Winning Combini — page 2

Still, unwilling to rest on the novelty of the format, 7-Eleven Japan implemented numerous initiatives to boost efficiency and profits. Rather than trying to plant an early flag in every prefecture, it pursued a market-dominance strategy instead, clustering stores close together in select areas. The company then farmed out distribution duties to a handful of centralized warehousing and trucking firms, and coordinated deliveries by the temperature of the goods being carried so as to reduce spoilage. The result? The number of trucks needed to serve an average 7-Eleven has fallen from 42 deliveries a day in 1976 to 10 in 2000. The company also obsessively tracked and analyzed sales information, developing one of the most sophisticated data-management systems in the world, resulting in superior customer service and inventory control. Says Kenji Tsukazawa, a senior analyst at JP Morgan in Tokyo: "They have always been one step ahead."

While 7-Eleven Japan boomed, its U.S. counterpart foundered, largely because it had neglected its own distribution network. So the U.S. company reached out to its former pupil for a hand. In the late '80s, 7-Eleven Japan and its parent, Ito-Yokado, helped to engineer a turnaround of the U.S. operations; then, in 1991, they bought 70% of the American icon.

With total sales in Japan of $18.5 billion and profits of $1.3 billion, 7-Eleven today is Japan's No. 1 food retailer and the country's most profitable retailer overall. Still focusing on the power of information technology, the company today uses a satellite-based ordering system that includes detailed weather information—so managers know to order more cold noodles on warm days or more fresh produce on rainy days to accommodate customers postponing a trip to the grocery store. "The sophistication of their IT system is unparalleled," says JP Morgan's Tsukazawa, noting that inventory response times can often be measured in minutes. "7-Eleven is always stocked with the freshest food, both on- and off-peak hours. Other stores' shelves are often empty after lunchtime."

The rise of 7-Eleven and the other Combini chains that have followed in its path disproves an alleged truism about Japanese business: that due to insurmountable structural barriers, such as red tape and powerful cartels, it's impossible for Japanese domestic retailers to compete. Although no one in the sector can touch 7-Eleven's efficiency, competition from rival Combini, such as AM/PM, FamilyMart and Lawson, is fierce—and the big winners are Japan's customers. Over the past few years, the stores have broadly expanded their offerings in an attempt to outdo one another. In addition to the 3,000 or so items each store typically stocks (from clothing to housewares, music to video games) many now offer services such as banking, dry-cleaning drop off, parcel post, mobile-phone recharging, photocopying, online shopping pickup, even voting and bicycle registration.

Nowhere is that rivalry more heated, however, than in Combini cuisine. In the U.S., food at 7-Eleven means Big Bite hot dogs, Big Gulp fountain drinks and Slurpees. In Japan, Combini are a haven of cheap, high-quality takeaway foods that are usually delivered to the store three times daily. The escalating arms race of food offerings is relentless, with the chains constantly producing new culinary weapons, such as gourmet rice balls, exotic salads, noodles from famous restaurants and local delicacies targeted to specific geographic regions. "In Hokkaido, we make bento boxes with local scallops and sea urchin," says 7-Eleven's Matsumoto. "But in Sendai, the specialty is cow's tongue, so we cater to that taste there." Biweekly city-guide magazines like Tokyo Walker provide lavish, photo-laden updates on what's new at each chain. Recently, the magazine reviewed all the summer cold-noodle specials on offer at major Combini. In the mood for something spicy? AM/PM was selling cold Chinese pork noodles with toasted-sesame sauce. Something soupy? Try the cold ramen at Three F. Hitomi Tanabe, a 19-year-old art student from Tokyo, is the perfect embodiment of how advanced Combini connoisseurship has become. "I go to one Combini for sandwiches, others for fresh noodles and another for onigiri," she says. With finicky customers like that, convenience-store innovation can't afford to let up any time soon. But 7-Eleven's proven responsiveness, says Yasuyuki Sasaki, senior analyst at Credit Suisse First Boston, should enable it to stay ahead of its rivals: "7-Eleven is capable of constantly transforming itself to be the ideal Combini. Japanese consumers are notoriously fickle. 7-Eleven doesn't ponder why, it just responds. That's the reason Japanese customers have two categories of Combini—7-Eleven, and all the rest."

With reporting by Yuki Oda and Toko Sekiguchi/Tokyo