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Seven&I Secret of Succeeding in China?

2, 10. 2006

   Riding on the deregulation movements in China, an increasing number of Japanese retailing firms are advancing into the Chinese markets. Many of them face tough price competition from local retailers, and they are having troubles in gaining earnings they had expected. Among them, however, the Seven&i group is steadily showing outstanding results, as indicated by its supermarket division that went into the black last year. What is the secret for making such a success?

Seven & I's operating companies are achieving steady business results in China. (Picture: Food Supermarket Wangfujing Yokado in Beijing)
Seven & I's operating companies are achieving steady business results in China. (Picture: Food Supermarket Wangfujing Yokado in Beijing)

   China used to ban not only the establishment of 100% foreign-owned wholesale and retail companies but also the forming of joint venture companies between foreign and Chinese firms. The drawback of the socialistic distribution system became more noticeable as a progress was made in the reformation and opening up of the economy. This led the Chinese government in 1992 to approving of the joint opening of retail stores by Chinese and foreign investors in 11 cities across the country. Then the advance of foreign invested retail shops into China began.
   A conspicuous project during the early stage of foreign advance into the Chinese retail market was the opening of the large-scale store, Nextage Shanghai, by Yaohan in the Pudong district in Shanghai. The headquarters of the store were moved into Shanghai to promote the business expansion with a plan to open supermarkets at 1,000 different locations in China. It, however, required too large a sum of investments to fulfil the plan for the Japanese supermarket chain which was merely of the middle ranking in size with its operation base only in the Tokai (Pacific coastal area) of central Japan. The parent company of the group, Yaohan Japan, virtually went bankrupt in 1997 and its stores were purchased by a Chinese firm.

Steady Advance in Contrast to Yaohan

   In contrast to Yaohan's fast move, Seven&i HOLDGS. Co. steadily carried out the strategy for advance into the Chinese market. Its general supermarket division, Ito-Yokado Co., was granted for the first time to set up chain stores throughout China in 1994, simultaneously as Macro of the Netherlands. Ito-Yokado opened the first shop of the chain in Chengdu in Sichuan Province in 1996. In the following year, it opened the Shilipu store, which was its first in Beijing.
   Seven&i is a group of retail stores that earns the largest profit in Japan, and it is financially firmly founded. It was, however, extremely cautious about opening stores in China. The company spent more than three years before it opened the Yayuncum store, which was the second one in Beijing. It gave the priority to the understanding of the need of the Chinese consumers and to strengthening of their trust in the brand name. In contrast, Ito-Yokado, which went into the black in 2004, now plans to open 10 stores in Beijing by 2008.
   In December 2001, China formally became a member of the WTO. It was decided then that China would deregulate the geographical restriction and investment regulations within two years after joining the WTO, and remove both restrictions within three years. All restrictions regarding franchise were also to be abolished within three years. Riding on these deregulations, the expansion of Japanese retail business in China is gaining momentum.
   Targeting at the forthcoming abolition of franchise restrictions, Japanese convenience store companies are making preparations for large-scale expansion in China. When Lawson, Ltd. first entered the Chinese market, there was not even a slightest hint of a convenience store there. But local enterprises which operated stores modelled after Lawson stores showed an explosive expansion. At present, the number of convenience stores in Shanghai tops 4,000. Following Lawson, FamilyMart Co. entered the Chinese market in 2004. Both companies are now going uphill in making profits because of the severe competition from the local enterprises.
   In 2004, Seven-Eleven Japan Co., convenience store company in the Seven&i group, also started business in Beijing. Price competition is severe as it is in Shanghai. But it is maintaining the business practices which run counter to those in China of "no donation or rebate, or accepting of goods return". Chinese retail shops manage to remain in the business even if they continued "war of attrition" which leaves little gross margin. This is because they accept rebates from suppliers. Foreign invested shops, including Japanese, are not exception. The French retail company Carrefour, for example, is a target of critical reports by the Chinese media which charged that Carrefour was even taking advantage of the French Revolution anniversary to ask for donations.

First Franchised Store to be Opened This Year

Shilipu Yokado in Beijing
Shilipu Yokado in Beijing

   It is required in China to pay registration fees every time new products are introduced. This reduces the incentives for supplies to put out new products. Under this condition, it is impossible to maintain the Japanese way of conducting the convenience store business in which new products are constantly coming out. Seven-Eleven has to go over a high hurdle as it has to grapple head-to-head with the Chinese way of doing business, but this is something unavoidable for Seven-Eleven in order to get the management of convenience store in China.
   Lawson, which leads ahead, plans to open about 400 stores in Shanghai by 2006, and1,000 inside the Shanghai city and 2,000 in the Chang Jiang Delta by 2010. Following Lawson, FamilyMart has announced its plan to open 1,300 stores in 2008. Seven-Eleven's plan calls for opening of 350 stores in Beijing. It is also considering opening of stores in other cities. It plans to open the first franchised store within this year, and other stores at an increasing speed in the futues.
   Lawson invested 51% in Shanghai Hualian Luosen in 2004, but it handed over the majority ownership to its partner Bai Lian Ji Tuan (Bailian Group). This was because Lawson judged the expansion of store networks in the future could not be done without local control. In case of Shanghai Fumanjia, the holding company that is the largest shareholder is under the majority control of Taiwan's major food company Dingxin Group.
   Seven&i differs from other companies in capital strategy. It acquired from its tie-up partner the stock of a Chinese joint venture for undertaking a general super market business, raising its holding to a majority. This enabled the group to hold the leadership for expanding the business in China at an increasing speed. At present, it carries out the three business in general supermarket, food supermarket and convenience stores in China. For Seven&i to catch up with Wal-Mart and other U.S. and European firms that are quantitatively bigger, however, the key is to improve efficiency of its inventory control and other distribution systems. Whether or not the company can succeed in this respect will determine the future of Japanese retailing firms which have hitherto conducted business overseas only on a limited scale.

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