On the 7th of October 2021, Reliance Industriesofficially announced that reliance retail has entered into a master franchise agreement with the 7-Eleven company for the launch of 7-Eleven convenience stores in India. And this deal has taken the market by such a storm, that the stocks of reliance rose by 1.5%. And while every single news channel has been announcing this deal over and over again, none of them told us why is this partnership such a big deal? Which is why in this episode today, let’stry to understand what exactly is the story of the incredible 7-Eleven company?.
Why is this partnership such a big deal forthe Indian retail revolution? And most importantly, how is this going to affect the billion-dollar business war between Amazon and reliance and for that matter, evenBigBasket and Grofers. This is a story that dates back to 1974 whenan American company named Southland Corporation, which already owned a chain of convenience stores in America decided to extend its chains in the Japanese market. And in the next 30 years, this company became so successful that they had 11,310 stores in Japan alone, and had a sales of $22 billion. And this Japanese subsidiary became so profitable that it ended up buying its own parent company.
Now this begs the question, how did a small convenience store become a billion dollar company? Well, as it turns out, the mastermind behindthis unbelievable growth of 7-Eleven was a man named Toshifumi Suzuki. To tell him about it, in the 1970s, Suzukiobserved that the retail market of Japan was undergoing a paradigm shift wherein the marketwas transitioning from a seller’s market to a buyers market. In simple words, seller’s market exists whenthe demand is way more than the supply of the products.
So in Japan from the 1940s to the 70s, whichwas the post war period, there were very few companies producing milk, tobacco, snacksetc. Therefore, the focus was only on the functionalityof the product and not on the brand or the specific features. For example, in India during our parent’stime, if people ask for a toothpaste it really did not matter whether it was a Colgate ora pepsodent. But today, we are very specific that we wanta Colgate or herbal toothpaste or Patanjali toothpaste. Just like this in the 1970s Japan, as soonas more players enter the market and the population.
Became richer, the consumers became more choosierabout their spending. And Suzuki observed this paradigm shift andhe saw that there were three critical weaknesses in the existing supply chain in the Japanesemarket. Number one in the seller’s market, the wholesalersand the manufacturers determined both the supply and the variety of stock. But both of these entities were not consideringthe changing preferences of the consumers. Number two, because the wholesalers did notconsider the consumer preferences. Even if the retailer ordered a particularproduct, they would ship an alternative product instead of the exact product in demand.
And lastly in the seller’s market deliveriesarrived on the supplier schedule and not necessarily when ordered. Therefore, the inventory management becamemore and more inefficient. And all these weak points lead to a tonneof missed sales opportunities that ultimately resulted into shelf warmers or dead inventory. That is how for the first time in post warJapan, sellers face the reality that more inventory did not produce more sales. And by absorbing all these trends, Suzukirealised that profits can only be generated when demand was accurately read and forecasted.
Otherwise, regardless of how big the retailerwas, they would start bleeding money. So now the question was, how do you forecastthe demand of the products? I mean, we’re talking about the 1970s whencomputers were still alien to most people. Well, as it turns out, that is when Suzukicame out with something called the tanpin kanri system. And this system turned out to be so revolutionarythat within just five years, the number of stores in Japan shot up by 52 times from just15 stores in 1974 to 801 stores in 1979. And the sales skyrocketed by 155 times goingfrom just 0.7 billion yen to 109 point 8 billion yen.
The question is, What the hell was so specialabout this strategy that resulted into such an explosive growth in just five years? To tell you about it in the seller’s market,the retailers blindly used to use the point of sale data in order to reorder the itemssold. So if 2000 haldiram’s chudas are sold, theywill just reorder 2000 haldiram’s chudas for the next month. But in the tanpin kanri system. What the philosophy says is that instead ofblindly using the store data, the employees must use the data to identify why those itemsare selling, when those items are selling.
And depending on the behaviour of the customers,they should be able to predict the future demand of the products and then they shouldplace the order. For example, while a normal employee wouldjust reorder 2000 haldiram’s chudas, a 7-Eleven employee will analyse and understand thathaldiram’s chudas usually get sold on a Monday Why? Because a lot of women in the neighbourhoodfast in the name of Lord Shiva. Therefore, they will order haldiram Judah’sonly on a Sunday so that the shelf space for the rest of the days could be utilised forother items, therefore, leading to better inventory management.
So if you see, the whole concept of the tanpinkanri system is not about the data, but the story behind the data that eventually is leadingto better supply chain management. Similarly, several employees are trained tolook at the micro changes in the customer behaviour, and then they deploy strategiesat the store level in order to drive sales. And here are some of the many many criteriasused by the store managers of 7-Eleven, which even today are major drivers of growth forthe company. The first criteria is that of daily routine. So in this case, if the store manager observesthat many housewives often drop their kids at school, and then they drive back home inorder to cook lunch, the 7-Eleven team will.
Actually put boards presenting the best lunchrecipes and along with that, they will also place all the ingredients needed to make thatrecipe. So the recipe says Paneer Tikka right alongsidethat board, you will find everything from paneer, vegetables and even the pan neededto cook the paneer. This is what you call as the product assortmentstrategy. Number two is weather. So if rainy season comes by, the same storemanager at the same store, will do a product demonstration of the best detergents theyhave. Why?.
Because the kids would play in the mud andget their clothes dirty, right. So the same housewives will look for detergentsin order to clean those stains, eventually resulting into very high detergent sales. Number three is time and affordability. So enough 7-Eleven even started offering lunchboxes. And even while selling these boxes, they wereextremely careful. For example, on first of October, the priceof the lunch box would be 1500 yen, but on 28th of October, it will cost only 1000 yen. Why?.
