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    7-Eleven's Transformer

    Convenience Store Industry Hall of Famer James Keyes reflects on his career at 7-Eleven, the successes he and his team achieved and those he has yet to attain.

    At press time, James Keyes was enjoying his first few days of retirement.

    On Nov. 11 — one business day after the completion of Seven-Eleven Japan Co. Ltd.'s tender offer for 100-percent control of 7-Eleven Inc. — the personable president and CEO of 7-Eleven Inc. announced his planned departure from the company.

    He did not leave to take a post with another company. He left because he said "the time was right" to explore the next adventure in his professional and personal life.

    Although he officially "retired" from 7-Eleven after 20 years of service, the business world probably has not seen the last of Keyes, who is only 50 years old. Having likely negotiated a handsome retirement package and tendered his valuable 7-Eleven stock options before Nov. 9 as all stockholders did, it is unlikely anyone but family and intimate friends will hear from Keyes for several months as he enjoys the fruits of his labors and plans his next incarnation.

    I promised my family I would take a few months off to relax,” Keyes said a day after he announced his retirement. “Then I will explore other opportunities. By design I have cleared the slate of any precise notions about my next steps. I want to keep my options completely open.”
    He said he will consider everything from writing and teaching or finding some way to incorporate in his business life the many hobbies he has, or — not surprisingly — he will explore leading another large public company.
    Two weeks prior to his retirement, Keyes was inducted into the Convenience Store Industry Hall of Fame, founded and hosted by Convenience Store News. The day after his induction celebration, he granted Convenience Store News an exclusive interview to talk about his and 7-Eleven’s success, and reflect on one of the biggest turnaround stories in the convenience store industry.
    In one of the most revealing quotes of the interview, Keyes commented on his legacy at
    7-Eleven and hinted at what he clearly knew was to come. “I hope I will have played a role in the transformation of 7-Eleven]and that people will look back and say, ‘Jim was responsible for getting the company to turn the corner.’ I don’t know if I will be the one to take it to the next level or if my strength is in the change — creating the change. That remains to be seen.”
    Without question, change is Keyes’ middle name. By most people’s definition he is a maverick, a change agent, a man who – for better or for worse — doesn’t take no for an answer, a leader who has erased the words “It can’t be done” from his vernacular. Keyes’ single-minded focus at the helm of 7-Eleven was on the customer, and his obsession was to continuously enhance the value the brand delivered to that customer.
    In theory it sounds simple, but when it drives every aspect of in-store execution — when every employee’s business eye is focused on the customer’s needs — that’s when real corporate cultural changes take place and financial success is posted. Since Keyes took the helm of the world’s largest convenience store chain five years ago, his strategy centered on five pillars — product assortment, quality, service, cleanliness and, last but not least, value — for the customer, shareholders and employees.
    7-Eleven is once again a privately held company, controlled this time by Seven Eleven Japan, the company’s largest licensee (see news story on page 12). Although not certain, few industry observers — including Keyes — expect the transaction will fundamentally alter the strategic track of the $41 billion company, since Seven Eleven Japan already owned 73 percent of the company’s stock before the tender offer and took an active role in determining the company’s direction.
    What is certain, however, is stockholder value during Keyes’ tenure soared from about $2 a share in 2000 to the final negotiated $37.50 per share offered to shareholders by Seven-Eleven Japan last month. No doubt Keyes and his 7-Eleven team delivered for all stakeholders.
    The company’s stock price growth mirrored the company’s consistent financial performance. In fact, 7-Eleven posted 36 consecutive quarters of same-store sales growth and for 12 consecutive quarters it met or exceeded earnings estimates under Keyes’ leadership. “We didn’t have any given quarter of 20-percent increases in sales. It was just consistent earnings and growth — in good weather, bad weather and hurricanes, good economy, bad economy — quarter after quarter,” Keyes said.
    Those performance increases are the result of hard work and focused execution on a strategy to turn the company around, bring it fully into the 21st century and prepare it for the future.
    All of these traditional measures and the way the company is changing itself and positively shifting outside perceptions of the convenience store industry also contributed to Keyes being selected by his peers for induction into the Convenience Store Industry Hall of Fame. (For more coverage of the Hall of Fame celebration, turn to Page 31.)

