographical variations in what is carried, and the extensive and constantly changing fast-food offerings. This variety and SEJ's flexibility in supplying stores, especially with different food items during the day, are considered an important reason its sales per store are much higher than those of competitors.

Page 6 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

(p. 167 ) Market Saturation

With the surge in the number of CVS, population per store fell to 2572 in 1996, which is below the 3000 then usually regarded as the critical viability level. In major urban areas the situation became even more unfavorable: in Tokyo, 2012; in Osaka, only 1819. However, the major chains feel it is important to distinguish between high-quality stores and lower-quality ones that are called CVS just because they are open 24 hours. The total number of CVS in Japan, 48,567 in 1996, includes every type that satisfies the minimum definition.

Of these, only about 32,000 were providing the other usual CVS services such as postage stamp sales, copiers, fax machines, video games, utility bill payment, and package delivery. Therefore, the population per high-quality store may actually have been around 4000. This means that, for quality operations, there was a chance during the late 1990s to add as many as 10,000 stores. In the event, the number of CVS actually declined by 9,000 to 39,627 in early 2001, and the general feeling is that saturation had been reached even for higher-quality stores.

Competitive pressures are indicated by the fact that low-quality stores that do not belong to a franchise have been closing or converting. In 1996 there were 1486 such closures, equal to 45% of the 3218 newly opened stores, which were virtually all franchises or owned by a CVS chain. Many of the mom-and-pop stores that once dotted neighborhoods also have closed or converted, but they are not included in these data unless open 24 hours.

Though the major CVS companies were doing some scrap-and-build of existing franchise stores, the number of scrapped stores per listed company was only some 100 per year, about 20% of new openings. Therefore, the share of stores related to the eight major CVS companies rose from the mid-1980s. It went from 21% in 1985, to 30% in 1990, to 40% in 1995, and to 43% in 1996. By 1996 their share was almost twice that in 1985. Reflecting a sharp shakeout, by 2000 the top six had 65% of stores and over 80% of total CVS sales. Now, even the major stores are reining in, with Lawson and FamilyMart in early 2001 announcing closures and relocations of hundreds of lower-performing stores, although planned openings in more promising locations mean there will be little net change in their total number of stores.

Page 7 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

Merchandise Strategy

CVS have continually sought to add services to attract traffic, even if they do not contribute directly to profits. Thus, many have long offered copiers, fax services, and video games. Beginning in 1987 they have become payment points for electricity, gas, and water bills (SEJ was the first, and reports having 3% of the market in 2000). In February 1989, SEJ also became

a payment point for Daiichi Seimei (life insurance). As deregulation has allowed, stores have added sales of money orders (June 1995) and postage stamps. Sale of rice also was allowed in 1996. Foreign exchange services (p. 168 ) started in April 1998. Package shipping began in the mid-1990s. SEJ works primarily with Yamato Un'yu (Black Cat), by far Japan's largest package delivery firm. In November 1999, SEJ began accepting payment for purchases made over the Internet. With these new offerings, sales of existing CVS began rising again.

Japan is still very much a cash-using society, and even those with credit cards are reluctant to give the number over the phone or Internet. This is demonstrated by the fact in the year ending February 2001, SEJ handled over ¥800 billion in third-party payments on behalf of 245 companies. This involved over 100 million transactions.

Reservation services for travel packages became available beginning in late 2000 and, looking ahead, stores may even be able to sell some prescription pharmaceutical products. One idea is to have them act as a pickup and payment point for an on-line pharmacy.

More banking and financial services will be offered as deregulation continues. Working couples needing financial services outside normal banking hours already have been targeted by firms such as Sanwa Bank (now part of UFJ; see chapter 10) in terms of its expanded automated branch network. Several CVS have announced aggressive plans to act as automated bank branches. IY has established its own bank, as discussed later.

SEJ and Sony have an agreement to offer high-speed downloading of games for PlayStation 2. This means the store can offer a total selection of games, but will have to inventory only blank CDs. Players will have an alternative to downloading over a slow (and expensive) residential telephone line. In addition, upgrades will be easy to provide for a small fee. The pressure on video game rental stores and software shops will be enormous.

Page 8 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

In cooperation with Sharp (a major electronics company), FamilyMart is deploying Famiport kiosks in stores to allow downloading of game software and e-books. The kiosks were in over 20% of FamilyMarts by May 2001. The service is aimed at users of Sharp's Zaurus, a PDA with almost a quarter of the Japanese market. The kiosks are being made by e-plat, a joint venture of Toyota and NTT Data (an affiliate of Japan's dominant telecom carrier). The ordering and payment system connects to a communications and computer center run by Toyota. Actual settlement is handled by NTT Data in conjunction with IBM and the banks' clearing system. FamilyMart also is cooperating with Toyota to promote the automaker's gazoo.com web site (which is discussed in chapter 7).

Handling this wide range of services requires thought, support, and staff training. For example, when CVS started selling game software in 1996, the makers selected stores on the basis of distribution power. This relates to how extensive the franchise network is and how well the distribution system works to supply stores. The implication is that although a CVS can add items and services, not all chains may be able to do so well and profitably. Further, many of these new products and services, especially financial ones, (p. 169 ) are very IT intensive. The store ideally wants the customer to buy lunch, a snack and magazine for later, and a toiletry, while checking bank balances, making payments, or trading stocks.

Site Selection and Owner Development

“Area dominance” is considered the best CVS site-selection strategy by IY and many retail analysts. This means having a network of stores in an area that is dense enough to be, overall, more conveniently located than any competitor without cannibalizing one's own sales, and convenient to a distribution center. This is extremely complex on the ground, as it involves more than just a grid of stores. Traffic patterns and locations of complementary merchants are just two of the many factors, and there is a niche industry devoted to siting retail stores (at least in the United States; a convenient overview is the Urban Land Institute's Shopping Center Development Handbook).

