7-Eleven Inc. (SEI) has orchestrated nearly 10 acquisitions in 10 states in just the past two years, snatching up small and midsize chains across the United States with a consolidator’s zeal.
More than one-half of its growth in 2011 was through acquisitions in New York, Florida, Illinois, Colorado and the Northwest. It had announced plans to add at least 630 sites in 2012 alone in the United States and Canada, with buys in Ohio, Pennsylvania, West Virginia and Wisconsin helping it reach that record-breaking target.
At a time when the nation talks about fiscal cliffs and economic retrenchment, the country’s best-known convenience chain is spending generously to feed an acquisition appetite that is peerless. In less than three years, the Dallas retailer has ballooned by about 1,000 sites, through organic growth and acquisitions, to hit more than 7,400 in the United States alone—about a 15% leap in store count. And the establishment in October of SEJ Asset Management & Investment, a Delaware corporation designed to finance expansion, underscores the promise of future growth.
Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, Scottsdale, Ariz., says demand for sites “is probably as great if not greater than it’s ever been.” Ruben could not speak specifically to the chain’s plans; however, in general, he says an industry feeding frenzy is taking place.
“There’s almost been a watershed event after Couche-Tard made a play for Casey’s,” he says. “Once that failed, big and small players started looking over their shoulder and really wanted to look at every deal.”
Big players who wouldn’t consider a deal for fewer than 10 locations are now interested; companies that prefer organic growth are suddenly interested in acquisitions; and those that stuck to certain regions are wandering over borders. “We have companies saying, ‘We don’t care how big or small it is; we’ll look at it,’ ” Ruben says.
7-Eleven’s most recent conquests are a who’s who of small regional giants: TETCO of San Antonio; EZ Energy of Seven Hills, Ohio; and Wilson Farms of Williamsville, N.Y. It also gobbled up some of the company’s largest licensees, such as Handee Marts, Gibsonia, Pa.; and Prima Marketing LLC, Fairmont, W.Va.
If its recent buying history is any indication of what’s to come, then future acquisitions may involve stores in the Southeast, where languishing real-estate prices, population growth and weather are pluses, as well as areas it pulled out of during its leveraged buyout in the late 1980s. Also, look for 7-Eleven to buy out remaining 7-Eleven licensees, some of which may need infusions of cash to upgrade facilities and site-level strategies; and push harder into markets in which its current presence needs a boost, especially where clusterings of stores begins to justify daily deliveries of fresh food.
“In the world of real estate and development, it has been a buyer’s market, and we have been in the enviable position to capitalize on property and space availability, plus 7-Eleven’s strong credit rating,” said Dan Porter, 7-Eleven’s real estate vice president, last May. Yet while competitive pressure may be greasing the wheels, the engine truly powering 7-Eleven’s spend ing spree seems more likely coming from within. These factors include:
- Pent-up energy and regaining ground in areas it once had sites.
- Opportunity to build density in 7-Eleven’s underdeveloped markets or growth areas such as the Mid-Atlantic and the Southeast.
- In response to overseas retail success from 7-Eleven Inc.’s Japanese parent company, Seven-Eleven Japan (SEJ), a focus on building critical mass in key markets to support a supply chain to accommodate foodservice, as well as soften the blow of advertising and administrative costs.
7-Eleven’s U.S. growth team—which includes Porter as well as Sean Duffy, senior vice president of development; and Robbie Radant, vice president of mergers and acquisitions—declined comment via the company’s spokesperson. But the outlines and direction of its domestic strategy are clear enough from talking with several franchisees and licensees, chains that have sold to 7-Eleven, and industry experts familiar with the company.
“7-Eleven is really an amazingly large real-estate company,” says Robert Buhler, president of Pleasant Prairie, Wis.-based Open Pantry Food Marts of Wisconsin, which signed a deal that gave 7-Eleven a platform to re-enter Wisconsin after an absence of nearly two decades. (See “Selling to 7-Eleven,” p. 16, for a firsthand account from Open Pantry and Prima about their decisions to sell to 7-Eleven.) “They want to own the real estate and control the corner. And they have the money to do it.”
A Time of Transition
Of all the factors fueling 7-Eleven’s resurgence as a consolidator, the idea of cycles, of businesses expanding andcontracting through their lifetime, may prove most telling.
Back in fall 1990, 7-Eleven’s predecessor, The Southland Corp., filed for Chapter 11 prepackaged bankruptcy. The proud family-run corporation experienced lows that mirrored its boom decades prior, when the land grab of convenience retail as a whole reached a heady peak. And it wasn’t just 7-Eleven; the M&A frenzy led rival Circle K to implode when debts came due.
