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Innovating innovation: The case of Seven-Eleven Japan

Hirofumi Matsuo matsuoh@kobe-u.ac.jp Kobe, Japan Susumu Ogawa ogawa@kobe-u.ac.jp Kobe, Japan

Seven-Eleven Japan is admired globally for its supply chain management. Now its rewriting the rules of innovation with a collaborative approach that integrates product, supply chain and sales process development.

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even-Eleven Japan Co., Ltd. (SEJ) is already an icon in consumer goods retailing. Companies ock to learn the secrets of its supply chain management and its ability to rapidly align what it sells to the changing needs of its customers [12]. While competitors have rushed to copy and catch up to SEJs best practices, SEJ itself has been forging ahead on another front. SEJ is now emerging as a pioneering innovator in the eld of innovation.

Few areas of competitive advantage ever last forever and SEJs competitors have worked hard to emulate its supply chain capabilities. SEJs closest convenience store competitor, Lawson Inc., now has the same level of gross margin (of about 30 %) Holistic innovation as SEJ for example. However, SEJs average daily sales per store of 656K yen To achieve its high level of original product introducare far above Lawsons 489K yen, and tions, SEJ innovates at the level of product attributes, Hirofumi Matsuo every day SEJs stores receive an averproduct supply chains and sales processes all at the is Professor age of 985 daily customer visits, each same time. Figure 1 illustrates the concept. The ideal of Operations with an average spend of 666 yen per innovation is one which connects all three circles at Management at visit, compared to Lawson stores 798 the same time. Kobe University, daily customer visits, with an average Kobe, Japan. spend of 613 yen per visit. So SEJ is Content innovation This is the traditional focus of generating 20 % more customer trafinnovation and revolves around product attributes fic and 10 % more spending per visit such as taste, flavor, appearance, texture, healthy Susumu Ogawa than Lawson (See Table 1). and safe ingredients, packaging, processing method, is Professor or a combination of all of these. Intangible and emoof Innovation Part of the reason for this is SEJs extional elements related to brand, fashion, a sense of Management at cellence at basics such as assortment social status, quality, health, and safety are also imKobe University, planning. Another part of the answer portant. On this front, SEJ collaborates with national Kobe, Japan. lies in SEJs innovative approach to brand manufacturers to make innovative manufacinnovation. Unlike most other retailturer-branded products available exclusively in its ers, who have focused on the develstores. opment of private brand products, SEJ collaborates with national brand manufacturers Supply chain innovation While they are important to develop new products that are sold under the from an operational point of view, most supply chain manufacturers brand names though only at SEJ stores. SEJ calls How 7-11 Japan compares such products original products. At the same 7-11 Japan Lawson Inc time, SEJs approach to innovation goes beSubstitution Eect Approx 30% Approx 30% yond the product itself Daily customer visits (average) 985 798 to include the products Spent per visit (average) 666 613 supply chain and sales processes. This combiDaily sales per store (average) 656,000 489,000 nation of approaches means that SEJ can differentiate its customer Table 1: While competitors are matching Seven-Eleven Japan offering in ways which in some areas, it is forging ahead in others

its competitors find very hard to copy. At the same time, SEJs ability to offer customers a continuous stream of unique new products feeds other aspects of its strategy. For example, over the past decade or so, SEJ has worked hard to reduce the number of SKUs carried by its stores (down from an average of 3,000 items in 1995 to 2,500 items in 2003). This reduces complexity and increases supply chain efficiencies. Yet, far from undermining customer perceptions of choice, range, interest and stimulation, SEJ has been able to improve these perceptions: at SEJ, not only can you always get the basics you want, there is always something new to try too.

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features usually remain invisible to the customer. At SEJ however, they are often elevated to form part of the product concept that is visible to the customer. For example, SEJ is unique among Japanese convenience stores to sell oven-fresh bread. The supply of oven-fresh bread depends on a supply and distribution network built specifically for SEJ by one of its manufacturing suppliers (see below). Competing retailers cannot simply procure oven-fresh bread from suppliers. To match SEJ on this front, they will need to develop another relationship with another manufacturer prepared to make similar long term investments in a complete set of supply chain and business processes. Sales process innovation Sales process innovation includes all the merchandizing that consumers perceive at stores, including facings of products, product line-up, promotional displays, sales staff s service, store appearance, and sales channel. Sales process innovation is usually driven by manufacturers. Key considerations include facings (sales of a product tend to increase almost proportionally

stand the behaviour of retailers and come up with ways of taking advantage of this behaviour. This is the challenge of sales process innovation.

