Taiwan Today

There is a Chinese saying that "fat profits follow many moving feet," and local entrepreneurs are showing that the old adage is certainly true in one of Taiwan's newest retailing success stories, the chain stores. After a sluggish start roughly six years ago, chain stores have exploded into the marketplace in the past three years, putting heavy pressure on the old—and ubiquitous-mom-and-pop variety shops. The three largest chains already have well over six hundred stores in operation, and it is predicted that the number will exceed a thousand by the end of 1990.

Traditionally, the neighborhood mom-and-pop shops were the final link in a distribution process that provided families with many of their basic needs. Lack of competition created an environment of business as usual, which meant that the variety and quality of products, the shops' interiors, and the style of service remained relatively constant. Not even a government-supported chain store operation called "Youth Store," set up approximately fifteen years ago, could stimulate any great change in the way these small retail stores operated. The loosely organized Youth Stores program did not emphasize coordination among different stores and failed to introduce modern concepts of retailing or economies of scale.

But the land of small entrepreneurs has been shaken by new concepts in retailing, and the business terrain is being thoroughly reshaped as a result. Consumer preferences have changed radically, especially in the past five years, and most of the old shops have just been unable to adjust. "Convenience store" now means more than "variety shop." People expect good lighting, high standards of cleanliness, clearly displayed items, and prompt and friendly service. If these are missing, too bad, it was nice talkin' to ya, pops.

According to a census of retail stores by A.C. Nielsen Marketing Research, (Taiwan Branch), during the period 1984-1988, the number of mom-and-pop stores dropped from about 53,000 to 27,000. When a new chain convenience store opens, it is not unusual for it to clear away five or six mom-and-pop stores within a 500-yard radius.

Even a decade ago, the mom-and-pop shops seemed as durable, and enduring, as Yangming Mountain. They were a part of everyday life, conveniently located just around the corner from home, and normally managed by old acquaintances of the family. And they carried everything: canned foods, dry goods, drinks, packaged snacks, knoshmittel (well, not everything), alcoholic beverages, cigarettes, and durable goods such as soap, detergents, pesticide and kitchen utensils. Usually the only perishables the shops sold were eggs and possibly milk and juice.

Variety, yes; aesthetics, no. The goods were invariably piled up in a small and faintly lit room following a system of organization that would challenge a me­dieval librarian. Management techniques were also fairly primitive. It was a family operation, and the shop's books were not models of bookkeeping excellence. Nevertheless, the mom-and-pop shops met important consumer and social needs. They were centers of gossip as much as a source for new buttons, hard candy, and cooking oil. They would have no doubt lasted forever if Taiwan had stayed the same.

It did not. Marked changes started occurring in consumer patterns during the late 1970s. Population pressures drove the city upwards into high rises, working patterns changed the pace of life and structure of families, and the a­mount of people's disposable income in­creased. The time was ripening for a new concept in retailing, especially for fast, efficient shopping in convenience stores. It was time for the chains; well, almost.

The first venture, by President Enterprise Corporation, was far from an immediate success, and part of the problem was timing. At the end of the 1970s, per capita income in Taiwan stood at a mere US$2,300, and the economy was still under the shadow of recession. But President Enterprise, the king of food and animal feed processors, was Taiwan's fif­teenth largest company, and its owners figured they had the financial clout and staying power to succeed. They needed both. It took six years to turn a profit on their chain of American-style 7-Eleven stores which they set up under the name President Chain Store Corporation (PCSC).

The firm's executives had noticed the rapid development of chain stores and related services in Japan in the 1970s, and they were convinced that building a modern chain store network in Taiwan could update the backward style of local retailing and eventually turn big profits. But it was not easy to remain optimistic. PCSC's 7-Eleven stores continually bobbed in the red from 1979, when it became Taiwan's first regular chain store operator, to 1985 when it earned the rust profit dollar for itself and its U.S. franchiser, the Southland Corporation.

PCSC's original network of fourteen 7-Elevens included Taipei in northern Taiwan, Taichung in the central part of the island, and Tainan and Kaohsiung in the south. During a few low months in 1983, the pace of store closings exceeded openings. The chain's competitiveness was weakened by its limited number of stores, low volume, and few opportunities to benefit from economies of scale.

