Seven Eleven: the donut issue

Seven Eleven began the rollout of new counter displays selling six flavours of donut last month. Although seemingly very minor news, this is so much more than just the latest merchandising idea from the country’s largest retail chain. The new idea not only complements the massively successful ‘counter coffee’ introduced last year, it also shows again how Seven Eleven will disrupt food and food service retailing. Seven Eleven is yet again pushing its rivals to make a choice between emulating the sector leader or continuing along a slower route to greater diversification. Everyone else selling donuts in Japan is in for a very rough time. What product category is next?

Japan loves donuts – but they have to be the right kind. America’s largest chain, Dunkin Donuts, was brought to Japan in the 1970s by Seibu Saison Group, but it’s adherence to the standard American franchise led to its ultimate failure. Meanwhile a much more minor brand, Mr Donuts, was introduced by Duskin (a subscription cleaning company of all things, but a precedent nonetheless – see Red Mango page 4) and by adjusting donut recipes and ranges became one of the biggest fast-food franchises in the country, and still maintains a huge following. More recently Krispy Kreme enjoyed a short burst in popularity, mostly thanks to unusual and exclusive branding, but the chain has never expanded to the extent of the more mass market originators.

Now Seven Eleven has entered the market. The convenience store chain has taken just 12 months to make itself the single largest coffee seller in the country by introducing custom coffee dispensing machines on the counter of every one of its 17,000 stores nationwide, selling more than 700 million cups a year and growing. Where better to add a new range of own branded donuts (Seven Cafe Donuts) than right next to those same machines? The aim in the first year is to sell 1.7 million donuts in six flavours at ¥100 a time, although by year two, Seven Eleven expects to sell 600 million, almost matching coffee sales.

Seven Eleven’s donuts are being manufactured in contracted factories and have their own heated display cases – Mr Donuts’ ranges remain largely cold fare in comparison. The first displays were introduced in November in Kansai, with nationwide rollout by the middle of 2015. Despite initial forecasts of 100 donuts per store per day, most are selling 300 or more a day – a non-issue given Seven Eleven’s hyper-automated just-in-time distribution system. By next year, factories in different parts of the country will also be producing limited edition donuts by region too.

Once again, Seven Eleven has scored a clear hit with yet another convenience based product and excellent in-store marketing. The few seconds it takes for its instant coffee machines to produce a cup is proving plenty of time to entice customers to add a donut to their purchase.

Donuts are nothing new to convenience stores, of course, and as of a couple of years ago, rival chains had been trying to offer more variety than the standard sugar and curry options. In 2013, Lawson introduced two flavours of Hawaiian Donuts, selling at ¥100-130 a time, while Familymart has its own chocolate ‘Old Fashioned’ donut at ¥108, introduced as recently as September. Both chains are looking to add other ‘exclusive’ flavours and twists on the donut concept.

The difference, of course, is volume. Rival chains may sell up to a dozen donuts a day from any one store, but many Seven Eleven stores will sell 10 times that number. Meanwhile, Mr Donuts, although ubiquitous, suddenly finds itself positioned well above the average price. In April, it introduced donut croissants (cronuts) freshly fried in stores, selling more than 10 million in the first month, but, priced at ¥200, sales are reportedly tailing off in the same way that sales of coffee at McDonalds and Excelsior have been hit in the last year by the new, lower priced options at convenience stores.

For Seven Eleven’s rival chains, the donut issue presents yet another unavoidable dilemma. The idea is so successful that Lawson and Familymart are market-bound to follow along. This reduces resources available to maintain their strategy of diversifying formats to compete less directly. Diversification is key if Lawson and Familymart are to keep pace with Seven Eleven’s growth, but the need to offer similar services means that both chains continue to copy the market leader at almost every turn.

The question is whether or not this is a serious issue. For Lawson, the answer is probably not, as it has the most advanced diversification strategy of all the chains, and despite losing its long-time president to Suntory, has managed to replace him with an equally tried, tested and dynamic individual in Gen Tamatsuka. It is increasingly turning to small supermarkets for future growth, including through the recent acquisition of Seijo Ishii. Its comparative sales figures are now much worse than Seven Eleven, but partly because a growing chunk of the business is outside the convenience store format.

For the rest, however, the picture of decline in the face of Seven Eleven’s relentless competitive pressure is now uniform across the sector, and no one else has the diversification strategy seen at Lawson. Familymart has remained strong due to acquisition and good organic growth, but it too looks to be at capacity. All the smaller chains from Circle K Sunkus down have little to offer other than stores located well away from Seven Eleven stores, and even this minor advantage is fast deteriorating as Seven Eleven expands.

The introduction of a new range of donuts isn’t earth-shattering news, but in Japan’s convenience store industry, it is just one more move by the sector leader that points to yet more problems for rivals – and of course anyone selling donuts.