Financial Management in Non Profit Organizations

ITO-YOKADO COMPANY, LTD. M. Edgar Barrett and Christopher D. Buehler Overview The Ito-Yokado Company consisted of tierce business segments Super instals and near anformer(a)(prenominal) Retail handicraft trading trading trading operations (lto-Yokado super w argonho victimisations, Daikum tax write- polish off w argonhousings, York food courseet, York Benimaru, Robinsons subdi mental imagery injects, and Oshmans gaudy Goods) eating place Operations (Dennys and Famil Restaurants) and Convenience Store Operations (7-Eleven lacquer). Ito- Yokado had just acquired struggling Southland Corporation and transitional long st treadgies for Southland would convey to be developed.Although change, Southlands king-sizest business segment was its Stores root word responsible for direct and franchising of over 7,500 7-Eleven appliance neckcloths. Masanori Takahashi, a older st yardgy analyst for Ito-Yokado was considering the possibility that long-term strategies that had been triple-crown in lacquer in like manner could be victorful in the f on the whole in States was vastly different than that of japan nevertheless, he was confident that finished sleepless and thorough planning, the goal of qualification Southland hitcapable could be carry through and throughd. Learning Objectives . To pose students with the development of a lacquerese federation and its move into U. S. grocery stores essay author serv sorbet review. 2. To acquaint students with elements of lacquerese solicitude through Ito-Yokados operation tidy disgorge and to induce them to motion the transferability of market placeing across national boundaries. 3. To familiarize students with the spirit of sell in lacquer buying essay papers online. 4. To show how Southland Corporation became subject to erudition by Ito-Yokado Company, Ltd. 5. To present the nature of the whatsis store diligence in the United States.In mid- blemish 1991, Masanori Takahashi, a seni or strategy analyst for Ito-Yokado Company, was preparing to depart for D onlyas, Texas. Once there, he would be confidential information a team of japanese and Ameri prat film directors responsible for establishing transitional and long-term strategies for the Southland Corporation. afterwards n previous(predicate) an immacu tardily year of intense bargaining and duologue with Southland and its creditors, Ito-Yokado acquired Southland on March 5, 1991. Takahashi began working with Ito-Yokado in 1972 as an assistant manager of unmatched of the participations superstores. He had advanced to the blank space of regional manager by 1979.In betimes 1981, Ito-Yokados Operation regenerate Project was conceived and Takahashi was asked to be a extremity of the team leading the project. During the first few months on the team, Takahashi quickly chthonicstand certain crucial aspects of the mod project, most nonably the call of point-of-sale (POS) systems. Implementation of the project advanced most rapidly in Ito-Yokados 7-Eleven lacquer subsidiary, so he also had become familiar with the operating environment of thingumabob stores in japan. As Takahashi left his capital of Japan office, he could not help alone feel twain excitement and suspicion ciphering his bracing position.He had gained confidence while involved with the prospered Operation shuffle better Project at Ito-Yokados superstores and 7-Eleven Japan doojigger stores, but this experience office or might not prove to be useful in respect to Southland. COMPANY BACKGROUND Ito-Yokados founder, Masatoshi Ito, was born in 1924 and graduated from a commercial high school in Yokohama. He worked briefly at Mitsubishi Heavy Industries in the beginning joining Japans war effort in 1944. After World War II, he worked with his mother and elder brother at the familys 66- red-blooded-foot clothing store in capital of Japan. 1 The store was in unifiedd as Kabushiki Kaisha Yokado in 1958.By 1960, Ito was in sole control of the family business. During that corresponding year he do his first visit to the United States. In 1960, Ito visited National capital Register (NCR) in Dayton, Ohio. While in the United States, Ito was introduced to call such as supermarkets and filament stores by NCR, which was sidelineed in selling bullion registers to Japanese retailers. In Japan, retailing was dominated by mom-and-pop stores and a smattering of venerable surgical incision stores, with few types of retail outlets in between. At this clip, Ito began to promise the possible role of mass dealrs in a society proper mass-oriented. Ito soon untieded a footling ambit of superstores in the Tokyo area. These stores carried a bragging(a) selection of household constitutelys, food, and clothing of generally lesser quality and lower price than either the mom-and-pop or department stores. By 1965, Ito had unresolved eight superstores. In the same year, the name of the chain wa s changed to Ito- Yokado. The produce of Ito- Yokado as a Superstore Itos concept for the superstores was centered on having the rough combining weight of some(prenominal) types of retail stores contained within one multistory superstore.The sign stores were laid near population centers and railroad stations in the Tokyo areas. Often, several stores were situated in close proximity in hunting lodge to achieve regional authorisation. The forgets were high name recognition, reduced distribution equals, and the effective credit crunch out of competition. Ito soon solidized that social changes in Japan could bring forth new opportunities for his retailing ideas. Younger and more(prenominal) than(prenominal)(prenominal) than mobile Japanese appeared to be less willing to sp dismiss a great deal of m shopping at numerous mom-and-pop stores. Also, the Japanese society was experiencing change magnitude suburbanization.Ito obdurate to locate stores in suburban prefec tures. There were 47 prefectures (provinces) in Japan. star reason for locating stores in suburban areas was the lower cost of strong estate. This allowed Ito-Yokado to open larger stores with more parking spaces than competitors laid in obstruct urban areas. Ito continued to use a strategy of regional dominance with these new interruptions, most of which were concentrated in the greater Kanto district, which consists of