To sell oven-fresh bread SEJ had to persuade a manufacturer not only to enter a new market, but to build an entirely new supply network capable of replenishing SEJs stores three times a day.

In traditional product development, these three regions of content innovation, supply chain innovation and sales process innovation are usually addressed separately and in isolation. First, manufacturers develop H o l i s t i c i n n ovat i o n : the sweet sp ot a new product with different content. Then SEJs focus: it is produced and dewhere all three intersect livered, maybe with a Sales Process business process innovation. Thereafter, it is Content sold, maybe with some merchandizing innovation. Instead, SEJ tends Supply Chain to work with its suppliers to bring all three regions together in an integrated way. To see Figure1: Holistic innovation innovates product content, supporting how SEJ does this, let us supply chains and sales processes all at the same time look at some examples.

to the number of product facings on the shelf ) and customer perceptions of choice and variety. Often, retailers can reduce the number of SKUs on their shelves without damaging customers perceptions of variety. The trick is to reduce the number of SKUs in a subcategory to a certain threshold level and to use the space that has been saved to increase the number of facings for the remaining products in the subcategory. When retailers do this, manufacturers can easily lose out. So manufacturers need to under-

Examples of supply chain innovation

Oven-fresh bread Content innovation: no significant innovation Sales process innovation: convenience stores as a new channel for freshly baked bread Supply chain innovation: realizing the delivery of oven-fresh bread three times a day without increasing costs, via close collaboration between a manufacturer and a retailer

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SEJ created a new product category called ovenfresh bread sold in convenience stores. Most large supermarkets can make freshly baked bread on site but with only 100 m2 of floor space, it is difficult for convenience stores to do this. If convenience stores want to offer their customers freshly baked bread, it needs to be delivered from factories to stores three times a day. In this case, SEJ persuaded a food manufacturer which did not have any previous experience in bread manufacturing to set up an SEJ exclusive bread factory network. The network was designed to match SEJs existing distribution and store network. This realized a low cost supply chain for three deliveries a day and has now been successfully implemented across the nation [3]. For the manufacturer, this was an example of sales process innovation; for SEJ it was an excellent example of supply chain innovation.

be closely monitored because the product has a short shelf life. The product concept was born out of collaboration between SEJ and Kirin Brewery. Because a temperature controlled supply chain had to be established before the product launch, Maroyaka Koubo was initially sold in only 150 SEJ stores located in four wards in Tokyo. As sales picked up, the network was enlarged to about 450 SEJ stores located in 23 wards in Tokyo in 2004. Since then, Kirin Brewerys temperature controlled supply chain has been further enlarged to cover many major cities. Now, Maroyaka Koubo is no longer sold exclusively through SEJ. Chilled vegetable juice Content Innovation: packaged ball-shaped frozen vegetable juice a fusion of two popular products, vegetable juice by Kagome Co., Ltd. and ball shaped ice cream by Ezaki Glico Co., Ltd. Supply Chain Innovation: a retailer collaborating with two manufacturing companies each with different capabilities Ezaki Glico Co., Ltd.s had developed know-how in manufacturing ball shaped ice cream, and Kagome Co., Ltd. had know-how in manufacturing vegetable juice. Each company had a popular brand in its respective subcategory. SEJ initiated a project for the two manufacturers to collaborate and to sell the resulting new product exclusively at its stores. Kagome and Ezaki Glico benefited by securing shelf space for the new product at SEJs stores; SEJ benefited by the opportunity to offer a differentiated product. This is particularly interesting because it depended on a unique collaborative arrangement between different suppliers an arrangement which is difficult for competing retailers to replicate. Calbee Foods Co., Ltd.s Excellent Farmers Potato Chips Content innovation: potato chips made of high quality potato Supply chain innovation: Calbee provides potato farmers with technical assistance to ensure high quality and conformance such as use of compost and rotation cropping. At one level Calbee Foods Co., Ltd.s Excellent Farmers Potato Chips are a content innovation: the innovation revolves around the use of high quality ingredients. However, its also a supply chain innovation because excellent ingredients require excellent farmers farmers who are important enough to the product