    People Power
    The positive changes at 7-Eleven stemmed from Keyes’ focus on new products, his passion to deliver quality and portable fresh foods, and insistence on information systems to support better store-level merchant decisions. But all of these changes are dwarfed, according to Keyes, when compared to the changes required from the people at all levels of the 7-Eleven organization, which operates 5,800 stores in the United States and Canada, and licenses 23,200 stores worldwide.
    “I would say that the culture and the people side of the business are the single biggest opportunity the company faces,” Keyes said. “It is much easier to transform technology, even easier to transform the supplier community than it is to change the mindset of the team. Because 7-Eleven is blessed with a legacy that goes back 78 years, it also suffers from that legacy. We’ve done the same things the same way for so many years.”
    The difficulties and tensions created by change are occurring at all levels — from store-level managers and franchisees to executive management. That change has to come from the top, Keyes said. “All levels of executive management have to constantly be changing in order to get the acceptance of change to permeate the organization,” Keyes said.
    In some cases, franchisees who have been successful in the business for 20 or 30 years are being asked to adopt a different — perhaps, in their view, a revolutionary — form of retailing that requires them to be more proactive and assume initiatives and responsibilities that were once the purview of manufacturers and suppliers. For example, headquarters is asking franchisees to order and manage their [direct-store delivered] product mix because they believe
    franchisees will experience considerable sales increases if they do. Some franchisees, however, are reluctant. They want to see proof that sales will increase by X amount before they implement any significant changes.
    “That’s the natural tension you will see inside of 7-Eleven today,” Keyes said. “There is this recognition that the company has to change, but the difficulty is actually adopting that change.”
    So, assuming change evolves slowly, what is Keyes’s vision for a convenience store five or 10 years down the road? In his view it will appeal to a much broader demographic.
    “We were guilty of very narrowly targeting our customer as the busy, predominantly male working person,” he said. “For a period of time — in the ‘60s and ‘70s — that was probably a wise demographic to target because it was the busy segment of society. Today, that has changed dramatically. The industry can’t afford to ignore the busy urban professional and the female customer, which in many cases is the busiest demographic of today’s society. The irony is 7-Eleven’s product assortment didn’t appeal to what is today the busiest demographic, which has to change.”
    The convenience stores of tomorrow will be much more relevant to customers, in environment and in product assortment, according to Keyes. A retailer can spend $300 million on advertising to try and convince the female customer that convenience stores are a great place for them to shop, according to Keyes, but it will never work.
    “If the stores are clean, the food products are fresh, healthy and taste good, and the service is friendly, then they are going to come,” Keyes said.

    Fresh and Portable
    One of the biggest changes, or upgrades, in offering at 7-Eleven is the prepared food assortment, as well as the quality and consistency of the foods on the menu. Keyes is quick to credit Seven-Eleven Japan for much of the inspiration for these initiatives.
    “Thirty years ago they realized the 7-Eleven product assortment didn’t fit the needs of the Japanese consumer, especially the more urban professional consumers,” Keyes noted. “So they modified their product assortment and targeted fresh foods as an opportunity. I saw what they had done and was intrigued by it, but didn’t know if it would work here in the United States.”
    When it comes to fresh food advice, another source of inspiration for Keyes was his wife Margot. As a busy professional who was frequently on the road, her biggest complaint was the dearth of convenience foods that met her lifestyle needs. “She would constantly encourage me to find a way to have healthy, better-for-you foods that she would prefer to eat rather than the only choices that were available in the marketplace at the time.”
    But the biggest challenge in the convenience store environment, he said, is food preparation, which is always going to be more difficult than at a fast feeder because “that’s their business and they can generate enough volume to support the staff necessary to prepare the food on site.”
    With a 24-hour operation, how do you meet the demands for food safety, quality and consistency with a prepared-on-site fresh-food model? In Keyes’s view, it cannot be done well.
    Instead, the focus at 7-Eleven has been on a new and different model, one that relies on third-party commissaries and vendors better able to deliver freshness, quality and portability, which Keyes believes is a more important ingredient than immediate consumption.
    “What I saw emerging in other countries — not just in Japan, but in Europe as well — was a new kind of food that was not prepared for immediate consumption. And here was the difference: It was high quality and portable. That is the missing ingredient here in the United States,” Keyes said. “High quality and portable here is associated with fast feeders. Although the quality may be good, it is only good for immediate consumption. It may be portable, but doesn’t hold up after 15 or 20 minutes. And, of course, it may not be the healthiest alternative.”
    Keyes isn’t referring to heat-and-eat products. He is mostly referring to high quality, chilled products that someone could, for example, pick up in the morning, for consumption later at work or at home.
    In Europe he has observed a ready market for to-go products that are portable and better for you including unique sandwiches and salad offers and chilled meals and snacks that fuse flavors from all over the world. The same trend is occurring in Asia, he added.
    "It ‘s not that the population in Asia doesn’t enjoy hot food. They do, but they have learned to create high quality chilled products, whether it is a Bento Box in Japan or their equivalent to an American Hamburger, which would be a rice ball (a protein starch chilled snack). In Taiwan, for example, where the rice ball didn’t exists, it now does."
    According to Keyes the Taiwanese added their own flair, adding a highly popular Korean spice called kimchi. "So here is a Japanese rice ball with Korean flavoring being sold in Taiwan 7-Elevens. It is fusion, and that’s what’s going on all over the world."
    The same opportunity exists here in the United States, Keyes said. "There is no reason we can’t create alternatives to the hamburger, hot dog and pizza," he said. "A pizza doesn’t have to be hot, for example. The fresh foods niche and opportunity that [exists for c-stores] is to be able to capitalize on portability, quality better-for-you choices. We need to provide alternatives that are just as tasty to the consumer that would have only been satisfied in the past by hot food."
    Currently, 7-Eleven’s prepared food business (fresh daily delivered items and grill products) represents about 10 percent of inside sales; five years ago it was about 6 percent. In Japan, 40 percent of inside sales are derived from high-margin fresh foods, a long-term aspiration of 7-Eleven stores in the United States and Canada.
    “7-Eleven is not going to go from 10 percent to 40 percent overnight, because there is a full transformational process that has to occur,” Keyes said. “But it can go from 10 to 20 percent in a reasonable period of time” and evolve from there.
    One exception to those sales numbers are the newly developed urban 7-Eleven stores, which are yielding between 20 and 30 percent of inside sales with fresh foods because the mix skews heavily to busy professionals.