For 7-Eleven, that late 1980s climate of hostile takeovers—including an attempt by Canadian raider Samuel Belzburg—in part led the company’s original owners, the Thompson family, to initiate a leveraged buyout. Those familiar with the company’s makeup at the time believed that its subsidiaries, which included an automotive retail chain called Chief Auto Parts; the c-store chain’s distribution, dairy and ice operations; and its refining and marketing arm with CITGO Petroleum, were more valuable sold off separately than remaining under the Southland umbrella.
That Wall Street pressure led to the Thompson family’s $4.1 billion leveraged buyout, with Southland selling many of those very assets itself to help repay the debt. 7-Eleven could have staged a comeback were it not for oil companies converting auto-repair bays at their gas stations to c-stores.
To hear people talk about that dip in the cycle is like listening to a Depression-era parent or Vietnam veteran. Innocence was lost.
Mike Scarpelli, who worked for 7-Eleven corporate during that period and recently retired from 7-Eleven licensee Alon Brands Retail, Odessa, Texas, says it was a devastating and defining period, and that it continued “in that seemingly standstill mode for a while.”
When the company’s largest licensee, Japan-based Ito-Yokado, bought 70% of the company, it became 7-Eleven’s “white knight,” Scarpelli says, especially with looming threats of hostile takeovers at the time. “They were our savior [in that they kept] the stores running, even though many of the related assets, such as the distribution centers, were sold off,” he says. “But what it did was put the company on permanent hold.”
At that point, the company seemed to be in limbo, Scarpelli says. However, part of the reason was to focus solely on the stores and reposition 7-Eleven’s systems to meet new challenges such as scanning, back-office technology and foodservice.
When CSP interviewed Jim Keyes, former 7-Eleven president and CEO, for its 2003 Retailer Leader of the Year issue, the company was still in recovery mode, even 12 years later. His goal at the time was to rebuild with “a sustainable competitive advantage.”
In his tenure at the top, Keyes invested in technology and foodservice, addressed supply-chain issues and fine-tuned its merchandise mix, while paring down what in 2005 was still $1.5 billion in debt lingering from the buyout.
Keyes left in 2005, and his successor, Joe DePinto, appears to have injected a new vigor into the process. Named CSP’s 2011 Retail Leader of the Year, DePinto and his team are credited with boosting the company’s Moody’s rating from Baa3 (in December 2005) to Baa1. They paid down debt, cleaned the balance sheet, dramatically improved cash flow, re-engineered the company bottom to top and remodeled a large portion of the system, preparing 7-Eleven for its current growth mode.
The effort did not come without hardship. Layoffs in 2009 at corporate and other cost-cutting measures seemed in line with both the economic times and current growth initiatives. But as DePinto told CSP at the time, “It’s tough now, and it’s going to get tougher really fast.”
Now, more than two decades since that bankruptcy, 7-Eleven has gone on the offensive, taking its newfound financial confidence to the street.
“Now I look at it as pent-up energy moving forward at light-speed,” says Scarpelli.
Land of the Rising Sun
Today, 7-Eleven is anything but idle. And as the North American subsidiary of Tokyo-based SEJ, which is owned by Seven & i Holdings Co., it has tapped its parent company’s best practices to further hone its domestic operations.
“As Seven & i has taken more of an influence over 7-Eleven Inc., a lot of the strategy is being driven from the Japanese operation,” says Robert Gregory, global research director for Planet Retail, a London-based retail intelligence firm.
Back in the 1990s, Southland Corp.’s Japanese parent started a review of the U.S. operations. What it found: By nearly every measure, the U.S. 7-Eleven stores lagged dramatically behind the Japanese sites.
“Profit margins were about half what they’re achieving in Japan, and sales densities are way down,” says Gregory. “If we can move it more toward the Japanese model and bring up efficiencies, there’s a huge uplift in terms of the benefit we can bring to it.”
The Japanese model: a triple focus on building in-store sales—led by fresh and hot foods, as well as private label— clustering of stores to grow efficiencies, and continuing to expand the percentage of franchised locations through initiatives such as the Business Conversion Program, which transitions single-store independents into 7-Eleven franchisees, as well as growing the number of multi-site franchisees.
As veteran industry consultant Dick Meyer points out, the move to 100% franchisee-run operations has huge financial implications for 7-Eleven, because franchisees with fewer than 50 employees are exempt from providing health insurance under the Affordable Care Act.
