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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

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)”,

Defying High Barriers to Entry: The Marketing Mix of 759 Store (16/010C)

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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.

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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. From then on, parallel importing directly

from overseas suppliers became 759’s default sourcing strategy.

Rapid Growth

Lam quickly figured out that in order to reap the full benefit of parallel importing directly

from overseas suppliers so as to establish sustainable operations, economies of scale and

volume were pre-requisites. Economies of scale would kill not two but three birds with one

stone:

a) Spread administrative and logistics overhead

b) Establish even better cost structures with bulk purchase discounts

c) Offer a wide variety of products for customers to choose from

It followed that the number of 759 Store had to be increased at a dramatic rate within a very

short time in order to establish sustainable operations. With this set as an objective, the chain

expanded aggressively in just four years. At the end of its first fiscal year, 2010-2011, there

were only eleven shops. By the end of fiscal year 2014-2015, the chain operated 249 stores.

The number of shops increased at an annual compound growth rate of 87%.

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CEC reported around HK$17 million of turnover for its retail operations for fiscal 2010-

2011.12 By the end of fiscal 2014-2015, that number had grown, at an annual compound

growth rate of 164%, to over HK$2 billion [for more information, see Exhibits 2 and 3].

From Snack Market to Other Mass Segments

In 2013, the retail chain started to open shops under the 759 brand covering other mass

market product segments. Those expanded 759’s retail operations to include the following in

addition to the original 759 Store:13

759 Kawaiiland and 759 Skyland, which sold personal care, skin care and cosmetic

products, as well as baby supplies, toys, novelties and accessories

759 Store Household Market and 759 Kaguya, which sold household goods,

kitchenware and small electrical home appliances

759 Shinguya, which mainly sold fashionable pajamas and bedding;

759 Toysland, which, as the name suggested, sold toys and baby supplies

759 Store Supermarket, which sold products of every type in 759 branded shops

a range of 759 bistros, including bakeries, wonton noodle shops, “cha chaan teng” (that

is, Hong Kong style tea houses), cafés and cart noodle shops.

Multiple reasons contributed to 759’s impressive growth rate and horizontal expansion.. One

was having the right marketing mix.

Positioning

The Chinese name of 759 Store, “759 阿信屋,” had a distinct Japanese connotation lost in its

English translation. This undertone was a reflection of the fact that the retail shops were set

up “with reference to the consumption model of Japanese localities.”14 Right from the early

days, the founder affirmed “lower margin with high turnover” as the principal strategy of 759,

and this maxim could be regarded as the foundation of the success of the rapid expansion of

the 759 operation.15 Despite the growing purchasing appetites for grocery and food items of

Mainland travelers to Hong Kong in recent years, Lam always emphasized that the customer

target of his retail operation was the “kai-fong” or the city’s local neighborhood residents. As

Lam pointed out, tourists’ fluctuating demands were not as dependable as local mass

customers’ consumption, which was a stable source of 759 sales revenue.

759 aimed at offering local mass consumers the aesthetic appeal of leisure and comfort, while

meeting their everyday shopping needs in a supermarket-style operation. However, the target

market segment meant 759 was directly competing with local supermarkets such as the

Park’nShop and Welcome Supermarket, as well as with neighborhood convenience stores

such as 7-11 and Circle K. The founder acknowledged that 759 Store could not compete in

terms of variety of product categories with the former, and could not be more convenient than

the latter. So the chain sought to diversify its sourcing portfolio to a host of overseas countries

that supplied a variety of products, ranging from food and beverages to personal care products

12

CEC provided the retail segment revenue of 2010-2011 in its 2011012 annual report .. CEC International Holdings Limited

(27 August 2012) “2011/2012 Annual Report”, http://www.0759.com/CECWEB/FinancialReport.aspx?lang=en (accessed 10 August 2015). 13

The description of different types of 759 retail operations was adopted from the company’s 2014-2015 annual report. CEC

International Holdings Limited (30 July 2015) “2014-2015 Annual Results Announcement”, p. 15,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015). 14

CEC International Holdings Limited (27 August 2012) “2011-2012 Annual Report”, p. 1,

http://www.0759.com/CECWEB/FinancialReport.aspx?lang=en (accessed 10 August 2015). 15

The group first used the description of “lower margin and high turnover” as its principal strategy on p.7 of its 2011-12 annual

report. CEC International Holdings Limited (27 August 2012) “2011-2012 Annual Report”, http://www.0759.com/CECWEB/FinancialReport.aspx?lang=en (accessed 10 August 2015).

