Triange 7-11

What's In Store for 7-Eleven? http://www.baselinemag.com/print/c/a/Projects-Data-Analysis/Whats-In-...

By Kim S. Nash | Posted 2002-11-01 You wouldn't know it to look at 7-Eleven's famous Slurpee, a cup of frozen mush consumed with a combination spoon-

straw, or a Super Big Gulp soda, a 44-oz. liquid homage to American excess. But 7-Eleven is mostly Japanese.

The convenience store chain suffered through a bad leveraged buyout in 1987 and bankruptcy three years later. In 1991, Japan's biggest retailer, Ito-Yokado Co., bought 73% of what is now known as 7-Eleven Inc. Since then, 7-Eleven has grown to $10 billion in U.S. sales and $33 billion worldwide with Ito-Yokado's help.

The Japanese influence is palpable in 7-Eleven's information technology. The Dallas-based company is widely viewed as a technology leader, not only among convenience stores but all retailers. That's because 7-Eleven managers in the U.S. can track sales at their 5,300 stores item-by-item, hour-by-hour with one-of- a-kind software hand-coded by programmers in the mid-1990s.

7-Eleven's retail-information system, or RIS, as the company calls it, was built to fulfill Ito-Yokado's philosophy that successful retailers "hypothesize, take action, then verify."

In other words, store managers must think through what customers are doing, devise a plan to spur more sales around those trends, then quantify the results. That goes for selling not only cold drinks and cigarettes, but sports gear, clothing or any of the other retail goods in Ito-Yokado's $25 billion empire.

But you can't do that without having the right data at the right time. The company's store system provides that. The system's strength is clear in what happens to inventory. 7-Eleven unloads its inventory in an average of seven days, far faster than convenience-store competitors like Uni-Marts Inc. (Download PDF file to see financial chart.)

But now 7-Eleven faces forces unseen when it painstakingly built its store-information system. Narrower profit margins are forcing retailers to cooperate more with suppliers, to figure out how to spend less money getting products on shelves. The partnerships call for extensive data-sharing, and 7-Eleven's proprietary approach threatens to block the way.

Collaboration with manufacturers certainly isn't unheard of at 7-Eleven. One example is the Candy Gulp, which 7-Eleven developed with Nabisco in 2000. It is a resealable plastic container that fits in a car's cup holder and is filled with chewy "gummy" candies to scarf down while driving. Though 7-Eleven mined its trove of sales data to discover that customers would likely go for a Candy Gulp, the company didn't actually have to exchange data with Nabisco.

But for the kind of large-scale technology synchronization that full supply-chain collaboration requires, 7-Eleven must either rewrite key parts of its system, convert to packaged applications or attempt to connect to other companies' systems with translation software that uses Web standards. The Web is what it's trying first.

"The current architecture does hinder us some in the types of functionality we can add on," acknowledges Tom Ingram, director of merchandising and logistics at 7-Eleven. "That's why we need, as much as we're able and as quickly as we're able, to convert to Web technologies."

For example, smaller suppliers are being encouraged to interact electronically with 7-Eleven through integration products from webMethods Inc., of Fairfax, Va. WebMethods offers a secured Internet link between 7-Eleven and its suppliers, which is less expensive and more flexible than old-style electronic data interchange technologies. Such integration could allow 7-Eleven to automate communication with suppliers, making delivery schedules more precise.

$400 Million Buys You">

What $400 Million Buys You

Inside 7-Eleven, enhancements to the retail-information system are now written with tools that adhere to the Web standard eXtensible Markup Language—mainly Java and Microsoft's .NET products. Pilots of .NET development at 7-Eleven have shown that programmers can build, test and deploy new systems 30% to 50% faster than they can using the company's existing software systems, says Keith Morrow, the chain's chief information officer. That will let 7-Eleven shift some of the

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65 people it currently has supporting RIS—roughly half of the 125-member technology staff—to new projects.

Retail executives have historically disdained the information technology department as a cost center. But in the low-tech retail sector, information technology has on occasion been a monster of a differentiator; look at Wal-Mart. At 7-Eleven, senior managers readily invest in technology, which will be an advantage for Morrow as he tries to replace existing systems with newer technology. Already, the company has accelerated technology spending by $120 million this year—bringing to $400 million the total it has spent on hardware, software and consulting since RIS development began in 1993.

RIS was built primarily using the Uniface development tool from Compuware Corp. Uniface is what's known as a fourth- generation programming language, which was a popular way to write software in the early 1990s. Uniface itself is 15 years old. While Compuware recently issued a statement saying it will continue to support and enhance the product, it also urged customers with critical business applications written in older versions of Uniface to migrate to the latest release. Compuware won't be retrofitting older editions with new features, such as support for Web services.

Migration, though, isn't in 7-Eleven's plans. As Morrow flatly puts it, "Uniface is not where we want to be."

7-Eleven isn't behind yet, but meshing the old with the new will be an expensive undertaking, says Pete Abell, an analyst at AMR Research, a technology consulting firm in Cambridge, Mass. Generally, integrating retail applications, whether proprietary or packaged, costs two to seven times the cost of the original software, Abell says.

7-Eleven officials decline to disclose their precise technology expenditures on RIS—direct purchases, leases and operating costs—since 1993, though the company says it spent $10 million on RIS software last year alone. Outfitting each of 5,300 stores with a Microsoft Corp. Windows NT workstation, software and frame-relay network connection cost another $30 million.

