0 7-Eleven Loves Starbucks [Special] February 24, 2004

David and Tom Gardner recently interviewed7-Eleven(NYSE: SE)CEO Jim Keyes onThe Motley Fool Radio Showon NPR. This is the second of five parts. All previous parts are linked right over there. --->

TMF: Jim, the last time we spoke you mentioned that the growth of Starbucks(Nasdaq: SBUX) was actually good for 7-Eleven because it brought more awareness to your coffee. How big is your coffee business these days?

Keyes: You know, our coffee business has been growing. We have been enjoying double-digit growth for the past year. Our coffee business is one of the crown jewels of 7-Eleven because it represents a tremendous amount of loyalty and repeat business. The growth of the business has been stimulated by some of what Starbucks has done -- bringing flavors, bringing varieties to coffee. That encouraged us to do the same. Really, the increase in the past year has been due to our Cafe Combinations program offering different additives, different flavors, and different syrups to our coffees, which the customers responded quite well to.

TMF: Is it fair to say that 7-Eleven is glad that Starbucks showed up on this earth?

Keyes: We actually are. I have to tell you, most of my people wouldn't agree with that, but from the CEO's perspective, what Starbucks does is create a great foil for 7-Eleven because we have terrific value. All the time we have people show up on television with a 7-Eleven coffee in their hand and they love to contrast their value of a 7-Eleven coffee versus Starbucks. Same great quality, excellent quality, ability to customize it, do it yourself, make your own. We have a terrific value compared to the cost at Starbucks.

TMF: Speaking of drinks, Jim, your Extreme Gulp holds around 52 ounces of soda. According to our crack research staff, the human stomach can hold around 52 ounces of liquid as well. Jim, do you recommend drinking an Extreme Gulp on an empty stomach?

Keyes:(Laughing.) Only if you are close to a restroom facility. We are very proud of our 52-ouncer. In fact, we recommend when you are carrying it in your car, if it doesn't fit in your cup holder, we recommend strapping it in with your seatbelt.

TMF: Jim, I walk into 7-Eleven with my friend, let's say. He's got a PhD in consumer behavior retail economics. Let's say that again. Consumer behavior retail economics. What is one thing that this friend of mine could point out to me about a 7-Eleven store that I might not already know?

Keyes: Well, he might point out that 7-Eleven is the ideal model of retailing. I compare it to our team internally as a microcosm of what happens in lean markets, or Wal-Mart(NYSE: WMT), or any other form of retail around the world. But it is a miniature version of that, where decisions made today will have immediate response from the customers so that by tomorrow I know how the customer responded to the changes in product offerings, or changes in shelf space that I gave a product today. I will have that feedback tomorrow. So it is a great learning ground, a great training ground, if you will, for all forms of retail.

TMF: So make that real for me, Jim, maybe a specific example. One of the store's tricks of the trade. Let's say, for example, are doughnuts always on the left?

Keyes: You know, that is a great example because in the old days we had a very difficult time knowing how many doughnuts to order. Doughnuts sales will actually differ based on the weather: A rainy day, a sunny day, hot temperatures, cold temperatures... these will affect the sale of even a chocolate-glazed doughnut versus a regular-glazed doughnut or a cream-filled doughnut.

TMF: I guess that makes sense.

Keyes: It really does. It is interesting to see those changes. We could never stay in stock because it was always a guess. Now, when making tomorrow's order, we can look at 8-10 days of actual sales data and compare the weather pattern on those to the sales data. Then we actually forecast tomorrow's weather for the store. When the managers are making tomorrow's order, they are placing that order with knowledge about previous sales patterns and the external factors that could affect tomorrow's sales. It helps us stay in stock and it helps us reduce the write-offs. The bottom line is the shareholder benefits and the customer benefits from this use of technology.

TMF: So you are really just exploiting the local weathermen.

Keyes: (Laughing.) We have become very good partners with our friends the weathermen.

Tomorrow: ranking the competition -- Starbucks, Kroger(NYSE: KR), and Krispy Kreme(NYSE: KKD).

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