Kirin Brewery chilled beer Content innovation: a new category of chilled beer: bottled beer with live yeast Supply chain innovation: creation of a temperature controlled supply chain to keep beer yeast alive. Kirin Brewery Co., Ltd. created a new category of chilled beer called Maroyaka Koubo, which roughly means mild tasting yeast. The beer is produced and sold with its yeast alive. To make this possible, the beer is delivered via a temperature controlled supply chain. Inventory throughout the supply chain must

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to become an explicit part of the brand. The innovation here is the technical assistance Calbee provides chosen potato farmers with and their conformance to farming excellence in areas such as use of compost

share was around 35 % for the period of 1990 to 2002. Ito En is a relatively new entrant, its market share growing from 1 % in 1990 to 9 % in 2002. Its main brand is the Ooi-ocha, a green tea in a plastic

L i fe s p a n o f n ew i n s tant no o dle pro duc ts in Japan

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Figure 2: Timeline of new product introductions by the Goo-Ta brand of instant noodles and rotation cropping. Through one-to-one collaboration with selected farmers, the corresponding supply chain is integrated from harvesting to sales. In three of the above cases, the project was initiated by SEJ. In the other case (Calbee), it was the manufacturer who came up with the idea. But in one sense who comes up with the idea is not critical: it is the ability to cooperate closely once a good idea has been identified that matters. bottle. According to the Beverage Marketing Power Survey 2003, Ito Ens share for vending machines in 2002 was 3.6 %. This implies that Ooi-ochas penetration to the convenience store and supermarket channels was comparatively high. Ito Ens Ooi-ocha brand has a staple product of Ooiocha and plus many variations called Ooi-ocha something. Ooi-ocha is not an SEJ original product. It is sold in many convenience stores and supermarkets, and it has successfully secured facings on retailer shelves. In convenience stores particularly, depending on forecasting and information on local and seasonal preferences, each store owner selects an appropriate line-up of variations from an available set of Ooi-ocha variations. By continually changing the mix of variations on the market, Ito En always has something new to say about its brand, and it can use its constant innovation to keep the brands image fresh. Nissin Food Products Goo-Ta Content innovation: Instant cup noodles with many ingredients

Examples of sales process innovation

Ito En Ltd.s Ooi-ocha Content innovation: various and unique flavours of tea in plastic bottle Sales process innovation: offering a dynamic lineup of variations, consisting of a staple product and its variations with planned short life cycles, that collectively gives a refreshing impression on brand and shelf The Japanese beverage market is traditionally dominated by Coca-Cola (Japan) Co., Ltd., whose market

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How new variants prolong produc t sales

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Calbee Foods Co., Ltd.s Promotion Package Content innovation: the manufacturer offers retailers a catalogue listing various packages of products plus related point-of-purchase displays that fit specific occasions and events Sales process innovation: an effective sales solution including products and point-ofpurchase displays for any specific occasion and event

Calbee Foods Co., Ltd. offers retailers a Figure 3: The total sales of Nissin Goo-Ta variations catalogue describing from October 2002 to August 2004 for all channels various combinations of potato chip variations Sales process innovation: offering a dynamic lineand a point-of-purchase display. Each combination up of variations through introducing one new is a solution tailored for specific occasions such as variation a month to the market, and maintaining Christmas or cherry blossom viewing parties. When five to six variations of Goo-Ta brand at a time, in a retailer orders a certain solution from Calbee, the order to collectively give a refreshing impression corresponding display and potato chip variations are on brand and shelf made to order and delivered with the lead time of four days. Nissin Food Products first launched its Goo-Ta brand of instant cup noodles in September 2002. It developed this brand to capture the shelf space of all the convenience store chains as well as supermarket chains. It is a relatively high-end instant cup noodle with characteristics reflected in the brand name: Goo-Ta implies that it has many ingredients. Unlike Ooi-ocha, the Goo-Ta brand does not have a staple form: it consists of many temporary variations that are distinguished by different ingredients and flavour. As Figure 2 shows, variations are introduced at a pace of one per month and phased out quickly so that five to six variations are always available at any one time. The life cycle of each variation is short, but the brand collectively maintains high sales volume and continues to be successful in securing the shelf space. As Figure 3 shows, Goo-Ta sales appear to be declining, but prolonging the life of this product in the highly competitive market is regarded as a success in Japan.

