Analysis: 7-Eleven's turnaround plan requires heavy lifting to stop Couche-Tard's $47 bln takeover
15/10/2024 05:31
*
Seven & i plans to split business to focus on core
convenience
stores
*
7-Eleven needs to bolster profit overseas, grow in
saturated
Japan, analysts say
*
Expanding mini supermarket format will be critical for
Japan
growth
*
7-Eleven plans to close stores, beef up fresh food
overseas
By Ritsuko Shimizu
TOKYO, Oct 15 (Reuters) - Japan's Seven & i Holdings
3382.T is betting it can boost value by hiving off
underperforming businesses and focusing on mainstay 7-Eleven
stores. The outcome of its strategy will determine whether it
can outmanoeuvre a $47 billion Canadian takeover bid.
Much depends on the retailer's ability to roll out a new
store format in Japan, and improve profit margins overseas,
analysts and industry insiders say.
Seven & i plans to split off its supermarket operation and
some 30 other "non-core" units into a holding company, York
Holdings. It will rename itself 7-Eleven Corp to emphasise its
new focus and aims to bring in strategic investors for York and
eventually list it.
The shake-up shows Seven & i's determination to ditch the
conglomerate discount that has weighed on its shares for years.
Poor performance at the supermarket business hasn't helped
either, making the Japanese company a ripe target for a takeover
bid from Alimentation Couche-Tard Inc ATD.TO , which owns
Circle-K.
The Canadian company announced a preliminary bid for Seven &
in August, and sources said last week it has since hiked its
offer by 22% to around $47 billion. If the deal goes ahead, it
would be the largest ever overseas buyout of a Japanese firm.
Given the pressure from Couche-Tard, Seven & i made an
"unavoidable decision," to split the business, said veteran
independent analyst Akihito Nakai.
"It's the only thing they can do," he said.
Seven & i has said it is "confident" it can unlock
shareholder value through a number of strategic actions and has
laid out near-term growth targets, including an EBITDA earnings
target of 100 billion yen ($670 million) in the next financial
year for the York unit.
Still, it's unclear how long shareholders will be willing to
wait. Shareholders Artisan Partners and ValueAct Capital have
previously called for Seven & i to shed what they said was
unnecessary bloat. The Japanese giant employs some 157,000
people worldwide across a business that spans clothing stores,
supermarkets and restaurants.
The change in portfolio strategy underscores Seven & i's
"urgency to unlock shareholder value," Jefferies analyst
Shunsuke Kuriyama said in a note.
In Japan, 7-Eleven stores have become a cultural touchstone,
known for a ready supply of fresh food and everything from
toothpaste to socks.
The Japanese stores are also highly profitable: the
operating margin is 27%, far above the 3.5% of 7-Eleven stores
outside of Japan.
Of 7-Eleven's 85,000 stores worldwide, some 21,000 are in
Japan, most of them franchises. The Japanese convenience store
market is also saturated: moreover, 7-Eleven faces stiff
competition from rivals FamilyMart and Lawson.
Same store sales decreased slightly in the six months to
September, compared to the previous year.
Reuters reported last month that some 7-Eleven owners are
dissatisfied with the company's current strategy, citing
concerns about competition from rivals, among other issues.
FAST ROLL-OUT
One area ripe for growth is mini-supermarkets, which are
bigger than convenience stores and stock more fresh food.
Rival Aeon 8267.T has rolled out more than 1,100 of its
"My Basket" stores, focusing on urban areas where there is
demand for the format from single and elderly shoppers. Aeon has
said it wants to double the number of My Basket stores.
7-Eleven introduced a mini-supermarket of its own, "SIP", in
February.
"The testing of the mini-supermarket SIP format is ongoing
and will eventually lead to the creation of a second domestic
growth division for the business," said analyst Michael Causton
of consultancy JapanConsuming.
"Test results are promising and once all set, it will roll
out fast," he said in a note on the Smartkarma investor research
platform.
The focus on SIP stores shows that Seven & i will need to
retain some kind of relationship with the supermarket business
that will be spun off into York, said veteran analyst Nakai.
"If they completely separate themselves from the
supermarkets, they will not be able to implement the new
strategy," he said. "Regardless of capital ties, they need to
continue a relationship of cooperation."
OVERSEAS BUSINESS
Fixing the bigger overseas 7-Eleven business may prove
tougher.
Seven & i cut it full-year profit forecast by a quarter last
week. That reflects "a more challenging environment with
customers downgrading purchases", Morningstar analyst Lorraine
Tan said in a note following the earnings.
Seven & i appears unable to cut costs fast enough to
mitigate the pressure on its margins, she said, adding that cost
cutting is central to plans to boost returns at the U.S.
convenience store operations.
So far, the company has announced plans to close some 444
underperforming stores overseas. It is also beefing up fresh
food offerings in the United States.
It is targeting a return on invested capital (ROIC), a
measure of profitability, of 10% by the 2030 financial year from
6.5% last year.
The question now is whether it can deliver soon enough for
investors, especially due to a perception that the firm is slow
to respond to calls for change.
Turning overseas convenience stores into higher margin
businesses like in Japan will take a lot of work, including on
merchandising, locations and marketing, as well as logistics,
said JapanConsuming's Causton.
"We might see some nice improvements in three years, but
five years is the minimum buy-in for the real gains to start
showing through," he said.
($1 = 149.2800 yen)
(Reporting by Ritsuko Shimizu; Writing by David Dolan
Editing by Shri Navaratnam)
((david.dolan@thomsonreuters.com; +81 3 4563 2708;))