Selection of franchisees is closely related to site selection, and is considered by IY and many retail analysts to be the most important aspect of CVS strategy. This is because the competition among CVS firms for new stores in promising areas has reduced the average quality of franchisees and CVS stores. (The U. S. literature on this is large, but there are many differences

Page 9 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

between the United States and Japan, especially in the legal system affecting franchises.)

At some CVS chains, the staff responsible for developing new stores and advising new franchise owners on store management is not very competent. Competence is very important when more complex services are added. SEJ's store-support staff of 1500 thus is a key competitive strength. Franchise- closing costs, are much higher than opening costs, so CVS firms have to pay careful attention to their relations, support, and contracts with franchisees. One listed CVS company and its franchisees have been struggling in court over interpretation of the franchise contract since mid-1996. Such rancor can adversely affect the whole franchise system.

The need to offer more services, liberalization of the Large-Scale Retail Store Act, and depressed economic conditions have created significant problems for small and medium family retail stores, and have given them strong incentives to become franchisees of a chain. Independents have not organized large cooperative marketing and buying organizations, as in the United States. A small family store licensed to sell liquor has a particular advantage, and the chains have offered good terms in such cases. As a result, more than half of new franchise stores have liquor permits.

IY has not utilized IT for site and franchisee selection. However, perhaps this is coming, or it may reflect good intuitive judgment in selecting franchisees, perhaps aided by a reputation that attracts better franchisees, which in part means having good locations and a liquor license. In 1996 SEJ had a net increase in franchise stores of 502, a record level.

(p. 170 ) The Ito-Yokado Group

The Ito-Yokado Group is Japan's largest retailer, comparable in size to The Kroger Co., the largest U. S. supermarket chain. Table 8.3 lists the group's principal components, and box 8.1 briefly describes U. S.-based Seven- Eleven.

The group dates back to a menswear store opened in 1920. The name Ito- Yokado was adopted in June 1965. The superstores and supermarkets use the same graphic logo, regardless of name, as do 7-Eleven stores, regardless of global location.

Alliances were formed with Wal-Mart in 1993 and Germany-based Metro Group (Europe's largest distribution group) in 1994 to share “information

Page 10 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

system and inventory control know-how while using their international networks to develop and import merchandise.”

It Strategies

IY's success illustrates the IT management principle that the implementation and design of each company's IT and IT strategy is unique to its competitive situation, industry, and corporate objectives. This is because such factors have influenced how IY measures success and how it chooses between packaged and customized software options. The company has linked its software strategies with its overall management goals through a mission statement that explicitly notes the importance of IT.

The next several sections look at how IY uses IT. A driving force in IY's use of IT has been Toshifumi Suzuki, and we begin with an overview of his philosophy and approach to IT. (For a detailed explanation of IY's IT strategy in the context of Japanese retailing see Hibara and Rapp 2000.)

Toshifumi Suzuki on IT

Toshifumi Suzuki, president and CEO of the IY Group since 1992 and previously president of SEJ, has always had a precise vision concerning how a retail business should be managed. He also knows that IT is indispensable to realizing IY's business goals, having spent his early career at SEJ, the most IT-intensive part of IY's operations. His important strategy decisions almost always entail the need for some IT input. Indeed, his management decisions often are in terms of what IT should be introduced. The types of IT that the IY Group has introduced since 1982 have corresponded to its business needs, and the level of IT has tracked its business requirements.

Mr. Suzuki regards retailing as a system-dependent industry, so he wants IY to be seen as excellent in using computer systems to meet the requirements the group, its suppliers, and its customers face every day. He emphasizes that retailing can benefit from using IT, but the IT must be a function of the retailing. To achieve this integration of retail and IT expertise, store (p. 171 ) Table 8.3 Ito-Yokado Group

Percent of Sales1

29.6 Superstores (GMS) 28.9 Ito-Yokado

Page 11 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

0.4 Marudai

· —  Cheng Du Ito-Yokado2

· —  Hua Tang Yokado Commerical2

7.3 Supermarkets 5.0 York Benimaru Co. Ltd. [8188]3,4 2.2 York Mart — Sanei

Discount Store 2.6 Daikuma

Department Store 1.1 Robinson's Japan

55.7 Convenience Stores 38.1 Seven-Eleven Japan Co. Ltd. [8183]3,5 17.6 7-Eleven Inc. [SE]2,3,6 2.6 Restaurants 2.0 Denny's Japan Co. Ltd. [8195]3,7

· —  Famil

· —  York Bussan Notes: There also are some small specialty stores (0.25% of sales).

Other activities not listed above provide 0.9% of sales.

Members of the IY Group had sales (net of intragroup sales) of 5,154 billion yen ($47.6 billion), making it comparable in size to the Kroger Co., the largest U. S. supermarket chain. Total sales figure given in table 8.1 is smaller because it is for the parent company and thus follows accounting conventions regarding how the revenue of affiliates and subsidiaries is handled.

(1) For fiscal 1999, which for most components (including the parent) ended 29 February 2000. For 7-Eleven Inc. data are calendar 1999.

(2) Operates outside Japan. (3) Publicly traded. Ticker symbol in square brackets.

Page 12 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

(4) Affiliate 28.6% owned by IY. Included in IY's consolidated financial statements under the equity method.

(5) Owned 50.7% by IY. In November 1973 an area licensing agreement was reached with Southland Corp. (then the owner of 7-Eleven) to open CVS in Japan. In December 1989 SEJ took over the 7-Eleven stores in Hawaii.

(6) TY directly or indirectly controls 72.6% (March 2001 proxy).

