Seven & I acquisition spree in bid to be first omnichannel conglomerate

Seven & I Holdings has a problem. In FY2012, Seven Eleven still accounted for 81% of the group’s net profits. It’s not surprising then that the group’s chairman, Toshifumi Suzuki, is keen to find new alternatives. This is the main thrust to four separate acquisitions announced in December, with the long-term goal of creating the first genuine omnichannel retailer, integrating physical stores with e-commerce. 

In the last six weeks, Seven & I spent some of its ¥1 trillion in cash reserves (up ¥300 billion in just two years) on four significant retail acquisitions. Its most recent purchase is 48.67% of Bals, acquired for ¥5 billion. Bals operates the 132 store FrancFranc home interior chain as well as a variety of smaller interior chains. Seven & I says it sees synergies in helping expand Bals’ chains in its network of department stores and SCs, just as it has with Loft and Akachan Honpo. Sales at Bals have fallen in recent years, down 7% in 2010, 2.5% in 2011, and 1% last year to around ¥33 billion, but the new ownership will allow Bals to expand small, station-based FrancFranc stores. With Seven & I’s backing it sees an opportunity for more than 200 Francfranc stores in Japan alone.

Seven & I also announced it would acquire 49.9% of Barneys Japan this month for around ¥6 billion. Barneys Japan operates 10 Barneys New York stores in Japan (including five outlet stores) under license from the US firm. The other shareholder is Sumitomo Shoji which acquired its stake from Isetan in 2006. Barneys’ same store sales have picked up recently following the arrival of new CEO Shinichi Uetadani from Krispey Kreme. Uetadani has pushed Barneys further upmarket, refurbishing stores and introducing more exclusive brands, with sales up 5% to ¥19.5 billion in FY2012. Seven & I emphasises the potential to use the brand online as well as deepen the buying skills of its other retail interests. Barneys Japan is Seven & I’s most upscale brand to date and should help support its Sogo & Seibu department store operation, particularly in fashion planning and purchasing for private brands. There may also be an argument for Barneys taking over slices of Sogo & Seibu stores given its stronger high-end fashion positioning and there are plans for smaller, SC located Barneys stores as well as department store concessions. Sogo & Seibu has largely missed out on the department store revival in the last year, partly because of overly focusing on food over apparel, and is in need of an injection of merchandising talent. Slicing off sections of stores for the more alluring Barneys brand, such as at Seibu Shibuya, may help improve footfall, sales and margins too.

In the same month, Seven & I’s GMS subsidiary Ito-Yokado said it would acquire a 20% stake in Tenmaya Store in January for around ¥3 billion. Tenmaya Store, based in the city of Okayama, operates around 50 stores in Chugoku with sales of ¥80 billion. Of Seven & I’s 183 GMS stores, around 70% are located in eastern Japan with only two Ito-Yokado stores in Okayama and one in Hiroshima. The supermarket sector is consolidating rapidly, and Tenmaya itself will pull out of Shikoku this year in the face of stiff competition from Fuji and Aeon. Seven & I took a significant stake in Daiichi in Hokkaido last August, and this move into the west of Japan has  the same aim of keeping pace.sion

Seven & I’s biggest new acquisition, however, is the purchase of Nissen Holdings. It will pay ¥12.6 billion initially for UCC’s 30.1% stake, rising to ¥17.7 billion for a targeted 50.74% share, making Nissen a subsidiary and adding ¥176 billion in sales. Nissen has faced significant problems in its core business, with sales falling 12.6% between January and November 2013 due to competition from dedicated e-commerce businesses. Last year it posted a net loss of ¥2.7 billion. It is hoped Seven & I’s funds and power in the market will help revive sales. Nissen and Seven & I have overlapping board members and a long standing relationship whereby orders through Nissen catalogues can be picked up at Seven Eleven, and Nissen catalogues are also available in the convenience store. The tender offer, made at a 30% premium, will be completed by 22 January and subsidiary company Seven & I Net Media is managing the deal.

The real value of Nissen is in providing the product sourcing, planning and direct marketing skills to marry with Seven & I’s national reach. Nissen has a database of 32 million customers (old and new) of which 12 million are registered at its online store. Nissen has also been successful in building mobile commerce stores especially for the younger market.

