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What doomed the 7-Eleven Indonesian adventure?

Established formats teach convenience store chain a lesson

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Modern Internasional moved to close all remaining Indonesian 7-Eleven stores by June 30.   © Reuters

JAKARTA When 7-Eleven convenience stores began popping up in Indonesia in 2009, they certainly looked like they would be a success. The stores stayed busy and local operator Modern Internasional made plans to expand the chain's reach outward from Jakarta.

But from June 30, 7-Eleven's famous 24-hour operations dropped to zero: Modern closed its remaining 130 or so outlets after a 1 trillion rupiah ($75 million) deal to sell the chain to conglomerate Charoen Pokphand came undone in early June, just six weeks after it was first announced. Charoen Pokphand's CP All unit runs Thailand's 7-Eleven network, the world's second-largest after that of Japan, but it will not be adding Indonesia to its empire after all.

Payment services have become a profitable business for Alfamart minimarkets. (Photo by Ardi Wirdana)

The sudden turn of events was no big surprise for Arifin, a parking attendant at a 7-Eleven on the outskirts of Jakarta: "The stores were always crowded, but the customers never bought much. They came to hang out and to enjoy the Wi-Fi. They would bring their laptops and stay for hours but only buy a single drink."

Ultimately, that was not enough for Modern, especially in the face of fierce competition on one side from Alfamart and Indomaret, locals chains each with a longer history and bigger network in the country, and on the other from street food stalls with faster customer turnover.

"The income from [7-Eleven] sales does not cover operational costs like electricity, lights, Wi-Fi and overhead," said Reza Priyambada, a retail analyst at Bina Artha Securities in Jakarta.

Both Alfamart and Indomaret had initially reacted to 7-Eleven's early outward success with imitation. The two had long operated as minimarkets, a format in Indonesia with a greater emphasis on fresh groceries than convenience stores and less stress on serving food or selling alcohol.

In an echo of Modern's franchise from Japan's Seven & i Holdings, Alfamart made a deal with Japan's Lawson convenience store chain while Indomaret created a convenience store sub-brand called Indomaret Point. Japanese convenience store chains FamilyMart and Ministop also signed up eager local franchisees.

Modern itself had originally prospered as the operator of Indonesia's Fujifilm photo printing network. It turned to 7-Eleven with retail photo developing in steep decline, converting some locations to the new business.

For young Indonesians, 7-Elevens offered a hip recreational space. Their street-side locations and affordable hot meals give them the feel of a traditional eatery while comfortable seating areas, air-conditioning and free Wi-Fi resembled the facilities of a modern cafe. About half the average store's space was dedicated to providing fresh food and drink.

Revenues reached a peak in 2014 of 971.77 billion rupiah as the number of stores hit a high of 190.

OUT OF BEER The good times were not to last. In April 2015, the government banned alcohol sales in convenience stores and minimarkets. At the time, alcohol accounted for about 15% of 7-Eleven's revenues.

Although the national government relaxed the policy five months later, allowing local authorities to decide on implementation, Jakarta, among other big cities, kept the sale restrictions in place.

Meanwhile, 7-Eleven might have been constrained in reorienting its focus by permitting issues, according to Tutum Rahanta, deputy chairman of the Indonesian Retailers Association. The trade department in 2012 issued a warning letter to 7-Eleven for selling retail goods without appropriate business permits, according to local media reports at the time.

Amid the alcohol ban, 7-Eleven's sales for 2015 dipped 8.8% to 886.84 billion rupiah and Modern itself dropped into the red with a net loss of 54.76 billion rupiah.

Alfamart and Indomaret both shrugged off the alcohol ban and posted revenue gains that year. The two, each operating more than 13,000 stores, have been selling groceries and snacks in the country for more than two decades.

They have been increasingly leveraging their broad reach to offer other services, including bill payment and travel bookings. Investment bank Nomura estimated in a report in May that such services accounted for a 15.3% share of Alfamart's earnings before interest and tax last year, up from just 1.1% four years earlier.

Modern began closing 7-Eleven in 2016 amid the sales slump, shutting 27 outlets. Chain revenues slipped a further 23.9% to 675.28 billion rupiah. Modern fell into the red on an operating level, with an operating loss of 764.32 billion rupiah. Early this year, Modern closed about 30 more 7-Elevens.

Ministop's franchisee, which had aimed to open 300 outlets, gave up with less than 10 in operation. Hero Supermarket, a retail group controlled by Hong Kong's Jardine Matheson Holdings, sold its struggling Starmart convenience store chain to Wings Group, holder of the FamilyMart franchise. Some of the former Starmarts have been converted to FamilyMarts, but that chain's web site lists only 59 outlets versus the 300 it was originally targeting to operate by 2015.

Both Alfamart and Indomaret meanwhile saw revenues continue to grow last year, with profits rising, too. Both, though, are also having second thoughts about the suitability of the convenience store format and are instead planning to open more than 1,200 minimarkets this year.

Alfamart has closed a number of Lawson outlets. Finance Director Tomin Widian told the Nikkei Asian Review: "We will not be adding any more Lawson stores as yet. We are currently still reviewing its business model."

Modern officials could not be reached for comment. The company's shares, which peaked four years ago at 1,050 rupiah, now trade for 50 rupiah. Without 7-Eleven, the company will be left with a small imaging business, the vestige of its old Fujifilm chain. At 228.7 billion rupiah, Modern's market capitalization is barely a quarter of what Charoen Pokphand was to pay for the 7-Eleven stores.

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