Eleven's turnaround plan requires hard work to stop the Couche-Tard takeover. world news

The shake-up shows Seven & I's determination to abandon the discounts that have weighed on its shares for years.

Poor performance in the supermarket industry hasn't helped either, making the Japanese company a ready target for a takeover bid from Alimentation Couche-Tard Inc., owner of Circle-K.

The Canadian company announced an initial bid for Seven and August, and sources said last week it raised its offer by 22 per cent to about $47 billion. If the deal goes through, it will be the largest overseas purchase of a Japanese company.

Given pressure from Couche-Tard, Seven and I have made the “inevitable decision” to split the company, veteran independent analyst Akihito Nakai said.

“It's the only thing they can do,” he said.

Seven&I said it has “confidence” it can unlock shareholder value through a series of strategic actions, and has set near-term growth targets, including an EBITDA revenue target of 100 billion yen ($670 million) in the next fiscal year. York unit.

However, it is unclear how long shareholders will be willing to wait. Shareholders Artisan Partners and ValueAct Capital previously called on Seven&I to remove what they say is unnecessary bloat. The Japanese giant employs about 157,000 people worldwide in its operations that include clothing stores, supermarkets and restaurants.

The portfolio strategy change highlights Seven & I's “urgent need to unlock shareholder value,” Jefferies analyst Shunsuke Kuriyama said in a note.

In Japan, 7-Eleven stores have become a cultural touchstone, famous for fresh food and ready-made supplies of everything from toothpaste to socks.

Japanese stores are also highly profitable: operating margin is 27 percent, higher than the 3.5 percent for 7-Eleven stores outside Japan.

About 21,000 of 7-Eleven's 85,000 stores worldwide are located in Japan, most of which are franchise stores. Japan's convenience store market is also saturated: Additionally, 7-Eleven faces stiff competition from rivals FamilyMart and Lawson.

Same-store sales fell slightly in the six months to September compared with a year earlier.

Last month, Reuters reported that some 7-Eleven owners are unhappy with the company's current strategy, citing concerns about competition from rivals, among other concerns.

Fast implementation

One area ripe for growth is mini-supermarkets, which offer larger and fresher food products than convenience stores.

Rival Aeon has built over 1,100 “My Cart” stores, focusing on urban areas where this format is in demand among both single and older customers. Aeon said it plans to double the number of My Basket stores.

In February, 7-Eleven launched its own mini supermarket “SIP”.

“The SIP format for mini supermarkets is currently being tested and will ultimately create a second internal growth segment for the company,” said Michael Coston, an analyst at consultancy Japan Consuming.

“The test results are promising and once everything is settled, the program will launch quickly,” he said in a note on investor research platform Smartkarma.

The focus on SIP stores shows that Seven and Ike will need to maintain some type of relationship with the supermarket that will operate in York, said veteran Nakai analyst.

“If they completely separate themselves from supermarkets, they won't be able to implement new strategies,” he said. “Regardless of capital ties, they should continue to maintain cooperative relations.”

foreign business

Fixing 7-Eleven's large overseas business may prove more difficult.

Last week, Seven&I cut its full-year profit forecast by a quarter. Morningstar analyst Lauren Tan said in a post-earnings note that it reflected “a more challenging environment and lower consumer purchases.”

Seven & I does not appear to be able to cut costs fast enough to ease the pressure on margins, it said, adding that cutting costs is crucial to plans to boost returns on its U.S. convenience store business.

So far, the company has announced plans to close approximately 444 unprofitable stores abroad. It is also expanding its fresh food offering in the US.

It targets a return on invested capital (ROIC), a measure of profitability, of 10 percent by fiscal 2030, up from 6.5 percent last year.

The question now is whether it will be able to deliver results to investors quickly enough, especially given the perception that the company has been slow to respond to calls for change.

Consuming Japan's Coston said there is a lot of work to be done to transform overseas convenience stores into high-margin businesses like Japan's, including merchandising, positioning and marketing, as well as logistics.

“We might see some improvement in three years, but five years is the minimum buy-in to start showing real gains,” he said.