Convenient, Connected

Back to Contents of Issue: March 2000

by Koki Tachino

When the topic is e-commerce in Japan, talk often -- and mystifyingly, to many foreigners -- turns to a bastion of non-virtual, just-around-the-corner retailing: convenience stores. Konbini, as they're called, are aggressively introducing multimedia e-commerce kiosks, Internet-based sales, financial offerings via major-bank ATMs, pick-up for catalog and online orders, and payment acceptance for other companies' goods and services. But why is e-commerce in the world's second-largest economy being linked to tiny retail outlets more suited, it would seem, to launching new flavors of rice balls?

Some context is in order ...

7-Eleven Japan launched the nation's first big convenience store chain in 1974, when it opened its first outlet in Koto Ward, Tokyo. Today there are roughly a dozen major chains, which have a combined 36,000 affiliated stores. (That figure jumps to 50,000 when you add in the nearly 40 small-scale chains).

The average outlet, including sales floor and storage area, stocks 3,000 items in a mere 30 square meters. To minimize no-sales, stores stock only briskly selling items, and constantly ensure high-demand items are available. 7-Eleven, for example, uses point-of-sale systems to keep strong-selling items in stock, predict what will sell, and exercise item-by-item inventory control. Knowing what will sell, and getting it on the shelves in time, inexpensively, is the basis of convenience store success. That's why konbini cluster multiple stores in the same area: Geographical concentration makes deliveries more efficient.

Most konbini are franchise operations. The franchiser provides management guidance, logistics support, information systems, product development, and, in some cases, goods that it manufactures itself; in turn, the franchisee, who is given considerable autonomy, pays the franchiser royalties based on sales or gross profit.

Perhaps what's most striking about konbini are their ultra-sophisticated high- performance logistics systems. Designed to make the chains far more efficient than other retailers, they keep products at the right temperatures at different stages, handle a multiplicity of products in small lots, mount GPS antennas on trucks to track delivery status in real time, use ISDN or satellite communication to transmit sales data, offer franchisees management, and provide the music to be played in the store. Outlets are equipped with redundant (for backup) IT systems for item-by-item inventory control, delivery inspections, and ordering.

A distinctive sight at Lawson's, the second-largest konbini, is "Loppi," a refrigerator-sized multimedia kiosk. Equipped with a 14-inch touch-panel display, it lets customers scan product information, place orders for new products, purchase life and casualty insurance, learn about used cars for sale, purchase concert and airline tickets, sign up for vacation tours, and have their fortunes told. Some convenience store kiosks can accept payments by credit card or electronic cash. All are connected to the in-store POS register, where kiosk purchases can also be paid for. Gathering information or making reservations or purchases via a kiosk is not much different than doing so via a website, but being able to pay either by credit card or at the store's POS register is a plus.

Lawson's goals for Loppi are to sell products that cannot be handled because of stores' limited floor space, and to pull in more customers by expanding services. The interactivity that is basic to the system is another plus: It enables Lawson to gather fresh, unfiltered information on customers. And because Loppi can accept payment, it can replace or augment the POS register's functions.

In 1999, Lawson used Loppi to accept reservations to purchase the wildly popular Pokemon Gold and Silver software for portable Gameboy machines. Customers -- mainly elementary and junior high school students -- lined up to reserve theirs. Another sign of a breakthrough is rising sales of travel products via multimedia stations at Lawsons' and at Sunkus, also a major chain. Such purchases reached about 300,000 items in fiscal 1998, according to the Japan Travel Bureau. The system seems to be gradually winning customer support, and not only for special products and campaign items.

These terminals do have room for improvement. Slow response times keep customers waiting, their design makes them awkward for children and the elderly to use, and their content needs to be differentiated from what is available on websites. Also, relatively few customers are using the terminals' payment functions; accepting more types of credit cards and prepaid cards is obviously the way to go. The goal is to make the kiosks so value-packed they motivate customers to take the trouble to go to the store.

In another move to expand product ranges and boost customer drawing power, major chains are also moving into online sales, with products and information on their websites -- mainly for game software. Some sites sell other products as well, but where they differ from stores in electronic malls is that the convenience store company accepts the payment itself. (In Japan, many shops have participated in e-malls but have not set up their own site.)

In this business model, the customer can pay for online purchases at the neighborhood convenience store and, depending on the product, even pick it up there. Ministop, the fourth-ranked chain, handles online sales indirectly, with links from its site to affiliated sales sites. Lawson sells from its own, directly managed site. At launch last November, @Lawson lacked in-store payment and pickup functions, and the product line was narrowly focused on CDs and DVDs. It now plans, with Lawson Digital Station, to offer in-store payment and pickup and a wider range of products. Third-ranking FamilyMart has announced that it will launch an Internet-based service ( in 2000.

