Seven & i president hastening downfall of convenience store champion

Updated : 01.11.2016 / Category Business Tribunals

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Shortly after starting a presentation on his "100-day plan," Seven & i Holdings President Ryuichi Isaka lavished praise on Honorary Chairman Masatoshi Ito, one of the group's founders.

"With total sales exceeding ¥10 trillion, the greatness of this gigantic group lies in the corporate philosophy that the honorary chairman has rigorously taught us," he said. "The fundamental message is that we want to be a good company, trusted by stakeholders. I believe our critical mission is to pass on this philosophy—laid down when the firm was first founded—to the next generation."

At one time, Isaka had come close to being fired, but survived to force then Seven & i Holdings Chairman Toshifumi Suzuki to vacate the position and become honorary adviser. Isaka consequently landed the presidency on May 26, 2016.

Upon assuming the reins of power, he pledged to work on strategies for growth and structural reform, and to announce his plans when second-quarter financial results were issued. Isaka asked for 100 days to make his preparations, and fulfilled his pledge on Oct. 6., when he disclosed his mid-term management program, dubbed the "100-day plan."

Unrealistic expectations
Suzuki ruled supreme over the group for 25 years, slowly building his power base in the process. Isaka's installation as president, meanwhile, was wholly unexpected, according to a source at Seven & i Holdings. It would thus be unrealistic to expect Isaka to exercise leadership at the holding company. Furthermore, he worked solely at Seven-Eleven Japan since joining the group, so lacks strong allies in the group's other companies. Indeed, Isaka has only the founding family to rely on; if he were to lose their backing, it is likely he would immediately tumble from power. These fears were apparently reflected in his high praise for Ito, which to many, seemed somewhat out of keeping with the occasion.

Isaka's plan failed to excite the market, however. Shortly before it was announced, the group's stock price stood at around ¥4,800, but following the announcement, the price fell by 5 percent. The market environment has been since improved, but Seven & i Holdings' stock price has remained at around ¥4,500.

"Though claims were made about a growth strategy and structural reforms, the growth strategy presented in the plan contains nothing new, and the structural reforms look insufficient," opined one corporate investor.

One of the main pillars of Isaka's structural reform plan is to downsize the department store business by forming a capital alliance with the H2O Retailing Corporation, which runs Hankyu Hanshin Department Stores. While possessing mutual stock equivalent to ¥5.7 billion, Seven & i Holdings would, within one year, transfer to H2O Retailing three Kansai region outlets operated by Sogo & Seibu Co. under the umbrella of Seven & i Holdings: the Kobe and Seishin branches of Sogo Department Store, and the Takatsuki branch of Seibu Department Store. The sales also involve the outlets' real estate, which had an estimated total book value of ¥32.4 billion as of the end of February.

Sogo & Seibu terminated operations at the Kashiwa branch of Sogo Department Store and the Asahikawa branch of Seibu Department Store at the end of September, and plans to close the Tsukuba and Yao branches of Seibu at the end of February next year. With the sale of the three stores in the Kansai region, the number of outlets under Sogo & Seibu has dropped to 16 from the 23 that existed at the beginning of current business year, which ends in February 2017. But there are still almost 10 low-margined stores in branches of Seibu in provincial areas such as Akita and Fukui, in addition to the Tokushima branch of Sogo.

Though referred to as "flagship stores," Seibu Department Store's main outlet—situated in Ikebukuro, Tokyo—and the Yokohama branch of Sogo Department Store are suffering from falling sales. "Merely cutting off the three stores in the Kansai region is highly unlikely to restore earning capacity," a banking industry source said.

Of course, Isaka is well aware of all this. According to a well-informed source, Isaka initially sought a way to withdraw completely from the department store business and approached the operator of the Daimaru Matsuzakaya department stores, J. Front Retailing Co. Ltd., with an all-encompassing transfer proposal.

However, the overture was rejected, with J. Front Retailing reportedly saying it could not accept stores in provincial areas as they would prove a heavy burden. Furthermore, Isaka reportedly offended Sogo & Seibu's management, because he did not ask for opinions within the group prior to pressing ahead with this proposal. Isaka quickly gave up on the idea; his efforts terminated with the transfer of the three branches to H2O—a far-from-satisfactory result.

'Too little, too late'
The market was even more disappointed by the structural reform plans for Ito-Yokado, a supermarket operator that posted operating losses of over ¥13.9 billion in the business year ending in February 2016—the first time it had posted a loss since its founding.

Isaka's plan, which contained no new additional restructuring measures, was merely a continuation of the steps set out in March under Suzuki's leadership: the closure of 20 stores during the business year that ends in February 2017, and the shuttering of an additional 20 stores by the end of the business year ending in February 2020. Though Isaka had initially intended to include a measure to freeze the opening of new stores, he was forced to backpedal on this idea in the face of strong opposition from the Ito-Yokado side.

Instead, Isaka has devised an idea that involves utilizing the assets of well-performing stores. He plans to change stores situated in convenient locations—such as close to railway stations—into grocery-focused supermarkets, and redevelop them as multipurpose complexes that combine condominiums for the elderly with child daycare centers, hospitals and other facilities. A new company will be established by the end of this year to roll out the plan.

In reality, however, stores situated at relatively inconvenient locations—such as those outside the Tokyo metropolitan area or in suburban areas—are a headache for Ito-Yokado. One of the group's senior officers said redeveloping conveniently located stores alone "makes no sense on any level." Furthermore, Seven & i's 100-day plan earmarks just six stores for redevelopment by the end of the business year ending in February 2020. "That's too little, too late," said a source familiar with the market.

Seven & i has its roots in Ito-Yokado, the latter helmed by president Atsushi Kamei, who in January this year assumed the post for the second time. Meanwhile, in the holding company, the founding family's Junro Ito— a figure respected even by Suzuki—remains as director and executive officer. Though Isaka might have to take such conditions into consideration, he cannot truly lead the group without wielding the knife. This could prove to be a limiting factor for Isaka, however, as he is known as a consensus-oriented individual by those around him.

Besides, Isaka's structural reform plans do not touch upon the restoration of other under-performing businesses, such as Denny's restaurants, Francfranc variety stores and Barneys New York luxury boutiques. According to a securities analyst, the only part of the plan worthy of a passing grade is the downsizing of the omni-channel retailing strategy.

Lack of innovation
Isaka was born in 1957. His father, Kenichi Isaka, served in such prominent positions as vice president of Nomura Securities and deputy director of the Tokyo Stock Exchange. After graduating from Aoyama Gakuin University, Ryuichi joined Seven-Eleven Japan as part of the first generation of employees with university degrees. He worked mostly in the food business, prompting one former senior officer of Ito-Yokado to say, "At the end of the day, Isaka is nothing more than a lunchbox-shop operator." Nonetheless, he steadily climbed the corporate ladder and became president of Seven-Eleven Japan in March 2009.

In February, however, Suzuki told Isaka that his services were no long required because he had been in the top post for seven years, but failed to come up with new innovations. Suzuki openly called Isaka "incompetent" at a press conference, and on other occasions. Isaka's 100-day plan merely seems to underline this point. The plan, which contains no details about innovative services or goods that Seven-Eleven will offer to its customers, merely drones on about "focusing management resources on the convenient store business and qualitatively enhancing the stores."

Seven & i's downfall may come sooner than expected under Isaka's stewardship.

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This is a translation of an article from the November 2016 issue of Sentaku. The original article can be found here.