colossal success

Despite its size, 7-Eleven Inc. employs the grace, speed to market and creative thinking often seen in aggressive start-ups. CSD honors the industry’s mightiest retailer for its all-consuming drive to serve the customer.

Like many of his peers, California franchisee Jas Dhillon believes thepower of the 7-Eleven brand lies in its ability to stay relevant, if not important,in the eyes of his customers. Having been in this business for nearly 20 years,Dhillon has watched 7-Eleven evolve from an “ordinary” corner store into a proprietarydestination for gourmet foods, premium services and other industry exclusives.

“The fastest-growing category in our stores is fresh foods with Big Eats sandwiches,” says Dhillon, who owns three 7-Eleven stores in Northridge. “The second would be Slurpee, which has given us a tremendous boost in our sales. And I’m always telling newcomers that [7-Eleven] invented ‘to-go’ coffee. We can have a Starbucks open up in our market and they don’t hurt us. As a matter of fact, we’ve seen growth in the coffee segment since Starbucks has appeared.”

Such endorsements are common within the 7-Eleven network, fueling the company’s growth. With another strong performance in the third quarter of 2005, 7-Eleven Inc. has recorded 36 consecutive quarters of increases in U.S. same-store merchandise sales. The company has been able to accomplish such a feat in less than desirable business conditions, according to Jim Keyes, president and CEO of the Dallas-based chain of 29,000 stores around the world, because of its focus on a singular goal.

“Quite simply,” says Keyes, who assumed the company’s presidency in 2000, “it’s about paying attention to what the customer wants.”

His answer is only half-right. True, being attuned to customer wants has fostered7-Eleven’s continued success. But, more importantly, it’s the company’s complexinfrastructure that enables stores to give customers what they want, when theywant it, with plenty of options for other items and services they might nothave considered buying when they walked through the door.

The company’s internal culture thrives on the development, refinement and aggressive promotion of popular sub-brands like Slurpee…and Big Brew coffee…and Big Gulp fountain drinks…and Big Eats sandwiches. This culture has powered the 7-Eleven brand into the pole position among a pack of hard-driving, quick-turning competitors.

Whether it’s a hot dog and a Slurpee at 2 a.m. in Manhattan, a Mad Croc energy drink and a Bacon Ranch Chicken Wrap at 10 a.m. in Philadelphia, or a Speak Out prepaid wireless phone and a meal-size salad at 7 p.m. in Chicago, 7-Eleven stores excel at serving the needs of an extremely diverse, continually discerning and always evolving customer base.

And they’re getting better at this task by the day, with the aid of new technology,new products and new systems designed to help stores operate as independentbusiness units, backed by a multi-national company with buying power and influencerivaled only by the retail landscape’s 800-lb. gorilla, Wal-Mart Stores Inc.For these reasons, among many others, Convenience Store Decisions proudlynames 7-Eleven Inc. its 2005 Chain of the Year.

Still young at 78

So much has changed since Southland Ice Co.—the company that pioneeredthe convenience store concept nearly 80 years ago by selling ice, milk, breadand other consumables— introduced the 7-Eleven brand in 1946. Throughthe years, the company has written quite a story for itself: It evolved intoa largely franchise-driven business model; diversified into countless areasto better serve customers and build new revenue streams; established sub-brandslike Slurpee and Big Gulp that have grown into “icon” status; endured throughand emerged from a 1990 Chapter 11 bankruptcy filing; changed its name to 7-ElevenInc. as a reflection of its commitment to convenience retailing; and becamewholly-owned by Asian licensee Seven-Eleven Japan Co. Ltd.

Today, the now-famous 7-Eleven logo adorns the facades of more than 5,800 storesthey operate or franchise in the U.S. and Canada, plus the 23,200 stores theylicense in 17 countries and U.S. territories. Worldwide, those stores generatedtotal sales of more than $41 billion in 2004. Keyes attributes much of the company’srecent success to the effectiveness of its “Retailer Initiative” merchandisingstrategy, powered by a technologyfueled ordering system that uses 80% forecastingand 20% history to help individual stores determine their merchandise mix bybetter understanding the factors that influence customer buying habits.

“It’s a system that enables customers to have what they want when they want it, and that’s been the basic concept of the company since its foundation,” says Dan Abraham, president of licensee Garb-Ko Inc. (Saginaw, MI), who came into the 7-Eleven “family” in the early 1980s. “From my perspective, the Japanese may have refined it, but 7-Eleven invented it.”

