Some 7-Eleven Owners in Japan Frustrated with Strategy Welcome Foreign Bid By Reuters

By Maki Shiraki

TOKYO – Jun Nagao, a former 7-Eleven franchise owner, has mixed feelings about foreign ownership of Japanese companies. Despite his reservations, he believes that a recent takeover bid for the retail giant by Canada’s Alimentation Couche-Tard could bring much-needed change to an organization he has been a part of for decades.

Nagao, who operated a 7-Eleven store in Gunma until last year, points to years of poor strategic decisions as a key reason why parent company Seven & i Holdings became a target for a $38.5 billion acquisition proposal from Couche-Tard last month.

He is not alone in his sentiments; feedback from nine current 7-Eleven franchisees in Japan indicates widespread dissatisfaction with Seven & i’s strategic direction. Most expressed support for the proposed buyout by Couche-Tard, the owner of Circle-K.

Even though Seven & i has dismissed the acquisition proposal, Couche-Tard has indicated continued interest in pursuing the deal, which would mark the largest foreign acquisition of a Japanese firm and enhance Couche-Tard’s economies of scale.

Franchisees have voiced similar complaints, particularly concerning the failure of the cashless payment service 7pay. Many also expressed concerns about increased competition and the rising costs that come as Japan transitions out of deflation after many years.

"As a Japanese, I don’t believe that foreign ownership is beneficial in principle," said Nagao, reflecting on his battles with the company’s headquarters before ultimately parting ways with 7-Eleven. He was part of a group that sought to amend mandatory 24-hour operating hours, only to lose a court case in 2013.

"The current management has struggled to create value… otherwise, this situation wouldn’t have arisen."

Seven & i has underperformed in the market. In the five years leading up to mid-August, just before the bid was announced, its stock rose 60% including dividends, while the benchmark index more than doubled.

Japan and the U.S. account for approximately two-fifths of the total 85,000 7-Eleven stores globally. While the Japanese market is smaller in sales, it is notably lucrative, boasting operating margins of 27%, compared to a mere 3.5% for the international market.

The average daily sales per 7-Eleven store in Japan outstrip those of main competitors Lawson and FamilyMart, although both rivals are experiencing sales growth.

Franchise owners are crucial to Seven & i’s profitable domestic convenience store operations. Many owners also hold shares in the company, and their concerns mirror those previously raised by U.S. activist fund ValueAct Capital regarding 7pay and the necessity for governance reforms.

It is essential to note that the franchisees interviewed do not represent all 21,000 franchises in Japan, and Seven & i does not disclose the total number of franchise owners. Most franchisees who spoke to the media chose to remain anonymous for candidness.

In response to inquiries, Seven & i stated that through various support measures for 7-Eleven stores and ongoing communication with franchise owners, it is "constantly striving" for sustainable growth and a "safe and secure management environment."

The company emphasized its commitment to collaborate closely with franchisees to foster mutual development.

A WAKE-UP CALL

By rejecting Couche-Tard’s bid as undervalued, Seven & i now faces the challenge of figuring out "how to create value independently," according to Tak Niinami, CEO of Suntory Holdings and former head of 7-Eleven competitor Lawson.

"The Couche-Tard proposal could serve as a wake-up call for Seven & i," he added.

In most franchise agreements in Japan, Seven & i manages real estate and store construction, while franchisee royalties range from 56% to 76% of their profits. Some owners have voiced concerns that these royalties are not being effectively utilized.

The 7pay service was abruptly shut down just three months after its launch in July 2019 after being hacked, resulting in the loss of at least 38 million yen from multiple user accounts. Additionally, last year, the company closed its eight-year-old online shopping platform omni7 after it failed to gain market traction.

"I worry they could repeat a significant mistake in the future," said one franchise owner located in the greater Tokyo area.

According to an internal survey from Seven & i, around 80% of franchisees reported being "somewhat satisfied," "satisfied," or "extremely satisfied" with overall management over the past three years. This information has not been disclosed publicly before.

NO COMPLAINTS

Shigeo Kasai, the only owner willing to be named, reported no issues with management or his three stores in Tokushima prefecture, where he has seen growing sales. He acknowledged, however, that foreign ownership could introduce new ideas and approaches to the business.

The decline in Japan’s population has made it increasingly challenging for convenience store operators to expand as effectively as in other markets, such as the U.S., a sentiment echoed by Shun Tanaka, a senior analyst at SBI Securities.

Same-store sales for 7-Eleven in Japan remained flat in the three months leading up to May, after a 3% rise in the last financial year. One owner from the Kansai region mentioned that an extended promotion focused on regional specialties had led to consumer fatigue, and once it concluded, there was no new strategy to sustain interest.

Another owner in greater Tokyo speculated that regardless of the outcome with Couche-Tard, a shift in ownership was inevitable. Before the approach by the Canadian company, this owner had predicted that another major retailer might step in.

"Even if the bid from Couche-Tard fails, I believe another company will eventually seek to acquire it," the owner remarked.