Defying High Barriers to Entry: The Marketing Mix of 759 Store (16/010C)

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for every household member and to household products for local families [see next section for

more detail]. In other words, 759 had polished its sourcing capability overseas so that local

consumers were provided with “an alternative yet unique choice.”16 This had become the

chain’s major competitive edge. In addition, with a view to allowing more product varieties in

a more relaxing and leisurely shopping environment, 759 had expanded its shops’ size as its

operations grew [for more information on 759 shop-sizes growth, see section on Placement

and Exhibit 3).

Product

Manufacturing Staff Turned Merchandisers

It was well-known that 759 relied on parallel imports as its major mode of purchase. In order

to be able to rely on this supply mode, which had a default minimum unit order quantity of a

full container load, 759 had expanded its operations quickly. To meet the merchandising

manpower required by this quick expansion, 759 had a unique solution. Most of its

merchandisers were staff re-assigned from the CEC manufacturing section. This was a logical,

though unique, personnel strategy given the legacy of 759’s birth.

Lam had to overcome the challenges presented by the inevitable fact that these devoted staff

had limited merchandising experience. So, instead of depending on experienced

merchandisers’ knowledge to decide on what to procure and what not, Lam used a

straightforward expedient: Let the customers decide. To do so, he had the advantage of

having a large scale of operations.. Lam allowed his merchandisers to try out new products by

procuring “small” quantities. Given 759’s scale, “small” quantities were usually larger than

the minimum orders suppliers required. If the products sold well, replenishment orders

followed. If the turnover of the new item was slow, the scale of operations allowed for such

margins of error, as it had the capacity to absorb and deplete products, sometimes with the

help of discounts.

Merchandising Approach 759 had a simple and straightforward merchandising approach. Merchandisers planned and

executed purchases according to procurement budgets reverse-calculated on periodic, monthly

or even weekly, sales targets, factoring inventory considerations and delivery lead-times. Lam

and the team regarded 759 Store as a distribution platform for suppliers and they sought to

align their interests with suppliers’. Due to their need for pricing autonomy, most local

suppliers were not interested in servicing 759. The chain would continue to rely on parallel

imports from its merchandising sources.

Despite the fact that 759 very often imported container-loads of products from overseas

suppliers, it did not use its scale of operations to negotiate to become the sole Hong Kong

sales channel for their products. At first, 759 did not strive to maintain a steady supply of hot

items or best-sellers, always supplementing shortages with similar products or by introducing

new items. With five years of operating experience and a scaled operation, 759 now planned

to manage the steady supply of its top 1000 best-sellers more effectively.

Besides parallel imports, in recent years 759 had started to develop and sell its own 759-

branded products. Given CEC’s manufacturing background, the company had a network and

experience in manufacturer-sourcing. According to the founder, 759-branded products were

16

CEC International Holdings Limited (30 July 2015) “2014-2015 Annual Results Announcement”, p. 15,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf. (accessed 10 August 2015).

Defying High Barriers to Entry: The Marketing Mix of 759 Store (16/010C)

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quite a success, with all such products ranked within the top 500 best-selling items among the

23,500 product varieties in the retail operation.