(7) Owned 51.6% by IY. Under license, Denny's restaurants were opened in Japan beginning in May 1973.

Source: Computed by the author from absolute data in Ito-Yokado Group 2000 Investors' Guide, p. 1.

(p. 172 ) operators and corporate managers make their own plans, then outsource the actual making of the hardware and software. Thus, IY people have to work out and exactly explain their needs to outside technologists. It is the dedicated units at Nomura Research Institute (NRI; the software provider) and NEC (lead hardware provider) that actually develop, implement, and manage the integrated software and hardware system.

Box 8.1 7-Eleven Inc.

The Southland Corp., founded in 1927, originated use of the 7-Eleven name for its stores in 1946. A 1987 leveraged buyout led to a bankruptcy filing in 1990. Since 1991, a wholly owned subsidiary of Ito-Yokado Ltd. (IYG Holding Co.) has owned the majority of the stock (72.6% per March 2001 proxy). The company's name was changed from Southland to 7-Eleven Inc. on 30 April 1999. Headquartered in Dallas, Texas, worldwide in 2000 the chain owned, franchised, or licensed some 11,500 stores excluding SEJ. Most, but not all, are called 7-Eleven.

Sharing information among all members of the IY Group—including business challenges and possible solutions—is something else Mr. Suzuki emphasizes. Each person in each section should have available the same insights with respect to specific business issues that top management has. Similarly, top managers' knowledge of IY's actual retailing situation needs to be current. Otherwise, Mr Suzuki feels, the company would be in trouble due to a

lack of congruence between the urgent issues facing IY and their possible solutions. As part of this, once a week he gathers the 1500 operation field

Page 13 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

counselors engaged in advisory support for the franchise stores at IY's Tokyo headquarters.

How IY should control each store's daily inventory level is a primary focus of Mr Suzuki's. In the late 1990s he was constantly questioning why inventory per store exceeded ¥10 million while daily sales per store were about ¥400,000. To improve performance, IY has to measure it. That means knowing a lot about what is happening in each store. For example, which goods on the shelves are sold each day, in what quantities, and at what times? The company also wants to know what items tend to be bought together. For perishables, weather-related, and seasonal items, the questions are when an item sells out and how much must be discarded. These data are then assessed in terms of how and when merchandise is delivered to each store.

Mr. Suzuki thinks retailing should respond much more quickly to changes in customer demands, including demand for more variety. For example, the company's analysis shows that different age groups prefer different types of rice balls. The weather, neighborhood events, and many other factors also have an impact on consumer choice, and each store will have a different story about what is likely to happen tomorrow. Each store therefore needs to estimate for itself which items customers will want to buy in the (p. 173 ) next 12 or 24 hours, and order accordingly. Reviewing the results allows continuous revision of the data used to make the forecasts. IY believes this constant “estimation, ordering, and reviewing” is the only way to respond to customers' changeable demands on a store-by-store basis.

However, IY prefers to do this analysis retrospectively, albeit almost in real time. That is, it seeks to just catch up to changes in consumer demand rather than trying to forecast demand weeks ahead in a larger context. From Mr. Suzuki's viewpoint, the latter is just a gamble, whereas the former is based on the solid evidence gathered by IY's system. At the same time,

the strategy does not suggest that ordering should be based only on past data. This is why IY is constantly assessing demand based on inputs from the stores concerning customer requests. As a result, approximately 70% of the items offered on IY's shelves change over the course of a year. This reflects weather and seasonality as well as changes in taste.

For Mr. Suzuki, product ordering is the most constructive and critical part of the retail business. He is suspicious of the automatic ordering systems that have been regarded as effective in the United States, arguing that they do not respond to rapid changes in the composition of consumer demand. From

Page 14 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

his experience managing 7-Eleven in the United States, he believes that the IT used in U. S. retailing lags behind SEJ's system in solving excess inventory problems and providing a more efficient ordering system. In particular, he thinks Japan has done a much better job of avoiding losing sales because of lack of merchandise.

IY's Use of IT

Because IT directly ties each store and franchise owner with corporate management, it is the primary link between the various strategic elements that affect the company. IY realized very early that maintaining and improving this advantage is the key to its competitive success against the other large GMS and CVS. This is why its corporate strategy and the IT groups at NRI for systems and NEC for hardware are so closely tied together on an interactive basis.

In 1982 IY decided to eliminate slow-selling goods from its shelves with an inventory control system developed in the United States. Because it did not have the IT staff internally to completely implement the project, it decided to transfer some of its staff to NRI and to work with NRI and NEC to develop the new system. Although it subsequently has outsourced much of its IT to NRI, it has retained IT planning and strategy within IY. As the relationship with NRI has evolved, it has brought many benefits to IY. (This is elaborated in the appendix to this chapter.)

The company has been a pioneer in using POS systems, including bar code readers, not only for generating sales slips but also for constantly checking on the popularity of every item in the store. In September 1982, SEJ installed what was then, according to the company, the largest POS (p. 174 ) system in the world. By December 1985, IY had a POS system in every one of its stores. Since that time, detailed, item-by-item information is uploaded to a central computer. In 2001 these data were being analyzed three times each day in a process that took about 20 minutes. The data also are sent to the wholesalers, distribution centers, and manufacturers supplying IY stores.

For the system to function smoothly, wholesalers and other suppliers need to have compatible information systems. IY has requested that suppliers invest in IT systems capable of meeting IY's continually evolving requirements. It has been difficult for many of them to make the large investments needed, but they cannot refuse if they want to keep IY business. Most who meet IY's high standards have benefited from the quick, automatic feedback of precise

Page 15 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

sales. Manufacturers, too, have benefited from more timely understanding of what customers want.

