Case Study: Ministop Philippines

Nielbert de Leon
Jedrek Estanislao
Ariel Gumabon
Erle Lope
Rod Rojas
Rachel Ronquillo

BA 291.1 Strategic Management I

Professor Art Ilano
July 12, 2011

Case Study:
MINISTOP Philippines

I. Case Facts

Main Problem:

Ministop is losing money, and hasn't earned a decent net income since it started its
operations. While it has achieved its target of becoming the fastest growing convenience
store in the country, adding by an average of 37 stores per year in 10 years, it has never
reached its target in terms of return on investment.

Related Issues and Possible Causes

1. In 2008, net income dipped to record low; Ministop President responded by stating
that increased operational expenses brought about by the changing dynamics of
store operations and escalating utility rates, has deeply affected the previously
forecasted payback period of the Ministop investment.
2. Out of the 50 managed stores, only half are making money, with the other half either
breaking even or losing money. Contract pre-termination is very common among
losing franchisees.
3. Losing franchisees have complained about Ministop’s low level of support for their
stores. Late, incomplete and no-deliveries are rampant. Head Office people they
complained were also non-responsive to some of their requests.
4. Franchisees complained about Ministop putting up another store near their location
which eats up a portion of their daily sales. They now wonder if the company is
planning properly their expansion.
5. Ministop Operations Department from their end has also complained about franchisee
selection. Franchisees commit various violations such as:
a. Not supervising the store for 8 hours as stipulated in the contract
b. Misrepresentation of operational expenses like one who declares high
salaries for store personnel but pays way below minimum wage, as reflected
by the high turnover of personnel.

Management’s Proposed Solution:

Launch an aggressive expansion program to increase its number of stores by 80-100 per
year, to exact 7-Eleven’s number by 2015 which currently stands at 700 and growing by
30-50 per year. Ministop management believed that it will deliver desired earnings if it it’s
the 200 –store mark. Unfortunately, it didn’t.

II. Problem Statement

After two years of launching the expansion program, Ministop is still losing money. Given
its current condition, should RCSI still continue with the business? What strategies can it
apply to improve its own profitability and that of its franchisees?

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III. Analysis

Comparative Analysis using 5 Rules for Hypergrowth Management

According to the article, Managing Hypergrowth by Alexander Izosimov, hypergrowth

refers to that steep part of the S – Curve that most young markets and industries
experience at some point, where the winners get sorted from the losers.

In the Philippines, It can be said that the convenience store industry is in a stage of
hypergrowth when Ministop entered the industry. The incumbent leader, 7-11 continues
to expand exponentially while there are also many other convenience store brands such
as Ministop trying to take a portion of the market share.

To survive this phase, the author proposes for companies to sort of comply with a set of
rules formulated to manage this phase. The five rules for hypergrowth management are
said to be the following:

1. Focus first on sales (Sell first and ask questions later)

2. Innovate with caution (Don’t try too hard too innovate)
3. Standardize structures and processes (organize like McDonald’s)
4. Delegate decisions to field managers (push decisions out in the front-line)
5. Reward action and initiative (foster a can-do culture)

In this section of the analysis, we try to compare whether Ministop implemented similar
strategies from the ones proposed in this article. If not, what strategies did Ministop
implement? What failed in their strategies?

Hypergrowth Management Rule/Strategy Ministop’s Strategy (What did they do?)

Focus first on sales
(Sell first and ask questions later)
Innovate with caution
(Don’t try too hard too innovate)
Standardize structures and processes
(Organize like McDonald’s)
Ministop had very aggressive growth targets
such that they indeed became the fastest
growing company in the convenience store
segment.
One successful innovation that Ministop did
was to introduce fast-food in its store.
Stores had similar formats and design.
However certain critical processes, like order
management, logistics, in-store promotion
and marketing, while probably standardized
might not be working as efficiently or
effectively.

The general feeling among franchisees was

Delegate decisions to field managers
that their views, opinions and ideas were not
(Push decisions out in the front-line)
being listened to.

Reward action and initiative Not much information can be obtained from
(Foster a can-do culture) the case write up.

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SWOT Analysis

STRENGTHS WEAKNESSES
INTERNAL ADVANTAGES INTERNAL DISADVANTAGES
-Customer Service; complaints of poor
- Relatively low franchising fees; major
service from the stores
enticement for would be franchisees
- Perception of being not “profitable”
- Existence of a Central Distribution Center;
- Lack of clear marketing and merchandising
should enable purchasing in bulk and with
focus/direction
the appropriate IT system an effective
- Poor use of point-of-sale information
inventory and distribution monitoring
management system
process.
- Sub-optimal distribution processes, on-time
- Ability to conceive and implement product
delivery not achieved
differentiation, such as the incorporation of
- Perceived lack of “empowerment” by
fast-food items in the store
franchisees and partners
OPPORTUNITIES THREATS
EXTERNAL ADVANTAGES EXTERNAL DISADVANTAGES
- Expansion of residential areas
- Other convenience stores (7-11, small
(subdivisions and condominiums)
neighborhood groceries)
- Booming call-center industry which
translates to more potential customers
especially in the central business districts

S-O Strategies

• Revamp the operations of the DC so that it can tailor its services to efficiently and
effective service the requirements of stores located in different areas
• Improve its IT infrastructure so that more meaningful data can be derived from
each store. Thorough analysis can be done which can lead to more effective in-
store offerings, stock-keeping and promotions specifically targeting customer
requirements in each location
• Continue with implementing product/service differentiation albeit in a careful
manner.

