How Classy Can 7 Eleven Get?

Plans to upgrade the chain meet resistance

The nation's biggest convenience-store chain, 7-Eleven, home of the Slurpee, wants to go upscale. Executives at Southland Corp., which owns and franchises the stores, describe a 7-Eleven of the future that's stocked with fancy fresh meals to go, the latest John Grisham novel, and an array of brand-name goods packaged specially for the chain. And that's not all. State-of-the-art information and delivery systems will allow owners and clerks to spend more time actually serving customers.

But for Dallas-based Southland, survivor of a disastrous 1980s leveraged buyout, the future is still a long way off. More than six years have passed since it emerged from bankruptcy and offered its vision for the new 7-Eleven. But it's still struggling to win over its sometimes balky franchisees and to introduce new products and services in more than 5,400 U.S. and Canadian outlets. Now in the midst of rolling out a food-preparation and distribution network, the chain is about to add a new level of complexity: a sophisticated information system that can precisely track over 2,300 items.

NO BALONEY. It's a high-risk strategy at best. Whether the chain's traditional blue-collar male customer will embrace the gussied-up 7-Eleven or whether enough new customers will flock to the stores to make the effort pay off are big questions. Even Southland's top brass acknowledges the risks. "All of this requires changing the perception of the customer on what to expect from a convenience store," says Southland Chief Executive Clark J. Matthews II. "That's a slow process--slower than we anticipated--but it's happening."

Southland's majority owner and architect of the new 7-Eleven, Japanese powerhouse retailer Ito-Yokado Co., is confident. Based on its success with its majority-owned Seven-Eleven Japan, one of that country's most profitable retailers, the company believes that the U.S. units could ultimately double their same-store sales. Others are skeptical. "Will people ever think of 7-Eleven for anything besides gas, cigarettes, and beer? And will they go there to get dinner? I'm kind of bearish on it," says Philip C. Bonanno, retail consultant at Management Ventures Inc. in Cambridge, Mass.

Making progress even more difficult is the fact that Southland franchises more than half its stores. That means cajoling an often fractious group, still wary of headquarters after Southland's 1987 LBO, which loaded the company with debt and sent it spinning into bankruptcy. The first phase of the fresh-foods program, which replaces the usual baloney-and-American-on-white with fancier fare, has been introduced in 2,500 stores over the past three years, but some store owners say customers shun the new offerings.

Indeed, a recent visit to a Dallas 7-Eleven didn't turn up many fans for the low-fat turkey breast on pita for $2.89 or the teriyaki rice bowl for $3.49. Jerry Ervin, owner of Affordable Drain & Sewer Service, says he drops in for chili dogs and Table Talk pies, but he prefers freshly made sandwiches. "Now I go to Wendy's more," he says.

Some store owners aren't wild about the new food either. Ted Poggi, a Southland franchisee and outgoing head of the National Coalition of 7-Eleven Franchisees, says owners face "horrendous" write-offs for unsold food. Southland says dissident owners are a minority.

Southland's progress has been slowed by more than just unhappy franchisees. Before it could begin remaking the chain, it had to contend with a host of more fundamental problems. Since 1992, it has remodeled some 5,200 stores, closed more than 1,200, and slashed its crushing debt load by 35%, to $1.7 billion. This year it plans to add 100 stores, the first increase in a decade. It has also revamped pricing by moving away from discounts on such core items as beer, cigarettes, and soda, which account for 40% of total sales, while cutting what it calls "insult pricing" on everything else. Although core items have lost sales, Southland points to 14 straight quarters of rising gross profits per store as proof that its efforts are working.

Certainly Southland's profit picture has improved. Earnings before taxes and extraordinary items climbed to $131 million last year, up from $102 million the year before, thanks largely to cost-cutting. Sales growth, though, has been more elusive. Because of store closings, revenues last year totaled $6.9 billion, down from $7.4 billion in 1992. More telling is same-store sales. Over the past three years, the chain has reversed a slide in that all-important measure--but just barely. Gains in the last two years were less than inflation. Those mixed results have the stock stalled at about $3 a share, down from more than $7 in 1993. With Ito-Yokado owning 65% of its equity and with a net worth approaching negative $800 million, Southland attracts few institutional investors.

What it has attracted is a slew of new competitors. Drugstores, 24-hour supermarkets, and others are all gunning for the "convenience" customer. Most of the major oil companies are moving to convenience-store/gas-station combos and linking up with fast-food chains for brand recognition. Mobil Corp. plans to operate more than 1,200 new "On the Run" markets by 2002 that will sell food from such partners as Blimpie International Inc. and Taco Bell.

Southland has chosen a more difficult--though potentially more profitable--path by creating its own food brands. It's hoping that higher-margin salads, sandwiches, and eventually dinner entrees will attract new customers. To prepare and deliver the new menu, it has assembled a network of seven third-party-owned commissaries, seven bakeries, and 13 distribution centers serving more than 2,500 stores. The system is lower in cost than preparing food on site, but competitors snipe at the quality. Regional convenience-store chain Wawa Inc., based in suburban Philadelphia, prepares fresh sandwiches in its 500 stores. "The customer wants restaurant-quality food," says Howard B. Stoeckel, head of marketing, who doubts commissary food can measure up.

FRESH MILK. Southland says its new system can lower costs, improve quality, and boost sales. Since agreeing to make deliveries through a distribution center in April, 1996, 7-Eleven supplier Oak Farms Dairy of Dallas has seen steady 5% year-over-year sales gains after an initial 19% jump, says general manager Rick Beaman. Stores now get fresh milk daily instead of three times a week. And prices are lower since Oak Farms passes on the savings of not having to serve the stores itself. Other suppliers, though--notably Frito-Lay Co.--have balked at turning over deliveries to outsiders partly for fear of losing control over in-store merchandising.

The linchpin in Southland's network is the new information system, which took $100 million and four years to develop and will consume at least another $100 million. Based on the system used by Seven-Eleven Japan, it's supposed to tie together the distribution centers, the stores, and headquarters. Owners can use it to track inventory item by item and to analyze sales trends based on time of day, weather, and other factors.

In theory, that should allow them to make more precise sales forecasts. But getting store operators to use the system effectively could be hard. One franchisee worries that his clerks aren't up to it. "We don't get employees who stay a long time, and we don't get brain surgeons," he says. And some fear the system is just an insidious way for Southland to exert control. Until Southland can persuade its store operators--not to mention its customers and suppliers--that the new 7-Eleven makes sense, its slow-motion turnaround isn't likely to pick up much steam.

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