Dhillon, the Northridge, CA-based franchisee, says Retailer Initiative enables him to delve into, say, the beer category and gain a better understanding of the category’s performance as a whole. It also helps him determine the strength of individual SKUs based on a store’s specific business conditions.

“You can look at how products are moving at any time of day,” he says. “You might have 2,000 SKUs, but you might only need 1,500. This system allows you to maximize facings and spend less time replenishing stock while making sure you don’t miss out on key sales opportunities.”

Using 7-Eleven’s Retail Information System (RIS), the driving technological force behind Retailer Initiative, franchisee Jivtesh Gill found a big sales opportunity in the cold vault. Gill, who operates three 7-Eleven stores in and around Stockton, CA, says RIS helped him alter his beverage assortment to mirror the wants and needs of his working-class customers.

“One of our stores in Stockton has a lot of warehouses with younger employeesworking 10- to 12-hour shifts,” says Gill. “In that store we sell a lot of energydrinks. Using [RIS] we realized we had a few shelves that we were constantlyrestocking, so we expanded and dedicated a whole door to energy drinks. By increasingthe assortment we improved the whole category. If there’s a category that’snot doing well, the system lets you narrow it down and use the space more effectively.”

Jack Wilkie, vice president of corporate communications, says that by utilizingthe forecasting technology and understanding the data to become more efficientat ordering, retailers can improve sales significantly, sometimes by as muchas 20%. He points to the roller grill—one of 7-Eleven’s core strengths—asa key area of opportunity for stoking sales.

“This [technology] helps us understand what customers buy and when they buyit,” he says. “One of our category managers went out to a store and, using athree-minute tool to manage the inventory on the grill, tripled the number ofhot dogs sold at that store.

“You have to have a hypothesis and you have to test it,” Wilkie adds. “There’sa little bit of risk involved, but how much risk? Who’s to say you’re not goingto sell hot dogs at 7 a.m.? [Believing] myths will prevent you from sellingproduct.”

Overcoming challenges

While the technology is available to every member in the 7-Eleven network, not everyone uses it to the fullest extent. This underscores the most challenging aspect of running a franchise-based company, according to Keyes: accelerating change while balancing the natural entrepreneurial instincts—and, perhaps, a hint of resistance—among individual retailers.

“Technology has enabled us to provide our franchisees with an incredible toolkitof information upon which they can make better ordering decisions to fit thechanging needs in their market,” Keyes says. “The technology and infra
structurewe have built enable stores to better manage deliveries, control inventory andhave the freshest product for our customers. Franchisees have embraced the technologyat varying degrees, but we now have irrefutable evidence that stores using theprinciples of Retailer Initiative consistently outperform others within oursystem or the c-store industry.”

Beyond technology, the driving force behind 7-Eleven’s success comes from the people behind the counter. And while some would suggest that being a primarily franchise-driven company could be a hindrance in this regard, Keyes believes otherwise.

“The key success factor for 7-Eleven stores is the degree with which the franchisee, licensee or store manager executes the fundamentals of convenience retailing,” says Keyes. “Are they constantly in stock with customers’ preferences? Is the store ‘fresh-food clean’? Is service fast and friendly? Have we developed a value proposition, beyond price, for every item in the store? Stores that have cracked this formula do exceptionally well.

“Beyond that,” he continues, “it is my belief that a franchisee has more ofa vested interest in the store and community and, as a result, is able to puthis or her personal signature on the store, which should help it outperformstores operated by corporate managers.”

If Dianna Feeley is any indication of the ability and commitment of 7-Eleven’s franchisees, the company is in great hands. Feeley’s whole family is ingrained in the company’s culture; her first job out of high school was with 7-Eleven, and she says she never imagined doing anything different. A corporate employee who worked in the company’s training, franchising and operations departments for 20 years before getting a store of her own in 1996, she now has two stores in San Diego.

“The store I had always wanted had been a corporate store that was never available before, and I won the lotto of my life when I bought it,” she says. “I saw owning a 7-Eleven store as my next level of contribution to a company I expected to work for my whole life. I am looking to get yet another store and continue to grow the business.”

