7-Eleven's lessons from Japan. (Strategies of the Fittest).

Two finance stories obsessed the business press in the late '80s: the burgeoning pace of leveraged buyouts and the rash of Japanese takeovers of American icons like Columbia Pictures and Rockefeller Center. A frequent headliner was Southland, owner of the 7-Eleven convenience store chain.

Southland was doomed by the first trend and saved by the second. To deflect a hostile takeover, the company went private with a $4.9 billion leveraged buyout unwittingly staged a few months before the stock market tumbled in October 1987. Then the junk bond market spectacularly collapsed in 1989. A year later, Southland, saddled with interest rates as high as 18 percent on $3 billion in debt, filed for bankruptcy.

Southland's licensee in Japan, meanwhile, was faring much better. The two struck a deal and Southland emerged from bankruptcy. Southland, which started out in 1927 as Southland Ice Co. selling blocks of ice (and later milk, eggs and other goods) to Dallas grocers, was purchased in March 1991 by a holding company made up of the Japanese retailer Ito-Yokado and its subsidiary Seven-Eleven Japan, Southland's largest and most profitable licensee. IYG Holding Co. initially acquired 70 percent of Southland and today owns 73 percent.

Though the acquisition sparked consternation in the American press and invited quips about "sushi Slurpees," it has been one of the more successful Japanese--American unions, relying on lessons from Japan to foster a turnaround in the United States. Among the ideas the American managers borrowed were more efficient distribution strategies and retail technology that has allowed the company to exploit its corporate buying power. Southland changed its name to 7-Eleven in 1999. (Seven-Eleven Japan predates the name change and chooses to spell out the "7.")

James Keyes joined 7-Eleven's former Citgo Petroleum subsidiary from Gulf Oil in 1985. He remembers that the first few years after the Japanese took over were rough on some American egos. "Many of the senior management team had come up through the system and had a great deal of pride in 7-Eleven," he recalls. "They had a hard time thinking that the licensee could teach us to improve." But Keyes saw opportunity. "If we are successful in continually changing as the customers' needs change, then we have virtually unlimited upside," he asserts.

In April 2000 he was promoted to CEO and is proud of the ideas he's borrowed from Japan and elsewhere. Analysts approve of Keyes' long-term growth strategy, which includes increasing capital expenditures to $500 million, up from $357 million a year ago, but acknowledge that recovery is taking longer than they'd like. "I call it my Rip Van Winkle stock because if you bought it and put it away for 20 years you'd be extremely happy," says Jonathan Ziegler, senior industry analyst with Deutsche Bank--North America. Earnings numbers are on the cusp of starting to look better, but we've waited a while to get here."

In the first half of this year, 7-Eleven's earnings, excluding one-time and unusual or extraordinary items like discontinued operations and gains or losses from currency conversions, increased to $44.7 million from $36.8 million a year ago because of cost reductions and improved store sales. The company owns or franchises 5,800 stores in North America and licenses 17,000 additional stores in 20 international markets.

Keyes, recently in New York to celebrate the company's 75th anniversary, spoke with Chief Executive Associate Editor Sonja Sherwood about where he finds good ideas.

Q: How long did it take 7-Eleven's American managers to begin adopting Japanese ways?

For the first two or three years, many American managers looked at the success of Seven-Eleven Japan as being unique to that country. After awhile, we began to see that it was Seven-Eleven Japan's infrastructure and business processes that allowed them to do a better job of keeping up with consumers' needs.

Q: What concepts translated first?

Simple elements included a centralized distribution system. Seven-Eleven Japan had discovered that a centrally located commissary business linked to stores via a daily delivery system allowed them a cost-effective way to distribute high-quality rice balls and bento lunchboxes to their stores.

At the same time, in the U.S. we were struggling with hot dogs. The challenges were the same: If you don't have a centralized bakery or a daily distribution system even something as simple as a hot dog roll is hard to provide with the best possible quality.

Seven-Eleven Japan was getting three deliveries a day with a delivery cost of between 4 and 6 percent on the dollar. In the U.S., 7-Eleven was getting most of its goods once or twice a week and our delivery cost was between 10 and 20 percent. Clearly Seven-Eleven Japan's infrastructure was a tremendous advantage.

Q: How long will it he before the US. business matches the cost savings and delivery efficiencies of Seven-Eleven Japan?

The geographic dispersion of our stores in the U.S. makes it more challenging. We have now implemented a centralized distribution system in 4,000 of our 6,000 stores and we have at least once-per-day deliveries in most stores, with that system rolling out to another 1,000 stores by the end of this year.

Our costs for daily distribution are now between 10 and 12 percent on average.

Q: What other best practices did the relationship lead to?

Seven-Eleven Japan embraced technology early on that today allows us to act like a global company and leverage our buying power.

For example, every 7-Eleven store all over the world uses plastic shopping bags that are pretty similar. We sourced bags for the U.S. out of Taiwan, being oblivious to the idea that we have a licensee in Taiwan with 3,000 stores, and they needed bags as well. The opportunity to source something as simple as plastic shopping bags for 23,000 stores worldwide is a tremendous opportunity.

Q: Have you given them any bright notions?

V-Com was one of ours. V-Com combines our existing business of money orders and ATMs, which are very profitable, with a host of new financial services such as the ability to cash checks, send or receive Western Union wire transfers or even do branch banking. It stems from the evolution of the ATM business we developed in the early '80s, when we became the first retailer to provide ATMs across our entire chain.

Q: How does Japan benefit?

Ito-Yokado [the Tokyo retailer that controls 7-Eleven's U.S. business] and Seven-Eleven Japan are rolling out their own internal ATM and banking system. Once we have a network that can reach the other countries, customers will be able to move money around or do any banking at any 7-Eleven store in the world.

Q: Where else do you find good ideas?

When you think of convenience stores, you might think, traditionally, of beer and soft drinks--probably not scooters. About two years ago, we realized that some franchisees m Asia were selling scooters, and doing quite well. We chartered a 747 to bring scooters over here to beat the market. We filled stores while demand was strong and were one of the few retailers that wasn't stuck with a tremendous inventory when the fad died.

Q: You're in New York City celebrating 7-Eleven's first 75 years in America; do you ever worry that Japanese ownership could spoil 7-Eleven's Americana image?

No, because actually, in every country people seem to see us as a local company. I was checking into a hotel in Taiwan about five years ago and the person across the counter asked me, "What's it like working for a Taiwanese company?"

I tried to tell her this is an American company. She said, "No, no, it's not." It was cute. I have to admit, at first I thought, "I have to do something about this; this is terrible. We need to let the world know we're American." Then I realized this was a really good thing--we're a very international company.