7-Eleven in Indonesia - a Porter's Five Forces Analysis

         in Indonesia:           [pic 1][pic 2][pic 3]

                 Five-Forces Analysis

Background

The first 7-Eleven opened in 1927 selling milk, bread, and eggs on Sundays and evenings when other grocery stores were closed. In 1946, the chain's name was changed from Tote'm to 7-Eleven to reflect the company's new, extended hours, 7:00am to 11:00pm, seven days per week. For the first time in 1969, its store in Austin, Texas opened 24 hours a day, seven days a week.

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Since 1991, 7-Eleven has been part of an international chain of convenience stores, operating under Seven-Eleven Japan Co. Ltd, which in turn is owned by Seven & I Holdings Co. of Japan. It is the world's largest operator, franchisor and licensor of convenience stores; the global reach of 7-Eleven totals to over 57,333 stores in 16 countries with total sales of ¥3,781.2 billion, or US$30.7 billion.

7-eleven officially entered Indonesian market in 2009 after Seven & I Holdings Co. granted master franchise to PT Modern International. It is worth noting that Indonesia is its most recent international expansion after 16 years.

Industry Analysis

Industry analysis provides a framework for assessment of industry and firm performance, identification of key factors affecting performance, determination of the effect of changes in the business environment on performance and identification of opportunities and threats in a particular business context.

The most important event in Indonesian retail industry is the market openness policies in the aftermath of Asian financial crisis in 1997. In order to secure loans from the International Monetary Fund (IMF), the Indonesian government agreed to liberalize wholesale and retail trade, including lifting restrictions on foreign investment. Nevertheless, the government still maintain a restriction on foreign investment in smaller scale retail.

As a result of the above restriction, PT Modern International, the operator of the declining photography businesses, Fuji Image Plaza, had failed to obtain a license from the regional Office of Trade to bring in 7-eleven. Instead, it decided to exploit a loophole: it applied its permit to the Office of Tourism which regulates restaurants and cafeterias. The tables and chairs set up at 7-Eleven outlets were their justification to operate as a café.

Capitalizing on its legal status as cafeteria, 7-eleven presents itself as a self-service cafe. Jakarta's 7-Eleven stores offer ready-to-serve drinks and food. Its outlets have tables and chairs, restrooms and free Wi-Fi. When it opened its first outlet in 2009, "Sevel," as 7-Eleven become known to locals, shook up the retail industry with its dine-in spaces. At that time local competitors like Alfamart and Indomaret were truly grab-and-go minimarkets. [pic 5]

The reason why the combined concept of minimarket and café works wonders in Indonesia is rooted in its demographics and socio-cultural aspects. In Indonesia, the population is mostly concentrated in urban areas and big cities where people tend to live within walking distance. Indonesians also have the culture of outdoor stalls, e.g. warung (street-side food stalls), as well as fondness for hanging out that there is a word for sitting, talking and generally doing nothing in Bahasa: nongkrong.

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The number of 7-Eleven outlets, meanwhile, has tripled in the five years time - from 2010 to 2015 - from 57 to 189. In 2013, 7-Eleven accounted for more than 60% of Modern International's 1.27 trillion rupiah ($103 million) in sales.

Further industry analysis on this paper is conducted by applying Porter’s Five-Forces framework.

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Internal Rivalry

Internal rivalry refers to competition for market share among the firms in the industry. Since the groundbreaking success of 7-eleven, the number of competitors in Indonesian landscape of convenience stores is increasing rapidly. Among its competitors are:

1. Lawson, another Japanese convenience store brand operated in Indonesia by Midi Utama Indonesia, a subsidiary of Alfamart, one of largest minimarket operators in the country;
2. FamilyMart, Japan’s third largest convenience store chain after 7-eleven and Lawson, engaging PT. Fajar Mitra Indah, a subsidiary of the Wings Group, a major manufacturer and wholesaler of consumer goods in Indonesia; and[pic 8]
3. Indomaret Point, belongs to local Indomaret chain, which adopted the format.[pic 9]

Each firm may have different cost advantage over one another, since convenience stores are known to apply “high-low pricing”, which refers to firms charging customers above average prices for products, in exchange for convenience (like cigarettes, beer and soft drinks), while discounting other products. There is also substantial excess capacity for each firm. Furthermore, in this market, customers often have low switching costs, since prices and sale terms are easily observable.