S-T Strategies

• Play on the strengths of Ministop to mitigate the external threats:

o Reputation as having lower franchising and start-up costs versus rival
companies
o Pioneering product differentiation like offering fast-food service in the
stores
• Try to provide distinct advantages/differentiation from the rest of the competition
in order to spur customer interest and continued patronage
• Make sure each store’s offerings match what most of its customers want.
Obviously, stores located in CBDs would have different clientele from stores
located at or near residential areas.

W-O Strategies

• Ministop’s ability to exploit the opportunities will be severely hampered if it cannot

fix its weaknesses.
• Ministop should address the following issues (weaknesses) immediately:
o Poor customer service both in distribution and in addressing complaints
o Laxity in in-store operational controls
o Marketing and in-store promotion focus

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W-T Strategies

• Competitors will start to wean away potential franchisees and business partners
from Ministop stores if the weaknesses continue unabated.
• Profitability is the main come-on for potential franchisees. Therefore, Ministop
must address this firs and foremost

Porter’s 5 Forces

Threat of Potential Entrants

Barriers to entry into the retail industry are high. Barriers to entry are high when
putting up a convenience store as it requires a huge amount of capital. Putting up a
convenience store does not happen overnight. Aside from being capital intensive, it
also requires a huge amount of effort, from getting business permits, hiring people, to
running the store itself.

Bargaining Power of Suppliers

Bargaining power of suppliers is weak. This is because there are many competitive
suppliers and the products are mostly standardized. Suppliers cannot charge
excessively high prices.
Moreover, the degree of differentiation of inputs is not that high. There is also a good
number of presence of substitute inputs.
There is high concentration of purchasers than supplier concentration

Threat of Substitutes

There is a high threat of substitutes because there are a lot of sari-sari stores
everywhere.
Convenience stores will be competing against the fast food chains for meal options
and grocery stores for dry goods.

Bargaining Power of Buyers

The bargaining power of buyers is high. Buyers can just switch from buying from
convenience stores to grocery stores because it provides a wide array of products.
They can also buy from sari-sari stores which can be even closer to their homes.
There is not much significant switching cost for buyers.

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Industry Competitors

There is a high intensity of rivalry due to a lot of existing convenience stores.

There is also a high fixed cost. When total costs are mostly fixed costs, the firm must
produce near capacity to attain the lowest unit costs. Since the firm must sell this
large quantity of product, high levels of production lead to a fight for market share and
results in increased rivalry.
There is a high storage cost or highly perishable products in Ministop. This causes
them to sell goods as soon as possible. If other producers are attempting to unload at
the same time, competition for customers intensifies.

IV. Recommendations

The group believes that in order to become more profitable, 3 key areas of concern that
our analysis have uncovered must be addressed. We think that Ministop has reached the
limits of its growth strategy and that further growth without addressing some fundamental
operational issues will only continue to bleed the company dry as profitability can never
be reached without resolving these issues directly and decisively.

1. Top Management

Get a competent CEO/president who has the necessary skills and experience to
overturn the company’s situation. Ministop needs a CEO with a more
“entrepreneurial” management style. With a new CEO, the company can re-visit the
business’ VMOs through thorough strategic planning. Simulated monthly income and
other targets used as bases for payback should be re-evaluated.

2. Maximize Store Revenues

a. The franchisees are important stakeholders in the business model. Management

should involve them in decision-making. One way of doing this is by formalizing
feedback mechanisms where franchisees can report operational issues. This
includes the formalization of escalation procedures and service level agreements
(SLAs). We believe that in this manner, stores can be made more responsive to
the demands of their local customers and therefore offerings and inventories can
be tailored to be more specific to customers.
b. Increase management control over the franchisees. Conduct periodic appraisal
programs to ensure the expected performance of the stores. Management should
enforce stricter policies when it comes to franchisee selection.

3. Improve Efficiency and Effectiveness (Cut Costs)

a. Invest in IT, especially in the ability to gather, process and use point-of-sale
information. This can lead to understanding which products sell in a particular
store. Distribution can then be specifically tailored to maximize revenue from
fast-moving products and reduce the carrying costs of slow-moving inventories in
each store. Marketing can use the info to tailor in-store promotion or
merchandising. Purchasing can also use the info to drive negotiations with
suppliers using economies of scale as a bargaining point. Logistics can also use
the information to better plan replenishment orders and manage inventory. All
these would lead to lower costs.
b. Review the operations of the distribution center. If necessary replace the
manager. On-time-delivery is a very critical KPI in this type of industry. Stock-
outs / late deliveries mean lost sales opportunities. Rush orders, unnecessary or
redundant deliveries increases the cost of operations. Reducing the turnaround
time of trucks reduces costs. All these entails detailed planning and tight control
of DC operations.

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