If one walks 100 meters along any street in Taiwan, one can usually find up to three convenience stores. This is a common scenario in Taiwan where there are more than 10,000 convenience stores, making it the country with the world’s highest density of convenience stores per person.
Qian Mei-juan, franchisee and manager of 7-Eleven Taipei Furong store, describes such intense competition for customers as the “traffic light war,” in that every time when the lights turn green, people have decided which convenience store to shop. Now, in response to changing market conditions, Taiwan’s top two convenience store chains—7-Eleven and FamilyMart—have been quietly undergoing transformation to sustain their growth by placing greater emphasis on setting up shops in commercial districts and establishing their own characteristics.
When visiting the 7-Eleven Furong store, one can find that next to the cashier counter, the area previously set aside for a magazine and newspaper rack is now for the display of Muji products. Some students and tourists come into the store for the specific purpose of buying Muji stationery and snacks, driving sales of such products up by nearly double. Besides the simmering pots of popular Japanese stew oden, there is a three-tray display case for selling Mister Donut products. And in the refrigerated section, a row of organic vegetables supplied by Formosa Environmental Technology Corp. is available. These are the features of the third-generation convenience stores.
Slowing sales trigger a competition war
From the first-generation convenience stores with 24-hour operations to the second-generation outlets with an emphasis on standardization and extensive store openings, the creation of third-generation stores has triggered a battle in retail channels.
The main factor igniting fierce competition is that the convenience store market is approaching saturation. Based on statistics compiled by the Ministry of Economic Affairs, the annual sales growth rate of the local convenience store sector reached nearly 9 percent in 2012. This decreased to 2 percent in 2015, trailing that of supermarkets and department stores and posting the lowest growth rate among various retail channels. Lin Yuan-ching, chief of the logics section at Business Model Innovation Division under the Commerce Development Research Institute in Taipei City, said “The high density of convenience stores has caused a bottleneck for further sales growth. It has become increasingly difficult to open new stores, increase foot traffic or raise unit prices.”
Amid this business battle, 7-Eleven and FamilyMart have adopted a different strategy of “shop in shop” and “the hybrid store” respectively to attract more customers. So far, some 400 7-Eleven stores offer Muji products. Also, the Starbucks branded-shelf has been established at about 30 of its stores. The “shop-in-shop” strategy has helped increase sales at the new format stores by 20 percent. Sales at FamilyMart’ new hybrid stores featuring cross-industry cooperation have also increased by at least 30 percent compared with those of its traditional format stores.
Partner with leading companies, raise unit prices
Take a look at the business strategy of President Chain Store Corp., which operates 7-Eleven convenience stores. “We’ve been thinking about how to encourage customers to extend their stays at our outlets,” PCSC President Ray Chen said.
The introduction of the new store formats by convenience stores actually has an evolutionary process. In 2008, PCSC had already started looking for ways to combine fresh food and a cafe, as well as establish seats and special areas for certain brands. To date, more than 70 percent of 7-Eleven outlets or about 3,700 stores, feature larger premises to offer these services.
Also in the last five years some outlets have sought to offer products with local characteristics. For example, flip-flops are sold at 7-Eleven stores located in Kenting in southern Taiwan’s Pingtung County. And its mascot, Open-Chan in sheep costumes, is sold at its stores in the Cingjing Veterans Farm in central Taiwan’s Nantou County. Over the last two years, the company has adopted shop-in-shop solutions at select outlets in commercial districts.
“Competing with our rivals for better store locations not only increases our operating costs, but also affects the sales performance in our existing stores,” Chen said. “Sales at traditional outlets are often affected by the intensity of the promotional activity. Only by increasing functions, expanding product lineups and undergoing sweeping overhauls can they register sustainable growth.”
PCSC has maintained competitive advantages as it has many reinvestment businesses such as Starbucks and has acquired distributorship rights such as for the sale of Muji products. PCSC sold its entire 51 percent stake in Muji (Taiwan) Co. Ltd. to Japan’s Ryohin Keikaku Co. in 2014. Chen said introducing strong brands into shop-in-shops can bring in new customers and increase consumers’ average spending. “Teaming up with other top companies can create a better outcome,” Chen said.
