7-Eleven stocks up on tech savvy

To aid her decision, Neal held a new lightweight wireless tablet with a colorful screen chock-full of information. She noted that she had two sandwiches that were due to expire that day and six the next. Using the gadget's built-in keyboard, she recorded the inventory information into an electronic form.

On the same screen, she saw that the National Weather Service was forecasting seasonably warm and fair weather for the next five days. Having observed customer behavior as an employee of 7-Eleven since 1979, Neal knew good weather was likely to mean good business over the upcoming weekend. Another part of the screen told her how many chicken salad sandwiches her store had sold on each of the last four Saturdays.

The display also provided information that let her see she had been selling out of the increasingly popular sandwiches the last few days.

"I've got to be more aggressive," she concluded as she used the gadget to order four more sandwiches, predicting that six would sell on Friday and another six on Saturday. She transmitted the order wirelessly to the store's back-office server, then onto the corporate network and data center, and eventually to 7-Eleven's fresh food distributor, where the sandwiches were made, loaded onto a truck and delivered to the store around midnight.

Thanks to innovative technology that permeates every layer of the world's largest convenience chain store, 7-Eleven knows exactly how many chicken salad sandwiches it sold in each of its 5,800 North American stores today, yesterday, last week, last month and last year. Better yet, it can predict with great accuracy how many of the item each store will sell tomorrow, and it can do the same for each of the roughly 2,500 products sold in its stores.

The hundreds of millions of dollars 7-Eleven has invested in technology over the past 10 years appear to be paying off. The profitable company, whose stock has soared above $30 since trading for less than $6 in early 2003, boasts 35 consecutive quarters of same-store sales increases and last year reported $12.2 billion in revenue.

7-Eleven hasn't always flourished. It struggled in the late 1980s after an ill-conceived acquisition of gasoline refiner Citgo and an ill-timed leveraged buyout aggravated by the October 1987 stock market crash. Help arrived in 1991 when 7-Eleven's Japan licensee, Ito-Yokado, became the company's majority shareholder and shared its retailing approach with the entire company.

Item by item
The innovative demand-chain approach to retailing that Ito-Yokado used to great success at Seven-Eleven Japan is known as "tanpin kanri," meaning item-by-item management, as opposed to category-by-category management. In traditional retailing, the emphasis is on how, say, beverages as a class are selling. In tanpin kanri, the emphasis is on how a particular beverage, such as Dr. Pepper, is selling. The idea is to pay attention to the fine details of customers' buying preferences and let them dictate which products are carried in the store--and ultimately, which products are developed.

In Japan, the strategy turned Seven-Eleven stores into hot spots to shop, especially when it comes to trendy snacks and freshly made food. In North America, customers are likely to visit a 7-Eleven store a few times a week, but in Japan they show up several times a day for breakfast, lunch, dinner and snacks. People are often looking for something new to taste, and delivering appetizing new food items is the key to keeping customers coming back in Japan and in North America.

Technology plays a crucial role in gathering, analyzing and distributing information in tanpin kanri and in its North American incarnation, known as retailer initiative. Before 7-Eleven introduced retailer initiative to North American stores, in 1994, the company had no accurate way of knowing which products its stores were selling. The company only knew which products it had bought from suppliers.

"Suppliers used to decide how much of their products to place on the shelves," recalls Margaret Chabris, public relations director at 7-Eleven and an employee at the company since 1978. "Decisions were made in the manufacturers' best interests, not necessarily the customers' best interests."

Keith Morrow, 7-Eleven's chief information officer and vice president of information systems, puts it even more plainly: "To take the shelves back from suppliers and vendors causes us to place a heavy reliance on automation and technology. We need actionable information in the store to place orders, or we just become order takers from our suppliers."

Today, the retailer initiative strategy underlies all technology at 7-Eleven. "Our philosophy is that decisions about what should be in the store are best made at the store at the moment of truth by people in the store on a real-time basis," says Morrow, who joined the company in early 2001. "Information lets us shape the store and what's in it around the demand curve of the customer who comes into the store, based on what they're doing day to day, minute by minute, not based on some focus group or marketing research or nonscientific guess of what a customer might do."

What customers want
The ability to respond quickly to customers' ever-changing tastes is paramount in the convenience store business. "The customer will reward those stores who know what they want," says Jeff Lenard of the National Association of Convenience Stores. He points out that competition for the convenience store customer has intensified over the past few years as many types of stores--pet stores, toy stores, drugstores, video rental outfits and even consumer electronics stores--have begun selling cold beverages and snacks.

"Over the last several years, 7-Eleven has been a leader and an innovator in using technology to serve customers," he says. "It may not be something customers see, but they see it because the store better knows what they want."

When it comes to collecting information on customer preferences and "using the information both tactically for ordering and strategically for merchandising, 7-Eleven is far ahead of any of its peers," says John Heinbockel, a Goldman, Sachs analyst who covers the company. "Other convenience store chains have only just gotten around to point-of-sale scanning in the last couple of years. They don't have the texture and the data that 7-Eleven has item by item, store by store, day by day, for the last decade."

