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FamilyMart looks to halt Asia losing streak after Thailand retreat

Japanese convenience store operator counts on trading house Itochu for comeback

FamilyMart has decided to withdraw from directly managing convenience stores in Thailand. (Photo by Marimi Kishimoto)

TOKYO/BANGKOK -- For convenience store operator FamilyMart, the sign of trouble in Thailand may be traced back to its fraught rollout of Japanese oden stew pots to unfamiliar customers.

The offering, widely popular in the home market, never gained much traction.

"I have never tried that before," said one customer coming out of the store. "I don't like the fish smell," commented another.

With lackluster results in the broader market, symbolized by the oden flop, FamilyMart in May transferred its 49% stake in its Thai joint venture to partner and local conglomerate Central Group, marking an effective exit.

The retreat is just the latest a series of its troubles in Asian markets, including a Chinese business ensnared in a fight with a partner. Yet as the aging Japanese market continues to shrink, FamilyMart must turn to foreign markets for long-term growth.

It seeks to stage a comeback by working with trading company Itochu, which is planning to turn the convenience store operator into a wholly owned unit.

"Unfortunately, the game has been decided in Thailand," said a FamilyMart executive.

FamilyMart will continue to hold on to licensing rights, and the stores will still retain the company's name. But it is in effect a full retreat from the market.

FamilyMart opened its first Thai convenience store in 1993, with the company earning the distinction as a pioneer in the local industry. But for decades afterward, the chain has run up against local barriers.

Japanese convenience chain Seven-Eleven, FamilyMart's biggest rival at home, eventually came out on top in Thailand by partnering with Charoen Pokphand, the nation's leading conglomerate. Now, 7-Eleven stores are ubiquitous in the county with roughly 12,000 outlets scattered throughout its borders.

Seven-Eleven has leveraged Charoen Pokphand's scale in food procurement and logistics, all without entering into a capital relationship with its partner. In contrast, FamilyMart stalled at about 1,000 convenience stores.

"Because [FamilyMart] was only able to partially localize the business, they couldn't capture the broad public, and decision-making took time as well," said Kenichi Shimomura, senior project manager at German consultancy Roland Berger.

In China, the company has opened 2,800 locations after setting up shop in 2004. The scale has earned FamilyMart the distinction as the largest foreign operator of a convenience store chain, bested only by four local rivals.

However, FamilyMart sued in 2018 to dissolve its joint-venture partnership with Taiwan's Ting Hsin International Group. The petition seeks to compel Ting Hsin to divest its stake in the venture, citing long-standing nonpayment of licensing fees, according to a FamilyMart executive.

The messy divorce is ongoing without a compromise in sight. The court battle has clouded FamilyMart's fortunes in the 1.4 billion-person market.

In South Korea, FamilyMart established its biggest overseas footprint with 8,000 locations. But that went up in smoke in 2014 when the company walked out of a joint venture with BGF Retail, headquartered in Seoul, after their ties had soured.

At the time, FamilyMart said it would consider another attempt to launch a South Korean business, but the company has yet to make a move.

"A relationship with a local partner is the most important aspect overseas," said an executive at a rival Japanese chain. "At the worst, [FamilyMart] could be forced to abandon your Chinese operation."

Seven-Eleven has overshadowed FamilyMart in Thailand. (Photo by Marimi Kishimoto)

In September 2016, FamilyMart President Takashi Sawada announced the ambitious goal of having more than 10,000 locations abroad by 2021. But the tally now stands at only about 8,000 across seven Asian markets.

Itochu's leadership will play a crucial role in determining whether FamilyMart's overseas strategic shift bears fruit.

While the Japanese trading house already owns 50.1% of FamilyMart, it plans to turn the company into a wholly owned subsidiary through a tender offer. It had sent personnel to the convenience store operator, but "FamilyMart is independent, and Itochu kept its distance out of consideration for other shareholders," an industry insider said.

If Itochu takes FamilyMart completely private through the tender offer, it will gain a freer hand in the company's management.

The retailer's Chinese operations are among the first areas expected to enjoy a boost from the deal. Even Itochu Chairman Masahiro Okafuji, who rarely talks about FamilyMart, has said the convenience store operator "must go on the offensive in China next after the domestic market."

Of particular interest is Itochu's relationship with Citic, China's largest state-owned conglomerate, in which the trading house invested about 600 billion yen ($5.68 billion at current rates) in 2015. Analysts have suggested that FamilyMart could leverage this connection to break back into the Chinese market in a different form from its joint venture.

Such ventures with local companies had been standard operating procedure for FamilyMart outside Japan. "We can combine Japanese-style convenience store operation with development of products that suit local needs," an executive said.

Overseas markets mean a multitude of consumer appetites and habits. Itochu's global network could give FamilyMart an advantage on this front.

The retailer can also capitalize on Itochu's history in the textile industry as it rethinks a product lineup that management says was incoherent in retrospect. "We tilted too heavily toward food," an executive said. "Handkerchiefs and Western-style clothes could be flagship products as well."

The convenience store business model rests on economies of scale, with more locations allowing for more efficient production and transportation of products. Industry sources generally see it taking a decade for overseas operations to become profitable.

FamilyMart earns only 13% of its revenue outside Japan, compared with 39% for rival Seven-Eleven Japan parent Seven & i Holdings, according to U.S.-based consulting firm A.T. Kearney.

FamilyMart Chairman Koji Takayanagi once said the retailer would "squeeze every bit out of" its relationship with Itochu. Now, more than two decades after the trading house became its top shareholder, whether its overseas operations can shine again as a new growth engine for the group remains to be seen.

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