With this promotion package, Calbee attempts to exercise a certain degree of control in merchandizing, which is important from the manufacturers perspective. An optimal combination of potato chip variations and a point-of-purchase display for any specific occasion is suggested to retailers.

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Product Development Strategy

For SEJs holistic approach to innovation to work, it must create a win for both itself and its suppliers. So how does this approach look from each partys point of view?

SEJ sticks to a role of coordinating supply chains, and thus its activities are not restricted by the constraints usually associated with owning assets. In the area of product development, too, SEJ is restricting its role to that of a coordinator.

Manufacturers product development strategy SEJs product development strategy For manufacturers the central challenge is how to As weve seen, with oven-fresh bread SEJ has been cope with the frantic pace and pressure for innovaable to develop a unique category for convenience tion in the Japanese retail markets. For this reason, stores; differentiate its product line-up via its colmany suppliers are keen to work closely with SEJ: SEJ laboration with Kirin Brewery for example, and its is a cutting edge buyer and working closely with SEJ collaboration with Ezaki Glico and Kagome. SEJ is successful in building relationships with Ch o c bars lifespan in Tok yo stores suppliers. This requires careful identification of 11% 1% suppliers incentives and 1% 0 weeks 6 weeks 2% design of relationships 2% (including its length and 36% 1 week 7 week 5% scope) depending on 2 weeks 8 weeks the nature of product 5% development projects. 3 weeks 9 weeks For example, SEJs oven6% 4 weeks 10 weeks fresh bread project was necessarily based on a 5 weeks 11% long-term commitment 20% from both parties. Its Source: SRI Data chilled beer project entailed a medium-term commitment until the Figure 4: Number of weeks in which new chocolate products achieved viability of a new prodsales of three or more units per week, Tokyo metropolitan area market uct concept was verifrom April 2003 to March 2004. fied. Chilled vegetable juice was a short-term project that required less resource commitment: an assurance of shelf space in over 10,000 SEJ stores Competing convenience may be enough for the two manufacturers to join the project. chains have not been Competing convenience chains have not been able to replicate these advantages because they are based not on new products alone but on unique combinations of new products and new supply chain arrangements, including collaboration between different suppliers. This plays to SEJs strengths. Its basic business strategy is characterized as a no-asset model. It has over ten thousand franchisee stores in Japan. Logistics-related assets are owned primarily by distributors. SEJ does not own factories, either. ICT hardware and software are also owned by vendors.

able to copy SEJ because each innovation combines product content with supply chain and sales process innovation plus close collaboration with suppliers.

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Sh o r t l i fe spans, long lead times

Beverage (7 manufactures)
Average sales period All channels: 7 months CVS: 14 weeks % change in average sales period over the last three years shorter by 0 % for 2, shorter by 10 % for 1, shorter by 30 % for 4 manufacturers One-year survival rate 28 % (all channels) 8 % (CVS) Average product development time
Source: author survey

Instant noodle (1 manufacture)

All channels: 3 months CVS: 2 months shorter by 20 %

Confectionary (3 manufactures)
All channels: 4 months CVS: 2 months longer by 10 % for 1 shorter by 20 % for 1 shorter by 25 % for 1 manufacturer

6 % (all channels) 3 % (CVS) 1 year

40 % (all channels) 17 % (CVS) 8 months

8 months

Table 2: Survey on the product life cycles of Japanese food manufacturers in 2004 gives them an excellent opportunity to learn market, technology, and advanced management concepts. Nevertheless, they face a major challenge. In the convenience sector, the typical assortment of products within a subcategory consists of the top seller, the second top seller and several new products. The main role of new products in this context is to draw customers attention to the subcategory, thereby increasing sales of the top sellers while refreshing the image of both the category and the store. This type of merchandizing policy tends to shorten product life cycles, sometimes dramatically. For example, Japanese convenience stores tend to delist any chocolate item which fails to sell three or more units a week. Figure 4 show how many weeks new chocolate products managed to reach this threshold in metropolitan Tokyo areas April 2003 to March 2004: 73 % of new chocolate products were removed from convenience store shelves within three weeks. Only 11 % lasted more than ten weeks. Table 2 summarizes a similar survey of seven beverage, one instant noodle and three confectionary manufacturers, all major players in the Japanese markets. For the seven beverage manufacturers, the average sales period of new products during the fiscal year of 2003 was seven months in all channels and just fourteen weeks in the convenience store channel. For one beverage manufacturer, the average sales period has shortened by 10 % over the