the Tokyo metropolitan area and surrounding cities. By the early seventies, Ito-Yokado stores were opening at the rate of four or five per year.By the slow 1970s, nine or 10 new stores were opened annually. In early 1987, 101 of 127 Ito- Yokado superstores were located in the greater Kanto district. Ito also select a strategy of leasing some properties for new stores. As of the mid-1980s, more than 87 part of Ito-Yokados aggregate sales ball over space, 10 of the corporations 11 distribution centers, and the company headquarters in Tokyo were all leased ? Often, retention prices were astronomical, or the owners of well-located sites would not part with their property for any price. Constraints on GrowthThe initial success of Ito-Yokado and the other superstores soon resulted in retaliatory action by a powerful competitor the mom-and-pop store owners. These small retailers were said to pull the strings of Liberal Democratic ships company politicians at the local level. 8 The action initiated by the small retailers resulted in the 1974 liberal Store Restriction turn of events, which was subsequently strengthened in 1979. The overlord act holded the opening of stores with sales areas of more than 1,500 determine meters (16,500 square feet). In wampum, the act restricted the hours of operation of new and existing large stores.A series of changes in 1979 added restrictions on stores with sales areas greater than 500 square meters (5,500 square feet). A Commerce Coordination Committee was naturalized in distributively area in order to set policy regarding large-store openings and hours of operation. The committees were effectively controlled by the small retailers. By the early 1980s, Ito-Yokado was opening moreover four or five new stores annually. Factors other than the Large Store Restriction Act adversely affected Ito-Yokado. Japanese consumers real disposable income decreased by a little more than 1 part during 1980-1981. 0 Japan experienced a general stinting prevail overturn in the early 1980s, as did the rest of the world, again serving to limit consumer purchasing power. bread income for Ito- Yokado-which had grown to the highest degree 30 pct per year between 1976 and 1981-grew by 9. 7 per centum in 1982 and by 0. 9 percent in 1983. 11 The legal restrictions imposed on large stores, when combined with the economic downturn, led to both(prenominal) lower current pull ahead and a project of reduced rates of growth in future earnings. Ito-Yokado as a Parent Company During the early 19 70s, Ito began pursuing new retailing interests.In 1972, he approached Dallas-based Southland Corporation in an try on to secure a permission to exploit 7-Eleven stores in Japan. He was rebuffed. He make a convertible take on in 1973 with the aid of a Japanese trading company, C. Ito and Company, and was successful in obtaining the license. Concurrently, Ito was pursuing another U. S. firm, Dennys Restaurants, in an attempt to obtain rights for opening Dennys Restaurants in Japan. Both subsidiaries, Dennys Japan and 7-Eleven Japan ( primitively called York Seven but renamed 7-Eleven Japan in 1978), were established in 1973.The first 7-Eleven and the initial Dennys in Japan were both opened in 1974. investment trust for each of the two bulk- own subsidiaries was traded respectively on the Tokyo Stock Exchange. Both subsidiaries became pelfable around 1977. ITO-YOKADO IN THE 1980s The Ito-Yokado group consisted of third business segments Superstores and other Retail Operation s, Restaurant Operations, and Convenience Store Operations. The Convenience Store Operations segment was made up of 7-Eleven Japan. The Restaurant Operations segment consisted of Dennys and Famil Restaurants.Ito-Yokado super- stores, Daikuma discount stores, two supermarket set up (York market and York-Benimaru), Robinsons Department Stores, and Oshmans Sporting Goods Store made up the Super-stores and other Retail Operations segment. Ito-Yokados financial narratives are shown in divulges 1 through 3 in separate attachments. SUPERSTORES AND OTHER RETAIL OPERATIONS York securities industry and York-Benimaru York Mart was a totally owned subsidiary established in 1975. In 1990, it moderated 40 supermarkets located professionally in the Tokyo area.These stores sell mainly fresh foods and packaged goods, and competition was high in this geographic and retail area. Ito- Yokados Operation Reform Program was implement by York Mart in 1986 as a means to boost efficiency and profits . By 1990 sales were change magnitude at 6 percent per year. See Exhibit 3. Is York-Benimaru was a 29-percent-owned affiliate of to-Yokado, and was an independently managed regional supermarket chain. York-Benimaru operated 51 stores as of 1988. The stores were located in the Fukushima prefecture of Koriyama-city in joinern Japan. Like York Mart, York-Benimaru operated with a higher profit security deposit than the supermarket industry as a whole. York-Benimarus earnings growth rate of 13 percent per year was expected to last into the 1990s, and Ito-Yokados share of this profit was the major contribution to the uprightness in earnings of affiliates portion of Ito- Yokados income statement (see Exhibit 2). Daikuma Daikuma discount stores were consolidated into the Ito-Yokado group in 1986, when Ito-Yokados ownership of Daikuma step-up from 47. 6 percent to 79. 5 percent. In 1990, Daikuma was one of the largest discount store chains in Japan with 14 stores.Although Daikuma was p opular among new-made Japanese consumers, the discount stores attracted the critical prudence of competing small retailers. Because the discount stores were regu recentd by the Large Store Regulation Act, intensive effort was required to open new stores. Despite these circumstances, and change magnitude competition, Daikuma opened two discount stores in 1989. Robinsons Department Stores In 1984, the Robinsons Japan Company was established to open Robinsons Department Stores in Japan. The Robinsons name was employ under the terms of a license granted by the U.S. store of the same name. The Japanese company was wholly owned by Ito-Yokado, and the first Robinsons Department Store in Japan was opened in November 1985 in Kasukabe City of Saitama Prefecture. This was a residential com- munity north of Tokyo and was a rapidly growing area. Although an Ito- Yokado super- store was located nearby, Ito-Yokados management believed that a niche existed for a slightly more upscale retail st ore. Ito-Yokado had shattered traditional wisdom by opening up a department store in the suburbs, not in the center of Tokyo. 