7-Eleven Keeping Eye on Tesco

Continues to tweak foodservice; converting all company-owned stores to franchisees by 2013

DALLAS -- 7-Eleven Inc., which has defined the convenience store business ever since the ice seller added milk, eggs and bread for the convenience of its customers 80 years ago, has its eye on the current crop of competitors and c-store wannabes, especially Tesco, said The Dallas Morning News.

Never have so many competitors been trying to redefine how Americans make a pit stop, said the report. The grocery industry is aiming for convenience, with smaller stores in neighborhood locations. Starbucks offers to-go sandwiches and drugstore giant Walgreen's [image-nocss] is experimenting with its self-serve Caf a W. Analysts are even talking again about a c-store concept emerging from Wal-Mart.

But the most buzz is the pending arrival of the U.K.'s largest grocer, Tesco PLC, whose convenience food store is dubbed Fresh & Easy. Tesco is spending $2 billion on its U.S. entry and plans 300 stores in California, Nevada and Arizona over the next five years. At 10,000 square feet, the stores, which are scheduled to begin opening in October, are one-fifth the size of an average supermarket but four times as big as a 7-Eleven.

Last week, Tesco released its list of 20 Phoenix locations, which indicates its pervasive strategy. The stores will be both in the inner citywhere consumers' choices often are limited to the lone convenience storeand in store-rich suburbia.

For 7-Eleven, the new competition comes as the company tries to become leaner and more nimble. Bought out in 2005 by its largest investor, Seven & I Holding Inc. of Japan, the Dallas company is moving toward a franchise-only structure for its stores. It has moved into a new headquarters building and has continued to work on prepared-food offerings. And it's keeping an eye on Tesco.

I have a lot of respect for Tesco both as a company and a competitor, CEO Joe DePinto told the newspaper.

Tesco has at least four formats and operates 2,800 stores in 12 countries. It has a 30% grocery market share. California, where Tesco has set up its U.S. headquarters in El Segundo, is 7-Eleven's biggest state, with more than 1,200 stores.

The niche that Tesco and others are trying to establish is a c-store concept with higher-quality food and beverages, which is what 7-Eleven has been working on since the 1990s. The industry's challenge is reversing the stigma associated with fresh food in a convenience store settingthat is, shriveled hot dogs on the roller grill and some less-than-attractive stores, said Jennifer Halterman, a senior consultant at TNS Retail Forward Inc.

7-Eleven has been a leader trying to bring healthier foods into its stores, and it's pushing the envelope, she told the paper. But alternative players could distract shoppers with these new concepts. These formatsand other similar concepts likely to followhave the potential to alter the landscape.

7-Eleven, which has 6 million customers a day in the U.S. and Canada, sells huge numbers of Big Bite hot dogs and Go-Go Taquitos, as well as delivered-daily salads, fresh fruit and sandwiches made with specialty breads and gourmet mustards. Our job is to continue keeping up with the customer. People come to our stores because they need to eat something, drink something, DePinto said. We're making regional fresh food a priority.

He said New Yorkers expect a corned beef sandwich, Chicagoans want a meatball sub, and in Southern California, it's pita bread. Mashed potatoes and meatloaf in family-size containers are sold in Chicago under the Pantry Select brand popularized by the White Hen chain, which 7-Eleven acquired last year.

In a pilot program in Salt Lake City stores, TurboChef ovens that combine radiant heat, microwave and airspeed technology are cooking pizzas in 90 seconds and chicken wings in three minutes.

And 7-Eleven's giving coffee a greater purpose with its Fusion energy recipe. For the cold and flu season, it's planning Fusion Defense coffee with ingredients such as echinacea.

Gasoline still makes up about a third of 7-Eleven's revenue. The company is one-third of the way through converting the 2,500 stores with gasoline pumps to 7-Eleven-branded gasoline after an agreement with CITGO expired last year, said the report.

That dominance concerns Halterman. The threat posed by these new concepts has greater significance now than ever before because of the convenience store industry's increasing reliance on low-margin gasoline, she told the Morning News.

Others keep siphoning off the gasoline business. Supermarkets, supercenters and wholesale clubs last year sold 12% of U.S. gasoline, up from 2% in 2000, Halterman added.

Inside its stores, beverages make up 7-Eleven's largest category, representing 43% of merchandise sales. Tobacco has been declining but is still 27%. Food represents 10% of sales, but DePinto said the target is 30%.

Thirty new items a week are available to stores, and its systems enable executives to decide quickly whether items stay or go. It constantly evaluates the mix of 2,500 items.

7-Eleven acquired Chicago's 206-store White Hen chain last year. In addition to acquisitions, 7-Eleven has two other ways it can grow, DePinto said. It wants to offer its brand to the 80,000 U.S. mom-and-pop c-stores. We can provide our infrastructure to entrepreneurs already out there, he said. We haven't grown this business in 10 years, but we have a huge opportunity with the 7-Eleven brand. It's also set up a real estate program to help existing franchisees build new stores.

The moves are bolstered by the belief that individual entrepreneurs are best-motivated to run 7-Eleven stores, said the report. That's why the company is converting its company-owned stores to franchisees, with plans to be virtually franchise-only by 2013, DePinto said.

Meanwhile, it is remodeling its 5,600 franchise and company-owned stores, finishing 800 last year and scheduling 1,050 for face-lifts this year.

DePinto is also changing the corporate culture to better deal with the rapid changes, the report said. The Chicago native and West Point graduate just completed a move of the corporate headquarters from the formal, art-filled Cityplace to the urban minimalist One Arts Plaza in downtown Dallas. 7-Eleven occupies seven floors, with window views from every cubicle.

Each floor has a caf a with a kitchen and refrigerated cases just like the cold-drink vaults in the stores. This is the environment that better fits the new culture we're trying to communicate, DePinto said.

After the company was acquired, it downsized the corporate and field staff, losing 140 positions. Now 1,000 people work in half the square footage. We've gone to casual dress, and instead of expensive artwork, we plan to use the walls to recognize our people and our stores, said DePinto.

But not everything is new at 7-Eleven. An old slogan is a reminder of the company's longtime market dominance. We've brought back Oh Thank Heaven for 7-Eleven,' and we're putting it on our signs, DePinto said. The customers love it.

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