Manufacturers are having to introduce ever more new products, ever faster, simply to keep sales level. The result is deadly spiral of increased costs and falling returns.
last three years. For four beverage manufacturers the average sales period is down by 30 %. Across all channels, 28 % of newly introduced beverage products survived a full year. But in the convenience sector this is down to just 8 %. Nevertheless, it still takes

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manufacturers about eight months to develop a new beverage product. The table shows similar trends for instant noodle and confectionary manufacturers. These pressures are reflected strongly within SEJ. As weve seen, SEJ has worked hard to reduce the number of SKUs it carries, from 3,000 in 1995 to 2,500 now. Fewer than 30 % of these products are able to maintain their presence on SEJs shelves for longer than one year.

changing variations. Nissin Food Products has five to six dynamically changing variations of instant cup noodles: at any one time the mix is likely to be different. But the underlying approach is similar. Calbees promotion package attempts to gain some manufacturer control on how its products should be sold. Meanwhile, Kirin Brewerys chilled beer is a manufacturers version of supply chain innovation. It is integrating forward by establishing its own temperature

With an increasing influence of the conD i f ferent innovation opp or tunities venience store channel Sales Process in Japanese retailing, innovation such practices have had profound effects on Supplier Manufacturer Retailer manufacturers product development activities. Manufacturers now Supply Chain Supply Chain innovation innovation need to introduce more new products simply to maintain the same revFigure 5: Supply chain and sales process innovation enue levels as before. from the perspective of the different parties. And since all the manufacturers are doing the same thing, the competition for survival becomes controlled distribution system to distinguish its ever harsher. The result is a deadly spiral of increased product from its rival products. Calbees Excellent costs and diminishing returns: increasing pressure to Farmers Potato Chips is integrating backwards with introduce ever more short-lived new products to the selected potato farmers. market. Whether it is forwards or backwards integration (or The sales process innovations discussed above help both), the process oriented enhancement of the manufacturers mitigate these challenges. By develproduct, involving vertical collaboration or integraoping brands consisting of a dynamic combination tion of business processes, can help create a sustainof many variations Ito En and Nissin Food Products able advantage. are trying to turn this pressure into a marketing and brand benefit. Their approach differs slightly. Ito En Conclusion has one core product supported by a set of everSEJ has been successful in Japan. But now competing convenience stores have replicated its forecasting and shelf space inventory management system as well as its supply chain management. This is prompting SEJ to explore new ways of gaining a competitive edge and of differentiating its offerings. One way it does this is via its extremely tight management of its product assortment. Another way is by continuously introducing original products products that are sold under manufacturers brand names but exclusively in SEJ stores. This marks a departure from standard private label strategies. At the same time it is intensifying the innovation race by integrating

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product innovation with sales process and supply chain innovation. Because of its process orientation, this more holistic approach to innovation is difficult to imitate. Retailers elsewhere have much to learn from these ways by which SEJ is pushing the frontiers of innovation. Manufacturers have something to learn too. Manufacturers traditionally focus on innovating the content of their brands. But SEJ is showing that context how the product is made, distributed and sold can also help manufacturers build their brands. Together the two sides are opening up a new chapter in collaborative innovation.

References 1. Takeda Y, Matsuo H (2002) ECR: a Fresh Look from Japan. ECR Journal 2(2):1727 2. Lee HL (2004) The Triple-A Supply Chain. Harvard Business Review, October, 102112 3. Takeda, Matsuo (2002) ibid 4. Susumu Ogawa (1998) Does sticky information affect the locus of innovation?: Evidence from the Japanese Convenience-store Industry. Research Policy 26:777790 Further Reading Broniarczyk, S.M., Hoyer, W.D., and McAlister, L., Consumers Perceptions of the Line-up Offered in a Grocery Category: The Impact of Item Reduction, Journal of Marketing Research, 1998, 166176. Bultez, A., and Naert, P., SH.A.R.P.: Shelf Allocation for Retailers Profit, Marketing Science, Vol. 7., No. 3, 1988, 211231.

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