January 13, 2017 7:20 am JST

Seven-Eleven Japan profits despite rising costs industrywide

Competing chains struggle to maintain sales, customer counts

Seven-Eleven Japan had a winning March-November period, while rivals struggled to rein in costs.

TOKYO -- Convenience store chain Seven-Eleven Japan grew its operating profit for the March-November period, winning heavily over struggling competitors as increasing labor costs weighed on the industry.

The Seven & i Holdings unit earned 187.1 billion yen ($1.64 billion) in operating profit for the nine-month period, up 4% on the year, it reported Thursday -- thanks largely to strong sales of private-brand goods. Through December, year-on-year sales at existing stores have grown for 53 straight months.

Seven-Eleven's winning product strategy was a large factor. The chain captured expanding demand for ready-made take-home meals, spurred by a rise in dual-income and elderly households. Private-brand goods -- which rake in over 1 trillion yen in sales per year, showing the benefits of scale -- sold well, particularly Japanese convenience-store staples such as rice balls and pastries. Deep-fried foods prepared in-store were also successful.

The chain's other strength is the sheer amount it spends on advertising. From March to November, it spent 54.8 billion yen on promotions, up 1.1 billion yen on the year. Seven-Eleven uses price markdowns to make consumers feel that they are getting a bargain, which encourages incidental purchases, raising spending per customer.

Competing chains, however, are suffering. Lawson's group operating profit fell 7% on the year, while Ministop's plunged roughly 40%. FamilyMart Uny Holdings slid 4% excluding the effects of a merger. Midsized chain Poplar skidded to an operating loss of 300 million yen, down from a 37 million yen operating profit the year before.

Hourly pay for part-timers is climbing due to a labor shortage. This in turn is hampering business at franchise stores and driving up headquarters' costs to support them. Lawson switched more franchise stores to a contract stipulating that headquarters cover more costs, such as disposal loss for boxed lunches and heat and electricity fees. FamilyMart Uny Holdings likewise shouldered more of franchisees' cost burdens.

Lawson's sales and administrative expenses grew 9%, while Seven-Eleven's rose 7%. Chains' ability to secure enough sales to cover rising costs diverged starkly. Seven-Eleven's existing-store customer count held steady from the year before, but Lawson and Ministop saw lower turnouts.

But even atop the throne, Seven-Eleven cannot rest. "We can't cover fixed costs with the level of sales our franchisees have had up until now," said Seven & i Holdings President Ryuichi Isaka. The chain now has over 19,000 stores in Japan, and some locations have started competing with one another for customers.

How to hook in deeply price-conscious consumers remains a challenge. "Consumers have a deep-seated deflationary mindset," says Shunsuke Kobayashi, an economist at the Daiwa Institute of Research.

(Nikkei)

Seven & I Holdings Co., Ltd.

Japan

Market(Ticker): TKS(3382)
Sector:
Industry:
Retail Trade
Food Retail
Market cap(USD): 37,441.86M
Shares: 886.44M

Lawson, Inc.

Japan

Market(Ticker): TKS(2651)
Sector:
Industry:
Retail Trade
Food Retail
Market cap(USD): 6,656.08M
Shares: 100.30M

FamilyMart UNY Holdings Co. Ltd.

Japan

Market(Ticker): TKS(8028)
Sector:
Industry:
Retail Trade
Food Retail
Market cap(USD): 7,158.88M
Shares: 126.71M

POPLAR Co., Ltd.

Japan

Market(Ticker): TKS(7601)
Sector:
Industry:
Retail Trade
Food Retail
Market cap(USD): 46.63M
Shares: 9.90M

Ministop Co., Ltd.

Japan

Market(Ticker): TKS(9946)
Sector:
Industry:
Retail Trade
Food Retail
Market cap(USD): 561.58M
Shares: 29.37M

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