Introduction 1.1 Introduction in the Modern Age, 7-Eleven Has Always Been Known As One of the Biggest Convenience

Chapter 1: Introduction

1.1 Introduction In the modern age, 7-Eleven has always been known as one of the biggest convenience stores in the world. 7-Eleven was originally founded in Dallas, Texas, in 1927 by Jefferson Green under the name of Tote’m, which was changed to 7-Eleven in 1946 (7- Eleven, 2019). Interestingly, the name 7-Eleven reflects their opening time as they open their stores from 7 am to 11 pm seven days a week. Traditionally, the definition of the term “convenience store” is a small store that sells foods, drinks, household goods, and other products and has convenient opening times. Subsequently, after several decades, 7-Eleven was able to expand their business internationally to regions including Japan, Australia, Sweden, Taiwan, Hongkong, Singapore, Malaysia and the Philippines with a strong brand of popular ice beverage drink and the first coffee to go (7-Eleven, 2019).

Interestingly, 7-Eleven is a company that has produced a lot of innovation for their products and created the phrase “Brainfreeze” for their range of flavored ice beverages, which are the most popular on the market. Similarly, 7-Eleven had also introduced other innovative products such as the Big Gulp and Big Bite (7-Eleven, 2019). Afterward, 7- Eleven was acquired by a Japanese company in 1991 where 69.98% of their shares were purchased and since then, 7-Eleven, Inc USA was rebranded as Seven-Eleven Japan Co, Ltd (7andi, 2019).

When 7-Eleven first entered Indonesia in 2009, it quickly grew into recognition as 7- Eleven became the current trend for hangouts for Indonesians at the time, supposedly due to its recognition in the global market. First of all, it is known that in the era of globalization, the trend of hanging out in stores has been increasing in Indonesia. People in Indonesia displayed an interesting behavior as they would use the stores to hang out and socialize. In general terms, a convenience store can be defined as a small supermarket that has many branches that sell groceries and a limited range of household needs. Furthermore, with a franchise of 7-Eleven by PT. Modern International Tbk (PT is the Indonesian acronym for a limited liability company, and Tbk is the Indonesian acronym for a public listed company) in 2009, they believed retail business in Indonesia was

6 proliferating and had a promising prospect for the next several years (Detikfinance, 2017). In the next few years, 7-Eleven was likely to become one of the most popular places to hang out in Jakarta because of the facilities that they provided such as free Wi-Fi and comfortable seating area with proper tables and chairs for socializing. In the early days of 7-Eleven’s operation in Indonesia, their primary company strategy was to combine the Indonesians’ demand for a place to hang out with affordability, which is attractive to a price-sensitive market like Indonesia. Correspondingly, 7-Eleven is always crowded as a result of being able to understand the trend of Indonesian customers at the time (Reuters, 2017).

Moreover, Indonesian people tended to spend more than one hour hanging out at 7-Eleven as they are allowed to stay indefinitely while only purchasing a single food or beverage. This has largely contributed to the success of 7-Eleven in Indonesia as this approach allowed them to gain customer interest in Indonesia (Tirto, 2016). However, the downside of such strategy is that such customer behavior is detrimental to 7-Eleven’s profitability as the revenue generated from such low volume purchases per customer cannot cover 7- Eleven’s operating expenses, which automatically becomes one of the main problems for their strategy.

Similar to other convenience stores in Indonesia, 7-Eleven is also disadvantaged by the government regulation in Indonesia. Notably, in early 2015, the Ministry of Trade declared that mini-markets and convenience stores are forbidden sell any alcoholic beverages to their customers and the permission only applies for supermarkets with a strict regulation (Idntimes, 2017). Such regulation was enacted to protect Indonesian youth from alcoholic beverages (Wowshack, 2018). Therefore, 7-Eleven had lost a significant portion of their revenue as a substantial portion of their revenue is generated from selling an alcoholic beverage to their customers, especially since their customers are mostly young individuals that tend to hang out and socialize (Indonesia Expat, 2017). Consequently, the revenue of 7-Eleven in 2015 had decreased significantly from Rp.971.8 billion to Rp.886.8 billion and their sales had decreased further in the following year by 23.9% in 2016 (Hong, 2017).

