Exam Prep (7-eleven case)

1. What was the differences in the business models between 7-Eleven and other
industry players in Jakarta? (20 marks)

In terms of business strategy, 7-eleven offered the unique value proposition of turning grab
and go convenience stores into a hangout spot concept, with its competitive advantage
being “A unique concept and store layout that combines a convenience store as well as a
destination of casual eatery.”

This integrated concept was a new and different business model from existing players.
However, it opened up the competition to not just convenience stores like Indomaret and
Alfamart, but also traditional warungs and tokos. In this way, it pursued a focused
differentiation strategy over the two sets of competitors in different ways.

When compared to the convenience stores that generally targeted all consumers, 7-eleven
targeted the Indonesian youths, appealing to their rising demand for “nongkrong”. They did
this via their larger range of fresh and ready-to-eat food (taking up 50% of store space)
coupled with tables and chairs for dine in.

Compared to traditional warungs, 7-eleven provided more convenience and comfort. In

addition to being open 24 hours a day, 7-Eleven provided additional amenities such as Wi-
Fi, air-conditioning and high-quality fresh foods and beverages. All of these features were
popular amongst local youths and young adults. Although 7-Eleven’s prices were not as low
as small street stalls’ prices, its offerings were still cheaper than formal restaurants or regular
fast-food chains. This provided affordability to youths with limited disposable income
and made 7-Eleven more attractive to them. 7-Eleven also had a more “cool” ambiance that
appealed to youths more than the street stalls, as it was an international brand name.

Lastly, It addressed issues that were faced by the focused target demographic (youths) that
competitors did not address as they had a broader competitive scope. Besides the demand
for nongkrong, youths faced fears of safety especially for females late at night. By partnering
with a taxi-calling service and its digital kiosk “Sevelin”, customers could visit 7-elevent, call
for a taxi and safely wait for the taxi to pick them up while having a drink or snack. Blue Bird
would maintain electronic records of the customer’s call, and the details of the taxi driver
who was coming to pick them up, which resulted in safer travel for customers.

By providing the necessary features to appeal to the youth of Indonesia, 7-eleven used a
focused differentiation strategy to compete with both convenience stores and traditional
stores.

2. What were the key internal factors that contributed to 7-Eleven’s success in
Jakarta? (20 marks)

7-Eleven had a unique product offering of fresh and ready to eat food. These products
coupled with their comfort and convenience for dining in (open 24 hours a day, Wi-Fi, air-
conditioning) was what helped 7-eleven differentiate itself and attract the target consumer
segment. These capabilities were able to successfully appeal to the target market due to 7-
eleven’s ability to develop and leverage on its resources. Across 7-eleven’s value chain, the
key activities that add value are their operations, distribution and marketing and sales.

Operations: For operations, 7-eleven pioneered the concept of a central kitchen that
provided 60 to 70% of the fresh food to the 7-Eleven stores in Jakarta. The central kitchen
was an innovative utilisation of PT Modern’s previous business resources, thus required
lower costs to set up. Produced and delivered daily, this concept ensured that the food
products were fresh and of a high quality. It also ensured that products were consistent and
uniform across all stores as they were produced together. The central kitchen both cuts cost
and increases customers' willingness to pay. It leveraged on economies of scale and
reduced manufacturing overheads by growing its private brand of products to provide a cost
efficient way of production. Its element of freshness and high product quality is appreciated
by customers who would choose these products over competitors.

Distribution: Due to the nature of the products being perishable, they require efficient and
frequent distribution channels. The collaboration with Iron Bird, featuring a chain of special
refrigerated trucks maintained this high quality. And delivery conducted overnight avoided
Jakarta’s notorious gridlocked traffic during the day. This collaboration helped to cut costs
whilst navigating the local traffic challenge in Jakarta to maintain their product freshness.

Sales and marketing: 7-eleven’s sales and marketing success was largely due to their
attentiveness and response to customer reception. First, it ensured that its product offering
appealed to young Indonesians by constantly tracking the reception and updating the
product line to adapt to the preferences. From rice based meals, they shifted towards more
fashionable and westernised food items that appealed to the younger generation. They then
added local flavours such as chicken black pepper rice balls, nasi goreng (Indonesian fried
rice) and local varieties of hot dogs and fried chicken. The authenticity to flavours was
preserved as they were made locally developed locally with vendors. Next, they quickly
responded to add more tables seeing as how their customers were hanging around the
steps and sidewalks outside of the stores. Their ability to provide greater convenience and
comfortable amenities for customers to enjoy their purchases helped win over the target
demographic. Additional services that it branched into such as digital kiosk Sevelin and
providing parking attendants to catch thieves, 7-eleven provided safety and security to
customers. Their partnerships with local celebrities and movie stars to launch the Iphone as
well as hosting events such as soccer screenings during the World Cup, live band
performances and online game competitions built the community element. These efforts
helped to increase perceived value of the brand name in customer’s eyes.

