AILIE TANG W. H. LO DEFYING HIGH BARRIERS TO ENTRY: THE MARKETING MIX OF 759 STORE “759” was a legend in Hong Kong. Before its 2010 inception, the city’s snacks and confectionery market had high barriers to entry. Suppliers were highly dependent on two supermarket chains as their major, and in some instances, the only retailers. Back then, the three-digit number “759” carried no special meaning for anyone in the city, except those involved in CEC International Holdings Limited (“CEC”), and only because the number was its code on the Hong Kong Stock Exchange.1 By 2015, 759 was a synonym of Hong Kong snack shops / grocery stores. In less than five years, the retail operation expanded from a small tuck shop selling a limited collection of snacks in a local shopping mall to a retail chain of around 250 outlets offering a huge selection of over 30,000 products. 759 had also diversified from shops of a few hundred square feet mainly selling snacks, to an umbrella brand that covered chains of shops and bistros with an average outlet area approaching two thousand square feet. All this showed that 759 had got its marketing mix right. So what was the company’s positioning? What was the product mix and how was it planned and executed? What was its placement strategy? What unique pricing strategy had 759 adopted? Did the company have a people strategy? How did the company build its brand, and what promotion and packaging directions did it take? How did all these “marketing Ps” sync? Snack & Grocery Markets in Hong Kong Before 759 Hong Kong had two key supermarket chains, the Park’nshop and Wellcome Supermarket. Before 759, there were two chain stores in Hong Kong that specialised in selling snacks and confectionery: Aji Ichiban and Okashi Land. The former specialized in traditional Chinese snacks. The latter mainly sold Japanese packaged snacks and confectionery, and was owned by a major snack and confectionery enterprise in Hong Kong.2 These were where customers usually went for packaged snacks and confectioneries.3 1 CEC International Holdings Limited operated two major lines of business. Its manufacturing business operated factories in Mainland China that produced electronic components. Its retail operation ran around 250 shops and bistros in Hong Kong. See: http://www.0759.com/CECWEB/index.aspx?lang=en (accessed 10 August 2015). 2 Okashi Land was a subsidiary of the Four Seas Mercantile Holdings Limited. Seehttp://fourseasgroup.com.hk/pp/retail.asp.htm (accessed 7 September 2015). 3 Reformation 21 Limited (8 April 2007) “香港人購買零食的習慣(Where Hong Kong People Buy their Snacks)”, To order this case, please contact Centennial College, c/o Case Research Centre, Centennial College, Wah Lam Path, Pokfulam, Hong Kong; website: http://cases.centennialcollege.hku.hk . This case was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (UGC/IDS12/14). © 2016 by Centennial College, an Independent College Established by HKU. 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.: 16/010C Version: SHMBA (July 2016) Page 1 Defying High Barriers to Entry: The Marketing Mix of 759 Store (16/010C) Though there was limited market data on the snack and confectionery market in Hong Kong, its market structure and condition could be inferred from a 2007 study conducted by the Chinese University of Hong Kong on Hong Kong’s retailing industry, with a focus on “the interplay between suppliers and retailers.”4 Major study findings, indicated that the majority of Hong Kong were highly dependent on supermarkets as their retailers, and most suppliers were not “able to stipulate the resale prices of the goods on the retailers” [for more details on the major findings of the study, see Exhibit 1].5 In addition to having strong bargaining power with suppliers, Park’nshop and Wellcome were “both subsidiaries of local property conglomerates and, given local conditions, the ability of newcomers to enter the market is restricted by high barriers to entry.”6 The Story of 759 Store With short supplies by local distributors, we tried to buy direct from Japan. But with only eight to ten small shops… the common response was to refer us back to local distributors in Hong Kong … I had to use my own network to gain a chance to meet with a major, one of the top ten, Japanese supplier… Just before meeting with him, I decided to list in our portfolio that we would be expanding to 30 shops within a short period of time. I even decided to change the name of our shops from “a snack shop” to “阿信屋” so that he would instantly know what business and target