It also reveals how much 7-Eleven and its franchisee base—as represented by the National Coalition of Associations of 7-Eleven Franchisees—have resolved any tensions over time.
Consider the shared learning a form of payback. When Ito-Yokado first gained licensing rights to 7-Eleven in Japan, it opened stores based on the U.S. model— and quickly struck out.
“They were selling Slurpees, which are very popular in the U.S.,” Gregory says. “In Japan, they weren’t popular at all, and actually failed.” But after a few years, the company removed low-performing items, revamped the store format and cut the locations to about half the size of the average U.S. store. Fresh and to-go foods became the focus of the stores, with hardly any selling fuel.
This model has proven extremely successful, so much so that it is spreading across Asia, a highly underdeveloped region for the brand. “It is less reliant on gasoline, more situated in residential and urban locations, and very much clustered together,” says Gregory, who cites that in Bangkok, Thailand, for example, several 7-Elevens will coexist on the same street, nearly all franchisee-owned.
The Japanese have pursued a strategy of high market presence, or what 7-Eleven calls “market concentration”: identifying an area with high growth potential because of demographic trends and/or the lack of strong competition.
“They really try to get this high store density,” Gregory says. “If they can get a number of stores within a defined area, even though they might compete with each other, there are actually quite a lot of advantages.” For example, distribution is simplified, brand awareness intensifies and marketing becomes more efficient.
“This is something they’re really pushing in the U.S., targeting big cities—New York, Los Angeles, Chicago,” says Gregory. “So over the next few years, it will be the case that there are more 7-Elevens cropping up in the same area even though they compete with each other.” (Sites that are part of the Business Conversion Program are exempt from a policy requiring 7-Eleven franchised locations to be at least a half-mile from each other.)
According to Jeff Kramer, CEO of Prima Marketing LLC, a licensee that sold 76 sites to the company last fall, 7-Eleven feels there is room for many more of its locations in the United States.
“If you look at a map, you can see a lot of holes in the country where 7-Eleven does not have a presence; maybe it had a presence years ago but pulled out,” he says. “There are many areas where if you have a strong brand and solid program, they can fill in around the country to be a true national brand.”
He and others also suggest that a stalled Japanese economy—weakened by a two-decade-long recession and the continued recovery from the 2011 tsunami—is encouraging Seven & i to place its weight on U.S. growth. But while the Japanese economy is soft, Gregory of Planet Retail does not see this as being a major growth trigger for the United States, pointing out that 7-Eleven has managed to “hold its own” in Japan, partly thanks to its ability to expand and sign on new franchisees.
Rather, the sites in Japan have become so efficient that any future growth will be incremental. “Sooner or later, expansion’s going to run out,” he says. “There are plenty of opportunities in other markets, whether it be the U.S., China or Mexico.”
And it is not only the quality of the sites that have reached a high-water mark—it’s also the market saturation. Consider, for example, that while Japan has roughly the land mass of California, it has 6,000 more 7-Elevens than the United States, Canada and Mexico combined.
Put another way: While 7-Eleven is far and away the largest c-store operator in the United States, it controls less than 5% of the U.S. c-store count, compared to SEJ’s nearly 31% share in Japan.
“That shows just how many 7-Elevens they can fit into a certain area,” Gregory says. “So they’re looking at a place like the U.S. or Canada and saying we can possibly have double the amount of 7-Elevens if we can get the model more efficient.”
Picking Up Food
With higher food sales a core directive for 7-Eleven, building the most efficient foodservice operation has been paramount for the chain. DePinto has said publicly that supply chain is an Achilles’ heel for much of the industry, especially with foodservice. Fresh food in many cases means daily deliveries, which are costly on several levels.
“They want to ... focus more on the sale of products, especially fresh foods, such as sandwiches and takeaway foods,” Gregory says of 7-Eleven. “As a part of this, to be successful, you need to have a number of deliveries to that store every day. Maybe a truck in the morning delivers fresh bakery items; maybe later you’ll have it delivering more merchandise based around pizzas, etc. Having a number of stores clustered together in the same area enables this to become more of a reality.”
Obtaining that magic number of stores to support a commissary and distribution infrastructure could very well be the No. 1 reason for 7-Eleven’s M&A activity. Speaking on condition of anonymity, one licensee sees foodservice as the prime motive for 7-Eleven’s acquisitions. “They have to have enough stores to support the foodservice hub,” he says.
