Over the past couple of weeks, I covered the 3 largest Japanese convenience chains. These articles can be found here:
Seven & i Holdings (OTCPK:SVNDY, OTCPK:SVNDF) – also here and here.
UNY FamilyMart (OTCPK:FYRTY, OTC:FYRTF)
The Japanese C-store industry
There is very little doubt that Seven & i Holdings dominates the c-store industry both domestically and globally. Aside from a few exceptions, the dynamics of the c-store industry in Japan is centered around Seven & is activities, which is then closely followed by and countered by UNY FamilyMart and Lawson.
Most notably, the recent industry focus has revolved around food. All three players are building product development capabilities and supply chain strength in order to capture the lions share of the ready-made lunch and dinner market. Oddly, this is one of the few exceptions I mentioned earlier. Seven & i was the last to rollout dining booths as a part of the standard store layout. That said, the hiccup did not stop the Seven & i train, as the company still boasts the highest average daily sales per store figures by a large margin:
Source: 7-Eleven, Family Mart, and Lawson IR (all in Japanese)
Japan can no longer afford to spend the shrinking pool of laborers on the convenience industry and there is an increased level of pressure for convenience stores to streamline operations. Organized by Japans Ministry of Economy, Trade, and Industry, the top 5 convenience store chains in Japan agreed to fully implement RFID tags on every product by 2025 in order to reduce labor intensity throughout the supply chain.
Global footprint and the General Merchandising Store (GMS) drag
Source: 7-Eleven, Family Mart, and Lawson websites (all in Japanese)
Again, Seven & i leads the pack by a large margin. Then we have Family Mart making an attempt to chase Seven & i. And then there is Lawson, which needs to figure out how to make existing global operations profitable before even talking about further expansion, though part of that may come from scaling operations.
While Seven & is convenience growth story is probably familiar to most western investors, the same cannot be said about the business performance drag caused by the companys GMS operations. Family Mart has a similar problem, and both companies are right-sizing their respective segments. Meanwhile, Lawson is a convenience pure-play with no proven track record for global c-store expansion.
Now for a dose of business performance, pricing, and balance sheet metrics:
Source: Financial Times (data obtained: 6/29/2017) + author calculations
While Seven & is c-store growth story is exciting to follow, it appears that some of the growth is already priced in. Additionally, the GMS exposure distorts the risk/reward profile of the company. Much of Seven & is c-store growth will be anchored down unless the company figures out how to generate meaningful returns out of its GMS segment.
The story is similar with UNY Family Mart, except that Family Marts c-store segment isnt an industry-leading performer. The company maintains the domestic store network scale to match Seven & i, but leaves investors with much to desire in terms of average daily store sales and global growth. Additionally, Family Marts balance sheet isnt particularly compelling and ROIC is the lowest of the three giants.
If we consider Lawsons share price, the story starts to sound compelling. No GMS exposure means no distorted risk/reward profile. Lawsons c-stores still have a long way to go before they become comparable to Seven & is industry-leading performance, but it is still outperforms Family Mart. The mostly domestic exposure combined with a money-losing global operation leaves much to be desired, but the only GMS-free convenience pure-play fairs well on various metrics, as seen above.
Wrapping it up
Of the three titans, my bet is on Lawson to lead in investment performance. I specifically say investment performance here because I still think Seven & is c-store strategy has a leg up over any of the other c-store operators. Income investors ought to consider putting a 3+% dividend yielding Lawson in their portfolio.
In contrast, I think UNY Family Mart is ill-positioned among the titans. The Family Mart branded-stores generate sub-par perfor mance and the Circle K + Sankus branded stores are even worse. The GMS exposure is no help either, and UNY Family Mart has the lowest ROIC to prove it.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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