Anyone who’s stepped into a 7-Eleven in Japan to grab a quick snack or withdraw cash from the ATM will understand why Alimentation Couche-Tard would want to pay billions to acquire the business. It’s clean, service is efficient and the food is good.
Like cars, electronics and rail travel, the convenience-store chain is a western invention that the Japanese have refined to near-perfection. After bringing the concept to the island nation, the stores have transformed Seven & i Holdings Co. into a JPY5 trillion ($45 billion) global retailer.
Circle K owner Couche-Tard, a smaller rival in Canada with humble beginnings, is betting that it can take the business further, confirming earlier this week that it made a preliminary proposal to buy out Seven & i. Although details are still scant, such as the price, financing or structure of any potential deal, the approach follows attempts by activist investor ValueAct Capital Management LP to focus Seven & i’s management on global expansion of the 7-Eleven concept.
Successfully bringing the standards and quality of Japanese convenience stores — FamilyMart and Lawson are the other major national franchises — to North America could breathe new life into the small-store shopping experience.
“I want the stores to be operated by a Japanese company as they reflect our taste and needs in their products, at an affordable price,” said Kirina, a woman in her 50s who was shopping at a 7-Eleven store in Tokyo’s Asakusa area. “But considering globalisation, a buyout might be right because Japanese companies need to become financially stronger and more international.”
Ryuichi Isaka, Seven & i’s CEO, understands this only too well. He has spent more than US$25 billion ($32.61 billion) during the past few years to expand his convenience store empire outside Japan, where the population is shrinking and the market is saturated.
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The CEO orchestrated the acquisition of Speedway and Sunoco gasoline-station networks in North America, adding to 7-Eleven outlets that have already taken root across Asia. In total, Seven & i operates 85,000 convenience stores, gasoline stations and retail outlets.
In contrast, Couche-Tard has about 16,700 stores. Yet, it enjoys a bigger valuation of about US$58.5 billion, underscoring the lingering concerns that Isaka’s moves have barely scratched the surface.
The buyout offer has “highlighted Seven & i’s significant undervaluation versus global peers”, said Mark Chadwick, an analyst who publishes on Smartkarma.
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“There could be a number of potential strategies at play,” he said, such as the Canadian company taking full control, non-core asset sales, or even a Japanese partner coming to help relist 7-Eleven as an independent entity.
Seven & i grew from small beginnings, tracing its origins to the small family-owned Yokado Clothing Store that first opened in Tokyo in 1920. The retailer, then known as Ito-Yokado, expanded rapidly during Japan’s rapid post-war reconstruction.
In 1974, it brought the US-based casual restaurant chain Denny’s to the country. It was during a visit to the US to negotiate that deal that a young executive at the Japanese company discovered 7-Eleven and struck a deal with Texas-based Southland, then-owner of the chain, to open the first outlet in Japan in the same year.
The company took the concept to new heights in Japan, becoming a retail behemoth along the way with assets ranging from department stores to restaurants and a banking network. The convenience store is now the locus of every Japanese neighborhood, an institution where you can not just buy a meal, but also pay your bills, send packages and access municipal services 24 hours a day, seven days a week.
7-Elevens have made the same mark in other parts of Asia like Hong Kong and Taiwan, where stores are key fronts for public services and have become known for staying open through typhoons and earthquakes.
Under pressure from Value Act, Isaka has been unloading some of the company’s under-performing legacy businesses: last year, it finalised the sale of the Sogo & Seibu department store chain to Fortress Investment Group at an enterprise value of about JPY220 billion. Earlier this year, the company said it is considering a listing of Ito-Yokado, the original core business, and eventually splitting it off.
The CEO is also squarely focused on expansion in Europe and the US, telling Bloomberg in an interview earlier this year that 7-Eleven’s expertise in making cheap, high-quality food can help transform Speedway and Sunoco gas-stations into a new retail experience.
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The goal is to move away from selling gasoline and cigarettes — arguably industries facing a long-term decline — and draw people in the same way as Japan’s convenience stores.
“The key to this change is fresh food,” Isaka said in an interview. “We are in an industry that must continue to adapt to change in order to grow.”
Despite this burst of activity by Japanese standards, Isaka appears to still be moving too slowly for some investors who may see Couche-Tard’s offer as a fast way to realse 7-Eleven’s value.
A merger of the two companies’ operations would create a chain of more than 100,000 convenience stores across the globe, by far the world’s biggest and most sprawling.
Hurdles for any deal, which include national political sentiment in Japan and antitrust regulators in the US, are substantial.
Yet even ordinary Japanese consumers can’t deny the pull of global domination.
“They have an uniquely Japanese hospitality regarding their service, so I’m worried that might change,” said Kita, a developer in her 20s, as she bought a onigiri rice ball and a small salad at a store near Tokyo Station. “But 7-Eleven shouldn’t stay in Japan and should expand overseas.”