Products' Countries of Origin Striving to maintain independent pricing and minimum “interference” from suppliers on retail

operations, such as product display and product promotions, meant that 759 would continue

sourcing overseas. According to 759, its products came from as many as 63 countries’

manufacturers, farms, exporters and local wholesalers. But in essence, most of their products

were imported from only a few countries or regions, including Japan, Europe, Korea, Taiwan

and China [for more details, see Exhibit 4A].17 Japan was its major source, accounting for

over 50% of its supplies in 2014 and over 40% in 2015.18

A number of reasons contributed to why Japan had become an important source country in

759’s supply chain. First, 759 was set up to echo the Japanese consumption model. Second,

759 turned to Japan when it encountered local sourcing problems. It was where the chain

discovered its successful merchandising solutions, that is, the parallel-import-enabled “lower

margin high turnover” model. Third,, when most people backed off from Japanese sourcing

after the country was hit by the Tōhoku earthquake and tsunami in 2011, 759 continued its

merchandising activities there, thereby successfully cultivating close ties and relationships

with local suppliers and distributors.19 But perhaps most importantly, it was the consistent

quality concept and quality standards of the country’s suppliers that made the country a

sustainable product source for the 759 chain. As an importer and retailer in Hong Kong, 759

needed quality control by manufacturers and suppliers to back its quality guarantee to

customers, and Japan’s consistent quality pledge explained why 759 preferred to source there.

For the same reason of quality, the group would focus on expanding to Europe as its second

major regional supply source. With Europe currently supplying around 15% of 759’s products,

the group targeted increasing Europe’s share of product supply to 35% in the future.20 In other

words, it intended to import mainly from Japan and Europe in the future, looking at these two

locations to supply 75% of its product range.

Product Categories Currently, snacks were the chain’s major revenue earner, bringing in around 50% of 2015

results, down from over 60% in 2014. The decreasing revenue share of this product category

did not mean that the chain was selling fewer snacks. In fact, the snack turnover was up 20%

from 2014 to 2015. Instead, the numbers reflected the results of 759’s conscious decision to

diversify horizontally into retailing other product categories that satisfied the personal and

household needs of its target customers, the “kai-fongs.”

Soon after the chain had secured its position in the local snack market, in 2011 and 2012, it

saw the snack segment would offer limited room to grow revenue substantially on a year-to-

year basis. Thus, between 2012 and 2013, the chain started to branch out and open different

types of 759-branded stores, specializing in selling non-food products such as household and

personal care items. It had also expanded its food offerings from snacks to include cereal, oil

and other foodstuffs. It also sought to open larger stores so as to incorporate both food and

17

Ibid. 18

Ibid; 2014 and 2015 referred to the group’s fiscal years of 1 May 2013 – 30 April 2014 and 1 May 2014 -30 April 2015

respectively. This reference was valid for subsequent discussion of the company’s marketing mix. 19

The decision to continue procurement from Japan was in fact a partly conscious decision and partly a result of obligation. A

few months before the 311 tsunami in Japan, Lam had entered into a gentleman’s agreement with his Japanese supplier. As the agreement was not a written one, he could have walked away from it. Had he chosen to do so, he might have won a battle to

lose a war. But, consistent with his personal principles, he decided to keep it. 20

Ibid.

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non-food products under the same roof. It seemed these efforts had paid off, as 2015 saw the

group’s revenue from non-snack food increase by 64%, taking up a 36.5% share of its 2015

revenue. Sales from household and personal care products leapt by almost 270%, contributing

9.2% of its sales for the year [for details, see Exhibits 4B and 4C]. 759 planned to continue

the momentum of growth in these two product categories, targeting to increase their share of

revenue to 38% for the former and 26% for the latter.

Pricing

Low Margins 759’s striving for pricing autonomy had initiated its path to success. 759 had a basic and

simple pricing principle: after absorbing all apportioned costs – rental, product costs, human

resources, logistics & warehousing, administration and other overhead – it kept a low margin.

According to 759, parallel imported products were priced with reference to the selling price of

the products’ place of origin. Despite the fact that there was room to charge higher prices and

realize better margins, there was a conscious decision to keep margins low. From a slight loss

in fiscal 2011, 759 had gradually grown and kept its profit margin to around 3% in recent

years.

Reasons There were three major reasons for 759 to maintain such low margins:

The market leaders in the grocery business had similar net profits. This was a powerful

benchmark that local customers used to assess all retailers, including 759, in forming the

perception of whether they were being charged reasonable prices.

