Who hasn’t had a Slurpee? Or, for that matter, an Icee? The two popular signature carbonated slushies are sold in convenience stores worldwide. First introduced in the early 1960s, Icee was the original slushy. The Icee Company licensed its slushy to Southland Ice Co, the Texas-based forerunner of the world’s largest convenience store chain, 7-Eleven. Slurpees and Icees are now customised for all sorts of tastes. There are zero sugar and non-fat Slurpees in America, as well as flavours like strawberry and cherry in Japan or durian and mango in Thailand.
On Aug 11, Alimentation Couche-Tard, a convenience retailer based in the outskirts of Montreal, Canada, launched a takeover of Tokyo-based Seven & i Holdings. Seven & i Holdings owns 7-Eleven compact stores open 24/7 and sells over 2,000 items, including prepared and ready-to-eat food, groceries, over-the-counter medicines, ice, milk, packaged beverages, confectionery and cigarettes. Cigarettes and lottery tickets are among the bestselling items at convenience stores worldwide.
There are 86,000 or so 7-Elevens worldwide, with over 23,000 in Japan alone. Owned by French Canadian entrepreneur Alain Bouchard, Couche-Tard (literally “night owl” in French slang) operates Circle K, the number two global convenience store chain and 7-Eleven’s top rival. Couche-Tard has grown aggressively over the past 20 years by buying out smaller convenience chains in the US and Canada.
Convenience stores are a huge business, growing around 6% annually in recent years. San Francisco-based Grand View Research estimates convenience retailers worldwide generated US$2.2 trillion in 2022. It forecasts the convenience market could grow to over US$3.12 trillion ($4 trillion) by 2028.
Globally, convenience retailing is a highly fragmented business, with family-owned stores open from early morning to late evening dominating the space. In many developed markets, global chains have caught on. 7-Eleven has over 14% share of the US convenience store market, while Circle K has about 5%. Together, the two control nearly a fifth of convenience store sales in America. In Asia, where 7-Eleven has a dominant share in Japan, Thailand, Hong Kong and Malaysia, their combined market share would be closer to 34%. China and Vietnam are the fastest-growing markets in Asia for convenience stores. Although 7-Eleven has a presence in both markets, local chains are dominant.
Convenience stores, dubbed konbini by the Japanese, are ubiquitous and essential to daily life in the country. The densely populated urban Japan is the natural home of compact, quick-stop retailing. Twenty million Japanese, or 16% of the population, shop at 7-Eleven daily.
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You can buy anything at a konbini — concert tickets, groceries or even collect your delivery package. Most also have an ATM and a tiny toilet. The Japanese live in small homes, work long hours in offices and spend much time commuting from home to work. That makes convenience stores such as 7-Elevens, which are landmarks in office districts, train stations and housing areas, places where people frequent for on-the-go food like small sandwiches (sando), rice balls (onigiri), bento lunch boxes and dorayaki, two pancake-like sweet cakes stuffed with fillings, as well as a range of mochi ice creams. There is something for everyone at the konbini.
In the late 1990s, Japanese supermarket operator Ito-Yokado, a franchisee for 7-Eleven in Japan and owned a small, minority stake in the US convenience store giant, bought the whole firm and moved its global headquarters to Tokyo. In 2005, as part of a corporate restructuring, 7-Eleven became a key part of Seven & i Holdings, which included Ito-Yokado supermarkets. Over the years, the Japanese giant has doubled down on convenience stores.
Three years ago, it bought Speedway, a 7-Eleven competitor, which gave it an even bigger footprint in the US. Seven & i has, however, been trying to sell its non-performing supermarket business for years. Earlier this year, the company’s board reportedly green-lighted an initial public offering for the supermarket unit. Selling the supermarkets would turn the holding company into a pure 7-Eleven play.
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Takeover not guaranteed
Enter the Canadian owner of rival Circle K. “It is bold, it is measured and if successful, would be the culmination of a journey to become the largest convenience store operator in the world,” Irene Nattel, an analyst for RBC Capital in Montreal, says of Couche-Tard’s audacious US$38 billion bid for Seven & i. But the takeover is far from guaranteed. The Canadian convenience retailing giant has only made a confidential, non-binding, preliminary proposal to acquire the Japanese firm. Couche-Tard executives say they want to talk with the Japanese owners of 7-Eleven and hammer out an agreement that is good for shareholders of both companies. The Seven & i board wants to separate profitable 7-Eleven from its laggard supermarket assets.
Even if Couche-Tard and Seven & i Holdings reach an agreement, regulators will be a huge impediment in their quest to pool their resources. For nearly two years now, the US Federal Trade Commission (FTC) has been trying to block supermarket operator Kroger’s takeover of rival Albertson for US$25 billion. Analysts expect Couche-Tard to agree to sell convenience stores in some markets that might have too large a market share after the merger to appease regulators. Kroger has made similar concessions, which haven’t been enough to satisfy FTC’s concerns.