The real trick will be preserving the capabilities of a system that has set 7-Eleven above its rivals.

Cash registers track sales by product and time of day and feed that data to a Windows NT server running RIS in the back room, which matches the information against inventory on hand and on order. Store managers know when they're selling what, and can tailor the product mix to their clientele. At one store in Dallas, for example, a man comes in every weekday at 7:30 a.m. for a cup of coffee and two blueberry cake doughnuts. The store manager knows to order the doughnuts every day. He also knows the man's vacation plans, from their morning chats, and doesn't order the blueberry cake doughnuts when that customer won't be around. Wal-Mart Stores and other big chains are also trying to do this, so they can give a mom-and-pop feel to their stores, even though their square footage makes it hard for them to come across this way.

7-Eleven's store-information system also factors in weather reports to help store managers do daily ordering. Expectations of a snowstorm might prompt them to lay in extra milk and batteries. Managers also are encouraged to know what is happening in their communities. A local soccer tournament over Labor Day weekend might call for lots of Gatorade and bags of ice.

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Franchise-Specific Ordering

Stoney Miller, assistant manager at a 7-Eleven store in Plano, Texas, not only knows how many pastries he sold the day before; he also knows how the sales were distributed over two-hour increments, and how well, for instance, the apple fritters fared versus the pumpkin cream-cheese doughnuts. On a recent day in October, Miller sold 153 muffins and doughnuts, 68 of which went between 6:00 a.m. and 8:00 a.m., with another 40 sold by 10:00 a.m. "That's the commuter coffee hour," he explains. "You've got to be well-stocked then."

Miller also knows, from data analysis, that his store typically sells seven 16-oz. loaves of Texas' most popular bread, Mrs. Baird's Extra Thin White, every few days. On the same October morning, he had four loaves on hand, so he put three more on order.

"I came from a competitor. We had nothing like this," he says. Miller was previously a store manager at both Circle K, which is part of the 6,300 convenience stores owned by Tosco Corp. in Greenwich, Conn., and Diamond Shamrock, a 4,500-store chain now owned by Valero Energy.

"7-Eleven is as good as it gets in their particular sector of convenience stores," says Jeff Roster, an analyst at technology consulting firm Gartner Inc. in Stamford, Conn. A lot of the detailed sales-trend data that companies strive for today, with suites of customer relationship management software, is what 7-Eleven has already accomplished, Roster says.

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The concept inherent in 7-Eleven's system—THAT store managers order items to stock their own stores—seems logical, but it isn't how the grocery business grew up. Traditionally, the truck drivers who deliver products from individual vendors directly to the stores were the people who tracked shelves and re-ordered. 7-Eleven went against the retail grain when it sought to take those duties away from drivers and give them to store operators. Roughly 60% to 70% of the chain's manufacturers now do business with 7-Eleven this way, Morrow says.

But there are important holdouts, including Anheuser-Busch, Frito-Lay and Coca-Cola. The politics are sticky. Beverages are 7-Eleven's biggest-selling products, representing 33% of sales last year. And these suppliers don't want to give up control over 7-Eleven's—or any retailer's—shelves. "Those drivers are commissioned salesmen," says Abell of AMR Research. "They feel they merchandise the inventory better than many of the store operators would."

That depends on the driver. Some are good. Others may try to unload merchandise that is being promoted. CIO Morrow remembers one of his early days on the job at 7-Eleven. He visited a local store and couldn't navigate an aisle because it was crowded with cases of Funyuns, Frito-Lay's onion-flavored snack ring of limited popularity. "I asked, 'What the heck is this?' " he recalls. "And the operator said that that's what the guy had on his truck." Morrow sighs. "They had union drivers and a sales force built around that model for decades."

In efforts now to collaborate with suppliers, 7-Eleven doesn't want to go against the grain again; it doesn't want to force suppliers to conform to the way its business routines—and supporting information systems—are set up. "The goal is to have a solution agreed upon beforehand, and then roll it out quickly together," says Ingram, 7-Eleven's logistics expert. "This comes from lessons learned in store-level ordering."

Morrow hopes Web technologies will bring 7-Eleven safely through the transition. The plan is to use Java and .NET to modernize RIS. And within two to three years, Morrow wants all of 7-Eleven's suppliers to use webMethods or other Web technologies to bridge between their systems and those of the convenience store. If they don't, 7-Eleven may find itself increasingly isolated on the well-ordered software island it has created.

Editor's note: This story has been updated to more accurately reflect 7-Eleven's technology budget. Since RIS development began in 1993, the company's expenditures have totalled $400 million, not, as initially reported, $1.3 billion.-Eleven Base Case"> 7-Eleven Base Case

Headquarters: 2711 N. Haskell Ave., Dallas, TX 75204 Phone: (214) 828-7011 Business: Convenience stores Chief Information Officer: Keith Morrow

Financials in 2001: $9.9 billion in sales; $103.8 million operating profit; $83.7 million net profit Challenge: Improve profit margins by collaborating with suppliers to make and ship products more efficiently

Baseline Goals:

Decrease (from seven) the number of days that inventory is held before being sold Open 250-300 new stores by the end of 2003 Deploy 3,500 financial kiosks in U.S. stores by December 2003; generate profits from this $200 million investment in 2004