BY Harvest Capital 

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唐吉诃德DON.KI(DON.Quijote)

1. What is the status of Don Quijote?

In Japan's past 30 years of economic decline, Don Quijote's business has not been affected; instead, it has been thriving and making remarkable progress.

As of 2020, Don Quijote (Group Name: Pan-Pacific International Holdings Corporation) has become the fourth-largest retail enterprise in Japan, with nearly 800 stores and a revenue of 1.6819 trillion yen (approximately 100 billion RMB).

Originating from domestic discount stores specializing in surplus and clearance items, about 65% of its revenue comes from categories such as home appliances, miscellaneous goods, sporting goods, and clothing, while approximately 35% is derived from food products. Although food serves as a traffic driver, the overall gross profit contribution still relies on non-food items.

2. Two key acquisitions for structural adjustments

Don Quijote can be understood as a company that operates both in the industry and as a venture capitalist (VC), and its post-investment empowerment has been well executed.

The two crucial acquisitions are as follows:

In 2007, the acquisition of GMS Nagasakiya, a comprehensive supermarket, led to a subsequent adjustment in the business model the following year.

In 2018, the acquisition of the chain supermarket group UNY, which was under the control of FamilyMart.

Nagasakiya is a large-scale comprehensive supermarket, and its resources and experience in the sales of meat and fish enabled Don Quijote to successfully expand into the fresh produce category. After taking over Nagasakiya, Don Quijote gradually transformed existing stores into "MEGA Don Quijote," expanding stores, diversifying SKU, and achieving a significant turnaround in Nagasakiya's performance. The SKU count expanded to 60,000 to 100,000, and store areas expanded to over 9,000 square meters. The number of customers targeting family consumption gradually increased. This acquisition allowed Don Quijote to experience the sweetness of using acquisitions to broaden its business lines.

MEGA Don Quijote

UNY, the leading enterprise of a chain supermarket group established in Japan in 1950, operated 234 supermarkets, 6,300 convenience stores, and 1,500 specialty stores during its peak period in the Chubu and Kanto regions. In 2015, FamilyMart invested 171 billion yen to acquire UNY entirely, making it the second-largest chain convenience store group in Japan. In 2017, Don Quijote and FamilyMart UNY Holdings formed a collaboration, with Don Quijote acquiring a 40% stake in UNY. The two parties jointly operated stores under the "MEGA Don Quijote UNY" brand.

The transformation of UNY involved adjusting its product structure, emphasizing the operation of non-food categories (Don Quijote's non-food products such as daily necessities and household appliances have higher profits), and incorporating Don Quijote's signature compressed display and treasure hunt-like shopping experience. The post-transition UNY acquired a more personalized image. In subsequent capital operations, FamilyMart and Don Quijote engaged in cross-shareholding. FamilyMart invested in Don Quijote, and Don Quijote acquired the remaining 60% stake in UNY.

These two acquisitions allowed Don Quijote to gain integration dividends, and starting from 2013, it accelerated its overseas market development. In Singapore, it established the Pan-Pacific International Holdings (PPIH) group and expanded rapidly through acquisition strategies to avoid cultural understanding deviations.

Additionally, after entering the U.S. market, in 2013, Don Quijote acquired 11 Marukai supermarkets (with an annual sales of $145 million) and the operator of Times Supermarkets, QSI Inc, in Hawaii (which includes 17 Times Stores, 5 Big Save Markets, 1 Shimas Market, and 1 Fujioka’s Wine Times). In 2021, it acquired the upscale supermarket Gelsons, seen as a move into high-end retail.

Entering the Singapore market in 2017, it introduced the new concept DON DON DONKI, emphasizing food operations and aiming to boost Japan's exports in agriculture, livestock, and fishery products.

3. What value did the acquisitions bring to the company's operations?


Why did Don Quijote insist on acquiring a chain channel from the previous era? What strategic value does this hold for its business?

From a data perspective, the integration of a comprehensive supermarket initially led to a short-term decline in personnel efficiency and sales per square meter. However, in subsequent business development, all key indicators, including personnel efficiency, sales per square meter, gross profit margin, inventory turnover rate, and per capita consumption amount, continued to improve.

Don Quijote was well aware of the efficiency issue early on.

Don Quijote's earliest site selections prioritized cost and often involved secondary properties. As a significant portion of its SKU (Stock Keeping Unit) was miscellaneous goods (日杂), with a relatively low quantity of food items and a lower turnover rate. The average inventory turnover days were five times, equivalent to a turnover once every two months, significantly lower than that of 7-Eleven.

