Case Study: Ministop Philippines

Nielbert de Leon Jedrek Estanislao Ariel Gumabon Erle Lope Rod Rojas Rachel Ronquillo BA 291.1 Strategic Management I Professor Art Ilano July 12, 2011 Case Study: MINISTOP Philippines I. Case Facts

Main Problem: Ministop is losing money, and hasn't earned a decent net income since it started its operations. While it has achieved its target of becoming the fastest growing convenience store in the country, adding by an average of 37 stores per year in 10 years, it has never reached its target in terms of return on investment. Related Issues and Possible Causes 1. In 2008, net income dipped to record low; Ministop President responded by stating that increased operational expenses brought about by the changing dynamics of store operations and escalating utility rates, has deeply affected the previously forecasted payback period of the Ministop investment. 2. Out of the 50 managed stores, only half are making money, with the other half either breaking even or losing money. Contract pre-termination is very common among losing franchisees. 3. Losing franchisees have complained about Ministops low level of support for their stores. Late, incomplete and no-deliveries are rampant. Head Office people they complained were also non-responsive to some of their requests. 4. Franchisees complained about Ministop putting up another store near their location which eats up a portion of their daily sales. They now wonder if the company is planning properly their expansion. 5. Ministop Operations Department from their end has also complained about franchisee selection. Franchisees commit various violations such as: a. Not supervising the store for 8 hours as stipulated in the contract b. Misrepresentation of operational expenses like one who declares high salaries for store personnel but pays way below minimum wage, as reflected by the high turnover of personnel. Managements Proposed Solution: Launch an aggressive expansion program to increase its number of stores by 80-100 per year, to exact 7-Elevens number by 2015 which currently stands at 700 and growing by 30-50 per year. Ministop management believed that it will deliver desired earnings if it its the 200 store mark. Unfortunately, it didnt. II. Problem Statement

After two years of launching the expansion program, Ministop is still losing money. Given its current condition, should RCSI still continue with the business? What strategies can it apply to improve its own profitability and that of its franchisees?

De Leon, Estanislao, Gumabon, Lope, Ronquillo, Rojas

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Case Study: Ministop Philippines

III.

Analysis

Comparative Analysis using 5 Rules for Hypergrowth Management According to the article, Managing Hypergrowth by Alexander Izosimov, hypergrowth refers to that steep part of the S Curve that most young markets and industries experience at some point, where the winners get sorted from the losers. In the Philippines, It can be said that the convenience store industry is in a stage of hypergrowth when Ministop entered the industry. The incumbent leader, 7-11 continues to expand exponentially while there are also many other convenience store brands such as Ministop trying to take a portion of the market share. To survive this phase, the author proposes for companies to sort of comply with a set of rules formulated to manage this phase. The five rules for hypergrowth management are said to be the following: 1. 2. 3. 4. 5. Focus first on sales (Sell first and ask questions later) Innovate with caution (Dont try too hard too innovate) Standardize structures and processes (organize like McDonalds) Delegate decisions to field managers (push decisions out in the front-line) Reward action and initiative (foster a can-do culture)

In this section of the analysis, we try to compare whether Ministop implemented similar strategies from the ones proposed in this article. If not, what strategies did Ministop implement? What failed in their strategies? Hypergrowth Management Rule/Strategy Focus first on sales (Sell first and ask questions later) Innovate with caution (Dont try too hard too innovate) Ministops Strategy (What did they do?) Ministop had very aggressive growth targets such that they indeed became the fastest growing company in the convenience store segment. One successful innovation that Ministop did was to introduce fast-food in its store. Stores had similar formats and design. However certain critical processes, like order management, logistics, in-store promotion and marketing, while probably standardized might not be working as efficiently or effectively. The general feeling among franchisees was that their views, opinions and ideas were not being listened to. Not much information can be obtained from the case write up.

Standardize structures and processes (Organize like McDonalds)

Delegate decisions to field managers (Push decisions out in the front-line)

Reward action and initiative (Foster a can-do culture)

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Case Study: Ministop Philippines

SWOT Analysis STRENGTHS INTERNAL ADVANTAGES Relatively low franchising fees; major enticement for would be franchisees Existence of a Central Distribution Center; should enable purchasing in bulk and with the appropriate IT system an effective inventory and distribution monitoring process. Ability to conceive and implement product differentiation, such as the incorporation of fast-food items in the store WEAKNESSES INTERNAL DISADVANTAGES Customer Service; complaints of poor service from the stores - Perception of being not profitable - Lack of clear marketing and merchandising focus/direction - Poor use of point-of-sale information management system - Sub-optimal distribution processes, on-time delivery not achieved - Perceived lack of empowerment by franchisees and partners THREATS EXTERNAL DISADVANTAGES Other convenience stores (7-11, small neighborhood groceries) -

OPPORTUNITIES EXTERNAL ADVANTAGES Expansion of residential areas (subdivisions and condominiums) Booming call-center industry which translates to more potential customers especially in the central business districts S-O Strategies

Revamp the operations of the DC so that it can tailor its services to efficiently and effective service the requirements of stores located in different areas Improve its IT infrastructure so that more meaningful data can be derived from each store. Thorough analysis can be done which can lead to more effective instore offerings, stock-keeping and promotions specifically targeting customer requirements in each location Continue with implementing product/service differentiation albeit in a careful manner.