The low net profit margin allowed room for 759 to put resources into polishing other

elements of its marketing mix. For instance, it was able to pay a higher-than-average

salary to its staff [for details, see section on People]. It was also able to run discount

promotions, the promotion most favored by customers, frequently.

Low margins were an effective defensive strategy, rendering the market segment

unattractive to newcomers. Anyone new to the market would have to price their

products at least as low as 759’s. Even if they could come up with an attractive product

mix, they would not have the chain’s scale. Thus, their competitive position, including

the other elements of their marketing mix and, most importantly, their cost structure,

would not be as strong. Low margins, coupled with 759’s scale of operations, also meant

it would be difficult for any competitors to launch a price war without hurting

themselves.

Pricing Categorizations 759 classified their products into five different pricing categories, namely marked price

products (“正價貨品”), fixed price products (“公價貨品”), “kai-fong” price products (“街坊

價貨品”), hot-selling price products (“熱賣價貨品”) and bargain price products (“超抵價貨

品”). Each product category had a fixed gross margin, allowing 759 to use its IT system to

generate prices automatically once cost information was input into the system. Merchandisers,

in consultation with Lam, would decide in which product pricing category a new product

should belong. Once that was decided, the system would generate pricing. In this way, 759

did not need to rely on staff experience to manage product pricing. This was one of the means

that Lam developed to enable re-deployment of staff with potential from the CEC

manufacturing arm to 759.

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Promotion and Packaging

The only principle I have in having any “promotion” program is that it must

directly benefit customers... We almost freely distribute VIP cards to

customers. These store-cards are in essence promotion leaflets that people

would keep in their wallets. I learn to use this form of “disguised” leaflet

from my early days in running factories in the Mainland.

- Lam Wai Chun, Founder and CEO, 759 Store21

Promotion 759 worked hard to control costs and spent minimum resources on promotions, because there

was simply no need to do so. With more than a million discount cards in customers’ wallets, it

would be bad resource deployment to run above-the-line campaigns. The money saved meant

759 could run more of its best-known and most-welcomed promotions: direct sales discounts.

It actively deployed its Facebook page and website to communicate and broadcast news it

wanted to share on new-product arrivals, replenishment of best-sellers, openings of new shops,

and sales discounts.

These efforts, together with a shrewdly-priced merchandising mix and convenient locations,

lured thousands upon thousands of frequent shoppers back 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.”22 When asked if 759 planned to

cultivate a more interactive relationship with store-card holders, all staff interviewed and Lam

consistently gave negative replies. The already active nature of this huge customer base and

their extremely elastic response to discount promotions meant that it would be difficult, if not

impossible, to have the marginal return of improved interaction with customers outweigh the

marginal cost of so doing.

759’s promotion strategy was simple: it only ran straightforward promotions that directly

benefited customers. Empowered by the fact that around 20% of the city’s population had a

759 Store-card, and the fact that most of them were frequent 759 patrons, the retailer had the

muscle to pull resourceful partners together for joint promotions. Some of the chain’s best-

known and best-received promotions were subsidized discounts by payment solution

providers, such as credit cards, EPS or Octopus card.23 The promotion mechanism was always

clean and straightforward: the payment solutions providers subsidized discounts in return for

customers using the provider’s solution as their preferred payment option. Besides directly

benefiting customers, having a straightforward and simple promotion strategy meant that 759

did not need to spend resources in engaging marketing professionals to organize campaigns or

line up joint promotions. Lam was the person in charge of promotions. This no-frills approach

to designing, approving and executing promotion programs meant speed and reduced

administrative costs for both 759 and its partners.

Packaging

The chain also spent minimal resources on the marketing mix element of packaging. Except

for the fact that Lam had given thought to the chain’s logo, the lonesome Finnish-style hut

21

This quote was from interview with Mr Lam Wai Chun by the Centennial College on 16 Jun 2015. 22

CEC International Holids Limited (30 July 2015) “2014-2015 Annual Results Announcement”, p. 23,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf. (accessed 10 August 2015). 23

“EPS (is a) secure cashless retail payment system” in Hong Kong, http://www.eps.com.hk/eng/company_home.asp (accessed

10 August 2015). “Octopus is an electronic payment system (in Hong Kong) using a contactless smart card known as ‘Octopus’”, www.octopus.com.hk/en/ (accessed 10 August 2015).