Obsessed with new stuff

The key to selling lots of new products lies in having lots of new products to sell. No other retailer in the convenience store industry has taken more chances, been more aggressive or had more success with new product introduction than 7-Eleven. While some of these ideas spring from the fertile minds of category managers who stay on top of trends both inside and outside the convenience channel, many also well up from collaborative relationships with key suppliers, according to Kevin Elliott, vice president of merchandising. Internally, this “doctrine” of retailersupplier collaboration is known as Team Merchandising.

“We work with manufacturers directly; it can’t just be happy talk,” he says. “We develop products together, we share costs and we have a write-off budget because we’re in the manufacturing business, too. Often we work with manufacturers to develop products specifically for 7-Eleven, but we’re also working with them to make products more cstorefriendly—it’s not just about what’s right for us but what’s right for the entire industry. For example, we worked with Pfizer to develop c-store-specific packaging for things like Neosporin that went from standard, grocery-type packages to smaller, immediate-use packages that could be merchandised more naturally in a c-store environment.”

Another recent example of Team Merchandising comes from a packaged frozen dessert called Stir Crazy, a stir-able soft-serve product that 7-Eleven created in a partnership with Wells’ Dairy Inc., manufacturer of Blue Bunny ice cream. The process took three years and dozens of trialand-error attempts to master, but together the two companies created a highly innovative product with cookie-based mix-ins and a chocolate middle layer to keep the two components separate. There was significant buzz about the new product when it was introduced in June of 2005.

The life cycle for creating new products, from “ideation” to retail introduction,can run from 10 months to a full year, depending on the product. This takesinto account everything from perfecting the fundamentals of taste, cost anddeliverability to marketing and merchandising considerations like package designand promotions.

Good partners

Some of the industry’s biggest, most powerful suppliers turn to 7-Eleven as a proving ground for new products. Earlier this year, a mysterious new product called Frawg popped up in the dispensed beverage centers in select 7-Eleven stores. The tangy, apple-flavored beverage— developed as a fountain drink and as a Slurpee flavor—was cocreated with PepsiCo and “unleashed” in August. It marked the first time a soft drink manufacturer of PepsiCo’s size and stature created a brand specifically for a single retailer; 7-Eleven has exclusive rights to Frawg for one year as part of the company’s “First, Best, Only” initiative, according to Fred Holgate, managing director of merchandising for 7-Eleven.

“We wanted to develop a new product that was built from the ground up,” saysHolgate, a 23-year veteran of BP/Amoco before joining 7-Eleven in 2004. “Weknew in the frozen beverage category that unique colors were part of a majortrend. We had also seen a lot of activity in apple-flavored products; we hadalready had success with Jolly Rancher soda, which we had developed with Hershey.It took about two years of product development and lots of consumer samplingto create Frawg, but we knew when it hit the marketplace it would succeed, andit did. It has done pretty well at the fountain so far, but it has done evenbetter with frozen.”

But large, multi-national conglomerates like PepsiCo certainly aren’t the only companies benefiting from 7-Eleven’s team-focused approach to product development. Pinnacle Food Products Inc., a small dry goods manufacturer that began working with 7-Eleven 11 years ago, produces flavor mixes for a number of the chain’s top-selling cappuccinos and cocoas. Earlier this year, 7-Eleven honored Pinnacle Food Products with its Retailer Initiative Award to recognize the vendor’s efforts in helping 7-Eleven achieve a 10% increase in sales of hot beverages in 2004, according to David Podeschi, senior vice president of merchandising for 7-Eleven. Past winners of the award have included The Hershey Co., Nestle Waters North America and Anheuser-Busch.

Regardless of the size of its suppliers, 7-Eleven strives to keep the dialogue open with all members of the vendor community—yet another example of how 7-Eleven differs from its retailer peers. Many retailers would characterize relationships with suppliers as mutually tolerant, if not just plain combative. But there is a “lack of friction points” between 7-Eleven and its suppliers because together they focus on achieving a common goal, according to Elliott.

“Ultimately, we have to be advocates for the customer, and we can’t do thatwithout good relationships with our supplier partners,” Elliott says. “We returnevery phone call from every vendor; you never know who’s going to have the nextRed Bull or the next Snackwells. 7-Eleven is a merchandising and a product developmentorganization, and that’s a cultural issue. Jim [Keyes] is all about merchandising,and because of that every person in this company is passionate about sellingproduct.”