S-T Strategies Play on the strengths of Ministop to mitigate the external threats: o Reputation as having lower franchising and start-up costs versus rival companies o Pioneering product differentiation like offering fast-food service in the stores Try to provide distinct advantages/differentiation from the rest of the competition in order to spur customer interest and continued patronage Make sure each stores offerings match what most of its customers want. Obviously, stores located in CBDs would have different clientele from stores located at or near residential areas.

W-O Strategies Ministops ability to exploit the opportunities will be severely hampered if it cannot fix its weaknesses. Ministop should address the following issues (weaknesses) immediately: o Poor customer service both in distribution and in addressing complaints o Laxity in in-store operational controls o Marketing and in-store promotion focus

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Case Study: Ministop Philippines

W-T Strategies Competitors will start to wean away potential franchisees and business partners from Ministop stores if the weaknesses continue unabated. Profitability is the main come-on for potential franchisees. Therefore, Ministop must address this firs and foremost

Porters 5 Forces

Threat of Potential Entrants Barriers to entry into the retail industry are high. Barriers to entry are high when putting up a convenience store as it requires a huge amount of capital. Putting up a convenience store does not happen overnight. Aside from being capital intensive, it also requires a huge amount of effort, from getting business permits, hiring people, to running the store itself. Bargaining Power of Suppliers Bargaining power of suppliers is weak. This is because there are many competitive suppliers and the products are mostly standardized. Suppliers cannot charge excessively high prices. Moreover, the degree of differentiation of inputs is not that high. There is also a good number of presence of substitute inputs. There is high concentration of purchasers than supplier concentration Threat of Substitutes There is a high threat of substitutes because there are a lot of sari-sari stores everywhere. Convenience stores will be competing against the fast food chains for meal options and grocery stores for dry goods. Bargaining Power of Buyers The bargaining power of buyers is high. Buyers can just switch from buying from convenience stores to grocery stores because it provides a wide array of products. They can also buy from sari-sari stores which can be even closer to their homes. There is not much significant switching cost for buyers.

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Case Study: Ministop Philippines

Industry Competitors There is a high intensity of rivalry due to a lot of existing convenience stores. There is also a high fixed cost. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. There is a high storage cost or highly perishable products in Ministop. This causes them to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies. IV. Recommendations

The group believes that in order to become more profitable, 3 key areas of concern that our analysis have uncovered must be addressed. We think that Ministop has reached the limits of its growth strategy and that further growth without addressing some fundamental operational issues will only continue to bleed the company dry as profitability can never be reached without resolving these issues directly and decisively. 1. Top Management Get a competent CEO/president who has the necessary skills and experience to overturn the companys situation. Ministop needs a CEO with a more entrepreneurial management style. With a new CEO, the company can re-visit the business VMOs through thorough strategic planning. Simulated monthly income and other targets used as bases for payback should be re-evaluated. 2. Maximize Store Revenues a. The franchisees are important stakeholders in the business model. Management should involve them in decision-making. One way of doing this is by formalizing feedback mechanisms where franchisees can report operational issues. This includes the formalization of escalation procedures and service level agreements (SLAs). We believe that in this manner, stores can be made more responsive to the demands of their local customers and therefore offerings and inventories can be tailored to be more specific to customers. b. Increase management control over the franchisees. Conduct periodic appraisal programs to ensure the expected performance of the stores. Management should enforce stricter policies when it comes to franchisee selection. 3. Improve Efficiency and Effectiveness (Cut Costs) a. Invest in IT, especially in the ability to gather, process and use point-of-sale information. This can lead to understanding which products sell in a particular store. Distribution can then be specifically tailored to maximize revenue from fast-moving products and reduce the carrying costs of slow-moving inventories in each store. Marketing can use the info to tailor in-store promotion or merchandising. Purchasing can also use the info to drive negotiations with suppliers using economies of scale as a bargaining point. Logistics can also use the information to better plan replenishment orders and manage inventory. All these would lead to lower costs. b. Review the operations of the distribution center. If necessary replace the manager. On-time-delivery is a very critical KPI in this type of industry. Stockouts / late deliveries mean lost sales opportunities. Rush orders, unnecessary or redundant deliveries increases the cost of operations. Reducing the turnaround time of trucks reduces costs. All these entails detailed planning and tight control of DC operations.

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