The Giant Awakens

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The Giant Awakens

After two and a half years at the helm of the industry's largest retail chain, 7-Eleven Inc. CEO Joseph "Joe" DePinto is refashioning the giant c-store behemoth into a more streamlined retailing machine, focused on serving franchisees with the most modern merchandising, operations and marketing programs in the market.

In a wide-ranging interview with Convenience Store News, DePinto spoke about:

-- How "servant leadership" will help the company move from a command-and-control structure to a more supportive culture based on developing win-win relationships with franchisees and vendors;
-- How migrating from a mix of corporate-run and franchise stores to mostly franchised is sharpening its focus and improving financial results;
-- How the retailer's image as a convenient, fresh-foods destination continues to evolve as the company updates its equipment, signage, graphics and packaging to communicate the fresh-foods message; and,
-- How the retailer is taking a leadership role in fixing the archaic c-store industry distribution model rife with redundancies and inefficiencies.

Reshaping the Industry's Distribution Model
7-Eleven is already working to consolidate direct-store delivery (DSD) distribution and improve store operations with technology.

When Napoleon said "an army marches on its stomach," he meant military campaigns succeed or fail on logistics, the system of supply and replenishment that keeps the front lines stocked with food and ammunition.

Modern retailing depends even more on its logistical umbilical cord than did Napoleon's army. Therefore, fixing a dysfunctional convenience store industry supply chain is one of the top goals of 7-Eleven CEO Joe DePinto.

"The current supply chain is archaic and complicated," he said. "It takes store operators' attention away from serving the customer." This is not just a concern for 7-Eleven, but for the entire convenience store industry.

"Distribution is so important to our industry," he said. "We have not previously talked about how significant we are and what kind of a partner we are to some of our vendors."

DePinto pointed out that in any good partnership there is "give and take" and an understanding that when things are out of balance, such as with DSD and, in some cases, wholesale distribution, the model must change and adapt.

"We recognize there are many redundancies in the current distribution model," he continued. "Because of the current economic times, and the rising costs of fuel and labor, we are committed to changing the model now to meet consumer and store needs."

DePinto's sentiments are more than just talk. 7-Eleven is already working to simplify store operations and consolidate DSD distribution. The company has successfully consolidated its fresh foods delivery system and is using the same approach with other major product categories by reducing the number of deliveries each store gets and the number of vendors delivering to each store.

The retailer is currently considering a logistics test in Southern California, and later this year plans to work with select vendor partners to consolidate distribution beyond fresh foods to frozen foods, grocery products and heavy liquids. In essence, rival DSD and warehouse-delivered brands will be asked to work together, sending products to a single warehouse where they will share space on the same trucks, minimizing the number of trips to each 7-Eleven store.

"The typical c-store gets between 50 and 70 deliveries a week [7-Eleven stores average about 62]. It's very inefficient when we have one vendor's truck on the lot and a second vendor on the lot waiting to get into the store," explained DePinto. "Who is paying for that second vendor to sit and wait on the lot? We all -- the distributor, the retailer and the consumer -- are ultimately paying for it."

Much of the inefficiencies in the industry are created by the costs borne by an inefficient DSD system, according to DePinto. For example, a branded bottled water that comes through a warehouse to 7-Eleven stores costs about 60 cents to deliver. However, the same bottled water from a major manufacturer through the DSD model would cost around 80 cents, he said. That 20-cent difference comes right out of the retailer's margin, claimed DePinto, and the bulk of that additional cost is caused by the inefficiency of the distribution system.

"The convenience channel's distribution system was built for the grocery industry, and the way product is delivered today is basically the same as 30 years ago -- but costs are higher -- labor, credit card fees, distribution costs, fuel," said DePinto. "The time is right to challenge the status quo, especially in light of fuel and environmental concerns," he added. "Distributors should look at modernizing a 50-year-old model and embracing a new, more efficient way to do business."

DePinto would deploy the model being used in Japan by the company's parent, Seven & i Holdings Co. Ltd. Once deployed, deliveries would decrease to 12 to 15 per store per week, he claimed.

But how do you cut deliveries to stores by as much as 50 per week and still keep them in stock and supplied with fresh food and merchandise?