    New-Product Czar
    In large part, Keyes is responsible for the industry’s new product revolution in both proprietary fresh foods and consumer packaged goods. Over the years he has challenged — or, more aptly, demanded — suppliers to come up with more relevant, more creative and appropriate new products for convenience stores. Some manufacturers bucked all the way, believing Keyes and 7-Eleven exceeded the boundaries of what retailers were allowed and/or expected to do in a retailer and supplier relationship.
    “I think there is upside here for everybody, not just 7-Eleven, and not just the convenience industry,” Keyes said. There is room for the industry collectively to “do a better job collaborating as partners to come up with wins for the ultimate consumer,” Keyes said. ”The opportunity is just beginning.”
    While progress has been made, Keyes admitted not all manufacturers and suppliers are on board. Some still feel threatened by the proactive role of the retailer and are reluctant to “relinquish any element of their role in either distribution or the new product development process, because, in many cases, that role by the manufacturer has been the competitive advantage,” Keyes said. “That ability to control distribution, control product development, package size and cost has been the lever that creates a barrier to entry for their competition.”
    Keyes often challenged reluctant suppliers by questioning their future viability, asking, simply, “If you don’t change, will that old approach make you more vulnerable to the competition in the future because you haven’t been able to be flexible?”

    The Ultimate Enabler
    7-Eleven has come a long way in its implementation of technology, and in Keyes’s estimation it remains a big opportunity for the company because it provides the data to better understand the demands at every individual store.
    “7-Eleven and the industry has given lip service for the last 20 years to the unique demographics of every location and our desire to tailor product mix to the needs of that neighborhood. It has been lip service in the past because we had no idea how to satisfy those needs,” Keyes said.
    Technology today is the next best thing to literally talking to the customer, he said. “As a result, 7-Eleven is not relying on market research and demographic studies alone. It’s actually able to put a product assortment out there, test it and continually morph it so that for every one of the 2,500 items in the store, the chance for success of that SKU” is optimized.
    Early on the process was about automating the stores, but today it is all about information. “I think more than a few retailers have fallen into the trap of thinking the technology will solve their problems,” Keyes said. ”It’s just a tool — a tool that will help them become better retailers.”
    Still, the data yielded by information systems is only one piece of the puzzle. The knowledge of the local store manager or franchisee is the differentiator.
    “It’s Friday night and there is no way to predict electronically the traffic generated from the Friday night football game,” Keyes said. “But the local retailer knows there is a Friday night football game because he or she is talking to the kids; they are a part of the neighborhood. 7-Eleven can arm that retailer with better decision-making tools so that instead of making an automated decision that will probably be wrong, an informed decision can be made that has a better chance of being correct.”
    It’s not just about having technology and automated reports. It’s about empowering and training people on the front line to be better retailers and use these tools to make more effective decisions, Keyes said.
    “The main objective is to drive improved retail, not drive automated efficiencies.”