For convenience stores, the issue is to create synergies by fusing the cyber world of the Internet with the real world of the store. To be competitive online, chain operators must take advantage of their stores' ability to move and distribute the product. The chains also need to sort out the overlapping roles of their in-store multimedia stations and their Net sites, and consider supporting access to their sites from mobile phones, for which demand is growing. Addressing these areas could give convenience stores a commanding position in retailing in both the real and cyber worlds -- and would certainly menace e-malls in the unsettled world of cyber commerce.

7-Eleven Japan began directly accepting payment for goods ordered from other companies in November 1999. The system works like this: The customer brings in the transfer form the mail-order or online sales company sent with the order, hands over the cash, and 7-Eleven arranges the transfer of funds into the other company's account. In the US or Europe, most such purchases would be paid for by credit card, but many Japanese consumers are anxious about using credit cards. They worry about running up big bills and about the security of using credit cards for online purchases. Because cash remains the preferred means of payment, direct marketing companies already ship goods COD or accept post-delivery payment by bank or post office transfer.

Having a convenient cash transaction at a neighborhood 7-Eleven eliminates one of the main customer anxieties concerning e-mall sites, and thus may contribute to the development of a direct business-to-consumer market in Japan. Several convenience store chains offer variations on this payment acceptance service, with cash, debit cards, prepaid cards, and credit cards as possible payment options.

The number of convenience store payment transfers is clearly rising. In 1998, electric bill payment at konbini surpassed that at banks (excluding bills paid by automatic deduction from consumers' accounts). In fiscal 1999, 7-Eleven Japan processed over 70 million transfer payments: a tenfold increase in just five years.

Until recently, transfers made at convenience stores were not handled by the chains themselves (except for those made to some major catalog sales companies). Instead, the catalog sales company would have a contract with a company specializing in payment acceptance services (such as Densan System or Wellnet), while the convenience store provided the service to the customer. 7-Eleven Japan's move into directly accepting payment is therefore a threat to such companies. The opportunity the chain exploited is cost: Densan and Wellnet developed and operate independent settlement systems that connect to a convenience store information system, so the catalog sales company using the service had to pay two sets of fees, one to the convenience store and another to the payment-acceptance company. Since catalog-sales outfits are not able to make customers pay those costs directly (by charging extra for paying at a convenience store, for example), they appreciate the cost advantage of having the konbini HQ handle payment acceptance directly, thus eliminating one fee.

Another plus for 7-Eleven was that its already robust information system could handle the new service without major changes. Thus, it could expand its services with little additional investment, and the new offering would also bring more customers into its stores. It was also a perfect fit with the Internet-based online sales that 7-Eleven headquarters was starting to get into.

While the new service is a good thing for catalogue and online retailers and for 7-Eleven, smaller chains without sufficiently powerful information systems may not be able to handle direct acceptance of payment. As a result, this service won't be a standard item at all convenience stores. That may be confusing for customers, but it gives the industry leaders a tremendous advantage. Possible threats are the appearance of other types of retailers offering the same service and the spread of online payment systems.

7-Eleven Japan, in a tie-up with book distributor Tohan, Yahoo Japan, and Softbank, has founded e-Shopping Books. The business model behind this service is selling books and magazines over the Internet, with pickup and payment acceptance at 7-Eleven stores. The service began last November and so far is rolling out smoothly.

Success factors include how much this route will be used, given that plenty of other routes for selling magazines and books already exist. That means low-cost operations will be key, which plays into 7-Eleven's strengths: As in the launch of the direct-payment-acceptance service, the cost of starting this offering was low, since the company could easily integrate it into its information system. But in online book sales the chain has a dozen competitors, including cyber branches of major bookstores and sites founded by venture companies. The key to e-Shopping Books' competitiveness will be how much customers appreciate the convenience of the pickup and payment-acceptance services.

While letting customers pick up books at outlets may be a draw, it's also a challenge for the retailer. Since the stores are already packed to the gills, finding a place to store the orders for pickup (and the possible impact on store cleanliness) could be a problem. In fact, the pickup system is a deviation from the convenience store concept of using item-by-item inventory control to give shelf space only to strongly selling products. If a book customer does not pick up his or her order, it becomes inventory, with attendant storage costs. Space considerations also suggest that the service may be suited to paperbacks and single volumes, but not to oversized or multivolume works. There's also the troubling possibility that customers buying books in quantity and wanting to use the pickup system might, for whatever reasons, be concentrated at particular stores, amplifying the storage problem. Payment is another issue: e-Shopping Books also does not accept the prepaid cards that in Japan can be used to pay for books at ordinary bookstores, even when the customer pays at a 7-Eleven. The venture has a highly experimental air, but 7-Eleven is optimistic to the point where it's considering offering pickup for products other than books.

