The Marketing Ps of 759 Stores

A MEMBER OF THE UNIVERSITY OF HONG KONG GROUP 香港大學機構成員 AILIE TANG W H LO AGAINST ALL ODDS: THE MARKETING PS OF 759 STORES 759 Stores (“759”) were born in 2010 when Lam Wai Chun’s (“Lam”) manufacturing business was in trouble and he wanted to warn his staff about possible redundancy. He also wanted to enrich their credentials by offering them exposure in retail business. He accepted his staff’s idea of opening a small tuck shop in a local shopping mall in August 2010. A few more shops quickly followed. He later named these shops 759 阿信屋 (1). In five years, 759 grew from a small shop to a chain of 249 outlets selling over 30,000 products (2). Its revenue had grown from nothing to over HK$2.1 billion [see Exhibits 1 and 2 on shop and revenue growth of 759]. Obviously, Lam had found a successful formula to overcome all the odds challenging 759’s survival, such as local-supplier boycotts, high rental and operating costs, and a Hong Kong taboo on independent pricing. Important aspects of Lam’s solution were reflected in 759’s marketing mix. Positioning Lam called his core consumer targets “kai-fong” – the local mass-neighborhood residents of Hong Kong. He had the everyday shopping wallets of these kai-fongs in mind when he set up 759’s supermarket-style operation. This laid the foundation for its logical merchandise mix: expansion from snacks to other daily necessities, such as personal care and food and beverage items, once the chain managed to get a foothold in Hong Kong’s retail scene. To compete against the wide product varieties of the two major supermarket chains (Park’n Shop and Wellcome) and the convenience offered by the two neighborhood convenience store chains (7-11 and Circle K), 759 sought to provide kai-fongs with “an alternative and unique choice” (3) of a wide variety of products imported from as many as 63 countries (4) sold under the principle of “lower margin with high turnover” (5). As the retail chain grew, the size of shops expanded, with a view to putting 759’s wide product range under one roof and offering kai- fongs a more leisurely shopping environment. Products 759’s successful product strategy was the result of local-supplier boycotts in 2010. At that time, 759 had only a few stores, and suppliers tended not to service them well. To order this case, please contact Centennial College, c/o Case Research Centre, School of Management, Centennial College, Wah Lam Path, Pokfulam, Hong Kong; phone: (852) 3762 6284; website: http://cases.centennialcollege.hku.hk . The case was supported by a grant (UGC/IDS12/14) from the Research Grants Council, HKSAR. © 2015 by Centennial College, a member of The University of Hong Kong group. No part of this copyrighted publication may be reproduced or transmitted, in whole or part, in any form or by any means, whether electronic, mechanical, photocopying, recording, web-based or otherwise, without the prior permission of Centennial College. This case was prepared for class discussion purposes and is not intended to demonstrate how business decisions or other processes are to be handled. Ref. 15/008CS Published: 12 October 2015 Page 1 Against All Odds: The Marketing Ps of 759 Stores (Ref.: 15/008CS) The industry also had a tight grip on the retail prices of different resellers, keeping them within a narrow range. When 759 tried independent pricing, the suppliers boycotted the chain. Lam managed to defy the odds by successfully got support from a major Japanese supplier, who assembled a container-load of mixed snacks in Japan at unit costs lower than the wholesale cost of similar products in Hong Kong. Since then, “parallel import mode in container loads” (6) became 759’s merchandising approach. To reap the full benefits of this approach, Lam adopted an unprecedented expansion rate, and, in five years, he grew the number shops from zero to 249 (7). He also expanded the number of countries from which he sourced his stock from one, Japan, to 63 [see Exhibit 3 for more details]. Lam preferred sourcing from countries and regions, such as Japan and Europe, where supplies were consistent and high-quality. Over the years, 759expanded its variety of imported products from snacks to cereals, oil, and other foodstuffs, as well as non-food items such as household and personal care products [see Exhibit 4]. The chain targeted increasing the non-snack foodstuff share of revenue from 36.5% to 38%, and that of non-food items from 9.2% to 26%. (8) It is worth noting that Lam redeployed his manufacturing staff as merchandisers. In order to compensate for their lack of experience, he took advantage of 759’s operating scale by importing minimal container-loads of new products to test consumer response, which then became the key consideration in replenishment. The merchandisers’ manufacturing background came in handy when 759 rolled out its branded