Because the first of the month is payday,so people have enough money to spend but by the end of the month, the budget is tight. And along with that even the ingredients insidethat box are changed in order to maintain profitability. So in the Indian context, in the first week,if you get paneer during the end of the month, you will get bhindi as your subji. And lastly, all this data is sent over ina consolidated format to the CEO who holds a bi-weekly meeting to understand and makechanges to the supply chain. And one of the most extraordinary cases thatI found was that on a certain Monday, they.
Observed that in spite of being a long weekend,the sales were a little low. And upon analysis, they found out that manymiddle aged customers went on a picnic while youngsters had gone on a trip. Now in this case, while most companies wouldclaim it to be impossible to sell when nobody’s in town, you know what the 7-Eleven guys did. They investigated deeper and found out. Although people did not buy stuff, while theywere out of town, they actually bought a lot of stuff before they went on a picnic. And that’s when they found out that peopleactually bought Salmon balls and apricots.
So from the very next year itself, all the7-Eleven stores in that neighbourhood, when the holiday season came, were equipped withapricots and Salomon balls. Therefore, from the following year onwards,they did not miss out on the sale opportunity. This was the level of micro analysis doneby both the 7-Eleven managers, as well as the board of the company that resulted intoa super efficient supply chain and an extraordinary store performance. Now I don’t know if you see this, but thenthis is like Toyota’s just in time system at the micro level, which has resulted intosuper efficient inventory management. In fact, if you look at the numbers from 1976to 91, the average inventory value per store.
Per month has fallen by 47%, going from 9billion yen to 4.8 billion yen. And the best part is that during the exactsame time the average daily sales per store shorter by 72%, going from 365000 yen to 629000yen. This is the insane supply chain managementsystem of the 7-Eleven company. Fast forward to the modern day, they haveconsistently been the pioneers in embracing technology in order to make the systems moreand more efficient. They set up their communication network linkingthe head office tours and vendors way back in 1971 itself and in the early 1998, theyintroduced the fifth generation information system using the internet, the intranet andsatellite communication and this in total.
Costed them $522 million and now they takingit to the next level by using artificial intelligence to predict demand at the micro level. This is a story of the incredible 7-Elevencompany. Now let’s talk about the most important partof the episode. And that is, with all this expertise at 7-Elevenhas, how is this going to benefit Reliance Industries. Before we move on, I want to thank our partners today’s episode, and that is small case. Small cases is wonderful company that designsa basket of stocks to help you make the best investments in any given market condition.
In this case of the retail wars, while most people will try to pick the winners among reliance and Amazon. Very few people will understand that the realwinners of this retail revolution, regardless of who wins this e-commerce war, are the FMCG companies in India and more specifically, those fmcg companies that can make affordable products for the middle class. So if you’re someone who is very keen on investing into the best companies in this category, you must check out the great Indian middle class small case. And this small case has handpicked stocks thathave extremely high growth potential. The best part is that the small case manager himself will automatically rebalance the stocks.
As per the market conditions to give you thebest returns possible. And even if you don’t want to invest, youcould use my favourite feature in this app, and that are the news section and the newslettersto get the latest updates about the most important happenings in the market. And this feature has been very useful to mealso while I curate my content and while I do my market research. So if you love the idea download the smallcase from the link in the description. Moving on to the partnership of reliance and7-Eleven, the first and the obvious part is that we are witnessing the origins of thebuyers market in India and with this partnership,.
Reliance will be able to extend its presencepan India. Secondly, considering 7-Eleven’s expertisewith selling fast moving goods if the tanpin kanri system is successfully implemented inIndia, it will give reliance the superpower to build an extremely lean supply chain, whichwill enable them to sell both groceries and fmcg products with extremely high profitability. And this is going to make life very, verydifficult for both bigbasket and grofers. Because they’re still struggling with profitability. Thirdly, this is going to make the retailwing of reliance extremely powerful because now there were 12,000 retail stores in theform of reliance Mart, reliance fresh, reliance.
Digital, Jio Mart, and now they’ve got 7-Eleven. And if you see, like we discussed in the reliance amazon video. This is a very, very powerful retail ecosystem, which could also see the addition of future retail if they win the case. And last and most importantly, this is pretty far-fetched. But considering the fact that 7-Eleven has mastered the art of prepared food. If reliance takes the right steps, we couldbe looking at a reliance cloud kitchen also. Meanwhile, I’ll attach a CNBC video of why7-Eleven failed in Indonesia, so do have a look at it and tell you the potential weak points that 7-Eleven will face in India.
And this is what brings me to the last segment of the episode and that are the three important lessons to be learned from the iconic case study of 7-Eleven. Lesson number one, while good organizations rely on cutting-edge data analytics and precise numbers. Great organizations will go the extra mile to understand the story behind the data. And these companies are and will always bethe winners of the modern-day data revolution. Lesson number two, in the 21st-century customer behavior, is by far the most important variable that will determine the success and failure of any organization. So if you’re someone who wants to read and understand behavioral science, I would highly.
Recommend you to start with this book called hooked written by Nir Eyal. And last and most importantly, like I’ve said many times, the only difference between ordinary and extraordinary is that little extra inthis case, it was Suzuki’s judgement and heavy investment into teaching the frontline staff about the intricacies of the customer behavior. And the staffs ability to keep an eye on something as seemingly insignificant as the housewives going home or the kids playing in the dirt. And these observations are the ones that turned7-Elevens into the most successful and the most profitable convenience store chain inthe world. And that is all from my side for today, guys.
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