In response, DePinto describes the current state of distribution as a "hairball chart." For example, take a specific municipal area like Dallas-Fort Worth. 7-Eleven has several DSD distributors and each truck goes to all the 7-Eleven stores in the market. Now, if similar products are consolidated on a single truck (for example, Coca-Cola soft drinks and Anheuser-Busch beer), one truck can go to fewer stores and replace the need for several other trucks to service one store, saving on fuel -- not to mention reducing the company's carbon footprint -- and cutting costs.

There are a lot of built-in barriers that can complicate DePinto's plans. For instance, many suppliers of DSD products don't own their own DSD systems, at least not fully. So they can't convert distribution approaches without buy-in from independents, which may number in the dozens and be very resistant to change, noted Jim Hertel, managing partner with Willard Bishop in Chicago.

Several DSD vendors contacted by CSNews declined to comment on the retailer's efforts to transform the industry's distribution model. "I'm a realist and understand there are significant roadblocks with some of our DSD distributors," DePinto acknowledged. "I am empathetic [to distributors' resistance to change], and I understand it, but if we truly think there is a change to be made, where there is a will, there is a way, and I'd like to see us work together."

If any company can exert its will for change, it is 7-Eleven, reasoned another consultant, David Bishop, managing partner of Barrington, Ill.-based Balvor. The chain's logistics, including an integrated distribution model that allows the company to supplement the distribution methods other retailers would use, are unsurpassed in convenience retailing.

"Cost and price have always been important," DePinto continued. "But during these tougher economic times, we have the obligation to the customer to control costs. It is the responsibility of all companies that serve the c-store industry to control their costs."

Fixing the distribution system may prove easier due to 7-Eleven's leadership in retail technology. "We believe the retail business is a logistics business," said DePinto. "We are big believers in technology and the use of technology to properly manage our product assortment. You will see us spending capital not only on information technology, but also to get products to the stores more quickly and efficiently."

Most franchisees interviewed for this story praised the competitive advantages afforded by 7-Eleven's technology systems. "That's one of the hallmarks of 7-Eleven's infrastructure: data gathering and utilizing information," said Bob Strauss, head of the Chicago-based Windy City Franchise Owners Association (FOA).

Through an Intranet that is connected to each store, franchisees can find information on a variety of topics, including item-by-item management and merchandising, controlling internal issues, making decisions to add or delete items and electronic ordering, according to Strauss.

Dennis Lane, the chairman of the National Coalition of Associations of 7-Eleven Franchisees, also called the retailer's business system "excellent," but acknowledged "there is always room for improvement." Most beneficial to him is the in-store technology, which provides the ability to do payroll and transmit it electronically, to analyze scan data from the point-of-sale (POS) system, and to order milk, baked goods and other products through the Central Distribution Centers (CDCs).

"The scan data is priceless," Lane said. "So is the fact I can order some products by 10 a.m. and have them in my store by 6 p.m."

The system allows franchisees to merchandise to neighborhoods more effectively, he added. "It helps me tweak the mix. The entire universe of products carried by [primary wholesaler] McLane Co. is available to us, not just 7-Eleven recommended products."

Lane's predecessor as chairman of the national coalition, Tariq Khan, agreed with this assessment of the POS system, saying his stores scan almost 95 percent of their products. "To have the scan data when sitting down with suppliers -- rather than syndicated or other data -- is priceless. I can tell you what my best and worst movers are in any category. The inventory is specific to each store."

The POS and ordering system also supports one of 7-Eleven's primary objectives: getting new products in stores quickly. "It is one of the key factors to growing sales," said Lane. "We cater to 18- to 35-year-olds who get their news and learn about new products on the Internet. That is a very connected generation. The consumer sometimes knows about a product before we do, and wants it immediately."

However, another franchisee worries that the retailer's new technology and systems cause store operators to spend more time in the back room than at the sales counter. Roger St. George, head of the Pacific Northwest FOA and a 7-Eleven franchisee for 29 years, noted as more corporate level processes become the franchisee's responsibility, such as accounting and ordering, it has resulted in higher labor costs.

Although acknowledging that the electronic ordering system is a key benefit of the 7-Eleven network, St. George explained that the ordering process prevents him from receiving an order a day in advance to account for out-of-stocks or special situations such as holidays, and he's seen an increase in the time it takes to place an order and receive it.

Lane, a 22-year franchisee with five stores on Long Island, added, "We need to be leaders in technology initiatives to help franchisees do things easier."

DePinto would probably agree with that.