Indeed, Mike Triantafellou, CEO of Handee Marts, Gibsonia, Pa., which sold its 58 sites to 7-Eleven last October, told the Pittsburgh Tribune-Review at the time that one of the key drivers of 7-Eleven’s business is to have fresh foods delivered daily. “We didn’t have the numbers to put that kind of distribution in place,” he said. He expected 7-Eleven to build a distribution center, bakery and fresh food commissary, accessible to the Pittsburgh and Cleveland markets, to supply the sites “because now they have enough stores to make that work.”
McLane Co., Temple, Texas, is 7-Eleven’s primary wholesaler; it also relies on a network of Combined Distribution Centers across the country for daily distribution of fresh products to customers’ stores.
Another sign of its laser focus on food: In early 2012, it hired Kelly Buckley, a 20-year restaurant industry veteran, for the newly created role of vice president of fresh foods innovation, and who is charged with leading a “restaurant-quality” team to introduce more fresh foods to the chain.
The truth is, 7-Eleven ranks modestly when it comes to industry foodservice sales. Whereas foodservice represents nearly 17% of inside sales for the channel, according to figures from the NACS State of the Industry Report of 2011 Data, at 7-Eleven it generates less than 12%, according to company figures. (Note: That gap may be smaller because 7-Eleven does not count dispensed beverages in foodservice the way NACS does.) Analyst Gregory says parent company Seven & i would like the share of food sales to be closer to that of its Japanese sites, where it accounts for roughly 30% of sales.
And 7-Eleven is already publicly showing its continuing commitment to foodservice. A new hot case of pizza (whole and sliced), a variety of chicken wings, chicken tenders and mini tacos was tested in San Diego; in just a few months it rolled into major markets such as Washington, D.C., and New York.
The core 7-Eleven menu includes hot foods such as roller-grill foods; a variety of sandwiches, salads, cut and whole fruit, and cut vegetables; and hot breakfast foods such as sausage, egg and cheese quesadillas. Some stores also offer refrigerated pasta dishes and gourmet cupcakes.
Anecdotally, 7-Eleven retailers cite mini tacos, as well as morning bagels and other baked goods, as a hit. A Midwest-based operator, who has been a franchisee for more than 20 years and does not yet have the expanded hot food program, describes the pizza product as excellent if prepared correctly. He also praises 7-Eleven for the quality of the foodservice equipment, which includes ovens from TurboChef Technologies. Overall, however, he worries about a lack of regional appeal.
“My concern with 7-Eleven’s foodservice push is they’ve got to regionalize the taste profile,” he says. “They insist on a one-size-fits-all product assortment. I’m smack-dab in the middle of the country, and we don’t eat jalapeno peppers at every meal. But a lot of what 7-Eleven likes to roll out has a Southwest flavor to it.”
Others who have observed 7-Eleven’s growth in the category are amazed at its advances in everything from product quality to supply chain. Jim Schutz, vice president of people assets for Open Pantry Food Marts of Wisconsin, who witnessed the transition when the company handed over 18 sites to 7-Eleven last summer, describes 7-Eleven as “a master at everything they do.” He was impressed by 7-Eleven’s approach to the position of the foodservice area in the store, with the roller grills and other heating units next to the checkout, and food served by the sales associate.“There is a lot of personal touch there,” says Schutz. “Because it’s close to the cashier area, they are able to keep an eye on that. It’s a lot easier than having the roller grill 10 to 15 feet away to make sure the food’s fresh, hot and full.”
In many ways, 7-Eleven’s journey is the industry’s journey. “Chains are evolving their footprints to emphasize foodservice and the infrastructure it takes to deliver fresh food every day at a reasonable price,” says David Bishop, managing partner of retail consultancy Balvor LLC, Barrington, Ill., citing how similar paths can still mean different business models. “I’d classify RaceTrac as converging into Wawa and Sheetz, while at the same time, Circle K and 7-Eleven are converging into what QuikTrip has done.”
“It’s a good base,” says Kramer, whose sites did not offer the full hot-food offer because there was not a high enough concentration of stores to justify frequent deliveries. “I think they have to keep building on it. They’ve done it cautiously because they have a franchise model. It’s important to try to have standardization and a reliable product the public can count on.”
To Market, to Market
Adding urgency to 7-Eleven’s efforts is what some retailers call “taking advantage of the recession,” which includes acquisition appetizers such as lower real-estate and construction costs, as well as a greater willingness from sellers to make a deal in a buyer’s market, swimming with players in a range of sizes. In 2011, 7-Eleven hired Lend Lease’s Multi-Site Group to handle construction and conversions, managing costs and accelerating the conversion process.
With low interest rates and ready debt and sale-leaseback financing, “it creates more opportunity for people to buy things they may not otherwise be able to buy,” says Ruben of NRC.