Core competencies
Fresh food product flavours and freshness: The catering to local flavours and local
production ensured that the products appealed to the local youths but the central kitchen
ensured freshness and quality with preservatives. This was seen as valuable to the youths. It
was also rare as other convenience stores did not have such a wide range of local fresh
food. The production and distribution of fresh food is inimitable because of the high costs to
set up the infrastructure. Substitutes are available in the form of traditional warungs, thus
there is temporary competitive advantage.
Community and nongkrong environment: The availability of a casual dining space for
nongkrong with affordable options compared to restaurants is valuable to youths. While it is
rare amongst convenience stores it is not inimitable as it is relatively easy to set up tables
and chairs. What is inimitable is the feeling of community and safety that 7-eleven helped to
establish through its sales and marketing efforts that customers associate nongkrong with
the brand 7-eleven over its competitors. While dining in is substitutable by warungs, they are
unable to provide the safety and convenience.

(Question: Hi prof, my answer to this question tried to integrate both value china and VRIO
but I am worried my answer is too long. Can I ask which parts of my answer would be
relevant then?)

3. In what ways did the external environment pose challenges to 7-Eleven in Jakarta?

The primary factors that the general environment posed challenges to 7-eleven were the
Political and legal, and economic factors, while at the industry level 7-eleven faced increased
rivalry from competitors as they branched out towards similar products and services.

Political and Legal: The local Jakarta government stopped issuing convenience store
licenses. This shows that local governments are generally not supportive of convenience
stores, especially foreign brands because of the threat that it poses towards traditional
markets. Furthermore, the 2013 franchise regulation cap on outlets pushed 7-eleven to have
to branch out to franchising and sub-franchising that could possibly damage the brand name.
It is likely that the government would protect traditional retailers, either by issuing more
restrictions on minimarkets or forcing 7-eleven to apply for a convenience store license. This
would threaten 7-eleven as it would prevent further expansion of outlets and thus revenue
growth which was Honoris’ goal. Increases to minimum wage also proved to threaten and
increase the labour cost for 7-eleven. As such, the political and legal environment posed
threats to 7-eleven’s top line growth and bottom line.

Economic: Rapidly rising costs of living posed threats to 7-eleven on multiple fronts. Other
than labour costs that increased, rising costs of real estate posed an especially high threat to
7-eleven that required more space than other convenience stores. This posed a threat as
rising fixed and variable costs would squeeze their profit margins.

Rivalry from competitors: 7-eleven originally differentiated itself from competitors by

offering innovative complementary services such as ticket and insurance buying services as
well as taxi-calling services. Some competitors followed suit as adding on these services had
low set up costs. Indomaret partnered with a local travel agency to provide hotel and flight
bookings. Alfamart launched an online service and collaborated with Indonesia’s largest cell
phone carrier, Telekomunikasi Indonesia, to offer mobile payments.This caused a more
intense rivalry as competitors were finding ways to compete with 7-eleven’s strategies. This
rivalry is intensified as switching costs for buyers are very low due to their price sensitivity.
More intense rivalry may mean that 7-eleven could lose market share and sales to other
competitors, posing a threat to their revenue.
 4. In consideration of the above challenges and internal factors, make
recommendations to 7-Eleven to increase sales in Jakarta? Justify your answer with
the given case data. (40 marks)

As the environment limits the growth potential of 7-eleven within its current scope of
business, 7-eleven should look to branch out to other revenue streams that can leverage on
its strong internal resources.

The political environment poses threats to the expansion of outlets of 7-eleven thus 7-eleven
can only depend on increasing the sales of existing outlets to grow its revenue and profit.

However, the increasing rivalry of competitors due to their expansion into complementary
services threatens the market share and differentiating factor of 7-eleven in this aspect, thus
limiting the possible growth of sales. Furthermore, the rising labour and real estate prices
compresses profit margins for existing outlets. Rather than find ways to cut costs or increase
revenue per outlet, it may make more sense for 7-eleven to rely on its internal strengths and
seek to grow its business in other adjacent business lines that have higher barriers of entry
for competitors.

7-eleven’s core competency of fresh and high quality food is strongly supported by its
efficient central kitchen concept and strong logistics network. Competitors have not been
able to copy this strategy due to the fact that it is both costly to set up as well as
complicated. One evidence of this is the fact that none of the competitors had followed in 7-
eleven’s central kitchen concept despite seeing how successful it was. The central kitchen is
currently poised for expansion in 2015 such that it can support up to 500 stores. However, if
the government limits the number of 7-eleven’s outlets to 150 or 250 outlets, there will be
much capacity wasted.

As such my suggestion is to maintain its current business model but also sell its food
products to competitors. This would include the supply of products as well as the logistics
provided by Blue Bird to their outlets as a total fulfilment package. Competitors are likely to
want to buy 7-eleven’s fresh food due to its successful performance and rising popularity
amongst consumers. By selling products to competitors, it also mitigates the threat of
competitors possibly setting up similar central kitchen facilities that would directly compete
with 7-eleven. Lastly, this solution would directly add a new revenue stream to 7-eleven
without straining its resources but making full use of any idle capacity from the newly
expanded kitchen.