In 1990 IY felt it had gained sufficient control over its inventories to declare it would no longer return unsold merchandise, an unprecedented move for a Japanese retailer. Because IY was assuming inventory risk, it could ask for lower prices, and pass savings on to shoppers while still earning higher margins (if it handled the inventory risk well), a beneficial loop.

IY's functional gains have more than justified the expense incurred in developing customized software and hardware systems for its stores, including the related costs of integrating them into a single IT system for the corporation and the constant training of employees on how to use it. Management firmly believes that, at least for IY, IT systems are not generic and are best developed by closely affiliated vendors.

Besides a preference for customization, IY approaches IT in a number of ways that are similar to other leading software users. They include the creation of large proprietary interactive databases that promote continuous feedback between various stages of the order, supply, transport, delivery, and sales process. IY's ability to use IT to economize on traditional delivery systems and inventory practices also is similar. In addition, IY has created beneficially competitive feedback loops that increase productivity in areas such as customer service and product availability while reducing cycle times, improving supply channels, and increasing customer sales.

The Fifth System

Since 1978 SEJ has had five upgrades of its IT system. The new fifth system was in place in June 1999 after about three years of development, testing, and installation (which had begun in November 1997). IY invested some ¥60 billion (about $495 million at 1997 exchange rates) in its new system.

All SEJ stores have satellite and high-speed telephone links to the mainframes in Tokyo and Osaka. Using satellites typically is faster and less expensive than land lines, and provides more assured communications in the event of disruptions from earthquakes and typhoons. The network was developed jointly with NRI and NEC.

(p. 175 ) The company tracks the number of customers visiting the store at any time, using sensors at the door and occasional quick counts by the

Page 16 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

staff. Clerks key in gender and age range (there are three categories) when entering each sale.

POS data from each store generate reports in three standard formats. The first covers sales of each SKU for the previous 24 hours. A graphic screen displays the quantity on the vertical axis and the time of sale on the horizontal axis, revealing periods of peak sales. The second format looks at individual items in relation to their product groups and covers longer time periods. Take rice balls, which amounted to ¥80.1 billion in sales in 2000, as an example. The share of each SKU in a product group's sales for the past one week or four weeks is shown in a rank-order list.

The third format monitors items that, to retain freshness, are delivered to each store several times during the day (such as rice balls, which arrive three times a day). The goal is to balance wastage against sales lost to being out of stock. The graphic displays sales quantity, the time an item sold out, and the quantity, thrown away if an item does not sell out, between deliveries.

In addition to such processed POS data, headquarters provides stores with information on the weather, neighborhood events, and other external factors in order to increase each store's ordering efficiency.

Item-by-Item Control

IY describes its marketing strategy as “item-by-item control.” This is expressed as “We formulate hypotheses about our merchandise mix and displays, and verify their accuracy against current sales data. Through this process, we aim to zero in on customers' ever-changing needs.”

Such attention to detail reflects the fact that the demographic characteristics and shopping objectives of customers change according to time, day, and season, as well as weather and local events. In response, the company changes the merchandise being displayed and adjusts quantities. As a result of the constant change in product mix and the large number of local vendors SEJ uses, the company says it tracks some 30,000 SKUs in its inventory system over the course of a year, which is six or seven times the count for any one store at any given time.

Sensitivity to time is most applicable to fast-food and deli-type items (called HMR—home-meal replacement—items in the literature). Thus, as an example, research for one store found that senior citizens prefer one type of

Page 17 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

sushi lunch packages, while housewives prefer another, and the two groups have slightly different shopping hours. The seniors buy slightly earlier, so the deli case is stocked first with their preference, then restocked with the housewives' preference. In both cases these are single servings. In the late afternoon, larger packages (typically, three servings) are displayed for family dinners.

(p. 176 ) The overall process means stores can narrow the items and services offered to those that their customers actually want to buy at any specific time. This makes space available for new products and services. The result is shelves that always look attractive to customers. IY is in effect extending JIT concepts to its customers' likely demand patterns, and it seems to work.

In this regard, local weather and events in the neighborhood are even more critical to CVS sales than to those of a GMS, which makes detailed sales data especially important. In part this reflects the more limited space in a CVS, which makes the opportunity cost of shelf space higher. Moreover, many items at a CVS are fast foods with a shelf life measured in hours. Thus, the daily demand forecast is much more important for a CVS and must differentiate among products precisely.

Because weather is especially critical, the company relies on private reporting stations that cover local areas and sends data to stores five times a day. Topography causes significant differences in weather, so fairly specific reports are important. The previous day's weather also is a factor, for different types of weather changes induce different buying patterns.

Faster data processing has allowed IY to move the ordering deadline from 10 A. M. to 11 A. M. for evening (after 4 P.M.) delivery. This gives each store's staff more time to analyze the available information, and thus improves the accuracy and precision of its ordering practices. Reflecting the importance of sharing information between top management and the franchisees, all 1500 field counselors have laptops.

Delivery trucks are incorporated into the system by having the drivers log in at each store, using a bar-coded card. This provides information for modifying routes to maintain schedules. There are frequent deliveries of fresh food, using different trucks for frozen, chilled, warm, and room- temperature goods.

The benefits of this sophisticated IT system have been reflected in SEJ's business performance. Average daily sales per store were ¥890,000 in fiscal

Page 18 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

2000, compared to ¥669,000 in 1997 and ¥356,000 in 1977. (Inflation in Japan has been relatively mild over this time period, especially in the 1990s, so this represents significant real growth.) From 1977 to 1997, average inventory turn went to 7.7 days from 25.5 days, and average gross margins rose to 29.9% from 24.0%. In terms of per-store sales by CVS in 2000, the average SEJ sold about a third again what Sukus, the next-best major chain, did, and almost half again the average of Lawson, the second largest chain.