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with smoke coming out from its chimney, the supermarket-style operation did not require

much to be spent on packaging apart from the bare necessity.24 In fact, 759 had only one in-

house designer, who looked after all the graphic needs of the 250 stores. The chain used

modular shelves, and needless to say, it had a restrained, standardized renovation budget.

Placing

In comparison to product sourcing and merchandising, it is more difficult to

find suitable store location and to try and gain support from property

developers… people wonder why in some locations, 759 has many shops

clustered in a small catchment area. The hard fact is that it is a supply-driven

result. If property developer offers me a potential site, not taking it is not an

option unless the rent was too high. If I rejected it, I’m afraid that they would

not consider 759 as a tenant next time when there is a vacant spot. ”

- Lam Wai Chun, Founder and CEO, 759 Store25

A Suppliers' Market Lam said that property developers in Hong Kong had much larger say on 759’s placement

than he himself did. Where to put a shop was dictated by the amount of customer traffic, and

property developers were the most important controlling factor in deciding or influencing

customer traffic. They had a location developed and flourishing, and all 759 could do was to

follow the footsteps of property developers whenever it could afford to do so. According to

demographic information on population distribution in Hong Kong, 759 could have had better

coverage in certain densely populated residential districts, such as the northern district or the

Tuen Mun district. But it was not up to Lam to decide whether he could open a shop in a

certain district or not. In the instances of the northern and the Tuen Mun district, rentals there

were abnormally high because they were Mainland tourists’ favorite areas for buying grocery

items. So 759 had to have less than desired coverage in these districts.

Containing Non-Controllable Costs

It went without saying that shop rental was a significant cost element and that Lam had a

bottom-line for rental affordability for his shops. For every shop, he would strive to meet a

minimum ratio of rent to turnover. Any shop that failed to meet that ratio, after introducing

such measures as changing merchandise or discount promotions, would not have its lease

renewed after expiration. Amid uncontrollably high rental costs, 759 strived hard to control

one cost element, the cost of merchandise-distribution logistics, to stay within 3% of total

turnover. Lam personally kept a close eye on this. According to the 759’s logistics team, it

was not rare that employees in charge of logistics would receive calls from Lam, warning

them about the possibility of overspending. This not only meant that he might closely

examine cost elements on a daily or even hourly basis, but it also indicated the level of his

involvement in 759’s operations and execution.

Rental was an important and high cost element that got transferred to customers, who

absorbed these costs with every purchase. In order to monitor and reflect the impact of rents

on cost and price better, Lam was in the process of having his IT team track and report

apportioned rental costs on a per-transaction and per-item basis.

24

Accordingly to Lam, “the Finnish-styled hut of 759’s logo was a remembrance of the loss of CEC’s largest manufacturing

customer in Finland that suffered from Nokia’s downturn. The solitary mood of the hut-in-snow reflected our forlorn feelings in losing the important customer. The hut has smoke coming out from its chimney, showing our longing to be able to continue

to earn bread for our families. ” This was from interview with Mr. Lam Wai Chun by the Centennial College on 16 Jun 2015. 25

This quote was from interview with Mr. Lam Wai Chun by the Centennial College on 16 Jun 2015.

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Competition 759 did not pay much attention to competitors on the retail front.26 Ironically, however, in

terms of securing desirable shop locations, the impact of competition could not be neglected.

The situation was complicated by the fact that most property conglomerates in Hong Kong

also owned retail operations, which meant they could show prejudice against 759 as a

potential tenant when their properties already had their own retail operations as tenants. Lam

had spent time and effort to try and earn landlord and property developer support, and had

slowly seen results with a few developers. Despite the importance of and effort in building

relationships with property developers and key agents, Lam had adhered to the basic principle

of not taking on any site that he believed would not meet his rent-to-revenue ratio standards.

