Can retailers excel at food manufacturing?
Japanese retail giant 7&i believes so.
I’ve updated this blog post on 23rd May to include the above video
Whilst 7&i’s CVS business is well known, and a key driver of profitability, the opposite is true for its superstore division, internally branded SST. SST accounts for 31% of group revenue but just 9% of EBITDA!
Superstores are a pain point for 7&i
7&i has been under shareholder pressure to divest its SST business or IPO it. This has been poo-pooed by Management who just a month ago at the AGM described the SST business as “miyuchi”, (身内, part of the family).
There have been some steps to restructure the SST business like dialling down on apparel and closing unprofitable stores. However, it remains to be seen if these steps are sufficient. Investors are fretting. Japanese shopper habits are changing, the weak yen is seeing more price increases than ever and whilst there has been some uptick in wages, they have been marginal at best. There are also more people shopping for groceries online.
7&i has long believed in its own branding, marketing and innovation prowess. It has a concept called “Team Merchandising” which involves close collaboration with suppliers on new product development.
Peace Deli: 7&I’s food manufacturing arm
Now 7&i has launched a new business, Peace Deli, which manufactures Sozai for its SST and CVS divisions.
Competition for 7&i in SST is brutal. There are over 50 supermarket chains in the greater Tokyo area only (compare that to CVS where the top 3 chains have more than 70% share).
Is it any surprise that neither Tesco nor Carrefour could find a path to profitability in Japan retailing?
Chilled and prepared meals have long been integral to supermarket (and CVS) merchandise, not just in Japan but globally. This fare which includes ready meals, prepared salads and meal kits is called Sozai (惣菜 , side dishes) in Japanese.
Like Bakery, Sozai drives shopper traffic
Why do supermarkets often place bakeries close to the entrance? To drive shopper traffic.
Whilst supermarkets often have a bakery, most of the bakery products are shipped frozen to the store. And frozen bakery and patisserie typically come from specialist suppliers. For companies like Lantmännen, CSM and La Lorraine, this is their core business.
Whilst there are some bakeries in Japanese supermarkets they are not as common as in the West. Hence why Sozai to some extent fulfils the same role.
In Japan there are over 21,000 food manufacturing businesses. This is a country with an extraordinarily deep and varied food culture.
So why has 7&i chosen to build its own food factory for Sozai? Wouldn’t using 3rd party suppliers be faster, and give more variety? There’s no shortage of qualified candidates, check out RF1!
7&i’s Peace Deli plant is in Chiba, East of Tokyo. I have tried to find details of how much has been invested exactly but this has proved elusive. I can reveal the land acquired by the company is over 32,000m² and it employs between 300-400 staff. Look at these photos, we are not talking small change.
Looking at other retailers, my sense is that the more gourmet the chain, the more likely they will have their own central kitchen. This is true for Seijou Ishii, for example or Redners Market in Pennsylvania.
In Britain, Marks and Spencer is famous for its food offering; innovation is important to drive repeat shopper traffic. M&S contracts with over 1000 food suppliers in the UK and across Europe.
Some mass market retailers or warehouse clubs do who ready to eat food, usually have a limited range of freshly cooked foods only. Costco has its roast chicken, and here in Japan a popular line of sushi.
(A final thought for exporters. 7&i’s Peace Deli is keen to showcase its mettle. Maybe it’s worth giving them a shout?)