products, a process that allowed them to use their networks and experience in manufacturing-sourcing. According to 759, its own branded products were among the chain’s top 500 best-selling items. Pricing 759 made a decision to keep its profit margin to around 3% for three major reasons. Firstly, this was the industry norm, that is, market leaders had similar margin percentages. So consumers tended to regard this margin as reasonable. Secondly, the delta between cost and margin represented the capacity that 759 had to strengthen the other aspects of its marketing mix, including offering higher salaries to attract and retain employees, and more frequent discount promotions to achieve high turnover rates. Thirdly, low margins were a barrier to entry, as it would be hard for newcomers to survive on such low margins without 759’s purchasing power. This would also deter competitors from initiating of price wars.. 759 deployed an IT system instead of human intelligence in its pricing. Products were divided into five different categories: marked price (“正價”), fixed price (“公價”), “kai-fong” price (“街坊價”), hot-selling price (“熱賣價”) and bargain price (“超抵價”). Each category had a fixed gross margin. New products were assigned to a single product category by Lam and his merchandisers. Then the IT system set the price according to cost. Promotions & Packaging According to 759, “around 480,000 customers shopped with store-cards more than once a week, and about 1,150,000 customers shopped with store-cards once or more in every 4 weeks” (9). The figure suggested that at least 20% of Hong Kong’s population had a 759 store card. These cards were distributed almost for free by 759, which saw them as promotion leaflets that would stay in consumers’ wallets. The large number of cardholders, coupled with low parallel-import costs, allowed 759 frequently and successfully to deploy straight-forward discount promotions. In terms of joint-promotions with third-parties, Lam adopted only mechanisms that would directly benefit customers. 759’sbest-received joint promotions involved offers of subsidized product discounts by payment-solutions providers. This simple and direct approach allowed for speed and reduced administrative issues for all parties involved in such promotions. Similar principles applied to how 759 managed its packaging. CENTENNIAL COLLEGE Page 2 Against All Odds: The Marketing Ps of 759 Stores (Ref.: 15/008CS) The fact that 759 had only one graphic designer for its 249 shops reflected the chain’s no- frills approach to packaging costs. Place Good retail locations are a suppliers’ market. Placement decisions involve consideration of customer traffic, which property developers were key in determining. Since some prominent Hong Kong developers already had retail grocery chains as tenants, 759 had difficulty penetrating certain desirable shopping malls. Over the years, Lam attempted to gain support from large property developers and major property agents. One of his focuses was finding retail spaces for larger shops, as revenue and shop size were positively related. Larger shops allowed 759 to place all its products under one roof, which was key to higher revenue. 759 believed that customers would prefer to shop for their personal and household needs at larger 759 stores. Presently, only 40% of 759 stores were larger than 1,500 square feet. Lam wanted to bring the percentage to 65%. The high rental environment in Hong Kong meant 759 had to exercise stringent controls on placement costs. Any location that failed to reach a minimum rent-to-turnover ratio would not have its lease renewed. Lam also personally kept a close eye on the logistics costs of goods delivery, containing them to within 3% of turnover. People Consistent with his other marketing strategies, Lam followed a no-frills approach in managing human resources. He did not spend much in customer-service training. Instead, he paid his staff handsomely to incentivize results. For example, front-line staff was paid around HK$16,000 a month in fiscal year 2014-15, at least 20% higher than market rates. (10) This approach seemed to be working: 759 surprised the industry in June 2015 when customers voted it an “excellent customer service” award in the supermarket/convenience store category (11) 759 did not have a customer service department’ most customer queries and complaints were answered and handled by front-line staff and their supervisors 759’s turnover rate stayed at a mere 10% of staff who had passed probation Almost all staff regarded themselves as directly reporting to Lam, and Lam saw things the same way. With 759 expanding at an extremely rapid pace while facing local-suppliers boycotts, a team without much retail experience, and operating costs increasing every year, stakes were high and the margin for error was low.

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