Small Department Store With the number of its shops sitting at around 250, further growing the number of shops

substantially was not 759’s priority. Instead, the focus was on increasing the size of shops.

According to its database, shop size and revenue were positively correlated. 759 believed this

could be explained by the fact that larger shops carried more product varieties and categories

for customers to choose from, and customers therefore preferred to shop at larger 759 shops

for their daily personal and household needs. 759 planned to focus on opening larger shops,

with, it was hoped, lower rent per square foot. It had set a target for increasing the number of

shops of 1,500 square feet or larger to 65% of the total number, up from the current 40%.27

The aim was “gradually consolidating the item categories into various specialty shops,

focusing on sculpturing ‘759 Store’ into ‘large grocery store’ (small department store) in

order to provide … customers much comprehensive range of items to choose”.28

People

The way to manage one production line versus 10 should be the same.

Likewise, I use the same way in running one single shop to manage the two-

hundred-and-fifty 759 Store.

- Lam Wai Chun, Founder and CEO, 759 Store29

A Flat Organization with an Extremely Hands-on Leader

759 had an extremely flat organization. Every staff member interviewed said they directly

reported to Lam, and Lam admitted that he regarded even frontline sales staff and office

janitors his direct reports. Because “retail is detail and detail is retail,” Lam constantly sent

signals to every one of the retail operations that he cared. He knew all the details of what was

happening throughout 759’s operations. In this way, everyone would probably be more

vigilant in accurately executing their roles and duties. At the same time, Lam gave his team a

strong and compelling reason to work hard and to deliver results. That is, he shared 759’s

good results with the team. For example, the frontline sales staff was paid around HK$16,000

a month, which was at least 20% higher than the market rate.30

26

When questioned about competitor tracking during interviews by the Centennial College on 27 May 2015, all 759 staff

consistently said they did not pay much attention to competitors. One staff repeated Lam’s guidance as an answer, “只要做好

自己本份，不用理會其他人” (“If you play your part well, there is no need to be bothered by others.”) 27

CEC International Holdings Limitedt(30 July 2015) “2014-2015 Annual Results Announcement”

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf. (accessed 10 August 2015). 28

Ibid. The quote was from p.23. 29

Next Magazine: 黃菲菲 (18 June 2015) “服務第壹大獎, Next Magazine”, 759store.com,

http://www.759store.com/video2.php (accessed 10 August 2015). 30

Ibid.

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Lam had another major reason to stay extremely hands-on. 759 was initially created to let his

manufacturing staff gain some retail experience for stronger credentials in preparation for

possible lay-offs. When the retail chain grew, more and more manufacturing staff transferred

from CEC’s manufacturing arm to 759. While Lam could apply his experience in running

production lines to operating retail shops, leading 759 through expansion at a breath-taking

pace, his manufacturing staff might not be able to keep up. Amid an operating environment

that had zero support from local suppliers and a local market dominated by two powerful big

names and prominent convenience stores, there was almost no margin of error. Thus, there

was a practical need for him to remain extremely hands-on to ensure impeccable execution of

every facet of the retail operation.

Effective and Efficient Staff Induced by Shared Returns

Though Lam described the essence of his people strategy as “change” and “adaptation,” and

he always employed contingency approaches in managing situations involving his human

resources, he did not over-complicate things when simple and basic solutions worked. While

a lot of large Hong Kong retail operators spent resources on customer-service training, he

believed that 759’s supermarket-style operation required frontline staff efficiency in

displaying products on shelves rather than greeting customers. He preferred to save resources

on training so that he could afford to pay well-performing frontline staff more. Also, while

chain operators had customer-service departments, 759’s shop staff and their supervisors

handled most of the customer-service workload, such as customer inquiries and complaints,

by means of specific product-related questions handled by related merchandisers. Lam’s

belief that happy and satisfied staff would deliver good customer service was proven recently

when 759 beat all the big names and operators in the supermarket and convenience store

category in Hong Kong and claimed an excellence in customer service award in June 2015.31

Lam also used direct, performance-linked incentives, with high but achievable products-

promotion and overall shop-turnover targets, motivating each shop’s frontline staff to go the

extra mile. This effective reward scheme allowed Lam to have peace of mind in empowering

shop managers with autonomy to run their own shops. In fact, such empowerment, together

with sharing profits with staff, enabled 759 to have a lower-than-usual staff turnover rate.