21 The location was expected to serve a population area of more than 600,000 residents and to cater a broad selection of consumer goods at prices higher than superstores even so lower than the downtown Tokyo department stores. Many of the strategies employed by Ito-Yokado in opening its Robinsons Department Store followed similar strategies employed in its superstores. The land was leased (in a suburb). Instead of purchasing goods on a consignment basis as most other department stores did, Robinsons managers were made responsible for the outright purchase of goods from suppliers.This allowed Robinsons to purchase goods at a momentously reduced price. Robinsons reported its first profit in monetary 1989, slightly four eld after opening. In contrast, most Japanese department stores operate approximately 10 years before reporting a profit. The single R obinsons location double-dyed(a)ed well-nigh ? 28 one million million million (US$220 one billion meg million) in fiscal 1989. 24 The second Robinsons Department Store opened in tardily 1990 in Utsunomiya, about 100 kilometers (60 miles) north of Tokyo. Oshmans Sporting GoodsIto-Yokado licensed the Oshmans Sporting Goods name from the Houston, Texas, produce company in 1985. That year, two stores were opened. ane of the stores was located inside the original Robinsons Department Store. RESTAURANT OPERATIONS The Famil Restaurant chain was started in 1979 as an in-store restaurant to serve customers at Ito-Yokado superstores. It had however, expanded to 251 locations by 1988. 25 The Famil chain did not record its first positive earnings until 1986. In Famils attempts to expand operations, the company had emphasized its catering business. By 1990, the in-store operations (those located in Ito- Yokado superstores) accounted for 45 percent of Famils sales, the catering business accounted for 32 percent of sales, and freestanding stores accounted for 23 percent of sales. Dennys Japan Ito-Yokado opened the initial Dennys (Japan) Restaurant in 1974 with a license from Dennys of La Mirada, California. Ito-Yokado tailored the U. S. family restaurant to the Japanese market, and Dennys Japan became profitable around 1977. By 1981, 100 Dennys Japan restaurants had been established. and in 1990 there were 320 such restaurants operated by Ito-Yokado. In 1990, Ito-Yokado controlled 51 percent of Dennys Japan stock. In the early 1980s. Ito-Yokado decided that Dennys Japan should purchase all rights to the Dennys name in Japan. The purchase was made in 1984, and royalty payments to the U. S. parent were thereby discontinued. In fiscal year 1990 (March 1989 to February 1990), Dennys Japan reported a net annual sales increase of 10. 9 percent, as compared with the 4. 9 percent Japanese restaurant industry sales increase for the same period= Exhibits 4 and 5 contain fin ancial statements for Dennys Japan.In 1988, Dennys Japan began using an electronic order-entry system, which allowed managers of individual restaurants to quickly order food sup- plies based on trends in their own restaurants. It also allowed for the periodic updating of menus to reflect new food items. See exhibits 4 and 5. CONVENIENCE STORE OPERATIONS 7-Eleven Japan Since the opening of the first 7-Eleven store in 1974, the chain had grown to more than 4,300 stores located in virtually all part of Japan by February 1990. 32 At that age, about 300 new stores were being opened annually.Ito-Yokado owned approximately 50. 3 percent of 7-Eleven Japan in 1990. Originally, young urban workers represented the primary customer base. As 7-Eleven penetrated the Japanese market, however, close e reallyone became a potentiality customer. In Tokyo, for example, utility bills could be paid at the chains stores. The 7-Eleven stores were small enough, with an total of only 1,000 square feet, to effectively avoid enactment under the Large Store Regulation Act. This allowed 7- Eleven to get by with the mom-and-pop retailers on the basis of longer hours of operation and lower prices.Faced with this competition, many of the small retailers join the ranks of 7-Eleven. By converting small retailers to 7-Eleven stores, Ito-Yokado was able to expand rapidly and blanket the rude 7-Eleven Japan pursued a strategy of franchising stores instead of owning them. The franchise equip for 7-Eleven stores was approximately 45 percent of the gross profit of the store (the way was 43 percent for 24-hour stores). Ito-Yokado provided most of the ancillary functions for each store (e. g. , administration, accounting, advertising, and 80 percent of utility costs).In 1987, 92 percent of all 7-Eleven stores in Japan were franchised. and by 1990, only 2 percent of the 7-Elevens were corporate owned. Within the Ito-Yokado group, 7-Eleven contributed 6. 8 percent of revenues in 1990. With t his relatively small portion of overall corporate revenues, however, 7- Eleven Japan contributed more than 35 percent of the groups profit. infra its licensing agreement, 7-Eleven Japan paid royalties of 0. 6 percent of gross sales to the Southland Corporation. In 1989 and 1990, 7-Eleven Japan paid royalties of about $4. 