    Two Way Street
    The future success for 7-Eleven, according to Keyes, lies in the company cultivating an entrepreneurial and empowered system, where strong communication is fostered both ways — from headquarters to stores and stores back to headquarters.
    Although the communications systems and processes are in place, it’s very difficult to accomplish because of the intrinsic nature of a hierarchical organization, according to Keyes.
    “All of the pressures of the corporate environment actually work toward inertia that sets in and defeats the entrepreneurship you would like to foster. It’s a constant challenge,” he said. “I’d like to say that we’ve figured this out, but we haven’t. 7-Eleven is working on the people side of the business every day.”
    Of course, it’s easier for corporate to control company-operated stores than franchise stores.
    Although the company envisions most of its growth in the future coming from the franchise side of the business, getting franchisees to share the vision for the future has been slow, but still steadily growing,
    “I have to acknowledge that there is still a healthy dose of skepticism in the franchise community,” he said.
    The job of the next president and CEO will be to earn franchisees’ trust and prove the company’s vision in terms of direct earnings to the stores.
    For trust to develop in a business environment, one has to be able to put themselves in the other person’s shoes, truly listen to their needs and be empathetic toward them, Keyes said.
    “I’ve got to tell you that as a manager that has not been a strength of mine. In the past it has been, ‘Let’s go full throttle and worry about what people think and feel later,’” Keyes revealed. “Maybe it’s just that I’m getting older, but I’m recognizing the old style I had doesn’t work.”
    So as 7-Eleven’s financial successes were posted quarter after quarter, it is the softer side — the people side, specifically the franchise side — of the business that challenged Keyes most of all.
    7-Eleven has upwards of 3,000 franchisees in the United States and Canada “and it is difficult to reach out to them all individually and let them know how important they really are to the enterprise,” Keyes said.
    Future unit growth will occur more on the franchise side of the business than through company operations. In fact, since the beginning of the franchise system at
    7-Eleven, franchise stores have outperformed company-operated units. Over the past few years, however, the performance pendulum is swinging the other way.
    “Corporate stores are performing higher because they are earlier adopters [of new systems, programs and products],” Keyes said.
    “The company still believes in the long term that franchisees will demonstrate more entrepreneurship and higher success than corporate stores. Although they are slower to adopt, when they do adopt, they will be better adopters,” he said.
    Asked if he walked into a store blindfolded not knowing the type of operation it was, would he be able to tell if it was a franchise or a company-operated store, Keyes said, “No. I can honestly say no.” In his estimation there are equally strong and weaker performers in both camps.
    About 60 percent of the
    7-Eleven system is franchisee operated, and where appropriate, entire markets are being converted to franchised stores if in the past they have been mixed. For example, Salt Lake City will be entirely converted to franchised stores over time. Stores in markets such as Dallas, Austin and Florida — which have been traditional testing grounds for new products and programs — will remain company operated.
    Relations between 7-Eleven franchisees and corporate certainly have improved over the past five to seven years. Tensions in the past, according to Keyes, were, due to poor economics and change.
    “If the company is suffering, if the individual store economics suffer, you’re going to have unhappy employees and franchisees. It’s really as simple as that,” he said.
    “When franchisees began to better understand the changes and see economic benefits of those changes, then the attitude and cooperation between the company and franchisees also began to change. Franchisees are essential ingredients to
    [7-Eleven’s] success.”
    Keyes described the relationship in the late ‘80s and early ‘90s as more of a trade union. Franchisees banded together to protect themselves against the company, which they believed could and would harm them.
    “The irony in this whole thing — especially today — is that the 7-Eleven model doesn’t work if the individual store model doesn’t work. If 7-Eleven does things in detriment to the franchisee, it does detriment to the whole company and system as a whole,” he said.

    Gas and the Future
    For 20 years, Citgo and 7-Eleven have partnered. At one time, in fact, 7-Eleven (then The Southland Corp.) owned Citgo. The contract, however, is coming up for renewal in April of next year and 7-Eleven has been carefully considering its options. Given the company has many of its own proprietary branded products, it wouldn’t be a long shot to one day see 7-Eleven branded gasoline at the pumps.
    But Keyes — who drafted the Citgo contract 20 years ago — kept his cards close to the vest, saying, “It provides 7-Eleven the opportunity to look at the future and see what is best for its customers.”
    With approximately 2,000 stores selling gasoline, 7-Eleven has been pleased with the Citgo relationship in terms of supply and earnings contribution.
    “The brand development opportunity remains,” Keyes said. So whoever 7-Eleven partners with — Citgo or another oil company supplier — 7-Eleven “would be more proactively working with them to develop the brand.”
    The percentage of stores selling gasoline in the 7-Eleven system is not expected to change dramatically — even as executive management focuses on growing its store base more aggressively in the future.
    Internationally, 7-Eleven is growing by about 1,700 to 1,800 units per year, while in the United States and Canada its growing by only about 100 units per year.
    “7-Eleven will ramp up modestly in the beginning, adding 150 to 200 stores over the next few years,” Keyes explained. “In the ‘80s we were growing by 500 to 600 stores per year, and the company can get back to that level in the future.”
    Outside the United States, the immediate focus for growth is in Asia, particularly China where
    7-Eleven currently has 280 stores.
    The focus over the lat five years has been on the turnaround of the domestic business. Under the new Seven-Eleven Japan ownership, Keyes said, “the international opportunities and what the company will be able to deliver on a global scale will be tremendous.”

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