As predicted for some time, Itochu has brokered merger talks between Familymart and Circle K Sunkus (CKS). As if the possibility of a merger between the number three and number four convenience stores wasn’t tantalising enough, Familymart may go all the way and merge with Uny, CKS’s parent company. Negotiations are ongoing, but failing a major personality clash, some new alignment is almost certain to emerge simply because Itochu wants it, shaking up both convenience and GMS sectors in one fell swoop.
Late in February Familymart and Uny confirmed they were in talks to merge. Initial reports naturally focused on a deal between Familymart and Circle K Sunkus (CKS) convenience store chains, until it was realised that something even bigger was on the cards: Familymart may be merging with CKS’s parent, Uny. This is striking, but not completely surprising news – and a development that JC has been predicting for several years now. It reconfirms the power that Sogo Shosha nowadays have in food distribution.
Familymart is on a roll. The third largest convenience store chain, it has made big progress over the past two years, consolidating its core business, adding new area franchises, expanding into new formats – it’s currently the leader in hybrid conbini/drugstores – and through major acquisitions, notably am/pm. As a result it is now running only just behind Lawson in sales volume. Lawson, meanwhile, has diversified out of pure convenience stores, allowing Familymart to grow share rapidly. While Mitsubishi runs Lawson, Familymart is Itochu’s main retail operation, having been the first to buy into retailing back in 1999.
Uny: Itochu’s big retail plan
Circle K Sunkus (CKS) is the number four convenience store chain. Its parent is already an Itochu retail interest, with the tie formalised in 2009 when Itochu took a 3% stake in Uny in part to discourage acquisitors looking to do precisely what Itochu is planning now – merge Uny into a national business.
Just as the other big retail groups set up convenience stores, so Uny established Circle K in 1984, but, like the bulk of Uny’s operation, Circle K has failed to expand much beyond the borders of the Chubu region that centres on Nagoya. In an attempt to fix this, it acquired Sunkus in 2001. Sunkus had grown through autonomous regional sub-franchisees, but had still managed to develop a strong, popular brand, even in Tokyo. Still, the combined CKS continued to flounder, struggling to unify brands and centralise operations, leaving it with high overheads. Itochu finally decided enough was enough when, in the past 18 months, regional CKS franchises started jumping ship at an unprecedented rate, defecting to one of the three larger chains even well before contract periods had expired. It was clearly a chain in trouble.
Acquiring CKS would allow Familymart to leapfrog Lawson into the number two spot by sales, and almost equal to Seven Eleven in domestic store numbers. Given its experience in successfully absorbing acquired businesses, there’s a strong likelihood that CKS should turn to gold in Familymart’s hands. A merger would require some serious and rapid weeding of poor or overlapping store locations and DC capacity and the CKS brands would almost certainly disappear in favour of Familymart – inevitable, but a worrying loss of face for Uny that could still be a major sticking point at the negotiation table. Difficulties aside, however, Familymart + CKS will put huge pressure on Lawson as it suddenly finds its share swiped from under its feet.
Can a cobini run a GMS?
But what about the possibility of Familymart taking on not just CKS, but also Uny? While Familymart is entirely a small format operation and has no experience in GMS chains, here again Itochu’s involvement makes this feasible. Itochu is currently the second largest food wholesaler in the country – with Lawson’s main shareholder, Mitsubishi, the largest. The trading house could use Uny as a way to progress its entire food empire, giving it the kind of sales muscle that would allow a genuine challenge to the might of Aeon and Seven & I. A hypothetical solution that would also delight Uny as much as Itochu.
Absorbing Uny is, however, far less synergistic than the simple merger of two convenience stores. It is the number three GMS operator with the full range of formats, including supermarkets, SCs and apparel specialty, but after unsuccessful attempts to expand into Hokuriku and Kanagawa in the 1980s, has largely retreated back to its home base around Nagoya. This timidity has allowed Aeon, Ito-Yokado and, most telling of all, even local Gifu newcomer, Valor, to expand rapidly across its home base. So while not a failure, Uny is also in trouble. Slow, lacking geographical reach, and seemingly devoid of new ideas, its strategy of maintaining a regional fiefdom is quickly crumbling.
Uny’s size and its brands give it the potential to be far more, but whether Itochu could make this happen without the additional help of the large store distribution infrastructure of an Aeon, Ito-Yokado or, should hell freeze over, even Walmart, is highly questionable. Having said that, Itochu is the only possible broker of a deal no matter how much Aeon would love to get its hands on Uny – and, after a couple of face saving years for Uny execs, Aeon will be first in line should Itochu begin a fire sale of parts of the group.
Although everything from practical operating considerations to personality clashes could still derail a merger, the fact that both Uny and CKS need new ideas, leadership and Itochu’s capital, should allow Itochu to broker a deal of some sort. Familymart will move rapidly ahead with CKS under its wing. For Uny, something much more innovative will be needed if it is not to be sold off as parts.
Itochu undoubtedly has the wherewithal to provide that spark, but it would be costly and take years to expand Uny’s thinking beyond a few kilometres from its HQ. The resistance of Aeon and Seven & I to any expansionary move would make such a project a hard slog and perhaps not worth the effort – Aeon and Seven & I may be linked to Mitsubishi and Mitsui respectively but Itochu still has deep ties to both retailers as a supplier.
For this deal, Itochu provides the necessary gel of a committed middleman in every sense of the word. Few analysts would yet bet their bonuses on the chances of a merger being confirmed, especially one involving the whole of Uny, but economic sense says it is more, rather than less, likely to happen. What happens after the merger is where it gets seriously interesting.
Familymart to acquire Coco Store, Lawson ties with Poplar
JC has reported the convenience store end game for the past two years, and we’re now well over the peak. With the Familymart-Uny negotiations in the background, Familymart also announced the acquisition of Coco Store last month. While not the industry shattering news of the bigger M&A deal, Coco Store is a mid-sized chain with 660 stores, 60% under its eponymous banner in and round Chubu and the other third under ‘Every One’ in Kyushu. Established in Nagoya in 1971 by the Morita family, co-founders of Sony, the chain had sales in FY2013 of around ¥90 billion and reportedly had been looking for a buyer for sometime – Familymart won out over Lawson, and Coco Store’s trading relationship with Aeon’s Ministop may also now be in doubt.
Securing acquisition of a mid-sized chain is a significant success given the stage of the sector’s development and the need to soak up share in the highly saturated market. Familymart will pay around ¥10 billion for this latest acquisition, but being debt free and with a reported war-chest of around ¥150 billion in cash, the Itochu-controlled company has plenty of scope to beat rivals to the punch yet again.
Having said that, Lawson did manage to buy a 5% stake in Hiroshima based mid-sized chain Poplar last month and elsewhere there are strong rumours of talks between Ministop and Three F.
There has never been a better time for owners of regional convenience store brands to look to cash in their investments.
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