Some divestiture benefits the combined entity that will emerge from the merger. In a recent research report, RBC Capital noted clear overlaps in Circle K and 7-Eleven or Speedway locations across North America. RBC Capital estimates that 31% of Circle K stores have at least one 7-Eleven or Speedway store within a one-mile radius and that 19% of 7-Eleven and Speedway stores have at least one Circle K store within a one-mile radius.
Convenience stores have traditionally been linked to gas stations, as petrol pumps are called in North America. Both 7-Eleven and Couche-Tard run gas stations. The latter acquired gas stations and adjoining stores from oil companies that were retreating from the retail market. A merger with Couche-Tard will bring scale to 7-Eleven’s petrol retailing business.
Why does Couche-Tard want 7-Eleven? As one of the world’s biggest convenience store operators, it knows the business inside out. Three years ago, Couche-Tard tried to take over French supermarket market operator Carrefour, which also operates one of France’s largest convenience store chains, but its bid was blocked by the government of President Emmanuel Macron.
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While France is hostile to foreign takeovers, Japan encourages its companies to partner with foreign firms. If successful, Couche-Tard’s bid for 7-Eleven owner could be Japan’s biggest foreign takeover ever. To make the merger work, Couche-Tard is likely to sell or hive off 126 Ito-Yokado supermarkets and other assets in an IPO and keep 7-Elevens and Speedway stores.
It is a challenging time to go on a shopping spree in Japan. The yen has recently strengthened by over 10% after the Bank of Japan raised interest rates. Analysts expect the deal will likely be funded partly with cash and partly with Couche-Tard shares. Aside from becoming the owners of a profitable global convenience store giant, Japanese shareholders would get more shares in a new combined firm if the yen keeps rising. Right now, they own shares in a conglomerate that is weighed down by an unprofitable supermarket business.
Marriage made in heaven
In some ways, the merger between the two largest convenience store operators is like a marriage made in heaven. They both need each other to get a new tailwind of growth. Alimentation Couche-Tard has a market capitalisation of US$57 billion and its shares are around 19.4 times this year’s earnings. It is a fairly acquisitive company that has been buying up laggard convenience store businesses and hammering them into shape. Its stock has quintupled over the past decade. More recently, it has had to deal with supply chain issues, food price inflation, shrinkflation or retailers selling smaller portions in larger packaging while holding down prices. Its stock is up just 2% this year.
Seven & i Holdings, meanwhile, has a market cap of US$34.5 billion. Its stock is trading 16.5 times this year’s earnings or a discount to pure-play convenience store peers because it also owns a challenging supermarket business.
Supermarkets are a high-volume, low-margin business, while convenience stores have to die for margins for many products. Prepared foods like sandwiches or ramen can command up to 50% margins. Fresh fruits sold in 7-Eleven are easily 40% more than they cost in the supermarket across the street. I don’t normally use convenience stores because I am no fan of Slurpees or packaged junk food. Yet, on a recent trip to Michigan, I was stuck in a small Holiday Inn. The only place I could get anything — bottled water, sandwiches, apples — was the nearby 7-Eleven. The prepared food might be hardly edible, but if 7-Eleven is the only store open when you want to grab a drink or something to eat, you will pay whatever they charge you.
Like all other retail outlets, convenience stores are heavily driven by tech rather than just marketing and economies of scale. The key to successful retailing is managing an efficient supply chain and an operational infrastructure with the best available software. Look no further than Amazon.com, Walmart or Costco to see how operational efficiency, software and the ability to manage a complex supply chain can drive margins and profits. The software also helps improve inventory management so that stores don’t over-order and, at the same time, don’t run out of items that customers want. The only difference between Walmart and 7-Eleven is that while the giant retailer has both physical stores and e-commerce, convenience stores are small, compact bricks-and-mortar entities that rely only on foot traffic and their ability to stay open 24/7.
A larger global footprint will allow the combined 7-Eleven and Circle K to expand in fast-growing markets in Asia, the Middle East and Latin America, where the convenience store market is fragmented. Asian retailing giant DFI Retail Group D01 Holdings (formerly Dairy Farm International), a subsidiary of Singapore-listed, Hong Kong-based Jardine Matheson Holdings J36 , the owner of Cold Storage supermarkets and Guardian pharmacies, has the 7-Eleven franchise in Hong Kong, Macau, southern China and Singapore. In Malaysia, the 7-Eleven franchise is owned by Berjaya Group. CP All Public Co, a listed subsidiary of the giant agri-based Charoen Pokphand Group, is the 7-Eleven franchisee in Thailand. Finding reliable local master franchisees like DFI Group in fast-growing regions is often key for brands like McDonalds, Starbucks, Pizza Hut or 7-Eleven.
More stores in more countries is just one part of the strategy. 7-Eleven has been experimenting with new store formats to boost profitability. Earlier this year, it unveiled a new store in Tokyo’s Chiba prefecture with more than twice as many products and a physical footprint nearly double the size of a normal 7-Eleven. However, the new store needs to generate twice as much revenue as 7-Eleven generates from normal stores. The merger will help Couche-Tard find out whether a larger range of goods will help attract more customers away from supermarkets and other stores to its global collection of konbinis.
Assif Shameen is a technology and business writer based in North America