customers my shops aimed at.7 - Lam Wai Chun, Founder and CEO, 759 Store8 Facts and Figures 759 was the retail business of the manufacturing group CEC. Despite only having been established in 2010, 759 accounted for over 88% of CEC’s turnover and was its major profit contributor.9 According to its 2014-15 annual report, 759 operated 249 retail stores with a total floor area of 431,000 square feet.10 The majority of these stores were original 759 Store, that is, stores that sold mainly snacks, beverages, staple and non-staple food. For the fiscal year 2014-15, these retail operations brought in revenues of HK$2,133,805,000, at an operating profit of HK$68,637,000, yielding a net profit margin of 3.2 %.11 [See Exhibit 2 for more information on 759’s retail revenue performance in 2010- 2015.] www.my3q.com, http://www.my3q.com/view/viewSummary.phtml?questid=162030 (accessed 7 September 2015) 4 Chinese University of Hong Kong (14 March 2007) “CUHK Marketing Department Survey on Hong Kong's Retailing Industry Reveals that Unfair Practices Generally Exist in Supplier / Retailer Relationship”, http://www.cuhk.edu.hk/cpr/pressrelease/070314e.htm (accessed 7 September 2015). 5 Chinese University of Hong Kong (14 March 2007) “CUHK Marketing Department Survey on Hong Kong's Retailing Industry”, http://www.cuhk.edu.hk/cpr/pressrelease/070314e.pdf (accessed 7 September 2015). 6 Willams, M. (March 2007) “The Supermarket Sector in China and Hong Kong: A Tale of Two Systems”, The Competition Law Review, Volume 3 Issue 2 pp 251-268, http://www.clasf.org/CompLRev/Issues/Vol3Issue2Art4Williams.pdf (accessed 7 September 2015). 7 “阿信” Oshin, the major character of one of Japan’s most watched TV series of all time, told the fictional story of Oshin, the founder of a chain of grocery store in Japan. 8 RTHK Radio News Archive (2 August 2015) “A Conversation with CEO, RTHK Channel 1”, www.759Store.com, http://www.759store.com/video2.php (accessed 10 August 2015). 9 CEC International Holdings Limited (30 July 2015) “2014-2015 Annual Results Announcement”, http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015). 10 Ibid. 11 Ibid. CENTENNIAL COLLEGE Page 2 Defying High Barriers to Entry: The Marketing Mix of 759 Store (16/010C) The Birth The story behind the birth of 759 was well-known in Hong Kong. When the founder of 759, Lam Wai Chun (“Lam”), needed to downsize his manufacturing operations in 2009, he wanted to signal his staff, preparing them for possibly losing their jobs and encouraging them to start looking for new career opportunities. At the same time, he wanted to explore other business opportunities in Hong Kong. Some of his staff suggested going retail and selling snacks. Lam decided to make a small investment and let his staff try the concept out. They assembled local supplies and the first 759, a tuck shop-style outlet in a small local shopping mall in Kwai Chung, was born in July 2010. The Merchandising Challenge With the local snack market dominated by the two largest Hong Kong supermarket chains, sourcing local supplies was never an easy job. The new kid on the block lacked scale. In fact, 759 was never considered a serious player by local distributors of branded snacks. It quickly ran into a near-fatal challenge. It wanted the freedom in set the price of the products sold, a logical desire, but taboo to the local grocery retail scene of the time. The primary considerations for local suppliers of grocery products, including snacks, were key accounts, that is, existing Hong Kong supermarkets and major convenience stores. When 759 failed to follow the rules, they faced supply shortages. Local snack suppliers decided either to boycott 759 or limit their supplies. This near-fatal challenge turned out to be a blessing in disguise, as Lam was driven to try to procure snacks in Japan, an expedient that proved eye-opening. With his personal network, Lam managed to solicit help from a major Japanese supplier. With much effort, 759 assembled a container-full of different brands of Japanese confectionary and snacks. What was so surprising to Lam and his team was that, even without many minimum-order constraints, the cost of these products was much lower than the wholesale cost in Hong Kong. The team quickly realized that they could source much more cheaply by importing directly from Japan, even when they did not have the volume to obtain bulk purchase discounts. This sourcing alternative not only allowed 759 to resolve its local sourcing problem, but gave the snack shops the foundation for their future success.