The Retail Story Nobody Discusses
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Convenience stores are one of the few areas of retail rarely discussed in the US financial media. It is a shame because investors may be missing out on one of the next great investment stories. A company in this space that is very quietly becoming one of the world’s largest retailers of any type is Seven & i Holdings Co. (NASDAQOTH: SVNDY), a giant in Japanese retail. Seven & I Holdings’ main claim to fame is that it is the parent company of the largest convenience store brand in the world: 7-Eleven.
The business model of convenience stores, driven by the sales of groceries, gasoline, alcohol, tobacco, lottery tickets, prepared food, coffee and soft drinks, is one of the many reasons that make 7-Eleven and others such a great story. Convenience stores are stable businesses selling the type of products that are unlikely to be negatively affected by the rise of Amazon.com (NASDAQ: AMZN) and other online retailers. And while online retailers can boast about next-day delivery, many convenience stores are generally open 24 hours a day, 7 days a week, 365 days a year and are located wherever you are located. And as I will discuss later in this article, innovations made by 7-Eleven have enabled the company to actually benefit alongside Amazon and other online retailers.
More than any other country on the planet, Japan has embraced the convenience store concept whole-heartedly. 14,231 of 7-Eleven's 47,289 worldwide stores are located in Japan. This numbers looks to increase even further as the company pushes into areas of the country they still have no presence in. Earlier this year, Seven & i Holdings began the process of expanding into the 8 Japanese prefectures (the equivalent of states) which they currently have zero stores.
A large reason for Japan’s embrace of the convenience store concept has been demographic changes that have been taking place in Japan. Increasingly busy lives are leading to an increasing annoyance toward traditional retailers, which have caused a decline in many other types of retail stores in Japan. Over the past few decades, many small and medium sized retail stores in Japan have declined in store number and sales. The same can be said recently of larger retail stores in Japan as well. Not convenience stores though. This negative trend among other retailers has been a positive for 7-Eleven in Japan; the rise of the importance of the ‘close by’ convenience stores in the daily lives of the average Japanese person. And very recently, this trend has accelerated, with a sharp increase in convenience store sales starting in 2008, coinciding with a sharp decrease in department store sales.
Internationally (United States)
Headquartered in Texas, 7-Eleven, Inc. (SEI) is the wholly-owned international arm of Seven-Eleven Japan. This division is responsible for all of 7-Eleven’s activities outside of Japan. One of SEI’s main focuses is continued growth in the United States. Readers in certain parts of the country might assume that 7-Eleven stores are ubiquitous across the entire nation, but that is not the case. 7-Eleven in the United States is still very much a regional story. While the Northeast and West Coast (and certain states in between) have a large number of 7-Eleven stores, much of the Southeast and Midwest states are without a single 7-Eleven store. As of December 2001, there are 17 states with zero 7-Eleven stores (and many more states with next to none).
The rest of the United States is open for sustainable expansion for years to come. SEI intends to achieve expansion through a series of M&A transactions, organic new store openings and the continued conversion of existing company-operated stores into franchise-operated stores. In Japan, three companies make up 73.9% of the entire convenience store market (with 7-Eleven occupying the largest amount, 36.5%, of the Japanese market). The United States is an entirely different story however. With the exception of 7-Eleven, the US convenience store market is made up of numerous small convenience store operators under many different regional brands. Small operators and regional brands with nowhere near the size and scale of the much larger 7-Eleven. These regional markets comprised of many small or independent operators leave the country’s convenience stores ripe for opportunistic acquisitions on the cheap, allowing 7-Eleven to quickly and easily expand into regions it currently has little-to-no presence. Just this year, SEI announced 5 separate acquisitions of 344 convenience stores in 8 states (3 states that previously had zero 7-Eleven stores).
People might not usually associate convenience stores with the word ‘innovative’, but Seven & i Holdings and 7-Eleven can be accurately described as just that. 7-Eleven has been able to take advantage of changes in worldwide retail, using its size, scale and innovative approaches to prosper. And where other brick and mortar retailers have struggled with the rise of Amazon and online retail, 7-Eleven has been able to profit alongside of these online retailers.