Average inventory turn has been relatively stable since 1991 even though the fourth-stage information system was introduced in the early 1990s and the fifth stage in the late 1990s. Average daily sales per store were relatively unchanged during 1992–97 reflecting the adverse macroeconomic conditions from the bubble collapse, combined with the micro effects of increased competition in the CVS sector. Just maintaining sales and turnover can be considered a major strategic accomplishment. Although general economic malaise continues in Japan, per-store sales have again begun to rise. Going (p. 177 ) forward, SEJ's initiatives in on-line banking and e-commerce are intended to build store traffic, and thus revenue.

IY and SEJ have constructed a very sophisticated system that is largely independent of the Internet. This of course reflects the fact that it was largely in place by the time the potential of the Internet was widely recognized. However, the companies feel that the advantages of a proprietary network are such that they would not have made the system Internet-based even if that had been an option. This is not to say they are ignoring the Internet in areas they feel it appropriate, and they are monitoring its use by others. It is an element of its relationship with Wal- Mart. Lawson and Mitsubishi Corp., Japan's largest trading company, are constructing an Internet-based system intended to emulate SEJ's.

Supplier Relationships

Using various vendors and some packaged systems offered by firms such as Symbol Technologies, BA Merchant Services, BuyPass, InterAct, DataSage, and Systech, it is possible for U. S. and other retailers to introduce cutting- edge IT if they believe it can return high benefits. However, an advanced IT system, however defined, is far from sufficient to make a successful retailer, because the virtual must merge with the real. To have anything at all on the shelves and not have the benefits of IT competed away by others doing the same thing means retailers have to have well-functioning relationships with their suppliers.

Page 19 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

Relationships between retailers and suppliers run along a continuum from predominantly hierarchical to mostly market-oriented. That is, retailers can control their suppliers fairly directly (contracting for private-label goods or even owning the production facility) or deal entirely at arm's length in spot markets. Relative size matters, but it is not the only factor in how the relationships work.

Reve and Stern (1986) created the following analytical framework to assess retailer and supplier relationships in terms of IT use and strategy.

1. Vertical interactions are the activity, resource, and information flows that take place between two organizations linked together in a distribution channel. Smooth progress and cooperation require that both share the belief that potential gains from cooperation can be larger than from not cooperating.

2. Formalization refers to the degree to which rules, fixed policies, and procedures govern inter-organizational flows, and how formal or informal contract rules on sharing possibly excessive returns can give each party enough of an incentive to keep cooperating.

3. Centralization of interfirm decision-making refers to the extent to which the power to make and implement interorganizational decisions (p. 178 ) is concentrated in one of the two interacting organizations. In this context, either party may be more powerful in decision-making than the other, but power can shift, depending on the parties as well as on the performance of the relationship.

Table 8.4 shows a mapping, based on this format, of IY's interfirm relationships that might also be applicable to other retailers and their supplier relationships.

IT has transformed the relationships between retailers and suppliers, but in and of itself it has not shifted power. Retailers continue to be strong relative to smaller suppliers but weaker compared to larger suppliers that have established, especially must-stock, brands. IT has made it easier for retailers, and thus for suppliers, to spot slow-moving items more quickly and discontinue them.

Matching IT, Organization, and Strategy

An epochal event in retailing is the cooperation between Wal-Mart and Procter & Gamble (P&G) that started in 1987 and helped promote the

Page 20 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

concept of ECR (efficient consumer response, which was developed and named by the U. S. Food Marketing Institution). Under this arrangement, retailers provide POS data to suppliers through a computer network, and suppliers automatically deliver goods to the store to replenish stock. This sharing of data helps avoid both inventory accumulation and lost opportunities, providing a win-win-win for suppliers, retailers, and consumers. (The key characteristics of ECR are defined by King and Phumpiu 1996.)

ECR is similar to what SEJ has been doing since the 1970s, but there are two important differences: who controls the ordering and how shelf space is controlled and allocated.

Under ECR, an order is generated automatically when POS data indicate an item has fallen to a specified level. In contrast, SEJ applies “micromer- chandising” under which each shop can order goods. The system authorizes clerks to predict near-term consumer demand resulting from, say, a change in weather or a special neighborhood event, and provides them access to a Table 8.4 Intensity of Ito-Yokado's Supplier Relationships

Aspect of Relationship

Benefits to retailer Benefits to supplier Formalization Centralization

SEJ and Daily Food Suppliers

strong strong strong strong

SEJ and Large Food Producers

strong usually weak weak relatively weak

IY and Apparel Makers

relatively strong relatively weak very weak None

For explanations of formalization and centralization, see text discussion.

(p. 179 ) system that assists them to order accordingly. Truly effective ordering requires judgment, and that means training store employees (and working to keep them long enough to gain relevant experience). SEJ is helped in this regard by the fact most of its stores are franchises with owners active in operations. In other words, SEJ's approach is part of paying attention to its customers and watching the merchandise on its shelves and the services it offers on an item-by-item, store-by-store basis, using both IT and judgment.

Such differences may or may not matter for particular retailers' performance, but they probably affect how interfirm relationships with suppliers are

Page 21 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

designed, depending on the specific constraints affecting individual retailers. This is developed more fully in the section “Highly Perishable Goods.”

Dependency

There is a potential for conflict between a retailer and a supplier when a very large percentage of the supplier's sales are through the retailer or the products are very important to the retailer. In the Wal-Mart—Proctor & Gamble example, 20% of P&G's U. S. sales are through Wal-Mart, while P&G items are a much smaller percentage of Wal-Mart's U. S. sales. Wal-Mart tried to leverage its buying power by proposing a comarketing strategy, which included P&G manufacturing private-label goods (at a profit advantage to Wal-Mart). P&G refused the request. It then began working to leverage its position of having many products that are ranked first nationally in their categories, while also developing ways to counteract, Wal-Mart's market power.