One of the biggest threats to Nissen’s business, apart from specialty chains, has been e-commerce portals that offer levels of choice and price that traditional direct marketing firms struggle to match. While more than 60% of Nissen orders are now handled online, its operations are still constricted by its dependence on the catalogue schedule, which requires product planning and selection as much as a year ahead of catalogue distribution. Incorporation within Seven & I will make it easier to overhaul the business and make a new role for itself as the e-commerce operations hub for the Seven & I group. Meanwhile adding in prominent lifestyle brands like Barneys and FrancFranc should in theory help build the allure of Seven & I’s e-commerce portal.

M&A reduces dependence on Seven Eleven

What is clear from these acquisitions is Seven & I’s determination to solve two problems. First is its dependence on the Seven Eleven chain for 80% of its profits, a danger given the saturation in the convenience store sector and threat of price competition. Its GMS and department store chains are very low margin and may never improve significantly, but adding specialty chains and skills could help raise margins and certainly allows more options for space control in the group’s growing chain of Ario and Seven Town shopping centres. Buying lifestyle and fashion businesses immediately introduces higher margin business segments to reduce the dependence on Seven Eleven.

In addition Seven & I is looking to the future, in particular wanting to successfully integrate physical and online retailing; genuine ‘omnichannel’ retailing. In a recent interview 81 year old Chairman Toshifumi Suzuki said that he had been “talking for a while inside the company about integrating the real (bricks and mortar) side with the Internet, but nobody was taking it seriously,” so he dispatched 50 heads of group companies to the US to listen and learn about how this could be done, particularly Macy’s success in integrating stores and online sales. The group has a new target of ¥1 trillion in online sales by 2020, up from just ¥100 billion last year, and by 2018 hopes to have more than 3 million products available for sale online, with purchases from all group stores combined into one shipment. It will spend ¥100 billion on a new system to handle databases and transactions, and make inventory at all stores transparent online, allowing seamless shopping on- or offline. By 2014 it already expects to have a unified e-commerce platform with a single ID for all group purchases.

Solving the ‘last ONE mile’ problem

In addition Seven & I says its research in both the US and Japan shows that the so-called ‘last one mile’ problem has yet to be solved – specifically the issue of efficiently getting deliveries into customers hands.

Seven & I hopes to solve this by making Seven Eleven’s 17,000 stores (projected to reach 20,000 shortly) into pick up points for customers for its own brands and also third parties. In theory this should also make it possible to shorten lead times given the highly efficient hub and spoke DC and truck network Seven & I already has in place, raising the possibility of a local rival finally emerging to compete with Amazon on delivery. The move will have the added benefit of bringing more, and more diverse, traffic to Seven Eleven stores, although with relatively little investment it will also be able to add home delivery too, as it is already doing to serve the senior market. Seven Eleven stores in the US are already much more advanced in offering pick up services, even including lockers for customers of Amazon, yet within Japan, Amazon partners with Lawson and Familymart.

This may take time, but if any Japanese retailer can rival Amazon in logistics-based customer service it is Seven Eleven. The primary USPs for a general merchandise e-commerce business are easy search, price and fulfilment (see Page 8). Price competition is hazardous, as is product search, but the expense and complexity of logistics makes competing in this arena a major barrier – just ask Rakuten which is now scrambling to catch up with Amazon. Seven & I already has much of the infrastructure in place.

Nissen’s skills in direct marketing are key in this new bid for leadership in omnichannel retailing. Although Seven & I is loathe to be seen as acquisitive, it will be looking to make more purchases in the next 12 months, aiming to beef up its skills and reach in e-commerce. It will also add more specialty retailers and brands to raise its profile and margins – and has plenty of cash to pay for them. With e-commerce sales growing by 13% in 2013 to ¥11.5 trillion according to Nomura, rising to ¥20.8 trillion in 2018 (see side bar), online sales could provide a major new source of growth for Seven & I, and at least begin to reduce dependence on Seven Eleven for profits. It also means that while physical saturation is being reached for convenience stores in terms of store numbers, their potential as pickup points, and for a myriad of other services, is nowhere near being reached.