This article first appeared in The Edge Malaysia Weekly on August 26, 2024 - September 1, 2024

WHO hasn’t had a Slurpee? Or, for that matter, an Icee? The two popular signature carbonated slushies are sold in convenience stores around the world. First introduced in the early 1960s, Icee was the original slushy. The Icee Company licensed its slushy to Southland Ice Co, a Texas-based ice seller and distributor, a 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, and flavours like strawberry and cherry in Japan or durian and mango in Thailand.

On Aug 11, Alimentation Couche-Tard Inc, a giant retailer based in the outskirts of Montreal, Canada, launched a takeover of Tokyo-based Seven & i Holdings Co Ltd, the owner of 7-Eleven compact stores that are open 24/7 and sell over 2,000 different items including prepared and ready-to-eat food items, groceries, over-the-counter medicines, ice, milk, packaged beverages and confectionery as well as tobacco products. Cigarettes and lottery tickets are among the bestselling items at convenience stores worldwide. 

There are 86,000 or so 7-Elevens around the world, 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 No 2 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 that has been growing around 6% annually in recent years. San Francisco-based Grand View Research estimates that convenience stores around the world generated US$2.2 trillion in 2022. It forecasts the convenience store market could grow to over US$3.12 trillion by 2028. 

Globally, convenience retailing is a highly fragmented business, with family-owned stores that are open from early morning to late evenings 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 38%. 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 conbini by the Japanese, are ubiquitous and essential to daily life in the country. Densely populated urban Japan is seen as the natural home of compact, quick-stop retailing. You can buy anything from a conbini — concert tickets, household goods or even collect your delivery package. The Japanese live in small homes, work long hours in offices and spend a lot of 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 or dorayaki, pancake-like sweet cakes with filling, as well as a range of Japanese ice cream. There is is something for everyone at the conbini. 

In the late 1990s, Japanese supermarket operator Ito-Yokado, which was a franchisee for 7-Eleven in Japan and owned a 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 US-based 7-Eleven competitor that gave it an even bigger footprint in the US. Seven & i has, however, been trying to sell its loss-making 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.

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 (RM166.2 billion) bid for Seven & i. But the takeover is far from guaranteed. The Canadian convenience retailing giant has only made an initial confidential, non-binding and 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 where it might have too large a market share after the merger, to placate regulators. Kroger has made similar concessions, which haven’t been enough to satisfy FTC’s concerns. 

Some divesture might actually be beneficial to the combined entity that will emerge from the merger. RBC Capital in a recent research report noted there are 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/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 as well as 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. While France is hostile to foreign takeovers, Japan is encouraging its companies to seek partnerships with foreign firms. Couche-Tard’s bid for the 7-Eleven owner could be Japan’s’s biggest foreign takeover if successful. Couche-Tard is likely to sell or hive off 126 Ito-Yokado supermarkets and other non-convenience store assets and just keep 7-Eleven.

The yen has strengthened by over 10% in recent weeks after Bank of Japan raised interest rates. Analysts expect that the deal will likely be funded partly by cash and partly by 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. 

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 trade at 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 as well as shrinkflation, or retailers selling smaller portions in larger packaging while holding down prices. Its stock is up just 2% this year. Seven & i, meanwhile, has a market cap of US$34.5 billion. Its stock is trading at 16.5 times this year’s earnings or a discount to pure-play convenience store peers because it also owns a low-margin 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 margins of up to 50% to 60%. Fresh fruits sold in 7-Eleven are easily 40% more than what 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 hotel. The only place I could get anything — bottled water, sandwiches, apples — was the nearby 7-Eleven. I ended up spending a small fortune there. Here is the thing. The prepared food might be hardly edible but if the 7-Eleven around the corner is the only store open at night when you want to grab something, you will pay whatever they charge you. 

Convenience stores, like all other retail outlets these days, 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 or for that matter Walmart, or indeed even Costco, for how operational efficiency, software and the ability to manage a complex supply chain can drive margins and profits. 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 basically 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 Holdings Ltd (formerly Dairy Farm International), a subsidiary of Singapore-listed, Hong Kong-based Jardine Matheson Holdings Ltd, 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. In Thailand, CP All Public Co Ltd, a listed subsidiary of the giant agri-based group Charoen Pokphand Group Co Ltd, is the 7-Eleven franchisee. Finding well-run local master franchisees 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. Seven & i has also been experimenting with new store formats to boost profitability. Earlier this year, the 7-Eleven operator unveiled a new store in Tokyo’s Chiba prefecture with more than twice as many products as well as a physical footprint that is nearly double the size of a normal 7-Eleven. The new store needs to generate twice as much revenue as 7-Eleven generates from normal stores. Whether a larger range of goods would attract more customers away from supermarkets and other stores to conbinis remains to be seen. 

Assif Shameen is a technology and business writer based in North America 

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