At rust, the firm's management thought that retailing success would come if they could only smooth out the long zigzag distribution process and create an effective outlet for their own products. "Initially, the distribution network was fairly chaotic, and it was frequently disrupted by non-market factors such as personal connections and personalized business arrangements," says Melody Hong, a public affairs specialist at President. "Cutting down on price markups and setting up our own sales outlets eventually benefited both the manufacturers and the consumers. "

But PCSC lost money during the first years because it aimed at the wrong target. "Some customers in southern Taiwan took their shoes off before entering a 7-Eleven," Hong says. "They thought that prices in such a clean and well-ordered place must be very high."

Two critical changes turned the profit picture around. In 1980, PCSC imported retailing knowledge from the U.S. and made Taiwan's 7-Elevens an identical twin of its American counterpart. The second shift came in 1983, and· it was even more drastic. After a detailed market survey, PCSC decided to change the target customers, preferred store locations, and product combinations. They targeted working women instead of housewives, moved into high people traffic areas, and left the residential neighborhoods and started carrying a greater number of processed convenience foods instead of fresh meats and produce. Profit sheets soon indicated that PCSC had a success story on its hands.

Hong analyzes the turnaround: "We found out that U.S. know-how needs to be translated into a locally acceptable formulation. Detailed evaluations and systematic market surveys have given us a more accurate picture of the Taiwan market. The American and Japanese experience in running convenience stores was quite misleading. For example, at the very beginning, we included durable goods such as pots and pans and perishables such as vegetables and fresh fruits in our inventory. It was a wrong combination for the Taiwan market."

PCSC also drew on its parent company. Working together with President Enterprise Corporation, it developed a menu of fast food items designed to appeal to Chinese taste buds. "Tea eggs are a favorite Chinese way of preparing boiled eggs, and our customers appreciate us for carrying them," Hong says. "The auditors from our U.S. franchiser found it incredible that we were selling this item. They thought such items didn't match 7-Eleven's image." She adds that their Cantonese and Taiwanese snacks are also very popular.

The study of customer profiles has continued, and PCSC has determined that people in the 15-35 age group are their best potential customers, a discovery that has had an impact on business hours. All 7-Elevens are now 24-hour operations.

Today, 7-Eleven has some major chain store competitors. When the retailing atmosphere began changing rapidly at the close of the 1980s, more investors were attracted to the chain store field.

Five other chain operations joined the fray, but they came a decade late and thus far have been unable to dis­lodge PCSC from its leading position. The five hundredth 7-Eleven opened its doors for business at the end of June 1990, and the chain plans to have six hundred stores by the end of 1990.

But the struggle for a larger market share is worth the effort: there is an estimated US$20 billion dollar retail market for food and sundries in Taiwan. PCSC focuses on three groups of consumers—children, teenagers, and working adults-and it tries to differentiate its products from chains in the market. Drinks, snacks, and hot fast foods are staple items for sale. Kids like special lines such as the different flavors of 7-Eleven's "slurpee" and, thanks to TV ads, youths go for "supercup coke" and the "hot dog tycoon." Working adults prefer ice cream, hot chocolate, and ready-to-eat foods. Taiwan's hot weather stimulates sales of soft drinks, but whatever the season, customers do not care much for one of the perennial American favorites- hot coffee. Coffee drinkers have apparently been spoiled by the individually brewed cups commonly served in the island's hotels and innumerable coffee shops.

Although the customer profiles of Taiwan's 7-Eleven chain are generally viewed by competitors as the standard for the industry, other chains are in­fluenced by the styles of their own particular franchisers. They have also tried to set themselves apart from the pack by producing distinctive images and by de­veloping market niches. These strategies have produced a number of differences between the various chains.

"We have targeted teenagers and yuppies between ten and thirty years of age," says Daniel Liu, manager of the am/pm Mini-Market chain, which in many ways is quite similar to the 7-Eleven chain. "Usually they are singles and working adults. They like to buy fashionable goods and stay up late, and they are rather insensitive to price. They don't mind paying a dollar or two more for a package of instant noodles from a bright, air-conditioned convenience store."