Key strategies: simple, easy to copy
To maximize its competitive advantages, PCSC opts to integrate brand resources within its business group and duplicate the shop-in-shop model at a fast pace. “If the business model is not easy to copy, then don’t do it,” Chen said. He said his company will monitor the sales performance of its shop-in-shops and will eliminate such an arrangement if their sales results are poor.
Currently, PCSC sells merchandise produced by its eight affiliated enterprises at 7-Eleven stores. Take shop-in-shops which offer Muji products for example. The provision of Muji’s pens, notebooks and snacks that carry low unit prices and are high in demand can attract many customers who normally do not visit its specialty stores. This helps the Japanese company nurture potential customers. In addition, currently around 150 7-Eleven stores located near schools or transit stations sell doughnuts from Mister Donut and related sales had registered a 10 percent increase last year.
Let professionals take the lead
Different from PCSC, which capitalizes on its group’s collective strengths and ownership of strong brands, FamilyMart seeks to cooperate with other industries such as Taoyuan city-headquartered Great Tree Pharmacy Co. Ltd., which operates a chain of pharmacy stores across Taiwan, and Penghu County-based Tan Hou Ocean Development Co. Ltd., which focuses on sales of meat, seafood and organic produce to create a new hybrid store format.
Before adopting the hybrid approach, FamilyMart had experimented with the shop-in-shop solution by setting up a kitchen to offer Taiwan-style boxed lunches, which contain rice, an assortment of vegetables and meat like fried chicken or pork chops, as well as a special area for selling health products and cooperating with home appliance firms to establish a customer experience place. “These efforts had all failed. The procedure for producing boxed lunches is too complicated, while selling home appliances and health products needs someone to provide explanations. These are not the strengths of convenience stores,” Yeh Jung-ting, president of Taiwan FamilyMart Co. said.
By learning from its failures, FamilyMart has got a different idea: invite professionals to do what convenience stores cannot do. Yeh found that “sales guides” are the key to success of the new format stores. Given the major customer groups at convenience stores want to enjoy fresh and hot food made on site and middle aged and older adults as well as housewives emphasize health, FamilyMart thus seeks to collaborate with Great Tree Pharmacy and Tan Hou Ocean Development as it trusts professionalism. Accordingly, the company let pharmacists take charge of pharmaceutical sales and employees of Tan Hou handle sales of fish and boxed lunches. “As we are unable to cultivate such talent, we choose to adopt the franchise model.”
On the other side, for Great Tree Pharmacy and Tan Hou Ocean Development, FamilyMart is a powerful sales channel with a stronger reputation. In April this year, Tan Hou shut down one of its shops near the Tianmu store of Pacific SOGO Department Store and then opened a hybrid store with FamilyMart also in the neighborhood.
Fewer products, 10 percent more sales
Yeh said though the number of product items from Tan Hou at the new hybrid store is only a half compared to its previous store, the food company has enjoyed a sales increase of 10 percent. “Visitors to our convenience store are the new customers for Tan Hou and that together with its existing customers demonstrate the effectiveness of the hybrid system.”
Cheng Ming-lung, president of Great Tree Pharmacy, also identifies with such a differentiation strategy of attracting customers. For example, at the FamilyMart Great Tree store located near the Taiwan Adventist Hospital in Taipei City, sales of diapers and milk powders have tripled since its opening. “Prices of products sold at our hybrid store are the same as at the [Great Tree] pharmacy store and moreover they can be delivered directly to consumers’ homes. Plus, customers can take advantage of our convenience store’s promotional activities and point cards,” Chen said. “These benefits attract a lot of housewives to visit our store.”
Chen decided further that his company will team up with FamilyMart to open five hybrid stores by the end of this year. Nevertheless, FamilyMart’s duplication speed of the hybrid store format is slower compared to that of 7-Eleven’s shop-in-shop model as it currently only has five such stores nationwide. But Yeh said his company will seek more business partners from different industries and hoped to open 300 hybrid stores in the next five years. The battle between the two giants in the convenient store sector is heating up.
As Hsu Chung-jen, known as Taiwan’s “godfather of logistics” said, “The market is not saturated, only reshuffled.” Over the last 20 to 30 years, the mushrooming of convenience stores has caused small grocery stores to vanish on the street corners. Nowadays, the new-format convenience stores have attempted to reshuffle the market with their overwhelming advantages and have declared a battle against all different types of retailers. Those who are not prepared for the battle will eventually be eliminated from the competition.
[By Deng Ning / tr. by Kelly Her]