In a dramatic effort to unlock shareholder value and ward off an aggressive $47 billion takeover bid from Canadian giant Alimentation Couche-Tard Inc., Seven & i Holdings Co., the Japanese retail conglomerate behind the global 7-Eleven chain, is reshaping its business strategy. By splitting off underperforming operations and focusing on its core 7-Eleven convenience stores, the company hopes to prove that it can deliver higher returns and fend off a foreign acquisition that would be the largest ever buyout of a Japanese firm by an overseas company.
The outcome of this strategy will determine whether Seven & i can regain its competitive edge or succumb to the pressures of a market hungry for leaner, more profitable operations. Much of its future success hinges on the retailer’s ability to improve its profit margins overseas, as well as its push to roll out new store formats in Japan, analysts say.
Seven & i’s restructuring plan, announced in mid-2024, involves splitting off its supermarket operations and around 30 other underperforming or “non-core” units into a newly created holding company, York Holdings. This separation will allow the company to streamline its focus on 7-Eleven, the global convenience store giant, and eventually rename itself 7-Eleven Corp., signifying its core business focus. The goal is to bring in strategic investors for York Holdings and eventually list it on the stock market, thus freeing up resources and generating value for shareholders.
This strategic shift signals a sharp departure from the company’s historically sprawling, diversified portfolio, which includes not just convenience stores but also supermarkets, clothing retailers, and restaurants. However, the conglomerate discount—the idea that the company’s vast operations have kept its overall valuation lower than if it were more focused—has long weighed on its share price.
By hiving off non-core businesses, Seven & i aims to finally unlock the value that has eluded the company for years. “It’s the only thing they can do,” said independent analyst Akihito Nakai, commenting on the company’s restructuring in light of Couche-Tard’s bid. The Canadian firm, which owns the Circle-K convenience store chain, raised its initial offer by 22% in September to around $47 billion, a move that has intensified pressure on Seven & i to act.
Seven & i has faced mounting pressure from shareholders, including prominent activist investors Artisan Partners and ValueAct Capital, who have publicly called for the company to shed what they described as unnecessary bloat and underperforming units. As a company employing 157,000 people worldwide, spanning numerous business segments, Seven & i’s operations have become cumbersome, with some areas dragging down the performance of the profitable 7-Eleven business.
For these activist shareholders, the supermarket business has been a particular point of contention. The performance of the company’s grocery stores in Japan has consistently underperformed, further strengthening the case for a spin-off. The restructuring, which includes setting near-term growth targets like an EBITDA earnings goal of 100 billion yen ($670 million) for York Holdings in the upcoming financial year, represents Seven & i’s clearest signal yet that it intends to focus on core strengths.
“This move underscores the urgency to unlock shareholder value,” wrote Jefferies analyst Shunsuke Kuriyama in a note following the restructuring announcement.
At the heart of Seven & i’s strategy is 7-Eleven, one of Japan’s most iconic retail brands. Known for its ubiquitous presence and reliable convenience offerings, 7-Eleven is a cultural touchstone in Japan, where its stores sell everything from fresh food and ready-to-eat meals to toiletries and clothing. The Japanese operations are highly profitable, with operating margins of 27%, far surpassing the 3.5% margins that its stores outside Japan achieve.
Of the approximately 85,000 7-Eleven stores worldwide, around 21,000 are located in Japan. The majority of these stores are franchises, and while the Japanese convenience store market is highly saturated, the format remains popular due to its wide product selection and efficient operations. However, even in its home market, 7-Eleven faces stiff competition from rivals like FamilyMart and Lawson, which have carved out strong positions in the Japanese convenience store landscape.
Recent data, however, has shown signs of a slowdown. Same-store sales at 7-Eleven Japan saw a slight decline in the six months leading up to September, suggesting that the company may not be immune to the broader challenges facing the convenience store sector. Furthermore, a Reuters report from September highlighted discontent among some 7-Eleven franchise owners, who cited increasing competition and dissatisfaction with the company’s strategic direction.
In response to the saturation of Japan’s convenience store market, Seven & i has begun exploring new growth avenues within its core business. One promising development is the expansion of mini-supermarkets, a format larger than typical convenience stores and geared towards offering a wider selection of fresh food.
Rival retail giant Aeon Co. has already seen success in this space, rolling out over 1,100 “My Basket” mini-supermarkets, primarily in urban areas with high demand from single and elderly shoppers. Aeon has even announced plans to double its My Basket stores in the coming years.
In February 2024, Seven & i launched its own mini-supermarket format under the name “SIP” as part of a broader effort to diversify its retail offerings. According to Michael Causton, an analyst at JapanConsuming, the SIP stores are still in the testing phase, but early results are promising. “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,” Causton said, adding that the company is preparing for a rapid rollout once the model proves viable.
The success of the SIP model could provide a vital lifeline to Seven & i’s Japanese operations, especially if it manages to differentiate itself from competitors like Aeon and Lawson. However, Causton and other analysts caution that the company must retain some level of cooperation with the supermarket business, even after it spins it off into York Holdings, to ensure the seamless execution of the SIP strategy. “If they completely separate themselves from the supermarkets, they will not be able to implement the new strategy,” warned Nakai.
While 7-Eleven’s domestic operations are relatively stable, its international business, particularly in the United States, faces steeper challenges. Seven & i’s recent decision to lower its full-year profit forecast by 25% underscores the difficulties it faces abroad. Rising costs, a slowing U.S. economy, and increasing competition in the convenience store sector have all contributed to the downgrade.
Morningstar analyst Lorraine Tan noted that Seven & i has struggled to reduce costs fast enough to maintain profit margins in its overseas markets, particularly in the U.S., where inflationary pressures and shifting consumer behavior have squeezed profits. The company is also contending with what Tan called “a more challenging environment with customers downgrading purchases,” meaning that consumers are opting for cheaper products or making fewer visits to convenience stores.
To address these challenges, Seven & i has announced the closure of 444 underperforming stores outside Japan, part of a broader effort to streamline operations and refocus on core markets. The company is also working to expand its fresh food offerings in the U.S., hoping to replicate the success of its Japanese stores, which have built a reputation for high-quality, ready-to-eat meals and fresh produce.
Despite these efforts, analysts caution that turning around the international business will not happen overnight. Seven & i is targeting a return on invested capital (ROIC) of 10% by the 2030 financial year, up from 6.5% in 2023, but many believe the road to achieving this target will be long and challenging. “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,” Causton remarked.
Seven & i’s restructuring plan is bold, but the company’s future remains uncertain. With a massive takeover bid from Couche-Tard looming and pressure from shareholders mounting, the company’s ability to execute its new strategy will be critical. Analysts and investors alike will be watching closely to see if Seven & i can deliver on its promises to streamline operations, boost margins, and fend off Couche-Tard’s advances.
The company’s ambitious store rollout plans in Japan and its efforts to improve profitability in international markets. Whether these moves will be enough to stave off the Canadian suitor, or if Seven & i will ultimately succumb to the pressures of the global retail industry, remains to be seen.
