"Keyes" to the Future

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"Keyes" to the Future

By Claire Pamplin - 05/06/2002
Jim Keyes, the CEO of 7-Eleven Inc., wants to put the power of retail where it belongs, into the retailer's hands — as opposed to those of manufacturers and distributors. He learned from 7-Eleven's Japanese licensees and shareholders important lessons in reevaluating every detail of the way the company operates, and in the crucial shift to a buyers' market shaped by customer needs.

Now, Keyes is leading the convenience giant into an era of technological sophistication that will put powerful retailing tools into the hands of store managers and key self-service products into customers' hands. The company recently partnered with Plano, Texas-based EDS for a full information technology package.

The chain's new stores will be on the small side , 1,500 square feet, and will not blanket the country, but rather will be clustered in key markets where enhanced distribution systems, supported by the new technology, and will ensure consistency in keeping stores in-stock and freshness for foodservice offerings.

Keyes sat down with CSNews Editor-in-Chief Claire Pamplin recently to talk about 7-Eleven's new directions.

Explain more about the advantages of your partnership with EDS.
There are three ways that we look at the use of technology. One is in simplifying the store, putting more simple-to-use information in the hands of the retailers so that they can make more informed decisions, so that their lives as retailers are less chaotic and that they're more in control if they're investing at the store level.

A second is being able to satisfy our customers in different ways. And V-com, the self-serve kiosk, is a good example of that. With V-com we have the opportunity to take existing products and services, something as simple as money orders, and then make it easier for a customer to buy a money order by making it self-service. There was a time when clerks served Slurpees. By moving the machine out and making it self-service, it changed the level of popularity of Slurpees. Customers liked doing it themselves.

With financial services, it's the same opportunity. It's a much different transaction than buying a bag of chips or a pack of cigarettes. So, if we can get that transaction into an easy-to-use environment, then the customer feels better about buying it. V-Com will allow customers to purchase money orders, use ATMs, and they'll go there to cash checks and pay the utility bill. We want to take the $5 billion worth of money orders that we sell every year and make it easier for the customer to buy those. These are services that lend themselves nicely to 7-Eleven.

But the real exciting opportunity comes once we establish the use of technology in an electronic distribution system. As our bandwidth expands, for example, and it becomes possible to download a CD in two minutes, we could literally sell CD-ROMs or movies, video games, anything that can be distributed electronically.

What is the third advantage of 7-Eleven's technology program?
To offset costs. We have a very expensive infrastructure. I was asked by an analyst recently, "Why is it that the convenience store business gets 34 percent gross profit margin and you make 2 percent net operating? Where does it all go?" My answer was that it's very expensive to run these distributor operations. Technology can take a lot of that expense out, whether it's the 980 people that we still have today doing manual processing of invoices, or the ability to communicate directly with suppliers, to place an order directly.

Was there any resistance to pushing this program forward?
With every passing day, we get more and more evidence that this business concept works. The changing economy actually helped us because we first noticed the change in the economy in the third quarter of 2000. We were reporting something called the working-man's recession because we saw it in our beer sales and our cigarette sales.

Because gas prices and cigarette prices have gone up, our customers actually started to change their behavior. Wall Street scoffed a little bit. At the time the dot-coms were still flying, the economy was strong. But it turned out that we were actually a good predictor of where things would go. And by seeing that change, we were able to change our product mix. We went to single beers instead of 12-packs, half cartons of cigarettes, half-gallons of milk, even. Those things contributed to a quick recovery from the tight economic times, and within six months we were right back to our 5-percent same-stores sales increase.

So from now on you'll have Wall Street calling you saying, "How's your beer doing?"
We have actually been interviewed several times by different Wall Street groups now saying, "What are you seeing now?"

Will the technology 7-Eleven is implementing be mandatory for any self-respecting convenience store, regardless of size?
Yes. We don't think that 7-Eleven is doing anything revolutionary. We are actually building what we believe are better retailing fundamentals. The only difference today is with technology we believe that it can be easier to put retailing decisions at the point of sale. And I'll contrast that to what many retailers are doing. Wal-Mart, for example, is doing many similar things with the big difference being the use of technology more for replenishment.

One could argue we would be better than we are today if we also did store replenishment of goods using technology. But what we would always miss is the ability for that retailer to know about a football game on Friday night, that at 10:30 the store would be full of students, and they'd better be stocked with extra chips and more hot dogs on the grill. That's good retailing.

7-Eleven seems to be bucking a c-store industry trend by building smaller stores.
You're right. We are bucking the trend. We were moving toward bigger and bigger stores. In fact, I think at one point, we built something close to 4,000 square feet. It was well over $3 million to build. But we can build four or five 1,500-square-foot stores for the same price.

Look at the success of Starbucks as a classic example: Starbucks could not have been successful if they built a 3,000- or 4,000-square-foot coffee shop. It would have really limited their real-estate opportunities, and it would have made them far less ubiquitous in the marketplace. When I see the success of our Asian markets, the business concept is very much the same.

Tell us about your new Times Square store in New York City.
The concept actually started on a trip in Asia. Someone from the press in Taiwan asked me what it's like to be a Taiwanese company. And I said, "Well, that's really interesting. But we're a U.S. company."

And there was a good and a bad aspect to this. The good part was that 7-Eleven has such a local flavor wherever in the world they are, people see it as their company. So they thought of it as a Taiwan company. But the problem was when I pressed a little further, this reporter had been in the United States a number of times and had never seen a 7-Eleven.

Where do people come when they come from many foreign countries to the U.S.? They go to New York City. And so it was a bit of an eye-opener that here we are in 20 countries and we don't even have a presence in the biggest city in the world — or the biggest city in the United States.

Will Times Square be your only Big Apple location?
We're actually looking at two locations. The other is on Wall Street, so that we can get additional presence in the investment world.

We want them drinking our coffee instead of Starbucks on the floor of the Exchange.

What is 7-Eleven's motor fuels strategy?
We decided many years ago to look at gasoline as we look at our other products; it's a convenience opportunity. One of our offerings is location and convenience. We make it easier. You don't have to drive 10 miles out of your way to get the cheapest price in town. We look at gasoline as a convenience product as opposed to a traffic builder.

What are the company's plans for expansion?
Our focus for the next few years is to get our infrastructure straight and for our core business to be very, very strong. And if we can, through the changes that we're making, create an operation that will generate 4 and 5 percent on the net operating income before tax, at that point every new store that we build is a 20-percent return-on-investment opportunity. Then it will be much easier to dramatically expand the size of the chain. For now, by sticking to our knitting and improving our fundamentals as retailers, the growth opportunities will come.