This was a mere 10% of those who chose to stay beyond the probation period.

Responses of Market Players

759’s unique marketing mix offerings was a first in Hong Kong. The two market dominant

players in snacks and grocery market in those days, that is, Park’nshop and Wellcome

supermarkets, were left helpless. Because they had to manage their well-established local

distributors networks, neither of them could match the direct-import product offerings and

attractive mass market price points. Park’nshop at one point tried to imitate 759 by opening a

few snack shops with look-alike offerings. Since Park’nshop had to counted on its original

suppliers’ network, this attempt soon proved to be futile in stopping 759’s growth.

As for the couple of legacy niche players, Aji Ichiban and Okashi Land, their market share

further shrunk and had remain small niche players in Hong Kong’s snack market.

The success of 759, however, had attracted a couple of new market entrants. Examples were

Ameyokocho and BestMart 360°. The former was formed in 2012 and at present ran 34 snack

31

Ibid. 759 Store was awarded the excellence in customer service award (supermarket/convenience store category) by the

Next Magazine in June 2015.

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shops in Hong Kong while the latter was formed in 2013 and had 28 shops by September

2015.32

The Road Ahead

On August 8, 2015, 759 launched its online shop, which was developed and run by university

graduates coached by Lam. As the first phase, the online store only featured pet food and

products. The online store announced that it would launch household products as its second

phase. This incremental approach should allow the online store to collate data and collect

feedback to polish and refine online operations so as to ensure a seamless click-and-mortar

experience. Though Lam expected the logistics costs to be high, he still adhered to stringent

cost control principles, saying “…balanced budget was the only standard for ‘759

ONLINE.’”33

Alongside its plans to open larger stores and ultimately shape its own version of the 759 small

department store, the retail operation also planned to launch a wholesale business in January

2016. This would target small Hong Kong retailers, selling them 759 best-sellers at wholesale

prices.

How should each element of 759’s marketing mix be adjusted to enable all these plans to

succeed? Specifically, what should the positioning of its online and wholesale business be?

What product mix should these new stores carry? What should their pricing strategy be? What

communications strategy should they use? Would there be synergy between 759’s click and

brick operations that could help optimize placement costs?

32

Facebook (n.d.) “Ameyokocho Shop List and Opening Hours” (アメ横丁 Ameyokocho 分店地址及營業時間)

https://www.facebook.com/notes/%E3%82%A2%E3%83%A1%E6%A8%AA%E4%B8%81-

ameyokocho/%E3%82%A2%E3%83%A1%E6%A8%AA%E4%B8%81-ameyokocho

%E5%88%86%E5%BA%97%E5%9C%B0%E5%9D%80%E5%8F%8A%E7%87%9F%E6%A5%AD%E6 %99%82%E9%96%93/896882977039925 (accessed 19 October 2015); BestMart 360° (n.d.) “Shop Information”,

http://www.bestmart360.com/%E5%88%86%E5%BA%97%E7%B6%B2%E7%B5%A1/

(accessed 19 October 2015). 33

CEC International Holdings Limited (30 July 2015) “2014-2015 Annual Results Announcement” p. 24,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf. (accessed 10 August 2015). The quote was from p.24.

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EXHIBIT 1: MAJOR SURVEY FINDINGS, CUHK MARKETING DEPARTMENT SURVEY

ON HONG KONG'S RETAILING INDUSTRY

1. Close to or more than half of the suppliers had been requested by retailers to:

Bear the responsibility of damaged goods (63.6%)

Share promotion fee (62.0%)

Accept the absolute authority of the retailers to remove the goods from shelf (61.2%)

Lower the prices (55.4%)

Offer incentive rebate unreasonably (46.3%)

Accept certain services provided by the retailers (44.6%)

On the contrary, only 31.4% of the suppliers managed to be able to stipulate the resale prices

of the goods on the retailers.