Not to be outdone online, Seven & i Holdings operates a number of popular online shopping destinations in Japan. 7 Net Shopping is one such destination, an online shopping website selling a wide range of product offerings similar to what you would find on Amazon. Another site is 7-Eleven Net, an online liquor store selling many popular brands of liquor, wine, beer, coffee and other food items.
7-Eleven has also leveraged the popularity of its stores in Japan to offer its own line of products. Under its Seven Premium and Seven Gold brands, 7-Eleven offers its products in categories such as packaged food, bottled drinks, wine, cosmetics, personal care products, household cleaners, bedding, kitchen items and stationary products. Late last month the company also announced the expansion of its product branding effort to include Seven Premium clothing and fashion items. These products are sold in-store, as well as online at 7 Net Shopping and 7-Eleven Net (typically priced lower than similar competing products on the same shelf).
7-Eleven has also become an innovator in the retail banking space. Operating in the over 14,000 Japanese 7-Elevens across Japan (as well as online) is 7-Eleven’s own independent bank, Seven Bank. A teller-less bank, Seven Bank operates 24-hours a day (every day of the year, including national holidays) through 7-Eleven’s network of Seven Bank ATM machines. Seven Bank customers can make cash withdrawals, cash deposits, bank transfers, request loans and send international money transfers conveniently and quickly though easy to use Seven Bank ATM machines. Seven Bank is so convenient that it is now my primary bank here in Japan, which has me personally shopping at 7-Eleven much more often.
With the success of this banking strategy in Japan, Seven & i Holdings could possibly be in the very early stages of a similar strategy for the US market. Today in Japan (September 7), Seven Bank announced the acquisition of ATM operator Financial Consulting & Trading International (Seven Bank's first overseas purchase). The acquisition will give Seven Bank a network of 2,500 ATMs throughout the United States.
7-Eleven and Amazon.com
Unlike many brick and mortar retailers, 7-Eleven has found ways to benefit alongside the rise of Amazon and other online retailers. In an effort to increase the convenience of shipping online orders, 7-Eleven in Japan has become a shipping hub for online retailing. Instead of ordering a product from Amazon Japan and waiting around all day for it to be delivered, you can easily choose to have Amazon deliver that package to your nearest 7-Eleven location (and in Japan with over 14,000 stores, the nearest location is often just a short walk from your apartment, office or right next to your local train station).
And to make online shopping even more convenient, 7-Eleven has effectively become a payment processor for Amazon and other online retailers. As an alternative to paying with a credit card, online purchases can be done in cash, paying for your Amazon purchase at a 7-Eleven cash register as if you were buying a bottle of Seven Premium branded red wine. This is a cash payment transaction that 7-Eleven, as the payment processor, receives a small portion of from Amazon. And while you are paying for and picking up your Amazon package, you are likely to make other in-store purchases as well. Walk in to pick up an Apple MacBook ordered from Amazon and walk out with a bottle that bottle of Seven Premium wine (and maybe some Seven Premium cashews or a box of Seven Premium laundry detergent while you are at it).
Instead of being a disruptive competitor to 7-Eleven’s business, Amazon has become one more reason for Japanese shoppers to make 7-Eleven the center of their daily shopping experience. This is now happening in the United States and Europe as well. Announced last year, Amazon Locker is an initiative by Amazon to make online shopping more convenient for customers. Similar to what I just described in Japan, Amazon is partnering with convenience stores, grocery stores and drug stores in the United States and Europe to offer the ability for customers to choose their nearest 24/7 retailers as their online order pick-up location. Thus far these Amazon Lockers have arrived in stores in Washington DC, New York, Seattle, San Francisco and London, with more to obviously come later, making 7-Eleven and convenience store retailers increasingly relevant in the online shopping marketplace.
Although 7-Eleven is rarely discussed in the US financial media, this surprisingly innovative company is quietly becoming the next possible massive growth story in retail. For those willing to look outside the NYSE or NASDAQ, the Tokyo Stock Exchange-traded Seven & i Holdings Co. could provide you with a fantastic investment opportunity.
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