A powerful rival from another field is Yamato Transport, which operates a small-parcel delivery service. The industry giant has cooperative ties with convenience stores, but has also launched a bookstore site with home delivery of purchases (including at night) and collection of payment after the books arrive.

In the US, where deregulation of the banking industry proceeded earlier, it's not unusual to find bank ATMs in retail stores; in Japan, however, it's still startling to find a bank ATM (as opposed to those operated by consumer credit companies) in a nonbank location. The Circle K konbini chain, which is strongest in the Chubu region of central Honshu, started installing the ATMs in 1989. FamilyMart, AM/PM, 7-Eleven, and other chains have since installed bank ATM machines in some of their stores - but have made it clear that they plan to expand toward ATMs in every store this year.

AM/PM Japan broke more new ground with its in-store installation -- in trendy Shibuya -- of an ATM for a nationwide commercial bank in March 1999, through a tie-up with Sakura Bank. Meanwhile, 7-Eleven Japan, the industry giant, is not standing idle. Along with Ito-Yokado, the parent company of the IY Group to which it belongs, it plans a joint 40 percent capital participation in a plan to set up a company that installs and operates ATMs (the remaining 60 percent of the capital is to be provided by participating financial institutions). 7-Eleven, having had a taste of working in the financial sector, is not going to stop with ATMs: It plans to work with Ito-Yokado to move into banking proper. Their plan to move into the financial industry, using not only the convenience stores but also the group's other retail outlets, is a threat to Japan's entire financial sector.

Lawson, so far, has not installed bank ATMs but does have a tie-up with fellow Daiei Group member and credit sales company Daiei-OMC to place cash dispensers for consumer credit transactions in Lawson stores. Lawson is now considering a bank tie-up, too. FamilyMart, the third-biggest player in the industry, is a central figure in E-Net, a new company set up by the convenience store headquarters, city banks, IBM Japan, and other investors, to install bank ATMs in stores. Circle K, Sunkus, Ministop, and Three F -- all medium-sized convenience store chains - are planning to put E-Net ATMs in some of their stores.

What effect will having bank ATMs in such stores have? Customers use convenience stores because they are, well, convenient. The stores have turned into their customers' refrigerators, magazine racks -- and now it seems wallets, too. For the konbini, having bank ATMs expands their services and pulls in more shoppers. Customers who pop in to use the ATM will predictably stay to buy something -- and because they've just made a withdrawal, the purchase sizes may increase as well. In fact, AM/PM, the first to put major bank ATMs in some of its stores, found, as hoped, that both the number of customers and the amounts they spent rose.

ATM placement is not, however, an unmixed blessing. Safety is a concern, despite Japan's reputation for low crime levels. With about 90 percent of convenience stores open 24 hours a day, convenience store robberies have been on the rise. And a customer who makes a cash withdrawal late at night would be conspicuous and easily targeted for mugging. Now, surveillance cameras are set up at the ATMs. Hours during which ATMs can be used and usage fees are additional issues. Convenience store bank ATMs now operate on the same schedules as those in banks and charge the same fees. But that isn't appealing on a cost basis to the banks, which already have their own systems and have to pay additional fees to place their ATMs in convenience stores. The new ATM-management companies mentioned above are expected to solve these operational and cost problems.

One opportunity -- direct transfer from a customer's bank account, on the ATM, to pay for purchases -- is not yet available. The Bank Act currently prohibits connecting a bank ATM directly to a convenience store POS register. But if it were easy for customers to use the in-store ATM to pay for purchases with bank transfers, that itself would provide competition for the convenience stores' acceptance of payment services.

The convenience store industry has grown dramatically in the past few decades. Since January 1998, however, all chains have experienced no or negative growth, year over year, at existing stores. To get back on track, they need to build a Japanese-style e-commerce solution, one that merges what it takes to succeed in cyber business (a fully developed infrastructure, cost performance, powerful branding) with effective use of convenience stores' strengths (powerful logistics and information systems). And they need to do this without forgetting the pursuit of ever-greater convenience for the customer, which is the heart of the business. If the konbini e-revolution does take off, it will drive significant new growth in Japan's consumer market.

Note: The function "email this page" is currently not supported for this page.