Ghost kitchen attacks 7-eleven’s food business

Convenience stores in Japan

7-eleven is the largest convenience store chain with more than 40% share in Japan. Convenience store became indispensable infrastructure for Japanese people. One of the biggest reasons that convenience store became popular is accessibility. There are 55620 convenience stores in the country, and this means there is 1 store per 2,300 citizens, which is 10 times as concentrate as Starbucks in the U.S (Ex.1).

In Japan, 68% of population finds at least one convenience store in 500 meters from their residences and this figure increases to 99% in Tokyo[i]. Taking advantage of this accessibility, convenience stores have prospered by selling as many as 3,500 types of products that people consume in their daily lives such as food, beverages, sweets, magazines, stationary, daily necessities, ATM, and energy station for electric vehicle.  The convenience stores enjoy economies of scale by using bargaining power against supplier, collecting customer’s information at cashiers, developing private brands, and building strong logistic network.

Value proposition for 7-eleven’s food business

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7-eleven’s food business provides wide variety of dishes for lunch and dinner from Japanese food such as rice balls, sushi, and ramens, to sandwiches, pastas, currys, dumplings, etc. Its first value proposition is convenience. Most of 7-eleven’s dishes are ready to eat when they buy it or after microwave. The second value proposition is price. The average price is cheaper than eating at restaurants and cooking themselves especially for single person. Thanks to these values, people can save time, effort, and money to go and eat at restaurant or cook themselves, and still get reasonably tasty dishes.

Threat from ghost kitchens

Uber Eats started its operation in Japan at the end of 2016 and has grown significantly since then. The delivery capability of Uber Eats enabled existing restaurants to offer their dishes to customers conveniently. They are taking away relatively high-end customers who care less about money but have bought dishes at convenience store because of its accessibility. Another emerging player who has attacked 7-eleven’s food business is ghost kitchen. Ghost kitchen is a professional food preparation and cooking facility set up for the preparation of delivery-only meals. It contains the kitchen equipment and facilities needed for the preparation of restaurant meals but has no dining area for walk-in customers.[ii] Ghost kitchen may post serious threat to 7-eleven due to their convenient, low cost, yet higher quality dishes. For convenience and quality, ghost kitchens are seemingly outperforming 7-eleven since ghost kitchens prepare fresh meal after they receive order (vs microwave in convenience stores) and Uber Eats delivers to customers’ residences. For price perspective, since ghost kitchens have no dining area for walk-in customers, they needs a smaller space only for a kitchen in cheaper location and also don’t need any servers. Therefore, it seems they can compete in the price range where convenience stores are dominating currently. On top of these strengths, the number of ghost kitchens can increase significantly because its business model requires only small initial cost.

Seeing the current situation of Uber Eats and huge potential in Japanese food delivery market, Door Dash and several other platformers are considering their entry to Japan. This competition has just begun and it is difficult to predict who will win, but since it seems that food delivery business model beats 7-eleven in convenience and quality,  the 7-eleven’s food business would lose at least some of its share especially if they don’t take any actions against this new wave.

7-eleven’s potential actions

It is still difficult to predict how seriously 7-eleven should consider the transformation of their food business due to little data available at this moment, but there might be these potential actions below.

• Domino Pizza strategy: Develop their own online platform, develop cooking capabilities in existing stores, and deliver food to customers house using own employees
• Pizza Hat strategy: Use Uber Eats and let them take orders and deliver food, and 7-eleven develops cooking capabilities in existing stores

My recommendation is Domino Pizza strategy. Although building platform and developing cooking and delivery capabilities seem huge leap for 7-eleven, the customer information currently collected at store’s cashier is fundamental to their business model. They are optimizing price, product lineup, and inventory based on the information in order to maintain their position as indispensable infrastructure for people’s life. Thus, they should not give up the customer information to platformers and to do so I believe they should pursue Domino Pizza strategy.