In the U.S. the am/pm Mini-Markets are also called "G-stores" (a convenience store operated by a gasoline sta­tion) and they target the driving public. Fast foods are the primary items for sale. The am/pm stores in Taiwan are not attached to gas stations, but their style of operation is similar to their U.S. model. About 15 to 20 percent of am/pm's items are fast foods, including ice cream, yogurt, pizza, and snacks. Self-service is part of the am/pm style. "There is a dis­pensing counter with mustard, ketchup, tomatoes, pickles, and onions where customers can help themselves," Liu says.

Both 7-Eleven and am/pm are backed by a large food manufacturer and therefore enjoy strong bargaining power with their suppliers. Melody Hong of PCSC and Daniel Liu of am/pm admit that they pay close attention to the sales of products supplied by their parent companies, but they claim that their major concern is the overall profit of the stores.

Decisions on how to pick 1,500 to 2,000 items to cram into the small area of the stores are governed by the market. Almost all of the chains have small business premises, ranging from less than 710 sq. ft. to the largest sites of over 1,500 sq. ft. Rents can be high, reaching as much as US$10 per sq. ft. in commercial zones. The rental charge is a key element in calculating the profit performance of products occupying space on the store shelves. Store managers keep an eye on profitability, and they want a fast turnover of items.

Chain executives say that they do not set any artificial barriers on the products of rival manufacturers. "Any item that sells less than thirty pieces per month is considered a dead item and has to be canceled from the master order list," am/pm's Liu says. "We have to be consumer-oriented in order to survive."

There are other reasons for continuing or canceling a product line. Because 7-Eleven has a sales volume exceeding US$265 million, it has the luxury of being able to look beyond short-term profit concerns. It also enjoys great economies of scale that can influence decisions on products. For example, in the monthly evaluation of the turnover of each item, some poor performers that score less than the required return per unit of space occupied are still kept on the shelves. "We have to make some items available to the customers for the sake of their convenience. For example, the turnover of dental floss, umbrellas, and underwear is slow, and most of the time they rank as dead items, but. 7­-Eleven keeps them anyway, " Hong says.

Size gives 7-Eleven another enviable advantage. "With a 500-store network, 7-Eleven is itself a mass medium," Hong says. "Products that need promotion can use us as the starting point, and the results are often very good." The chain is willing to arrange tie-in sales and other types of promotions for new items. For example, 7-Eleven ran a successful campaign pushing the sale of Milka brand chocolate by offering a tie-in gift of the popular supercup coke. Maxwell House instant coffee was also able to capture a 30 percent market share in only three years' time by using on-site promo­tional displays in 7-Eleven stores. It had taken rival Nestle instant coffee considerably longer to capture a similar market share.

Although neither 7-Eleven nor am/pm excludes the products of other companies from their shelves, they do show a preference for their own products. This is done partly as a means of developing a distinctive image and fostering customer loyalty to their regular brand name products. The objective is not easily accomplished because in many cases the goods produced by the various parent companies are more or less interchangeable.

Even though the Family Mart chain does not have the absolute cost advantage possessed by 7­-Eleven and am/pm, it is performing well in the marketplace. The companies backing Family Mart are not manufacturers, and therefore the chain does not get the favorable price breaks enjoyed by their major competitors. But Family Mart's parent companies are experienced service sector corporations, and they are offering valuable support to the chain.

The Chinese Automobile Company holds a 51-percent majority share in FamilyMart; Japan's FamilyMart has a 41-percent share, and C. Itoh Co. Ltd. holds 9 percent. Says J.C. Pan, vice president of Taiwan Family Mart Company: "In the West, a manufacturer seldom gets involved in retailing. Manufacturing and selling are two different fields. The manufacturer's job is to produce the best quality goods possible, and to do this they must specialize in R&D. The retailers are responsible for promoting the product."

While 7-Eleven and am/pm chains have imported their retailing techniques from the U.S., FamilyMart is drawing on help closer to home. "In some respects; Taiwan is quite similar to Japan," Pan says. "Tokyo and Taipei are both densely populated metropolises in the East, and FamilyMart has already shown that it is the competitive equal of 7-Eleven in Tokyo."