An American icon

When consumers hear the word “7-Eleven,” the next word that pops into theirheads is, more often than not, Slurpee. The two have become synonymous, in someways interchangeable (see Interview with the Slurpee, p. 44), accordingto Garb-Ko’s Abraham.

“There’s no product in the convenience store market like Slurpee,” Abrahamsays. “For the first time ever for us, Slurpee is our No. 1 profit generatorin terms of gross profit dollars, even above cigarettes. There’s constant reinforcementof the Slurpee brand at store level, and [7-Eleven has] been promoting it regularlyfor 30 years. Other branded pr
oprietary items in the 7-Eleven fold play a significantfactor in everyone’s success, including ours. A consumer can walk into a 7-Elevenin New York or Miami and have the same experience with the same proprietaryofferings, and that’s where the value of the brand reaches its zenith.”

For years, 7-Eleven—along with much of the rest of the convenience retailingcommunity—has realized the need to diversify its product mix. Cigarettes,hot dogs and, yes, even Slurpee and Big Gulp can no longer carry the day interms of profitability and sales potential. This realization has given riseto a broad menu of unique, new prepared food items under the Big Eats banner.

Bologna and cheese sandwiches still have a place in 7-Eleven’s freshfood cases, but most of the new food offerings are more upscale by design, featuring high-quality ingredients like artisan breads, roasted vegetables and chef-crafted spreads. Some of the new sandwiches and wraps—the Smoked Turkey with Cilantro Poblano Spread on Jalapeno Bread sandwich and Pastrami with Sweet Hot Mustard wrap included—got “road tested” in stores in the company’s fresh food “lab market” in Austin.

These new creations are the result of creative thinking from some of the foodindustry’s greatest minds. A team of chefs reports to Kulsoom Klavon, the company’sdirector of product development who revamped TGI Friday’s menu before joining7-Eleven. Peter Coulter, previously the corporate chef at Campbell’s Soup subsidiaryStockpot Inc., leads the food development group as the company’s executive chef.

While part of the company’s foodservice “story” revolves around its commitment to becoming a destination for high-quality sandwiches, wraps and baked goods, the real story is how the chain gets these food items to its stores. All prepared foods are made daily in local commissaries solely for 7-Eleven and get delivered to more than 5,000 of the company’s U.S. stores through Combined Distribution Centers (CDCs) to make sure stores receive only the freshest foods possible; sandwiches and wraps have a shelf life of just two days.

“Fresh foods are our fastest-growing category,” says Kevin Gardner, director of marketing communications, “and we’re looking to continue that momentum. We see fresh foods as a differentiator, leveraging our scale to establish a product development team and process to develop unique, high-quality fresh foods and deliver them to our stores through daily distribution.”

But how do daily-distributed foods compare when more competitors than ever before—including some best-inclass convenience retailers—now offer fresh foods prepared on-site, made to the customer’s specifications? Nancy Wade, a 7-Eleven fresh food merchandise manager and former market manager, says she considers that challenge surmountable.

“Customers want to know their food is prepared fresh, and that is our ace inthe hole,” she says. “How do you communicate that our product is made freshand delivered fresh daily? You communicate it at store level. We sample it andtell customers it’s made in a commissary every day.”

But sampling isn’t the only tool in 7-Eleven’s arsenal to help boost sales. Like every other measurable in-store category, the RIS system helps retailers make better decisions in managing inventory, according to Wade.

“Market managers are pretty heavilyinvolved in execution and the numbers, and one of the things we look at closely is hourly sales,” she says. “You can choose a category and, in twohour increments, you can see how a product sells throughout the day. You know when to sample, how to keep it stocked and how to schedule staffing.

“Every day you decide what to order, but you also decide what not to order, since you don’t want things that aren’t selling well weighing down your inventory,” she continues. “Also, 7-Eleven teaches you to use forecasting. If there’s a snowstorm in the forecast, how’s that going to affect your order? If it’s going to be 80 degrees tomorrow, how does that affect your order? You order more cool sandwiches.”

A part of life

The 7-Eleven name—along with many of its brands—is embedded inthe fabric of Americana. It will forever be a part of life for the vast majorityof American consumers. But a similar challenge remains: how to convince customersthat its stores are more than just places to pick up cigarettes, Cokes and SlimJims. Slowly, it’s winning over new converts and expanding on the more than6 million customers its stores serve each day.

