*

Seven & i ( SVNDF ) has rejected $38.5 bln offer, but Couche-Tard

says

still interested

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Some Japanese 7-Eleven franchise owners cite concerns

about

missteps

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Seven & i ( SVNDF ) says working with franchisees on growth

By Maki Shiraki

TOKYO, Sept 26 (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 ( SVNDF ) ripe for a $38.5 billion

bid from Canada's Alimentation Couche-Tard ( ANCTF ) 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 ( SVNDF ) strategy and welcomed the proposed

buyout by Circle-K owner Couche-Tard.

While Seven & i ( SVNDF ) 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 ( SVNDF ) 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 ( SVNDF ) 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 ( SVNDF ) 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 ( SVNDF ) 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 ( SVNDF ) 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 ( SVNDF )," he said.

In the majority of franchise agreements in Japan, Seven & i ( SVNDF )

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 ( SVNDF ) 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 ( SVNDF ) 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)