Eight years ago, when the first Family Mart was opened in Tokyo, there were already more than six hundred 7-Eleven stores operating in the city. It was a lopsided war, but Family Mart was equal to the task. At present, it has well over two thousand stores in the Tokyo area, no less than 7-Eleven. "In Taiwan, we are not yet in a position to compete against what has taken PCSC more than ten years to build up," Pan says. "Our strategy is never to lose to the competition at any new location established. If we lose, there is no way we can develop our future market share."

Taiwan's Family Mart made a long-term assessment of the local market before it actually initiated operations. They learned that a good location would take a store more than half way to success, and the chain has been aggressive in utilizing this knowledge. It is the job of the chain's development department, considered to be the "locomotive of the business, to win every battle for store sites. Its track record thus far has been excellent."

"For example, after 7-Eleven opened a store in the National Taiwan Normal University area," Pan says, "we decided to open a Family Mart right next to it. We didn't fail. Our three stores in the Taipei Railway Station area are also very successful," he adds.

Just as during the early development of 7-Eleven, Family Mart had to find out how best to judge the market. For this, it has drawn on the support of C. Itoh, one of its company backers. C. Itoh is one of the largest trading companies in Japan, and it has 146 branch offices in 70 coun­tries. It is an agent for other companies and does not do any manufacturing itself, but the company has a worldwide distribution, financial, and information network which it has put at the disposal of Taiwan's FamilyMart.

With the imported know-how, Family Mart has established a product distribution center in Wuku, a highway hub which is only about 40 minutes by car from Taipei. Here it set up the heart of its operation, a point of sales (P.O.S.) computer system. This is considered to be the central nervous system of the selling network, and it should enable the chain to undertake speedy expansion in the near future.

The P.O.S. management system is the key element which makes store automation possible. Shopkeepers can use the P.O.S. bar code scanner to order goods, record total trade, list the most popular goods, and serve other analytic functions. It saves both time and man­ power. The proliferation of computerization and automation in offices, factories, and other places of business has been supported by the government for the last eight years, and this has created an environment in which the P.O.S. system can function without much difficulty. The 7-Eleven and am/pm chains have also started to install the system. For example, President Enterprise and PCSC have set up a distribution center with the technical help of Mitsubishi Corporation to control the entire PCSC network.

Family Mart's Pan explains the need for the computerized system: "A perfect­ed supply system is needed to back up large-scale expansion in the future. A computer on-line system in the distribution center processes incoming and outgoing information, including orders re­ceived from hundreds of chain stores with varying quantities and thousands of items reported at different times. With such a large chain store network, we can't telephone to order thousands of items from hundreds of manufacturers."

Some analysts think that the Taiwan retail market is large enough to accommodate ten thousand convenience stores. Others estimate the maximum number to be closer to two thousand. Liu of am/pm thinks that somewhere between two and five thousand stores is the most reasonable estimate. "We have to leave some space for supermarkets in cities and for traditional mom-and-pop stores in remote areas," he says.

Whatever the total, it appears that being a latecomer into the market can be an advantage, as long as there is still room for expansion. Family Mart executives, for example, think that three to four years are enough to attain the volume needed to benefit from economies of scale. The latecomer in the chain store business can in effect leapfrog the period of trial and error.

From the positive projections being made by Taiwan's largest chain store operators, it appears that the number will continue to grow rapidly and that the competition will be fierce. But no matter who has the largest number of stores, it is clear that traditional mom-and-pop retailing is coming to an end. The neighborhood family shops, despite their homely appeal, must invest more money, update management methods, and improve their appearance. The alternative is to close.

But even with these adaptations it is still doubtful that they can survive. "They will make it only where there is no keen competition," Pan says. "They don't have a large enough sales volume or the P.O.S. information system, their bargaining power with manufacturers is weak, and their profit margins will remain very narrow. They can hardly be expected to survive under such circum­stances."

According to chain store executives, there is but one-way to save the traditional shops: they will have to join the chains in some form of association. While it may be difficult for these fiercely independent entrepreneurs to subordinate themselves in some ways to the chains, it might just work. Chain store owners say that they would welcome the mom­-and-pop stores as a part of their franchise operations, and they are generally willing to share their logos, know-how, experience, and profits with them. The idea bears careful thought, especially since the small shops have long offered a style of personalized service different from the chain stores. There still might be room in the marketplace for mom and pop after all.