The Mobile Operations Terminal, or MOT, from NEC that helped Neal order chicken salad sandwiches is one of two new wireless tools 7-Eleven is installing in stores this year to slash the time and labor it takes to count inventory and order new products. The other is the MC3000 color handheld scanner from Symbol Technologies, used to collect data on every item as it

The MOT is a far cry from inventory and ordering methods 7-Eleven store managers used in the past. Displaying the mix of desperation and industry that often accompany a lack of automation, these included tearing off tabs from bound notebooks, color-coding information by hand, keeping track of frozen sandwiches and their expiration dates on sheets of paper, and, in a pinch, even making sandwiches on the premises following instructions from corporate management.

The company's wireless tools aren't the only recent upgrade. Last year 7-Eleven spent $93 million on technology. In its 5,300 U.S. stores, the company installed new ProLiant servers from Hewlett-Packard, wireless local area networks and software for computer-based training. The company also introduced a software ordering system for fresh food, a fast-growing and increasingly important product category for 7-Eleven.

The new technology installed in 7-Eleven stores works under a Windows-based proprietary system, known as the retail information system, or RIS, which has been under development since the mid-1990s. It supports the retailer initiative strategy by providing timely sales data that enables each store to tailor its product assortment to its customers. RIS also helps store operators see which items are selling well and which are not, allowing them to make room for more popular products and for new items. RIS also reduces the risk involved in introducing new products because sales data is available for evaluation within 24 hours of a product's introduction.

Sharing data
7-Eleven shares some of its data analysis with a handful of key suppliers, such as Anheuser-Busch, Kraft Foods and PepsiCo in a partnering program called 7-Exchange. The 7-Exchange data system for category management, which suppliers access through a secure Web site, can provide insights that lead to new products or new packaging.

"We worked with Anheuser-Busch when we noticed a significant shift in consumer behavior around beverage package size," Morrow recalls. "Through analytics, we knew that the customer preference was migrating from take-home multipacks of beer and soft drinks to larger-size single servings."

A case study helped lead the beverage giant to reduce the multipacks and increase the size of single cans.

Information from the 7-Exchange system can also alert participating companies to a potential missed opportunity. Recently, Kraft Foods noticed that some 7-Eleven stores weren't carrying Nabisco's popular new three-ounce Big Bag line of Oreos and other cookies and crackers as widely as other stores were.

"We contacted our field group and sent them to talk to store managers and show them how well the Big Bag line was selling elsewhere," says Randy Watkins, Kraft Foods national account manager. "It's the store manager's decision whether to purchase or not, but we gave them the information to allow them to make what we thought was a good Retailer Initiative decision."

7-Eleven also has used technology to open up the doors to small suppliers. Although most of the larger suppliers exchange information with the convenience store chain through traditional electronic data interchange-based transmissions, smaller suppliers use a Web portal, called the Web Vendor Terminal, to communicate with the company. The beauty of the Internet-based system, Morrow explains, is that thousands of smaller suppliers that don't have EDI can accept orders from the stores, allowing them to carry very specific ethnic or local items, such as panini grill sandwiches and self-serve espresso in a Manhattan store that opened this summer.

Technology enables 7-Eleven to "micromarket," Lenard says. "What works in Dallas may not work for customers in New York and California, so using technology to really target what each store and each set of customers needs is critical."

Trial and error
Not all of 7-Eleven's tech initiatives have succeeded. Many people expected self-service checkout, which big-box stores such as Wal-Mart Stores and Home Depot are offering increasingly, to appeal to convenience store customers. But in trials, the company found that "less than 4 percent of our customer base had a preference to talk to the machine rather than with the store clerk," Morrow says.

This contrasts with the growing popularity of the ATM-like virtual commerce, or v-com, kiosks installed in more than 1,000 of 7-Eleven's U.S. stores. "With services like getting a check cashed, the bias goes the other way," Morrow explains. "People prefer to do financial transactions with a machine because it's more secure and more private. With v-com, you don't have to talk to a person about getting a money order or who you're giving money to."

Another technology that 7-Eleven has yet to embrace is radio frequency identification, which is used to tag items for inventory tracking. Other big retailers, most notably Wal-Mart, use RFID to keep tabs on inventory, but Morrow believes it isn't yet suitable in the item-by-item business of convenience stores.

"The cost and reliability of RFID are prohibitive at the item level and will be for years," he says. "It doesn't make sense to put a 50-cent tag on a sandwich that costs $2."

However, RFID is being used for contactless payment acceptance at 7-Eleven stores. The technology is expected to be installed in all U.S. stores by early 2006. The latest initiative allows a 7-Eleven customer making a purchase to pass a credit card embedded with an RFID chip near a specialized scanner to pay without handing over the credit card to a clerk for swiping.

The tech innovations that do fly at 7-Eleven are often the result of extensive pilot programs to test viability and customer response. For example, 7-Eleven began experimenting with virtual commerce in 1998. The pair of wireless gadgets the company is deploying this year is no exception. At the pilot program in the Rockwall, Texas, store, manager Neal used various versions of the scanner and MOT for 15 months. She seems delighted with the finished products she received recently. And she seems pleased with her newfound power.

"With the new system, I can order exactly what I want." And that is exactly what 7-Eleven wants.

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