Have Japanese convenience store operators found the winning formula to conquer Asian markets?

Expansion in Asia’s emerging markets is seen by major Japanese “konbini” operators as an essential strategy to offset challenging market conditions at home, but are their objectives overambitious?

Compared to more modest local players in many Asian markets, Japanese-based convenience store chains benefit from strong operational efficiency based on their experience of operating in a highly competitive domestic market.

However, with a challenging domestic environment in which they face an ageing population, could declining profitability at home eventually undermine their capacity to invest abroad and ultimately scupper their wider global ambitions?


o Implications for Japanese convenience store operators:

Successes in emerging markets in Asia-Pacific will rely increasingly on establishing solid partnerships with local master franchisees as well as on building efficient logistics centred on a network of local suppliers.

o Implications for local competitors:

The efficiency standard in convenience retailing and customers’ expectations in terms of product quality and choice are set to rise, prompting consolidation and an acceleration of the move towards franchising.

o Implications for Japanese food manufacturers:

The expansion of convenience store chains provides further opportunities to develop their presence in emerging markets through local production facilities.

Domestic market – not yet saturated?

In contrast to larger store formats such as supermarkets and mass merchandisers, which are both forecast to see sales decline in Japan between 2010 and 2015, convenience store sales are expected to increase, albeit moderately. The channel is not yet too saturated and is relatively resilient to the low level of consumer confidence and high unemployment.

Japan’s demographic conditions, with an ageing population, favour smaller neighbourhood store formats over larger stores, and tapping into the demand from middle-aged and elderly customers will become more essential for convenience store operators to offset the decline of the overall Japanese population.

The recent launches of hybrid concepts between convenience stores and parapharmacies/drugstores, tested by AEON and Lawson, also illustrate how these companies are trying to meet the emerging needs of these age groups.

Although the Japanese market is competitive and highly concentrated, with the top five players accounting for 83% of channel sales, the presence of small regional chains remains significant.

Hence, major operators still have potential for expansion, especially in smaller cities and in the residential areas of large conurbations. Itochu expects to expand further and plans to add 2,000 Family Mart outlets by 2015, to its total of 9,000 in 2010.

Seven & I is opting for a more cautious approach. The company is planning to close around 600 of its least profitable stores in 2010 in order to increase margins, while simultaneously opening 1,000 new outlets in new areas.

China – strategic partnerships to boost expansion beyond first-tier cities

Itochu, Lawson and Seven & I have highly ambitious expansion targets in China. Due to the large distances between Chinese cities and the wide economic disparities between regions and differing legislation regarding the authorisation of franchise stores, Japanese convenience stores have generally focused on first-tier cities.

However, as they grow in line with rapid economic growth and the modernisation of the retail infrastructure in second-tier cities and take advantage of changing legislation that authorises franchised stores, operators will be increasingly present in other cities through area licensees.

While Seven & I plans to open around 400 company-owned 7-Eleven outlets in Beijing and Tianjin over a three-year period to 2012, expansion prospects are likely to be more important in the Guangdong Province in Southern China, where local authorities have given the group’s local partner Dairy Farm permission to open franchised stores. Seven & I should also make efficiency gains as a result of the rising food production of its Taiwanese partner Uni-President in China.

Lawson intends to open 130 outlets in 2011 in Shanghai and Chongqing and has ambitious longer-term plans to grow its network tenfold to around 3,000 stores by 2020, with possible ventures in several north eastern cities including Beijing, Dalian and Shenyang as well as in Chengdu in the south.

Most bullish is Itochu, which stated that its single biggest growth market will be China, where it intends to have 4,500 Family Mart stores by 2015, over 10 times its 2010 number. This plan will be supported by recent investment in its logistics and distribution network in Shanghai and Suzhou. For 2010, it expects to expand its presence in neighbourhood areas of Shanghai with 100 new outlets.

Malaysia, the Philippines and Thailand firmly on the radar

Not all attention, however, is being focused on China, with numerous other emerging markets in Asia with a low level of maturity being fertile grounds for Japan’s convenience store chains as they increase the use of franchised stores in order to develop their presence and keep capital expenditure low. While around 90% of 7-Eleven convenience stores in Japan are run by franchisees, this proportion remains much lower across Asia.

In Malaysia, Seven & I will rely more frequently on franchisees to drive expansion, and sees potential to almost double its store network to 2,000 units by 2015. Expansion could also be boosted by a possible venture into forecourt retailing in partnership with Shell.

In Thailand, the proportion of Seven & I’s franchised stores stood at around 45% at the end of 2009, and the group seeks to raise it to 60% over a five-year period, with the pace of network expansion set to be maintained at 500 units annually. Meanwhile, its rival Itochu plans to open over 400 stores by 2015 to reach a total of 1,000.

The retailer innovated in 2010 with the presence of Yamazaki Express bakery counters under a partnership with the Japanese food manufacturer Yamazaki, in a deal which illustrates the synergies that can be achieved between Japanese and international operations.

In a less developed market where it has little direct competition, the Philippines, Seven & I expects to double its network between 2010 and 2013 to reach 1,000 stores, with 100 new units planned for 2010.

A broader battleground – recent and future market entries

Recent and future market entries will ensure that the main players extend their international reach. Indonesia and Vietnam in particular remain underdeveloped markets for convenience stores, but could be future battlegrounds for Japanese chains.

Itochu ventured into the Vietnamese market in January 2010 via a joint venture agreement with local company Phu Thai Distribution & Investment Group, and plans to open 300 stores within five years.

Rival Lawson stated that it is also considering entering Vietnam. Seven & I widened its presence in emerging markets by entering Indonesia in November 2009 with its first stores in Jakarta, although its expansion has been slowed by legal barriers as it struggled to obtain the correct licence for its outlets.

Japanese players to retain competitive advantage

In the highly cut-throat environment in Japan where margins are low, convenience store operators have to diversify and innovate, while continuing to expand in emerging markets. The recent format innovations tested and product mix diversification in Japan indicate that Japanese operators are likely to retain the level of profitability required to fund investment abroad.

As they retain high standards in terms of format innovation and operational efficiency, this should also help Japanese retailers maintain a clear lead over local retailers. Hence, although some of their expansion targets may appear overambitious, they are well positioned to meet most of them, with the support of local franchise partnerships.