And, more than ever before, the people running 7-Eleven’s stores have the confidenceand the capabilities—through new products and services, technology, anintense focus on food and a commitment to giving customers plenty of choices—towin the battle for the consumer’s share of dollars, share of stomach and shareof mind.

“I opened my first franchise in December 1997,” says California franchisee Jivtesh Gill, “and my analysis at that time led me to believe that 7-Eleven was in tune with the times and better prepared to evolve in the future. Today, we’re focused on fresh foods now and my overall sales are increasing.

“I’m excited about the company’s preparedness to be competitive,” he continues. “We have all the tools we need.”

At 7-Eleven, the customer is king

A recentConvenience Store Decisions study of convenience storecustomers and their shopping habits showed that 7-Eleven truly is America’spreferred convenience store. Customers listed several reasons for their fondnessof 7-Eleven, ranging from proprietary products like the Slurpee, to the peoplebehind the counter, to the consistency from store to store.

What also came through was a pervasive sense of nostalgia associated with shopping in 7-Eleven stores as children and evolving into 7-Eleven customers as adults. Today, many of those who participated in this study automatically think of 7-Eleven when they hear the term ” convenience store.”

The study, directed by branding agency CoyneBeahmShouse, asked customers questions focusing on a variety of subjects, like what they love about convenience stores, what improvements they would make to convenience stores and how would they react if for some reason they could no longer shop at their favorite convenience store. Here’s what customers said about 7-Eleven.

Products:
“I would say 7-Eleven is my favorite convenience store. They are usuallycleaner, have more variety and have reasonable prices. I’m always happy to seea 7-Eleven when I’m on the road. It’s comforting to know what you are goingto get when you go in there. Plus there is the Slurpee!! I’m pretty sure theyput a special chemical in there that makes me dependent upon them.”

“I frequent 7-Eleven for my coffee every morning because it is my favorite.I occasionally get a coffee at Dunkin’ Donuts, but it’s not the same. I haven’tfound a coffee yet at another convenience store that compares!”

“About eight years ago I re-introduced my brother to the world of Slurpees. He’s been hooked ever since. Depending on the time of day we’ll typically see the same people in 7-Eleven. A smile in passing is our way of acknowleding each other—we all know why we’re there.”

“The very first thought that came to mind in relation to convenience stores was 7-Eleven and Slurpees—love ‘em.”

“If they closed all the 7-Elevens, I would fall fast and deep into a pit of despair. There is no substitute for the Slurpee; every other frozen drink that tries to be a Slurpee is nothing but a utter dissapointment.”

People:
“In my earlier years, I would play softball tournaments a lot.We would frequently, on the way to the game, stop [at a 7-Eleven store] andbuy some beer, ice it up and be on our way to the game. We got to know the workersreal well, in particular a lady named Fran that would always be gracious andjovial as we sauntered into the store to get our beer. She would ask questionslike, ‘Where are you playing this weekend?’ She was one reason why we alwaysfrequented that particular 7-Eleven store.”

“7-
Eleven: It’s a great one-stop shop for breakfast foods, lunch and dinnersnacks if there’s no time to eat; they always play good ‘elevator music'; andthe people at 7-Eleven seem to be more happy than tired of being at work. Thestores are also well cleaned.”

Nostalgia:
“I remember going to the local 7-Eleven as early as five orsix years old. I would have to save up enough money, and I’d go with my brotheror friends. I would usually buy Slurpees, candy and baseball or movie cards,such as Star Wars. In the early 1980s, video games were everywhere. Some storeshad machines such as Pac-Man and Donkey Kong. I was content to drink my Slurpeeand watch the older kids play.”

“My first memories of convenience stores involved getting Slurpees at 7-Eleven after begging my parents to take me there on the way home from places. It reminds me of being youthful.”

“My girlfriends and I thought we were so cool being able to go to the 7-Eleven all by ourselves. We would go at least twice a day just because we could. We would always buy the biggest Slurpee they offered.”

“I remember as a kid going to the local 7-Eleven and purchasing Slurpees andcandy with my allowance. I always to my friends and we would take turns buyingand sharing. Our favorite type of Slurpee was the featured flavor or mixingthe cherry and Coke flavors. That was an ultimate weekend of joy.”

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