Looking at Couche-Tard and 7-Eleven’s recent acquisitions, “generally, they’ve been pretty opportunistic, and bought traditional c-store companies, portfolios, groups of stores, major-oil companies,” says Ruben. “The bigger players that have access to capital have gone where the opportunities are, and they’ve taken advantage of those where they could.”
Jim Fisher of Houston-based site-analysis firm IMST Corp. believes 7-Eleven is seizing a market opening. “They’re just seeing great opportunities and taking advantage of it,” he says. “It’s good retail, not old, worn-out, tired retail. It’s not companies that have starved the goose and have eaten all of the eggs.
They’re buying companies that have been really systematically feeding the goose and have good production.”
Fisher believes 7-Eleven’s push to be a franchise-dominant retailer is also a driving force. “It’s driving the company through acquisitions and through the franchise; they want to find good locations for those franchisees,” he says, describing it not so much as “pent-up demand” but more “an opportunity of now.”
“They’re coming on at the right time because they’ve cleaned up their balance sheet over the past five years, vs. loading it up” like other large chains have, says Buhler of Open Pantry. “I think 7-Eleven will use that strength to buy locations and transform them into franchised sites so they get their money out pretty quickly, and the sites become a cash machine for them.”
But 7-Eleven may hold a unique set of circumstances dating back to its 1987 leveraged buyout. At that time, it had to sell off many of its assets to better focus its potential. A source requesting anonymity says part of its goal may be to reclaim markets lost in that retrenchment, with the caveat that those markets hold potential going forward.
These motivations could hold true in areas such as Ohio and Pennsylvania, where 7-Eleven made its most recent acquisitions, including Handee Marts, EZ Energy and Prima Marketing; and Wisconsin, where it connected with Open Pantry.
“When you look at the markets where they’ve really had major acquisitions in lately, they are … markets where they are but want to have a significantly enhanced presence,” says Fisher. “They are markets that are growing: Charlotte, Houston, San Antonio, Dallas. Those are very aggressive, very strong economies.”
As 7-Eleven returns to markets, however, it will connect with new and evolved competitors, such as in Houston and San Antonio, says Fisher. “The market’s dynamics have shifted greatly in the very recent past with Susser for Stripes and Landmark for Timewise. There’s new development, whereas in the past there hasn’t been and had been dominated by major-oil companies.”
Similarly, 7-Eleven is re-entering Charlotte at the same time as QuikTrip, and expanding in Florida along with Wawa, RaceTrac and Thorntons. “It was one of those markets that was neglected,” Fisher says, citing the previous lack of a strong retail offer.
While one source suggests that growth may be tempered by the age of some of the acquired assets and the state of their markets—“Many of those stores are older locations in older parts of town,” says the source—overall, the retail giant appears to be buying a mix of properties.
Fisher says sites are in a combination of growth and more established neighborhoods. For example, he names C.L. Thomas’ Speedy Stop assets, for which 7-Eleven is reportedly close to finalizing a deal. Many of these locations—old Chevron corporate stores that were acquired, razed and rebuilt from 1,800-square-foot stations to 4,000-square-foot stores—have been greatly improved.
“That’s some of the opportunity by buying C.L. Thomas, TETCO and other acquisitions they’ve made: It gives them newer sites in well-established areas,” says Fisher.
But with opportunity, he says, comes challenge. “It takes a totally different capability to be a franchisee of a 4,000-square-foot store with a fuel court, 20 fueling positions and 120-foot conveyor car wash, compared to being one with a 2,400-square-foot store with no gas.
“The big challenge is to find those franchisees who are at ease and have the skills to successfully handle that type of retail offering—which might mean they’re going to be looking for those franchisees who can do multiple stores, rather than single.”
True, says the Midwest franchisee. “7-Eleven wants more stores—but I don’t think they want more franchisees,” he says. “I think they will try to get to a position where the single-store franchisee is a dinosaur. It will be like Subway: In order to be financially successful, you have to have multiple locations.”
To find where 7-Eleven expands next, Fisher suggests focusing on the markets with the strongest economic growth, such as the Sun Belt states and the Southeast. Markets in between North Carolina and Florida such as Atlanta, as well as Alabama and Louisiana, could be candidates.
7-Eleven would examine the same fundamentals as any retailer—site, location and building quality—says Kramer of Prima Marketing, and are very “economics-driven” and patient.
“The Japanese are very long-term-oriented,” he says. “In other words, they’re not just looking for returns du jour to send the stock up for today. They will continue to look for acquisitions that fit their model.”
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