Unknown Foreign Opportunities: Seven & i Holdings
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most companies with a $27 billion market capitalization are household names (or at the very least, well known to everyday investors). While Tokyo Stock Exchange-traded Seven & i Holdings (NASDAQOTH: SVNDY) (TYO: 3382) is a household name in its home country of Japan, it is practically unknown in America. Although the company itself is unknown on the American side of the Pacific Ocean, you are likely aware of the company’s biggest claim to fame: the global convenience store 7-Eleven.
With no major US publicly traded companies in the convenience store space, it is one of the only areas of retail that the U.S. financial media almost never discusses. This hurts US investors, because convenience store retail could potentially be a very profitable investment opportunity. Driven by the sales of fresh take-out food, groceries, alcoholic and non-alcoholic beverages, tobacco, lottery tickets, and gasoline, convenience stores are very stable operations selling daily repeat-purchase products. Convenience stores are part quick-service restaurant, part grocery store, part liquor store, and part gas station.
Of the roughly 48,000 worldwide 7-Eleven stores (more store locations than any other retailer), about 15,000 stores are located in Japan, Seven & i Holdings’ most mature and stable market. The United States, on the other hand, remains one of Seven & i Holdings’ major areas of future growth. Unlike Japan, 7-Eleven in the United States is still a regional story, with most of the company’s stores located on the East and West Coasts. And with the exception of 7-Eleven’s 8,000 US locations, the convenience-store space in the United States is comprised of tiny regional operators, with nowhere near the size and scale of 7-Eleven.
This situation leaves these small-time operators as cheap acquisition targets for the much larger 7-Eleven. And acquisitions they are, with 7-Eleven making nine separate purchases of 626 total stores in just the past 13-months. With many more organic new store openings to go along with those cheap acquisitions, 7-Eleven is using its dominant position in Japan to fund its quick expansion across the United States.
While many would consider 7-Eleven a pure retail operator, a good argument could be made that 7-Eleven is actually a real estate play. Following in the footsteps of one of the most successful retail companies in the world, 7-Eleven operates the majority of its stores under a franchise model made popular by McDonald’s (NYSE: MCD).
The majority of McDonald’s restaurant buildings, and the land underneath those buildings, are directly owned by the company. In addition to the royalty fees and advertising fees franchisees are required to pay (12% and 4%, respectively, for McDonald’s), franchisees are also required to pay McDonald’s monthly rent for the use of the building and land.
Those are fees and rents McDonald’s can predictably expect from its 27,000 worldwide franchisees for 20-years (the duration of a typical McDonald’s franchise agreement). And at the end of those 20 years of fees and rents, McDonald’s is able to renegotiate the contract under new favorable terms, and start the process all over again. This model, in part, is what has made McDonald’s such a worldwide success story.
7-Eleven is very similar in that respect. Seven & i Holdings owns the majority of the buildings and the land of its nearly 48,000 worldwide locations. The company enters into agreements with franchisees (typically 10 years for 7-Eleven), collects royalty fees, advertising fees, and rent payments, and starts the process all over again every decade. This is quite a profitable business model for those who can execute successfully on the strategy. And being ranked the fourth-best franchise in America by Entrepreneur Magazine (7-Eleven’s fourth straight year in the top five), Seven & i Holdings has proven itself to be quite adapt at executing on the strategy made famous by McDonald’s.
By limiting ourselves to just opportunities within our own borders, we are significantly limiting our opportunity for greater returns. Seven & I Holdings may offer just such a case. As one of the largest retailers in the world, yet largely an unknown company in America, a little extra effort and research into Seven & i Holdings could be well worth your time and money.
WhichStocksWork owns shares of Seven & i Holdings Co. The Motley Fool recommends Amazon.com and McDonald's. The Motley Fool owns shares of Amazon.com and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!