1 million and $4. million, respectively. The financial statements for 7-Eleven Japan for the years 1986 to 1990 are shown in Exhibits 6 and 7. OPERATION REFORM PROJECT Ito-Yokado implemented the Operation Reform Project in late 1981 in a retail industry environment punctuated by reduced consumer spending and take root margins. The goals of the project were to increase efficiency and boost profitability by increasing the bloodline turn while avoiding empty store shelves. The plan was originally implemented in the Ito- Yokado Superstores and the 7- Eleven Japan public toilet stores.The implementation of the project involved a coordinated effort of catering to rap idly ever-changing consumer preferences while, simultaneously, monitoring mathematical product pay heed more closely. This coordination was accomplished by making individual store managers more responsible for such decisions as what intersection was to be stocked on store shelves, thus allowing managers to tailor swop selection in their individual stores to local preferences. Top Ito-Yokado regional managers held hebdomadally meetings with store managers to monitor the implementation of the project.As late as 1988, these meetings were still held on a weekly basis. In order to avoid depletion of store stocks, Ito-Yokado established an on-line ordering system with vendors. In 1982, the ordering system reached only 400 vendors. By 1988, however, the system linked Ito- Yokado with 1,860 vendors. Point-of-Sale System As implementation of the Operation Reform Project began, Ito-Yokado paid change magnitude attention to the importance of obtaining information regarding the flow of m erchandise through individual stores. The son of a bitch chosen to accomplish this task was the point-of-sale system.POS system usage was increasing in the United States in the early 1980s, but the systems were used primarily to increase productivity at the interchange register. In contrast, Ito- Yokado used similar systems as a part of the project by monitoring unique(predicate) merchandise flow. As of the late 1980s, many retailers in the United States had begun utilizing POS in similar capacities, and some had begun to use POS to track the purchases of individual consumers. The first use of POS systems in Japan came in 1982, when 7-Eleven Japan began installing them in its stores. By 1986, every 7-Eleven store in Japan was equipped with such a system. The systems available were sophisticated enough to monitor the correct stock of merchandise in a typical doodad store having about 3,000 items. The systems could monitor the flow of every item of merchandise through the purcha se, inventory, sale, and restocking stages. In late 1984, Ito-Yokado decided to install POS systems in the superstores. The sophistication of those systems installed in contraption stores, however, was not adequate to handle the merchandise flow of a superstore, which could stock up to 500,000 items. New POS systems were developed n a coordinated effort by Ito-Yokado, Nippon Electric, and Nomura Computer Services. The installation of POS systems in the existing superstores was completed in November 1985, with more than 8,000 POS registers installed in 121 stores. With 138 stores in 1990, Ito-Yokado had an estimated 9,000 POS registers in the superstores alone. In 1986, after the systems had been installed in all superstores and 7-Elevens, Ito- Yokado accounted for about 70 percent of the POS systems in use in Japan as of 1988 7-Eleven Japan was the only major convenience store chain in Japan to have installed POS systems. By August 31, 1989, Japan had 119,137 POS scanner-equipped registers in 42,880 stores, making it the country with the most POS systems in use. The POS systems used by 7-Eleven Japan and Ito-Yokado superstores were upgraded in 1986 to add a new dimension to Ito-Yokados Operation Reform Project. The upgraded systems allowed for bidirectional communication with the company headquarters. This feature essentially allowed information to flow not only from individual stores to a central location, but also from the central location back to individual stores.By linking the central system to other computer systems, more information than just sales of retail items could be transmitted. This capability allowed Ito-Yokado to increase the efficiency of deliveries by centralizing some orders. By increasing the total size of orders, Ito-Yokado increase its bargaining position with distributors. One result of this bargaining strength was more frequent deliveries of smaller volume. From 1987 to 1988, deliveries increased from one to three per week for stor es in many regions of Japan, notably the Tokyo, Hokkaido, and Kyushu areas.Using the POS systems, 7-Eleven began to offer customers direct parcel delivery in conjunction with Nippon Express. In addition, some POS terminals were being used to hump prepaid telephone credit card game+ Since October 1987, Tokyo-area customers had been able to pay their electric bills at 7-Eleven since March 1988, they had also been able to pay their gas bills Women traditionally manage household finances in Japan, so these works were designed to attract more women customers to the convenience stores. Results For the Ito-Yokado superstores alone, average days of inventory decreased from 25. in 1982 to 17. 3 in 1987. By 1990, it was estimated to be 13 days. The effect on operating margins and net income for the entire Ito-Yokado Corporation was equally dramatic. In 1982, the companys operating margin stood at 5. 1 percent. It had increased to 8. 1 per- cent by 1987. By 1990, the operating margin had cl imbed to 10. 5 percent. Net income for the corporation increased from ? 14,662 million in 1982 to ? 34,649 million in 1987, and ? 58,465 million in 1990. 7-Eleven Japan preserve similar increases in operating margins and net income during the same period.In 1982, 7-Eleven Japans operating margin was 20. 7 percent. It had increased to 34. 6 percent by 1987. Net income from the 7-Eleven operations increased from ? 7,837 million in 1982 to ? 33,000 million in 1987. As of 1990, the Ito-Yokado Corporation was the second largest retailer in Japan, with ? 1,664,390 million of annual gross sales. The leading retailer was Daiei, with ? 2,114,909 million of revenues. Ito- Yokado was, however, the most profitable retailer in Japan, with net income of ? 58,465 million. In comparison, Daiei recorded net income of only ? 