Thus, P&G has sought to develop new products that will be must-stock brands—that is, items so popular among consumers that retailers, even Wal-Mart, cannot be without them. Also, in 1994 it established several distribution centers to make it easier to supply products to small and medium retailers. In addition, P&G began to strengthen its relationships with other large retailers, such as Kmart. The goal was to reduce dependence on Wal-Mart. Still, Wal-Mart's continued expansion domestically and globally means it continues to be P&G's biggest outlet, so there is continued tension over profit sharing.

A similar situation has occurred in the relationship between SEJ and Yamazaki, Japan's top bread maker. Yamazaki's sales through SEJ have been estimated to be about 10% of Yamazaki's sales, while SEJ gets about 80% of the bread sold in its stores from Yamazaki. In 1993 SEJ proposed a private- label project, Just Baked Bread, to Yamazaki. For SEJ, the purpose was to provide high-quality bread at prices in SEJ's stores lower than in Yamazaki's own shops. SEJ was going to establish several new bakeries, which would cover nearby SEJ stores. Yamazaki was asked to invest in these bakeries and produce bread there. The system would have enabled quick provision of high-quality baked goods consistent with how IY supplies its stores with other perishable items.

(p. 180 ) However, Yamazaki's policy and position are similar to P&G's, as its bread market share in Japan is over 30%. It had never done private-label baking, and it saw no reason to put its national brands' market share at

Page 22 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

risk, let alone its technology and established distribution network. Yamazaki rejected the proposal, except for the island of Hokkaido, where the venture began in December 1993. However, Yamazaki, to protect itself from SEJ's market power, also began providing products to Lawson, the second largest CVS, from its existing bakeries through its own distribution network.

On the other hand, soon after SEJ announced its entrance into financial services (in cooperation with NRI, Sony, and NEC) three other financial service firms—Bank of Tokyo—Mitsubishi, Sanwa Bank, and Nikko Securities —agreed to invest as well. They saw SEJ's outlets as an easy way to extend their user base by linking their IT systems with IY's. None of these firms dominates Japanese banking or finance, so none has as much to lose by supplying private-label financial services to IY's customer base compared to Yamazaki in bread.

Team Merchandising

IY has made an effort with its GMS to sell more private-label or exclusive merchandise (called “team merchandising” or “team MD” by IY), especially in apparel. This has developed several popular products, such as polo shirts and 100% cashmere sweaters. Ideally, IY will be able to offer an exclusive design with a well-known brand. However, team merchandising often is only a spot transaction for a specific project, which means IY cannot promise to continue buying such merchandise on a long-term basis from one particular maker for an extended time period.

When large producers with well-known brands are involved, the overall performance of a private-label strategy has not been good. This is because such a supplier has little incentive to make the required investment or to negatively affect its own brand, which is a kind of investment. Thus, in dealing with apparel makers that are the top brands in their categories,

IY generally has acquiesced in the suppliers' desire to sell products under their own labels, using IY as a major distributor. Thus, strong interfirm relationships in apparel have been problematic despite IY's retailing preeminence and IT sophistication.

As an example of SEJ's evolutionary learning, the company has implemented a clever strategy for private-label products. SEJ acquired the right to use the names of two famous noodle shops. It then went to Nissin Food Products, the top manufacturer of instant noodles, and contracted for production of a premium product solely for SEJ using the acquired names. This has been a

Page 23 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

triple win: not only has SEJ benefited, but the noodle shops receive licensing fees and Nissin is selling more instant noodles than it would otherwise.

(p. 181 ) Highly Perishable Goods

Close cooperation with suppliers in providing attractive fast food, such as box lunches, rice balls, and sandwiches, as well as fresh foods and fruits, has made SEJ the number-one fast-food purveyor in Japan. Indeed, in fiscal 2000 its fast-food revenue was more than 40% greater than McDonalds. (Over 60% of this involves cooked rice, including rice balls [almost 13% of total fast food] and sushi.)

This business has been quite profitable for SEJ even though all these items can perish during the day. The key has been in how it has overcome possible conflicts with or among its suppliers—the difficulties with Yamazaki appear to have been an exception. Most of SEJ's suppliers of fast and fresh daily food are smaller companies that don't make national-brand fast food. Although such firms may have less concern over joining with a specific retailer, other conditions still must be met to have cooperation work well in practice. This is because SEJ requires very timely delivery, as well as maintenance of quality and taste.

Yahagi (1994) has described some of the conditions needed to do this well, drawing on the arrangement between SEJ and its daily food suppliers, which he calls a “closed system.” Such systems are characterized by relation- specific investments by suppliers, a high concentration of the suppliers' business with the buyer, and an open and fair reward system that shares benefits.

The daily food suppliers have been organized by IY in a formal way so that they can supply the same quality of food daily nationwide. For example, SEJ meets with box lunch producers once a week to discuss new products based on an analysis of its customer database. If, for example, it is decided to have three varieties of chicken box lunch, IY shares information on how to make these with all producers, requesting each to create the same menus and provide them to all SEJs.

IY's fast-food producers are required to bear the cost of building delivery centers and organizing delivery systems dedicated solely to their business with SEJ. From SEJ's standpoint this not only keeps its investment in bricks and mortar to a minimum, improving its asset turnover, it also firmly commits and ties the suppliers to SEJ's strategy, stores, and system. As

Page 24 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

part of tying the suppliers to itself and ensuring systems compatibility, SEJ rents out IT equipment. Whether a supplier decides to join an alliance with SEJ depends on whether the relationship-specific investment will benefit it. Almost one-third of SEJ's suppliers sell 100% of their output to SEJ (Yahagi 1994).

