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

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Entry

In an industry, new entrants will erode current players’ profit in two ways: (1) entrants will divide the market demand among more sellers, and (2) entrants will heat up internal rivalry. Entry barriers can manifest in government policy that supports or discourages new entrants. In Indonesia, the policy appears to serve as both. On 12 December 2013, the Ministry of Trade issued Regulation No. 70/M-DAG/PER/12/2013 regarding Guidelines for the Structuring and Development of Traditional Markets, Shopping Centres and Modern Stores (Regulation 70), which came into effect on 12 June 2014. It attempts to limit the spread of small-scale modern retailing by stipulating that holders of a master franchise may operate only up to 150 company-owned stores. If a retailer already has more than 150 outlets, the rest of the existing stores should be franchised to a third party within 5 years. This regulation is intended to encourage partnerships with smaller businesses. Importantly, the regulation doesn’t distinguish between the nationality of franchisors or franchisees, basically relaxing constraints on foreign chains. Still, land availability and receiving necessary permits from local government officials can be a constraint.

The market share of minimarkets and convenience stores skyrocketed from only 4 per cent in 2000 to 22 per cent in 2010. Therefore, there is still huge potential for further development and opportunities for investment.

Substitutes and Complements

Substitutes and complements are two important factors influencing market demand. Substitutes would divide the profits and intensify the competition in this market, while complements would boost the demand and hence enhancing profit opportunities in the market. The substitutes for 7-eleven and the likes would be the restaurant chains such as McDonald’s, KFC, Dunkin’ Donuts (the three altogether have >600 outlets) PHD, Domino’s and Starbucks – some of which also operate around the clock. Nowadays, online shopping are considered to be alternative to traditional shopping. 7-eleven realizes this potential and has partnered up with Go-Jek, the app-based motorcycle taxi company for its delivery service to reach out to a broader consumer base.

Supplier Power[pic 10]

Supplier power is the ability where industry’s upstream input suppliers to negotiate prices that extract industry profits. With the further and fast development of retail industry, many convenience stores have a strong bargaining power. 7-eleven has a competitive advantage, when the supply of location is concerned. Modern International controls a national chain of around 1,200 Fuji Image Plaza shops. It plans to convert nearly 200 of them into 7-Eleven stores. Furthermore, 7-eleven are well-known for its house brands/products such as Slurpee, Big Bite Hot Dog, Soda drinks Gulp, hot drinks Café Select and fresh food & drink with a brand 7-Fresh like Fresh Bakery, Rice Bowl, Salad, Pudding and other food & beverage, sourced from its own two super kitchens in Cakung. In fact, ready-to-eat food and beverages now generate more than 90% of its store sales.

Nevertheless, the supplier power may increase in the near future with the government regulation No. 70 which limits house brands to 15% of the total stock-keeping unit in each store. 7-eleven has started to source some of its private-label products from local manufacturers. In some outlets, it has even engaged local delicacy producers such as Maicih.

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Buyer Power

Buyer power refers to the ability of individual customers to negotiate purchase prices that can extract profits from sellers. With fast economic growth, the Indonesian consumption level is expected to grow. Indonesia has the world’s fourth largest middle class with 17.3 million households as of 2014, behind the USA at 25.3 million, India at 74 million, and China at 112 million.

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Top Five Emerging Markets with the Best Middle Class Potential: 2015-2030

Growing purchasing power gives Indonesian middle class households considerably more room for discretionary spending. According to World Bank, Indonesia’s GNI per capita in 2014 is $3,630. Interestingly, in Jakarta alone, the per capita income is over $11,000. Isamu Nakayama, President of FamilyMart Co Ltd has stated that the magic number in convenience store sector is $3,000 GDP per capita. He believes that once people reach this level, they tend to become more interested in sanitarian alternatives rather than stalls, which provide convenience stores the opportunity. [pic 13]

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Number of Households with Annual Disposable Income over US$10,000 (Constant) and Household Disposable Income Real Growth in Indonesia: 2006-2020

The five-forces in the recent Indonesian convenience store market can be summarized in a table as follows:.

Forces

Threat to Profits

Internal rivalry

High

Entry

Medium to High

Substitutes and complements

Medium

Supplier Power

Medium

Buyer Power

Medium

Maintaining Leadership: Strategy for 7-eleven

Convenience stores are expanding rapidly in Indonesia. Following the introduction of 7-Eleven in 2009, the stores have grown in popularity amongst young consumers. Yet, the relatively low barriers to entry has brought in more and more competitors for 7-eleven. This, along with the government regulation that restricts growth of convenience stores industry to protect the small and medium grocers and business, has slowed 7-eleven down.

It still enjoys the position of a market leader who reaped benefits of penetrating the market early. When the government still struggled to regulate these blurred lines or hybrid between retailing and food service (Is it a minimarket or a cafe?), in its early years, 7-eleven has set up more than 150 stores. As things stand, 7-Eleven operates under a restaurant license.