9,457 million for 1990. monetary statements for Daiei are shown as Exhibits 8 and 9. THE SOUTHLAND peck The Southland Corporation began in Dallas, Texas, in 1927 when Claude S. Dawley consolidated several small Texas ice companies into the Southland Ice Company. This new company was under the direction of 26-year-old Joe C. Thompson, Sr. down the stairs Thompsons guidance, Southland began to use its retail outlets (curb service docks) to sell products in addition to ice, such as watermelon, milk, bread, eggs, and cigarettes. With the addition of these products, the concept of the convenience store was born.During the Great imprint and the 1940s, Southlands convenience store business added several more products, including gaseous state, frozen foods, hit products, fresh fruit and vegetables, and picnic supplies. Because the store opened at 7 AM and remained open till 11 PM, the store name 7-Eleven was adopted during this time. The 1950s were a period of substantial growth in terms of the number of stores and of 7-Elevens geographical coverage. The first stores located outside of Texas were opened in Florida in 1954. During the same year, 7-Elevens oper ating profit surpassed the $1 million mark for the first time.By 1959, the entire 7-Eleven empire established 425 stores in Texas, Louisiana, Florida, and several other East Coast states. John Thompson became president of Southland when his father, Jodie Thompson, died in 1961. During the 1960s, a population migration toward the suburbs and changing lifestyles presented Southland with new growth opportunities. John Thompson lead Southland on the runway of expansion, and more than 3,000 stores were opened in the ten dollar bill. The product line of 7-Eleven also grew during this time to include prepared foods, rental items, and some self-service gasoline pumps.The 1970s were also a period of achievement for Southland. In 1971, the $1 billion sales mark was surpassed. Southland- stock began trading on the New York Stock Exchange in 1972, and the 5,OOOth store was opened in 1974. It was at this time that Masatoshi Ito approached Southland with the prospect of franchising 7-Eleven st ores in Japan. During the 1970s and early 1980s, Southlands activities became more diversified. In 1986, the company had four operating groups the Stores multitude, the Dairies Group, the Special Operations Group, and the accelerator pedal Supply Division.The Stores Group represented the largest of the operating groups in terms of sales through the 1980s. The Stores Group was responsible for the operating and franchising of convenience stores. At the end of 1985, there were 7,519 7-Eleven stores in most of the United States and five provinces of Canada. This group was also responsible for 84 Gristedes and Charles & Company food stores. 38 Super-7 outlets, and 7-Eleven stores operated under area licensees in the United States, Canada, and several Pacific Rim countries, including Japan.The Dairies Group was one of the nations largest dairy processors in 1986 and served primarily the Stores Group, although aggressive marketing in the 1980s targeted service to institutional dairy n eeds. This group operated in all of the United States and parts of Canada. The Special Operations Group consisted of Chief Auto Parts (acquired in 1979) Pate Foods (a snack food company) Reddy Ice (the worlds largest ice company) and Tidel Systems (a manufacturer of cash dispensing units and other retailer equipment).The Gasoline Supply Division was formed in 1981 to serve the gasoline essentials of the more than 2,800 7-Eleven stores handling gasoline. This divisions history was punctuated by the 1983 acquisition of Cities Service Refining, Marketing, and Transportation businesses (CITGO) from Occidental Petroleum. Southlands Recent Activities Southlands dramatic growth and variegation during the 1970s and early 1980s resulted in 7-Eleven having a dominant position in the convenience store industry.Despite this position, circumstances since the mid-1980s had greatly eroded 7-Eleven and Southlands strengths. The inunct price collapse of early 1986 was the sharpest drop of in the buff rock oil prices in history. The instability of crude oil and wholesale refined products, coupled with CITGOs inventory methods and various write-downs, resulted in only modest income for a previously very profitable company. The volatility of CITGOs financial position greatly affected Southlands earnings. Southlands equity interest in CITGO contributed to a $52 million loss for the entire corporation in 1986.In order to reduce the impact of an unstable crude oil market and the accompanying volatility of CITGOs earnings, South- land entered into a say venture with Petroleos de Venezuela (PDVSA) in late 1986. The joint venture with PDVSA had several components. Southland sell a half- interest in CITGO to a subsidiary of PDVSA for $290 million. In addition, PDVSA concur to both supply CITGO with a minimum of 130,000 barrels of crude oil per day and pro- vide its share of CITGOs working capital requirements. A takeover attempt of Southland occurred in April 1987.Canadian financi er Samuel Belzberg approached the Southland board of directors with an offer of $65 per share of usual stock. Unwilling to relinquish control of Southland, the Thompson family tendered $77 per share for two- triads of the outstanding shares in July 1987. The other third of the shares would be purchased at $61 per share (plus $16 per share of new preferred shares) by the would-be private Southland Corporation. backing for this acquisition came from $2 billion in loans from a group of banks and a $600 million bridge loan from Goldman, Sachs and Salomon Brothers. An additional $1. billion was generated by the issue of subordinated debentures Gunk bonds) in November 1987. This occurred after the stock and junk bond markets crashed in October 1987. Southlands investment bankers had to sell the bonds at a blended rate of almost 17 percent, instead of the anticipated rate of 14. 67 percent. The Thompson family emerged from the buyout owning 71 percent of Southland at a total cost of $4. 9 billion. Paying the racy Costs of a Leveraged Buyout After Southland had been taken private through the leveraged buyout (LBO), strong changes occurred in both Southland and 7-Eleven operations.Southland was restructured, with the elimination of two levels of middle managers. During this time, Southland began selling more 7-Eleven stores than it opened in the United States and Canada. Due to the increased number of licensees opening stores overseas, however, the total number of stores worldwide continued to increase. 