Seven-Eleven

Ichiro Suzuki

On August 19, management of Japan’s Seven & i Holdings, which runs Seven-Eleven convenience store chain around the world, announced that the company has received a takeover offer from Canada’s convenient store operator Alimentation Couche-Tard. While size of the offer is unknown, shares of Seven & i, in response to the offer, rose 22% lifting its equity market capitalization to $5.6 trillion yen ($39 billion). If it goes through, this would be the largest foreign takeover of a Japanese company.

Convenience store Seven-Eleven has its origin in the U.S. In the 1970s, Ito Yokodo, supermarket/ general merchandiser operator in Tokyo, bought the rights for the convenience store in Japan and started Seven-Eleven Japan as a subsidiary. Over the next few decades, Seven Eleven became everything stores in limited space, selling not only food and beverages but also stationery goods, Amazon gift cards, socks, pantyhose, etc. at premium prices. Taxes and utility bills can be paid there, too. The only thing that they don’t sell is gasoline, which Seven-Eleven in the U.S. does as its mainline of business. The convenience store chain became a hallmark of efficiency through the system that controls inventory and logistics operations. 

Over the decades, Seven-Eleven outgrew its parent Ito Yokado, which began to struggle toward the end of the 20th century, when consumers stopped buying cloths at general merchandisers. By the time Ito Yokado was peaking out, Seven Eleven in the U.S. ran into a crisis in the late 1980s. In 1991, Seven Eleven Japan bought Southland Corp that operated the convenience store chain in the U.S. In 2005, Seven & i Holdings was formed to bring Ito Yokado, Seven-Eleven Japan and other retail operations under one umbrella. The holding company also absorbed Seibu department stores that was originally outside the group.

Soon, foreign activists began to demand Seven & i management for more aggressive actions on the underperforming Ito Yokado and Seibu. To be specific, they wanted Ito Yokado divested or shut down. Founder Masatoshi Ito started his business by selling quality shirts at reasonable prices in Tokyo. The business then developed into general merchandiser Ito Yokado that sells not only food but also clothes and other life style-related goods. This origin has made Seven & i management hesitant to close Ito Yokado stores when it faced activist investors’ pressure. While the food department’s performance was acceptable, it was cloths that dragged Ito Yokado. Management, however, always hoped there might be a way for the struggling business to survive somehow. Consumers came to think that buying shirts at supermarkets uncool even if they were good value for money. While Seven & i closed Ito Yokado step by step over the years, their action was always a step behind what the market wanted. 

CEO Ryuichi Isaka joined Seven Eleven Japan in 1980 straight out of college and has spent his entire career at the company. This might have made him especially loyal to the company and the founding family. He doesn’t seem like a right person to axe the underperforming business that was deeply associated with the founding family. This is a negative side of lifetime employment. Management is very attached to the company. Even worse, founder’s son Junro Ito is No.2 man as executive Vice President, and is heading the supermarket division. Mr. Isaka may also be beholden to his predecessor who built Seven Eleven to what it is today. Former CEO Toshifumi Suzuki built Japan’s unique convenient store operation from scratch when Ito Yokado ventured into Seven Eleven over half a century ago. Long-time former CEO and founder Ito were allies for decades and Mr. Suzuki of course didn’t want axe the struggling supermarket/ general merchandisers. 

A week before a takeover offer on Seven & i, Starbucks Corp stunned the market announcing an appointment of new CEO to replace Laxman Narasimahn, under whom the company has been struggling. The market hailed to the appointment of Brian Niccol of Chipotle Mexican Grill, sending Starbucks shares over 20% higher, and adding $20 billion in equity market capitalization. Ouster of CEO after only 14 months on the job was engineered by the board of directors. Independent board members, in particular, led the action, probably in concert with Starbucks founder Howard Schultz who was dissatisfied with Mr. Narasimahn.

The takeover offer has been sent to Seven & i’s outside directors for a renview. Nine out of fifteen board members of the company are non executive independent outsiders. Foreigners represent four of nine non executive directors. On the surface, this group doesn’t look like a typical sheepish board not uncommon for Corporate Japan. However, Seven & i’s  outside directors haven’t stood up against the management so far, it seems. The boards’ showing of their teeth to the management is the next step required for Japan’s enhanced corporate governance. Cosmetic changes have been made to make the board look independent of the management. While this is one thing, it is entirely other thing if the board can deliver messages that CEO doesn’t want to hear. Couche-Tard’s offer on Scven & i is considered as a long shot, at present. The board, however, is required to act to enhance shareholders’ value this time around, one thing they haven’t pursued aggressively. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.