FamilyMart: A convenient success

Posted on March 1, 2003 
Filed Under Anita, CNET

By Anita Devasahayam

FAMILYMART opened its first 24-hour convenience store in 1998 in the eastern edge of Seoul at Songpa district. Within five years, the convenience chain that competed with big players such as 7-11 and LG-25, triumphed by adding another 1499 stores across the country. It emerged on top of the pile and remains profitable. FamilyMart

It can be argued that household goods and perishables are proven money-spinners for strategically placed stores as a FamilyMart typically location are populated suburbs filled with apartment blocks and housing complexes. FamilyMart remains a strong contender to other convenience store chain operators with its winning combination of wise business decisions, tech-savvy set-up and good relationship with franchisees.

FamilyMart believes that its franchise system became so successful because its owners nurtured relationships with its franchisees, says its Information Systems Department manager Sang Shin Park.

Beyond building good rapport, the store set-up options are attractive and the name FamilyMart connotes a familiar home-like atmosphere where everything and anything a household would need is available under one roof. Needless to say, goods were competitively priced.

Sang adds that franchisees have two options when setting up a FamilyMart store.”The storeowner can personally cover the location and interior costs, while the head office prepares the point-of-sale (POS) system and inventory. In this case, FamilyMart’s royalty is 35% of store revenue over a 5-year period. Or take the second option which is to allow the head office to cover all costs for opening a store (building deposit and monthly rental, interior decor, inventory, and POS). In this case, the royalty is 60% of revenues over two years.”

The bonus for either option is real-time connectivity that has helped lower cost in the initial years. In the early days, FamilyMart’s corporate network was based on leased ISDN lines for transmitting store sales and inventory information to the central warehouse database. However as the number of stores grew, the cost of maintaining leased lines turned out to be pricey and the network, difficult to manage. Increased business at storefronts meant greater number crunching activity at the back-end that had a direct impact on the network, slowing down performance.

“Overall the older based technology quickly became too costly and lacked the performance required for growing the business. The drop in productivity prompted senior management to upgrade the network last year,” reveals Sang.

Smooth moves

The objective of the upgrade, he says, was to provide firewall security and create a Virtual Private Network (VPN) between FamilyMart’s 1500 franchise stores and corporate warehouses in South Korea. By transitioning to ADSL and setting up a VPN, FamilyMart succeeded in improving security and communications while dramatically decreasing its communication costs, he adds.

“Before embarking on the project, we performed and qualified VPN performance tests and based on the results selected high tech POS systems from US-based NetScreen Technologies Inc.”

In October last year, the company undertook a nationwide implementation program and within six months, 700 NetScreen units were deployed at FamilyMart stores located in urban and rural locales of South Korea.

“The NetScreen-5XTs are like plug and play devices and was easy to configure, install and manage. This is extremely important as we do not have technical personnel at each franchise store to manage and monitor the security device at all times,” explains Sang.

In addition, the VPN also allowed FamilyMart to develop advanced distribution and data exchange techniques to keep its franchise store profitable. “Real-time POS information, tied in with an effective distribution system helped our franchisees devote more time to marketing and sales instead of worrying about supplies or inventory related to back-office operations.”

Shifting to from ISDN to ADSL certainly had its financial benefits. “Before deploying ADSL, we spent about US$7800 on telecommunication expenses a month. Now it is only US$1600 per month on telecommunications costs - a savings of US$6200 or 80% savings a month.”

For 24-hour convenience stores, 80% savings is plenty with raising cost of goods, rentals and stiff competitions from other chain operators and shopping malls that continue to invade the Korean society.

“The reason behind our VPN deployment was to save line costs to thousands of stores. VPN had the advantage of immediate ROI (Return On Investments) compared with other security systems,” Sang reiterates, adding that the in the long run, communication between headquarters and franchise shops gained with the VPN.

Secured sum

Having had the experience of managing an ISDN set-up, Shan took advantage of the new VPN to turn real-time transactions at the front end into instant updates at the back end at the central database.

“Our previous ISDN network used floating IP, not fixed IP. This meant that the transition from POS was not always immediate. It also meant that when there were any changes or updates to the system, the connection with each store would sometimes be broken,” says Sang.

Part of the reason behind the implementation was to ensure that the transactions and the process to transfer data for analysis from the stores to head office occurred in real-time - with no interruptions - and that the data was always secure - crucial move for retailers aiming to remain in the business

Sang adds that in addition to processing real-time orders, examining and calculating critical sales data, NetScreen was set up to provide extra information such as weather updates, timely news and events giving each store an edge over the competition.

“The franchisees use such information to make useful small talk with customers - it is good for business when you are friendly, they keep coming back for more,” he quips.

FamilyMart will continue to install NetScreen-5XPs in its remaining 800 stores throughout the rest of this year, and plans to have all sites securely connected by June this year. The presence of improved technology had also kept headcount in check. As of December last year, FamilyMart has 470 employees.

“Our long term goal is to use the information collected at the POS to improve operational efficiency and inventory. Also they use the VPN to distribute confidential, sensitive information to their franchisee,” Sang concludes.

Published in C | Level, CNET Asia magazine, March/April 2003,
by Anita Devasahayam

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