7-Eleven Japan was primarily responsible for this increase, with the opening of 340 stores in 1988 and 349 stores in 1989. Southland also divested itself of many large assets in the 1988 to 1990 period (see Exhibit 10).Significant in this group of divestments were the entire Dairy Group, more than 100 7-Eleven stores in the continental United States, Southlands remaining interest in CITGO (sold to PDVSA), and 7-Eleven Hawaii, (purchased by 7-Eleven Japan). In Novemb er 1989, 7-Eleven Japan purchased 58 stores and additional properties from Southland. These properties and stores, which were located in Hawaii, were exchanged for $75 million in cash. The 58 convenience stores were unionised as 7- Eleven Hawaii, which was established as a subsidiary of 7-Eleven Japan.As of declination 31,1990, Southland operated 6,455 7-Eleven convenience stores in the United States and Canada, 187 Highs Dairy Stores, and 63 Quick Mart and Super-7 Stores. Southland owned 1,802 properties on which 7-Eleven stores were located. other 4,643 7-Eleven stores in the United States and Canada were leased. In addition the company possessed 234 store properties held for sale, of which 109 were unimproved. 77 were closed stores and 48 were wasted properties adjoining store locations. Three of Southlands four food-processing facilities were owned (the other was leased).The company owned six properties in the United States on which distribution centers were located. tail fi n of the six distribution centers were company owned. Until December 1990 the company had also owned its corporate headquarters (called City- place) located near downtown Dallas. 59 Financial statements for Southland Corporation are shown in Exhibits 11 and 12. THE PROPOSED PURCHASE OF SOUTHLAND BY ITO-YOKADO The divestments of 1988, 1989, and 1990 constituted attempts by Southland to generate sufficient cash to service the massive debt incurred from the LBO of 1987.By early 1990, however, it was apparent that the cash generated from these divestments and Southlands operations was not sufficient to cover its interest expense. Some experts estimated that Southlands cash before longfalls would reach $89 million in 1990 and more than $270 million in 1991. 60 Southlands long-term debt still totaled about $3. 7 billion, and interest expense alone in the first three quarters of 1989 was almost $430 million. In March of 1990, Southland announced that it was seeking economy by Ito-Yokado . Proposed Acquisition of Southland by Ito- YokadoSouthland had looked at possibilities of receiving assistance from other U. S. companies, but decided that Ito-Yokado was the best potential abetter _or_ abettor. 63 The original proposal would have resulted in Ito-Yokado receiving 75 percent ownership of Southland for $400 million. This proportion of Southland would be split between Ito- Yokado and 7- Eleven Japan, with 7- Eleven Japan obtaining two-thirds of the 75 percent share. The deal was contingent on Southlands ability to swap its outstanding openly traded debt for stock and zero-coupon (non-interest-bearing) bonds.The publicly traded debt amounted to approximately $1. 8 billion. There were five classes of public debt, ranging in type and interest paid. The interest rate of the bonds varied from 13. 5 percent to 18 percent. Ito-Yokados offer was also contingent on 95 percent of all bond- holders of each public debt issue accepting the swap. Under this original proposal, the Thompson family would retain a 15 percent stake in Southland, and the remaining 10 percent of the company would be held by bondholders.The original proposal had a deadline of June 14, 1990, at which time either Ito- Yokado or Southland could invalidate the agreement. Neither party indicated that such action would be taken, even though Southlands bondholders balked at the swap proposal. A bigger problem was facing the two companies a rapidly approaching interest payment due on June 15, 1990. Southlands failure to pay the $69 million payment would result in Southland having a 30-day grace period in which to compensate bond- holders. At the end of the 30-day period, unpaid bondholders could try to force South- land into bankruptcy act. Revisions to the Proposed Buyout Southland did not make its scheduled interest payment that was due on June 15, 1990. Bondholders, meanwhile, had shown little regard for the original deal struck between Ito-Yokado and Southland. Three more revisions o f the proposed debt restructuring and terms for the buyout were submitted between mid-June and mid-July 1990. In each revision, either Ito- Yokados or the Thompson familys stake in Southland was reduced and the share of Southland stock offered to bondholders increased.With each revision came increased bondholder support, up to now this support was far short of either the two-thirds majority (as required in Chapter 11 restructuring cases) or the 95 percent acceptance rate hardened by Ito-Yokado, As revisions were submitted, the expiration dates of the debt restructuring and stock purchase by Ito- Yokado were extended. On July 16, a bondholder filed suit against Southland for failure to pay interest on June 15, because on July 15 Southlands grace period had expired. By September 12, a majority of bondholders had tendered their notes. This majority was still far short, however, of the 95 percent swap requirement dictated by Ito-Yokado. The deadlines were extended to September 25 for both the debt swap offer by Southland and the stock purchase offer by Ito-Yokado. As Southland was apparently headed for involuntary bankruptcy filing under Chapter 11, the proposal again seemed in jeopardy. Acceptance of the Proposed Buyout The deadline for Southlands debt swap offer was again extended. Bondholder approval was last obtained in late October.Ito-Yokados offer to buyout Southland was extended to March 15, 1991, pending motor hotel approval of the prepackaged bankruptcy dea1. The bankruptcy-court petition for approval of the prepackaged debt restructuring was filed on October 24,1990. Although Southland did not have sufficient bondholder approval as dictated by Ito-Yokado, the bankruptcy court proceedings were swift. The last few bondholders who held out were placated in January when the Thompsons relinquished warrants for half of their 5 percent stake of Southlands stock. On February 21, 1991, the U. S. ankruptcy court in Dallas approved the reorganization of South land.? At that time, at least 93 per- cent of the holders of each class of debt issued by Southland had approved the reorganization. On March 5, 1991, Ito-Yokado purchased 71 percent of Southlands stock for $430 million. Two-thirds of this stock was purchased by 7-Eleven Japan, and the other third purchased directly by Ito-Yokado. The terms of the accepted debt-restructuring agreement between Southland and its bondholders are shown in Exhibit 13. THE CONVENIENCE STORE INDUSTRY IN THE unify STATESThe convenience store industry in the United States changed dramatically during the decade of the 1980s. The number of convenience stores in the United States, the gross sales of these stores, and the gross margins all increased during this time period. The net income of convenience stores, however, decreased significantly. This military issue was largely the result of the rapid expansion of several chains of convenience stores and the increased number of convenience stores opened by oil c ompanies. come Measures of the Industry The number of convenience stores grew from about 39,000 in 1982 to more than 70,000 in 1989.From 1985 to 1989, industry sales increased from $51. 