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Business deals

7-Eleven plans expansion to 20,000 US stores after Speedway buy

Acquisition cements Seven & i's top position in major retail market

Seven & i aims to raise its brand profile in the vital U.S. market with its $21 billion purchase of the Speedway gas station and convenience store chain. (Source photo by Kyodo)

TOKYO -- Japanese retail group Seven & i Holdings plans to expand its web of U.S. convenience stores to 20,000 following the $21 billion deal to buy American counterpart Speedway, it was learned Monday.

The company's 7-Eleven chain is already the biggest in the U.S., with about 9,000 stores. In addition to Speedway's 4,000 or so existing outlets, the group plans to further build the network, distancing itself from Canada's Alimentation Couche-Tard, the No. 2 operator in the U.S., which has around 6,000 including Circle K shops.

The plans were revealed in an earnings conference of U.S. oil refiner Marathon Petroleum, Speedway's current owner.

"We plan to work hand in hand with Seven-Eleven as they grow out their portfolio," Marathon President and CEO Michael Hennigan said. "They have a stated goal to expand to about 20,000 stores."

Hennigan said the two sides have "a second agreement" under which Marathon will continue to supply the network "beyond the existing Speedway situation."

The fusion of online and brick-and-mortar stores is proceeding apace in the U.S., spurred by the spread of the novel coronavirus. With the $21 billion deal, Seven & i accelerates its effort to challenge and other rivals online in one of the world's biggest retail markets.

The deal, the biggest corporate acquisition worldwide since the coronavirus outbreak early this year, also will be Seven & i's biggest such purchase, easily surpassing its $3.1 billion acquisition of Texas-based convenience store chain Sunoco LP in 2018.

Seven & i abandoned its initial bid for Speedway this spring, after it failed to reach an agreement on the price in exclusive negotiations with Marathon. Some of the Japanese retailer's board members said the price tag, said to be about $22 billion, was too big.

But Joseph DePinto, CEO of 7-Eleven, Seven & i's U.S. unit, did not give up. He continued to press Seven & i's board members to OK the deal since Marathon hinted at wanting to sell its Speedway unit last October.

According to U.S. consultancy AlixPartners, there were 153,000 convenience stores in the U.S. in 2019. Most of these are run by small and midsize operators, with the top 10 companies accounting for just 20% of the market. That fragmentation means there are few convenience store chains with several thousand outlets available for acquisition. If it had lost the Speedway purchase to a competitor, Seven & i might have ceded the top spot in the U.S.

Changing consumer behavior as a result of the novel coronavirus epidemic has also given Seven & i a lift. In the U.S., more customers are placing orders online and picking them up later to minimize the risk of catching COVID-19. Unlike in Japan, mail-order deliveries take time because logistics networks are underdeveloped in many parts of the country. 

"Speedway convenience stores are of great value and have great potential due to their proximity to our customers' homes," said a Seven & i executive.

The company's persistence paid off. In June, as the spread of the coronavirus slowed somewhat, Marathon again began looking to sell off Speedway. Marathon is believed to be struggling with its main oil refining business, forcing it to raise cash.

Marathon chose an auction format in its second attempt to sell Speedway, asking four or five companies in Europe and the U.S., including Seven & i, to submit tender offers.

Seven & i reviewed its acquisition plan and decided it would be able to reduce the burden of the purchase to about $12 billion from the roughly $21 billion it plans to actually offer. To do this, it will sell some assets. The board decided in mid-July to take part in the auction.

But one company insider said Seven & i thought its chances of beating out rival bidders was "not even 50%." The company's winning of the deal was "a near miracle," the person said.

In a news conference on Monday, DePinto said he intends to spend more on technology to support home delivery services, and for other purposes, in the U.S. Although it holds the top position in the U.S. convenience store market, 7-Eleven has a much smaller footprint than rivals such as Walmart.

Seven & i plans new store openings in Asia, but intends to accelerate its global expansion by first bolstering its brand recognition in the U.S., one of the largest markets in the world.

The purchase comes with risks. One is the expected decline in gasoline demand. Gasoline accounts for roughly half Speedway's sales, but the shift to electric vehicles will continue over the medium to long term as environmental regulations are tightened across the world. Seven & i expects its gasoline retailing business to remain steady over the medium term, but plans to gradually reduce Speedway's reliance on gasoline, shifting its focus to food, as with 7-Eleven outlets in Japan.

Another potential headache for Seven & i is the growing influence of environmental, social and governance investing on the business. The market reaction to the buyout announcement was skeptical. On Monday, Seven & i shares fell sharply on the Tokyo Stock Exchange, briefly dropping 8% versus their Friday close.

It remains to be seen whether Seven & i's U.S. gambit will help the company do more than make up for a maturing market in Japan. With its cash on the table, there is no going back now.

Additional reporting by Ken Moriyasu in New York.

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