Soft Drinks Price Cut Hard to Swallow for Seven-Eleven's Rivals
10, 20. 2005
In the first part of September 2005, Japan's leading convenience-store operator Seven-Eleven Japan Co., Ltd. cut prices on its soft drinks, its mainstay product. A fixed pricing system has long helped convenience stores keep profitability at high levels. Seven-Eleven's measure was prompted by weakening performance across the sector, which has raised the specter of a shakeout.
Seven-Eleven has made cuts from 147 yen to 125 yen, on seven categories of soft drink sold in 500ml PET bottles. The same products are sold at between 90 yen and 110 yen at supermarkets and drugstores. With convenience stores charging nearly 50% more, customers felt they were overpriced.
Seven-Eleven is the giant among convenience-store chains in Japan. In fiscal 2004, sales at its stores totaled 2.4 trillion yen, making it the foremost Japanese retailer (non-consolidated basis). With an OP margin in the year of 34%, it has a reputation as a highly profitable company. On September 1, it established a holding company with group affiliates Ito-Yokado (general merchandise stores) and Denny's Japan (restaurants), enabling it to integrate its management.
Slowdown Afflicts Sector
Seven-Eleven's action is a response to weakening performance at convenience-store operators. Even the star of the sector has seen sales fall below year-earlier levels at established stores for five consecutive terms since 2000. The reason is intensified competition from retailers outside the sector, such as supermarkets, which now operate deeper into the night, and drugstores. More recently, competition has come from the Shop 99 chain, which sells everything from fresh food to daily miscellaneous items at a flat price of 99 yen. The convenience stores have lost their monopoly on the attribute they are named for, 24-hour convenience.
Smaller Convenience Store Chains Feel the Heat
Seven-Eleven will now focus on negotiating lower prices from its suppliers. Here, it has gained leverage from the establishment of the holding company Seven & I Holdings with Ito-Yokado. Some observers expect Ito-Yokado's overwhelming purchasing power to put Seven-Eleven in a strong position for bargaining with the manufacturers that supply the chain.