4 billion to $67. 7 billion, an increase of 6. 3 percent per year. Gross margins increased from 22. 8 percent in 1985 to 26. 2 percent by 1988. Despite such growth, convenience store operations experienced a decrease in net profit in the late 1980s. The total industry pretax profit peaked in 1986 at $1. 4 billion, fell to $1. 16 billion in 1988, and plummeted to $271 million in 1989. Some trends are shown in Exhibit 14. The expansion of convenience stores in the 1980s was led by large convenience store chains and oil companies.In addition to the growth experienced by the Southland Corporations 7-Eleven, Circle-K, a Phoenix-based convenience store chain, expanded from 1,200 stores in 1980 to 4,700 stores in 1990. The Role of the oil color Companies The impact of oil companies on the convenience stor e industry had been significant. well-nigh all of the major U. S. oil companies began combining convenience store operations with gasoline stations in order to boost profits. In 1984, Exxon opened its first combination convenience store and gas station. By 1989, it had 500.Texaco operated 950Food Marts in the same year. From 1984 to 1989, the number of convenience stores operated by oil companies increased from 16,000 to 30,000. Gasoline sold at a lower margin (about 6 percent in 1984) than nongasoline convenience store products (32 percent in the same year), so the sale of convenience store items presented an opportunity for those gas stations with good locations (i. e. , street comers) to increase profits. In order to capitalize on the potential for higher profits in retailing, the major oil companies boosted their marketing expenditures.In 1979, the oil colour industry spent about $2. 2 billion for their marketing efforts. By 1988, these expenditures were almost $5 billion. The convenience stores operated by oil companies were growing in both number and size. In 1986, only about 20 percent of the oil company convenience stores were 1,800 or more square feet in size (the size of about 90 percent of traditional convenience stores). By 1990, however, more than 50 percent of the oil company convenience stores were between 1,800 and 3,000 square feet in size. ? Merchandise Trends for Convenience StoresBecause of the intensified retailing efforts of oil companies and large convenience store chains, some trends (other than those mentioned previously) evolved. In 1985, gasoline accounted for 35. 4 percent of convenience store sales. By 1989, gasoline accounted for 40 percent of sales. The gross profit margin for gasoline sales had increased from 7. 3 per- cent to 11. 7 percent more than the same period. ? Of the 61,000 convenience stores in the United States in 1985,55 percent sold gasoline, and in 1989, 65 percent of 70,200 convenience stores sold gasoline.In 1 989, 75 percent of the new convenience stores built were equipped to sell gasoline. Although gasoline sales and margins became an increasingly significant contributor to convenience store revenues, contributions of revenue from other merchandise stagnated. In 1985, merchandise (other than gasoline) sales for the convenience store industry amounted to $33. 2 billion. In 1,989, sales reached $40. 6 billion. This increase in merchandise sales, however, was offset by the large number of store openings. In 1985, the average yearly merchandise sales per store was $544,000.This number increased to only $578,000 in 1989. THE circumstance While flying from Japan to the United States, Takahashi reflected on the success that both Ito-Yokado and 7-Eleven Japan had enjoyed over the course of many years. These achievements were the result of long-term strategies that were carefully tailored to the Japanese market. Could these same, or similar, strategies be the foundation for making Southland financially successful again? He realized that the convenience store industry in the United States was vastly different from that of Japan.Nevertheless, he was confident that, through careful and thorough planning, the goal of making Southland profitable could be achieved. -11 pts if late (after 6pm of due date) and additional -5pts for each day thereafter for max late points of -26 pts. Lists the Strengths / Weaknesses/ Opportunities / Threats for the Ito-Yokado Company (total 10 pts) SWOT analysis. Strengths (list and briefly discuss only 3) 1 pt each for total of 3 pts. SWOT, defined as the strength, weaknesses, opportunities and threats is an organizational tool used to analyze core competencies of a business.And like most businesses the Ito-Yokado Group consisting of three business segment (superstores and retail operations, restaurants operations, and convenience store operations) is no different. The strategies used to expand its operations Point of sale register, diversifi ed portfolio, name(branding) and strategic location Weaknesses (list and briefly discuss only 2) 1 pt each for total of 2 pts Opportunities (list and briefly discuss only 2) 1 pt each for total of 2 pts The need for new ideas, real estates, the most vulnerable (younger generation) Threats (list and briefly discuss only 3) 1 pt each for total of 3 pts.The threats faced by the Ito-Yokado Group are competition from mom and pops store, decrease in disposable income and Large Store Restriction Acts. As discussed in the article, the Large Store Restriction Acts specify by rival competitors makes it challenging for the organization to cater to its consumer