Figure 1: 7-Eleven’s Revenue, 2010-2016

Source: Minimeinsights (2019)

7-Eleven had persistently faced sales decline over the years since 2015, which had ultimately resulted in bankruptcy as they were forced to close down their outlets in Indonesia as of 30th of June 2017. In fact, according to the Financial report of PT. Modern International Tbk (2015, p. 92), the loss of sales from 2015 had forced 7-Eleven to close 20 underperforming stores in Indonesia and the loss of sales was affected from the ban on alcoholic beverage by the Indonesian government. In addition, the rivalry between convenience stores in Indonesia is highly competitive, because there are big competitors for 7-Eleven such as Indomaret and Alfamart that had already dominated the Indonesian market since the early 2000s with a bigger network through local chains. More recent evidence has shown that other competitors, including Circle K, have already entered the Indonesian market since 1996. Likewise, Lawson which is the second largest convenient store after 7-Eleven in Japan, had also entered the Indonesian market in 2011 with a license from PT. Midi Utama Indonesia, Tbk which is known as Alfamart (CNNIndonesia, 2017). Moreover, with high growth of convenience store in Indonesia, Indomaret, being the market leader, had created Indomaret Point in 2010 to compete with Lawson and 7-Eleven. According to Vir (2018), Indonesian convenience store has been dominated by Indomaret and Alfamart with a total of 90% market share and their stores are ubiquitous, meanwhile 7-Eleven only have a small percentage of market share among the convenience stores in Indonesia with a total share of 0.7% (Oxford Business Group, 2018). In addition, it is estimated that there are 14,000 Indomaret convenience store

8 outlets, while Alfamart has approximately 11,000 outlets. Meanwhile, 7-Eleven only had 161 stores at the end of 2016. Moreover, 2016 was one of the hardest times for the Indonesian convenience stores and the retail store market, in which there are some companies such as Hero retail store and Starmart convenience store that were forced into bankruptcy (Tribun, 2016) and, according to CNN Indonesia (2019), Hero Supermarket experienced a huge decrease in their sales with a huge loss of Rp.163 billion in the third quarter of 2017. One of the reasons for these decreases was the firm faced huge competition with Indomaret and Alfamart. Ultimately, Indomaret and Alfamart are the companies that increase their operation and revenue in 2017 because of their competitors that could not survive in the Indonesian market, and both are also planned to increase their operations to 1,200 outlets in 2017 (Nikkei Asian Review, 2017).

As such, the aim of this study is to conduct a precise and comprehensive analysis of the bankruptcy of 7-Eleven in Indonesia. There will be an analysis of the 7-Eleven business model that will determine what affected their performance in the Indonesia market, and lastly an analysis of competition between the convenience stores in Indonesia.

1.2 Research Gap Several studies have looked up at the bankruptcy of 7-Eleven in Indonesia and it was caused by the government regulations, the purchasing power of Indonesian customers, and the internal problems from the PT. Modern International itself. There has not been a lot of attention from the previous studies towards the operational expenses of 7-Eleven in Indonesia. Furthermore, the excessive operational expenses that contributed to 7-Eleven bankruptcy in Indonesia has not been empirically illustrated.

1.3 Research Objective The primary objective of this research is to investigate what are the factors of 7-Eleven bankruptcy in Indonesia in 2017. Specifically, the researcher would like to know why, despite 7-Eleven’s success in its early years in Indonesia, did 7-Eleven were forced into bankruptcy.

1.4 Research questions In order to investigate 7-Eleven bankruptcy in Indonesia, this research will address two questions that pertain to the literature on bankruptcy and Indonesia government regulations, which are: RQ1: What are the factors that contributed to 7-Eleven’s bankruptcy in Indonesia? and RQ2: How significant was the effect of the government ban on an alcoholic beverage in 2015 on 7-Eleven’s revenue in Indonesia?