The reward system for participating suppliers is clear and stable. For a daily food product, the margin for suppliers is specified as more than 18% of retail. This is applied to all suppliers regardless of how much of the item they provide, the geographic area, or the product type. Such reliance on (p. 182 ) rewards based on a high degree of formalization gives strength to the cooperation between the suppliers and IY. This is a symbiotic relationship and beneficial loop in which IY's success contributes to its suppliers' success and conversely.

E-commerce

Ε-commerce is definitely taking hold in Japan. Although it has been evolving differently than in the United States, it is changing Japanese retailers' strategies. Thus, with NRI's help, IY is moving quickly and decisively to have an impact on the development of e-commerce. In particular, it has been developing a customer-driven strategy in which the concept of convenience goes well beyond the types of items one normally has associated with CVS.

A key area in making e-commerce work is in developing convenient and secure payment mechanisms. Many Japanese do not trust giving a credit card number over the Internet or the telephone, and others simply prefer to pay cash. Teaming with a CVS allows e-commerce web sites to have people pay at a conveniently located store, as well as take delivery there. This also facilitates returns, which can be done on the spot.

It is common to order items such as books, video games, and CDs through the Internet, using the CVS for payment and delivery. In fact, IY has led this change. In 1999 SEJ established joint ventures such as e-Shopping!Books with Softbank, Tohan, and Yahoo Japan, and CarPoint Japan for car sales with Softbank, Microsoft, and Yahoo Japan. In addition, the 3 million customers

of Japan's largest virtual mall, Rakuten Ichiba [rakuten.co.jp], can use SEJ stores to make their payments and pick up packages if they do not want them delivered. SEJ and NRI jointly have started providing clearing services for purchases made on the Internet. IY reports that about 75% of shoppers on its web sites pick up and pay at the store.

Page 25 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

7dream.com

In January 2000, SEJ and NRI announced the formation of a new e-retsu (a company based solely on IT relationships) with capital of ¥5 billion. Called 7dream.com , SEJ intends it to be “one of the largest EC [e-commerce] businesses in Japan and operate at the forefront of its field.”

7dream provides a range of services on its web site, which eventually will be accessible from the multimedia terminals currently being installed in SEJ stores. In keeping with NRI's recommendations that any e-commerce access strategy be “ubiquitous,” 7dream also can be accessed directly over the Internet and other networks, including those open to mobile phones and direct TV.

The new firm is offering services related to travel, music, gifts, mobile (p. 183 ) phones, event tickets (including a tie-up with PIA Corp., Japan's largest-ticket agency), books (through an arrangement with e-Shopping! Books Corp.), car-related services (sales via CarPoint and, later, arranging auto inspections, repairs, driving lessons, and rental cars), and information services related to entertainment, digital photographs, and special examinations in partnership with firms such as Toppan Printing and JMA Management Center. Table 8.5 lists the owners and what expertise and services they bring to the venture.

As of August 2001 there were about 1,200 7dream terminals in 7-Eleven stores in the Tokyo area, with rollout elsewhere planned over the next few years. Meanwhile, anyone can order from the web site, or the call center, or in the store, using a monthly catalog available at all stores. The offerings in the catalog are nonbulky, because the stores have limited storage space for holding items until they are picked up. The catalog contains items not offered via the kiosks, which currently are more focused on tickets, CDs, and games. (This is currently true of the kiosks at all the CVS chains.)

SEJ expects start-up costs to be around ¥40 billion and projects annual sales of about ¥150 billion for 2002 and ¥300 billion for 2004. This obviously offers IY tremendous opportunities to enlarge the goods and services available at SEJ stores throughout Japan. It also significantly extends NRI's IT business and expertise.

Table 8.5 7dream.com Owners Owner (percentage) Expertise and services provided

Page 26 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

SEJ (51%) NRI (13%)

NEC (13%) Sony (6.5%)

Sony Marketing (6.5%) Mitsui & Co. (6%)

JTB (2%) KINOTROPE (2%)

(p. 184 ) IY Bank

Principal organizer; provides places for kiosks to access the web site

Advises on structuring the business, as well as on developing and operating the e-commerce system

Built and operates the web site. Also designed and developed the multimedia terminals, all of which are connected via dedicated lines

Supplies technological support related to its mini-disk and integrated-circuit card technologies. including on-line packaged music

See Sony

A trading company, it provides information, general merchandising support, and distribution services

A travel agency (formerly Japan Travel Bureau)

A software firm it consults on Internet business design and systems development

Under Japanese law, only banks can have ATMs, so the other CVS have invited one or more banks to locate ATMs in their stores. That means the bank controls the ATM. IY and SEJ want to control the services available through the ATM, so they decided to organize their own bank.

IY was the first nonbank to apply for an on-line banking license, joined by Bank of Tokyo-Mitsubishi, Sanwa Bank (UFJ Group), NEC, and NRI as shareholders. It opened in May 2001. Nomura Securities, Nikko Securities, and Sony have joined the venture and three other banks (Asahi Bank, Shi- zuoka Bank, and Bank of Yokohama) have affiliated. The shareholding and affiliated banks have provided staff, as has SEJ. The bank's president is a former Bank of Japan official.

Page 27 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

The participation of two securities firms reflects an expectation that on- line brokerage services will be provided at some point. Sony has affiliates offering life and auto insurance products, and also is planning its own e- bank. The banks expect to be able to close branches without sacrificing customer service. Depending on the store's location, the ATMs accept different affiliated bank cards as well as IY's.