2. More than 30% of the suppliers has experienced restrictions from their major retailer

regarding their business with other retailers:

Restricted to supply goods to other retailers (38.0%)

Stipulated the prices charged to other retailers (36.4%)

Accept the retailer as its exclusive retailer (32.2%)

3. If suppliers’ major retailer was supermarket-only, an overwhelming majority of them (65%

- 84%) had been subjected to the demands of all but one of the listed operational practices by

the supermarkets. Similarly, if suppliers were dependent on a single type of retailer, a greater

proportion of them (80%-93%) were subjected to more restrictions and demands imposed by

the retailers.

4. A greater proportion (35.1% - 54.2%) of larger suppliers (large supplier: annual sales value

of more than HK$50,000,000 and medium supplier : annual sales value between

HK$5,000,001 – HK$50,000,000) were subjected to more restrictions and demands in

comparison with the smaller suppliers (annual sales value of less than HK$5,000,000) (8.9% -

20.3%). In other words, the presumably greater bargaining power of the larger suppliers did

not provide them with an upper hand in the power and conflict balance with the retailers.

5. Although there is a negligibly small number of retailers (four) had offered incentives to

encourage suppliers to act in the ways preferred by them, none of these retailers are

supermarket.

Source: Major Survey Findings (14 March 2007) “CUHK Marketing Department Survey on

Hong Kong's Retailing Industry”, Chinese University of Hong Kong,

http://www.cuhk.edu.hk/cpr/pressrelease/070314e.pdf (accessed 7 September 2015).

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EXHIBIT 2: 759 RETAIL REVENUE 2011-2015*

* Refers to financial year ending 30 April 2011 to financial year ending 30 April 2015

Source: Investor Information (n.d.) “Announcement” and “Financial Report”, CEC

International Holdings Limited, http://www.0759.com/CECWEB/investorinfo.aspx?lang=en

(accessed 10 August 2015).

HK$'000 2015 2014 2013 2012 2011

Revenue 2,133,805 1,442,981 812,150 241,158 16,661

Operating Profit 68,637 51,157 11,617 3,101 -3,748

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EXHIBIT 3: GROWTH OF 759 STORE: NUMBER OF SHOPS AND FLOOR AREA

Source: Investor Information (n.d.) “Announcement” and “Financial Report”, CEC

International Holdings Limited, http://www.0759.com/CECWEB/investorinfo.aspx?lang=en

(accessed 10 August 2015).

2015 2014 2013 2012 2011

No. of shops 249 192 134 71 11

Total Floor Area (sq. ft.) 431,000 271,000 146,000 57,000 N.A.

Average Floor Area Per Shop (sq. ft.) 1,733 1,411 1,090 803 N.A.

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EXHIBIT 4A: 759 PRODUCT MIX - COUNTRY OF ORIGIN

Source: Announcement (30 July 2015) “2014-2015 Annual Results Announcement”, CEC

International Holdings Limited,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015).

EXHIBIT 4B: 759 PRODUCT MIX - PRODUCT CATEGORY

Source: Announcement (30 July 2015) “2014-2015 Annual Results Announcement”, CEC

International Holdings Limited,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015).

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EXHIBIT 4C: TURNOVER BY PRODUCT CATEGORY 2014 VS 2015

Source: Calculations from information from Announcement (30 July 2015) “2014-2015 Annual

Results Announcement”, CEC International Holdings Limited,

http://www.0759.com/doc/art/announce/2015073001/201507300001.pdf (accessed 10 August 2015).

Revenue Revenue

2015 2014 + %

HK$'000 HK$'000

Snacks 1,043,431 868,675 20%

Cereals, oil and foodstuffs 778,839 474,741 64%

Household and Personal Care Items 196,310 53,390 268%

Others 115225 46175 150%