needs. The result is not only deprived customer, but decrease in revenue, as the laws restrict the size of the store, making it impractical to grow different variety in store products.Another threat is consumer income, the curb consumer income, means consumer has restrict amount for discretionary spending. And last but not least is the competition from mom and pops stores. These types of small businesses despite their sizes can pose a real threat for large companies such as 7-Eleven, reason being, is the fact that they are better know and rooted within the community. Essay questions to be answered in detail. (18 pts for each question for total of 90 pts) 1.What were some of the primary reasons for Ito-Yokados remarkable degree of success during the past several decades? Globalization in my opinion was one of the biggest factors in the company success. Todays market makes fierce competition whence businesses no longer can afford to operate locally. In order for them to be successful, they must(prenominal) join the rest of the world in forming federation through Joint Ventures, Franchising, Licensing, and Foreign Subsidiaries. While the advantages of sphericalization exist, it is not without its disadvantages.The renewing of a company from a local organization into a multinational organization is not an ea sy task mainly because of the various laws, time, efforts, and monetary investment that one must be able to shoulder before taking on such venture. The factors listed include, but are not limited to political stability, relationship between the two countries, licenses fees, market responsiveness, and the cost can determine the successfulness of a business. In addition, the careful planning and leaders ability can also determine whether or not a business can make the transformation successfully.As a leader one of the primary goals is to have a vision that can be communicated down the chain. And as demonstrated by Ito-Yokado, he clearly demonstrated his vision for the company by strategically expanding the companys operations into three different segment ranging from retail stores, restaurants chain and convenient stores. The result was a diversified portfolio with increase revenue. Another reason of success can be measured by the risk decision made by the companys leaders. With any o peration whether personal or professional, one must be willing to take isk, a risk in which the benefits preponderate the cost. Although the transformation from the Japanese market to the American was uncertain, because of factors such as consumer responsiveness, income, laws and relevant regulations, the decisions to invest into the various markets was worthwhile all because of proper planning and market response. The result was a successful Ito-Yokado group. 2. How did Ito-Yokados 7-Eleven Japan differ from Southlands 7-Eleven operations during the 1980s? While the two shares the same name the difference in their operations where obvious.The 7-Eleven in Japan compared to that of Southland differ in their operation that is, the door-to-door parcel delivery by Nippon, the convenience of bill pay for its customers, immediate growth opportunities through franchising. Because of the Large Store Restriction Act, the company was limited in growth to expand its physical location as a r esult, they resort to a smaller size stores strategically located in suburban areas. This venture was a deliberate marketing strategy used to penetrate the most vulnerable areas (suburbs) and fight off competitions brought on by the moms and pops stores.While the 7-Japan thrive in its operations of smaller stores with over 3000 items with point of sales register, their counterpart was not far behind. Under the leadership of John Thompson, the 7-Eleven in Southland were able to operate convenience stores with expanded products and function including low cost gasoline, and prepared food. Despite troubles with the oil industry, the 7-Eleven of Southland was able to form a partner with Oil Company such as CITGO and largest ice producer Reddy Ice. The result was a perfect union that brought about increase revenues.The union however, was short lived, as the company profit plummeted and had to file for bankruptcy. 3. What are Ito-Yokado and Z-Eleven Japan acquire for their $430 million? 4. What is your prognosis for Southland under Ito-Yokado ownership? Will Ito-Yokado be successful? Based on the article, it is apparent the management and leadership of Ito-Yokado Group are making the right decisions and stirring the company in the right direction. This is sheer through it increase franchising of stores and increase revenue. While the Group might be successful in Japan, areful consideration must be given to the market in the United States. As noted in the reading, the Southland Group under the leadership of John Thompson has had its share of misfortune mainly because of the oil industry. The fall in oil prices and volatility of the market resulted in loss of profit and buyout. While the venture of acquiring Southland Group, Ito-Yokado, must ensure it does it homework, with proper conceive of the US market. They must also, realize that the US market is one of capitalism with fierce competition.Unlike Japan, there are no such rules as the Large Store Restriction Ac t, as long as the proper conditions are met with the right paperwork, a business can expand as necessary. Another determining factor is the need for the product. yes the idea to expand is great However, is it cost effective or will the company be better off 5. Is 1to-Yokado a global company? Explain your answer. The answer whether Ito-Yokado was a global company would be yes based on the fact that the company operate in more than one country with various subsidiaries.Ito-Yokado, will be consider Multinational Corporation simply because the operation and production of its products and services were done both in the United States and Japan. In addition the trading of its stocks was offered on both the NYSE, and the Japanese trading markets, thereby influencing the economy of both nations. Another important factor is the fact that nowadays, globalization makes it almost impossible for businesses to operate locally. For this reason they must be willing and able to compete on a global st age with numerous