By the end of July 2001 there were about 1000 ATMs installed, all in metropolitan Tokyo and adjacent areas. Installation costs have been about ¥2.5 million each. An ATM is a bank branch under banking rules, and accounts can be opened only at a bank branch (or by mail), so SEJ can open accounts only in stores with the ATMs. In the first two months about 10,000 accounts were opened. Not surprisingly, ATM use has been primarily on weekends and after 8 P.M. Besides 7-Elevens, ATMs ultimately will be placed in Denny's restaurants and IY's general-merchandise stores.

Conclusion

IY shows how IT in combination with physical location can be used creatively to expand store sales to include services that can range from package delivery, to banking, to downloading music and computer games, thereby increasing store revenues and customer traffic that can lead to additional sales. In IY's vision, IT is seen as enabling stores to expand product and service offerings in order to respond more effectively to fluctuating demand even while reducing inventory costs and increasing sales per square meter. IY recognizes that success requires it to establish a well-functioning delivery system between retail stores and suppliers, something IT can facilitate, along with close working relationships with suppliers of certain types of goods (highly perishable ones in particular), although the latter involves more than just IT. In effect, IY is extending JIT concepts to its customers likely demand patterns, and it seems to work.

In pursuing its vision, the company has become a leader in using totally integrated management (TIM) to change its competitive environment. This (p. 185 ) is because it has developed an approach that uses IT to capture significant improvements in productivity via a TIM system through which it monitors, controls, and links every aspect of supplying and delivering its products and services, including its external environment. IY also is using IT to influence demand and the competitive environment. Thus, the company is at the forefront in developing the TIM approach for food and convenience- store retailing.

Page 28 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

Appendix: the Role of Nri In Developing and Implementing IY's IT Strategy

One of Ito-Yokado's most important and successful interfirm relationships is with NRI, which operates like a captive IT subsidiary while delivering the benefits of a large, relatively diversified systems integrator. This appendix provides an overview of NRI and outlines its relationship with IY.

NRI considers itself to be “Japan's largest all-around information services company,” comprising “think tank, consulting firm and SI [systems integration] vendor,” and through 2000 it has been second only to NTT Data in total IT-related billings. However, it is not a think tank in the U. S. sense of an independently funded, often nonprofit, research institute providing policy recommendations. Rather, most work is done under contract for paying clients, some of which are public entities. In addition, the bulk of its revenues actually comes from its activities as a major software developer and systems provider, and it is definitely profit oriented.

The institute had about 3600 employees and almost $1.8 billion in revenues for the year ended March 2000. It is 100% owned by various members of the Nomura Group, which is centered on Nomura Securities, Japan's largest securities firm (although in 2001 there was talk of a public offering of part of the company which finally occurred in November.) This makes it very strong in providing financially related IT services, including systems development and operating support. The present NRI is the result of a merger in 1988

of the former Nomura Research Institute, founded in 1965, and Nomura Computer Systems, founded in 1966 (as Nomura Computing Center). NRI has offices and computing centers in Japan, the United States, and Europe, as well as offices in other Pacific Basin countries.

Not surprisingly, given its parentage, NRI's financial systems solution business is the most extensive part of the institute's activities, and it is particularly strong in back-office support for such tasks as account management, government reporting, and trading. These are just the sort of IT systems Ito-Yokado's bank will require both internally and to interface with the larger financial community.

NRI's intense relationship with Ito-Yokado began in the early 1980s when IY decided that it was better to develop a long-term, in-depth relationship with an outside IT systems provider than to continue to expand its internal (p. 186 ) IT department or create its own software company. It chose Nomura

Page 29 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

because it felt that the kind of systems Nomura Computer Systems (NCS) had developed to support Nomura's branch office network was the closest to the kind of IT systems support it wanted for its stores.

IY transferred most of its IT department to Nomura to form the nucleus of what became a dedicated IY group within NCS. However, it retained a small IT planning and strategy section which manages the relationship with NRI and the implementation of IY's IT-based retail strategy. The arrangement, which has been extremely successful, thus effectively functions as a closely affiliated software supplier with legacy functions and understanding. NRI is an investor in IY's new IT-based ventures, such as IY Bank and 7dream.com.

As Ito-Yokado seeks to use its convenience stores, bank, and IT systems to offer financial service or to connect to other firms such as insurance companies and brokerages, NRI's expertise and experience will become even more significant. IY's entry into on-line banking includes NRI and Nomura Securities as investors. In some cases, government rules state that a firm must have an “approved” system before it can offer a financial product to the public. NRI of course has existing approved systems and has a number of offerings to support asset management and trust banking activities.

NRI provides POS and consumer analysis systems support to “supermarkets, convenience stores, family-type restaurants, and other chain stores that supply a large variety of products in small quantities.” Much of this is to IY and its group members, including Denny's Japan. To quote NRI marketing material, NRI will help identify a firm's IT needs and then build and operate the system so that the firm can assume an “aggressive management style.” This includes building and managing interenterprise networks and large- scale database systems that help the client identify and manage consumer consumption patterns and behavior. This leverages the expertise NRI has developed through its work with Ito-Yokado. However, according to IY, their agreement precludes NRI's offering other users IT developed for IY for a least two years after deployment. This allows both NRI and IY to spread development costs.

Through its work in developing Ito-Yokado's supplier-linked systems, NRI has been able to extend its consulting and systems support into manufacturing fields such as apparel. But the idea in all cases is to provide “comprehensive system integration services, from systems design and development to the integrated operation of computers and networks,” just as it does for Ito- Yokado and the Nomura Group.

Page 30 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan

For more details on NRI and its IT activities, see Rapp (2000).

Page 31 of 31 PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2013. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see http://www.oxfordscholarship.com/page/privacy-policy). Subscriber: null; date: 06 February 2013

Retailing: Ito-Yokado, Seven-Eleven Japan