Due to a lack of high-frequency goods and prime locations, Don Quijote acquired struggling comprehensive supermarkets with a larger share of food items and higher consumer frequency. This move resulted in improvements across various performance metrics. The overall customer base also exhibited a trend toward a younger demographic, marking a resurgence in the company's growth trajectory.

7-Eleven

7-Eleven's enduring success has two crucial characteristics:

1. Long-term altruistic thinking, prioritizing limited profits.
2. Adaptive capacity in the face of crises.

The franchise model of 7-Eleven and the direct-operated model of Don Quijote represent two different approaches, each requiring distinct capabilities. The franchise-centric 7-Eleven model is more focused on channel business, expanding more rapidly, utilizing a broader range of societal resources, and dealing with more complex profit distribution considerations. This places higher demands on platform-type enterprises.

Through a strategy of thin margins and high sales volumes, coupled with continuous system optimization, 7-Eleven has ultimately established a robust ecosystem. Customers enjoy convenience, franchisees make profits, and small to medium-sized suppliers also gain returns, creating a stable space for its survival and development.

2% annual profit margin

Any short-term practices would impact long-term operational stability and the achievement of long-term goals. 7-Eleven does not aim to pressurize goods every day or raise prices. Instead, it coordinates products, suppliers, and franchisees to achieve an ideal state.

Compared to Don Quijote surviving in a difficult environment, 7-Eleven has strategically positioned locations. Franchisees, entering with store resources, have higher expectations for 7-Eleven.

Most operators would sacrifice altruism for short-term profits. 7-Eleven's operations are not straightforward, and its net profit margin is not high, around 2% annually. It's like walking a tightrope on the edge of a cliff, where a slight misstep could lead to losses.

2. Adaptability in the Face of Crisis

Since 2018, the operational efficiency of 7-Eleven has encountered bottlenecks. As seen in the chart above, the development speed of 7-Eleven has gradually slowed down over the past 15 years. In recent annual reports, 7-Eleven emphasizes transformation every year, with a check on the changes from the previous year. To address communication issues between franchise stores and the headquarters, apart from the Store Consultant (OFC), director-level executives have been added, allowing franchise stores to communicate directly with them.

In recent years, stores have actively adjusted to changes:

1. Product structure is more focused on essentials: Increased supply of essential foods, frozen pre-prepared home-cooked meals, processed meats, fruits and vegetables, and cooking products to cope with the pandemic.

2. Stores are located closer to users: With an increase in home orders and a decrease in office area orders due to the pandemic, more community-based, residential-based, and suburban-based stores have been added, bringing them closer to users.

3. Providing home delivery services: Implemented in-house logistics, equipped with refrigerated vehicles, and established in-house teams to deliver takeaway orders.

Digital strategy complemented by supply chain upgrades:

7-Eleven in Japan provides same-day delivery services by appointment; mobile stores with light-duty trucks; digitized processes for convenient inventory checks at the store level (stores can check inventory by the box); and continuous optimization of last-mile delivery using AI technology. Undoubtedly, significant effort has been invested in implementing a digital strategy.

Numerous operational details are continuously evolving and improving, placing stringent demands on the business's operational capabilities and iteration speed.

The premise of the strategy is the determination of the organization. Essentially, 7-Eleven is a platform-level enterprise that provides infrastructure. The key is to enhance the food and beverage category, making it an integral part of the infrastructure. In addition to business aspects, organizational capabilities are also aligned with changes in the business. The most critical category for convenience stores is food and beverages, and comprehensive supermarkets have stronger operational capabilities in this area compared to convenience stores.

To enhance the competitiveness of 7-Eleven's food and beverage category and achieve the metropolitan area food strategy, the company elevated the food section of its large supermarket, Ito-Yokado, to a first-tier department. A new company, New York Company, was established to manage all food and beverage businesses under the 7-Eleven Group. After taking over 20 stores from Ito-Yokado, New York Company played a leadership role in the organizational leap of the company's food and beverage category.

Following the establishment of New York Company, it immediately invested in a new round of technological infrastructure development, including supply chain and infrastructure (central kitchen, digital processing center, logistics, etc.).

The Japanese retail enterprises, Tang Jihuode (Don Quijote), and 7-Eleven, both grew in challenging circumstances (macroeconomic decline, suboptimal locations, limited profits).