By Maki Shiraki

TOKYO (Reuters) – As much as Jun Nagao doesn’t like the idea of foreigners scooping up Japanese companies, the former 7-Eleven franchise owner thinks a takeover would bring welcome change to the retail giant where he spent decades.

Nagao, who until last year owned a 7-Eleven convenience store in Gunma, north of Tokyo, says years of strategic missteps left parent Seven & i Holdings ripe for a $38.5 billion bid from Canada’s Alimentation Couche-Tard last month.

He is not alone in his criticism. Reuters also spoke to nine current 7-Eleven franchisees in Japan, almost all of whom voiced disapproval of Seven & i’s strategy and welcomed the proposed buyout by Circle-K owner Couche-Tard.

While Seven & i has rejected the bid, Couche-Tard has said it remains interested. The deal would be the biggest-ever foreign acquisition of a Japanese company and would boost the Canadian retailer’s economies of scale.

The franchisees were almost unanimous in some of their complaints, including about the high-profile failure of a cashless payment system, 7pay. Many voiced concern about competition from rivals and said they struggled with rising costs as Japan exits deflation for the first time in decades.

“As a Japanese, I don’t think having companies bought out by foreign firms is good in principle,” said Nagao, who battled with headquarters for years until he agreed to part ways with the company. He was among a group of owners who lost a 2013 court fight to shorten mandatory 24-hour business hours because of tight staffing.

“The current management failed to create value… otherwise, this sort of thing wouldn’t have happened.”

Seven & i has been a market laggard. In the five years to mid-August, just before the bid was unveiled, its shares rose 60% including dividends while the benchmark Nikkei index more than doubled.

Japan and the U.S. account for around two-fifths of the 85,000 7-Eleven stores worldwide. The Japan business is smaller by sales, but highly profitable, with operating margins of 27% versus an average of 3.5% outside the country.

In Japan, 7-Eleven’s average daily sales per store exceed those of main competitors Lawson and FamilyMart, although sales at both rivals are growing.

Owners are key to Seven & i’s lucrative domestic convenience store business and some are also shareholders. Some of the owners’ comments to Reuters show issues previously raised by U.S. activist fund ValueAct Capital and other investors about 7pay and the need for a governance overhaul are shared by other stakeholders.

To be sure, the owners Reuters interviewed are not a comprehensive sample of the more than 21,000 franchised stores in Japan. Seven & i does not disclose the number of owners, and almost all of those who spoke to Reuters declined to be identified in order to speak openly.

In response to questions from Reuters, Seven & i said through support measures for 7-Eleven stores and communication with owners it was “constantly striving” towards sustainable growth of its stores and creating a “safe and secure management environment”.

It would continue to work closely with franchisees to grow together, it added.

‘WAKE-UP CALL’

By rejecting Couche-Tard’s bid as too low, Seven & i now has to think about “how they themselves can create value,” Tak Niinami, CEO of drinks company Suntory Holdings and the former head of 7-Eleven rival Lawson, said in an interview this month.

“The Couche-Tard proposal could be a wake-up call for Seven & i,” he said.

In the majority of franchise agreements in Japan, Seven & i arranges the real estate and the store construction and owners return between 56% and 76% of their profits to it as royalties.

Some owners say their royalties are not being put to good use.
The 7pay cashless payments service was shut down just three months after its July 2019 launch. It was hacked days after it went live and at least 38 million yen ($270,000) was later confirmed missing from some 800 user accounts.

Last year, Seven & i shut down its eight-year-old online shopping site omni7 after it failed to gain traction.

“I think they could make another big mistake again,” one owner in the greater Tokyo area said.

According to an internal Seven & i annual survey of franchisees obtained by Reuters, for the last three years around 80% said they were either “somewhat satisfied”, “satisfied” or “extremely satisfied” with management overall.

Details from the anonymous survey have not been previously made public.

‘NO COMPLAINTS’

Shigeo Kasai, the only owner who agreed to be named, said he had no complaints about management or the three stores he operates in Tokushima prefecture, where he said sales were growing.

But he saw a potential benefit from foreign ownership, saying it could be a catalyst to fresh ideas and ways of doing things.

Japan’s declining population made it more difficult for convenience store operators to grow as they can in other markets like the U.S. That has likely weighed on owners, said Shun Tanaka, a senior analyst at SBI Securities.

Same-store sales at 7-Eleven in Japan were flat in the three months to May. In the last financial year they rose 3%.

One owner in the western Kansai region said the company ran a promotion focused on regional specialties for so long that customers tired of it. When the deal finally ended, there was nothing to replace it and generate consumer buzz.

An owner in the greater Tokyo area said no matter what happens with Couche-Tard, ownership will eventually change. Before the Canadian company made its approach, the owner had assumed some other retailing heavyweight could swoop in.

“Even if Couche-Tard’s takeover bid fails, I think another company will come along to buy it,” the owner said.

($1 = 141.5800 yen)