[Stock-Analysis] The Kings of Convenience: FamilyMart
How does my favorite convenience store stack up against 7-Eleven & Lawson?
This is part 2 of my Kings of Convenience series. To Read part 1, The Kings of Convenience: 7-Eleven, click Here.
Overview
The FamilyMart Company might be not be that famous in the Western hemisphere, but it is actually the world’s second largest convenience store chain, only after 7-Eleven.
And for all it’s worth, FamilyMart is my favorite convenience store because of its warm logo, extra dark coffee selection and awesome FamilyMart branded clothes.
As I am writing this, there are 24,996 FamilyMart stores worldwide. These are located in Japan (66% of total stores), Taiwan, China, Philippines, Thailand, Vietnam, Indonesia, and Malaysia.
There are loose plans to expand to the western hemisphere, but for now the focus markets are in Southeast- and East Asia.
History of FamilyMart
In many ways, the story of FamilyMart is way more simple and Japanese than either 7-Eleven or Lawson.
It all started in 1973 when Seiyu Stores, Ltd., the company that founded MUJI, wanted to create a more approachable retail store than their grand supermarkets. To do this, they created a department that would focus on community-based retail and opened the first concept store in Sayama, Saitama Prefecture. They named this store, you guessed it, FamilyMart.
According to its founders, the name FamilyMart was chosen to indicate its dedication to a franchise model with mutual respect among customers, franchisees, and Seiyu through a “family-like” relationship.
This message has been hammered into the Japanese public for almost 40 years now, with FamilyMart’s slogan being “Anata to Konbini Family-Ma-to” (a Japanese play on words loosely translating to “FamilyMart with you”)
(click on the link below to hear FamilyMart’s message through its 40 years of existence)
In 1981, FamilyMart had been so successful that Seiyu decided to break out the division into its own company that they named FamilyMart Co., Ltd. In 2002, it went public on the Tokyo Stock Exchange (TSE).
In early 2020, part of FamilyMart Co., Ltd. was acquired by the parent company of Don Quijote. As a result, ITOCHU, one of Japan’s largest trading company, became FamilyMart’s main parent company with a stake of 50.1%.
On July 8, 2020, ITOCHU announced that it will spend approximately ¥580 billion (approximately $5.5 billion) to purchase 100% of FamilyMart Co., Ltd. This deal has now been finalized and FamilyMart’s financial statements are now fully integrated into ITOCHU’s.
Future Plans for FamilyMart
As mentioned above, FamilyMart has loose plans to expand to the western hemisphere, particularly the US, but also in Europe. However, due to the rising labor costs and decreased demand caused by the Covid-19 pandemic, these plans have been put on hold indefinitely.
FamilyMart is still expanding rapidly in Southeast- and East Asia, and even continues to open new stores in the stagnant market of Japan.
The company has in a very Japanese fashion embarked on an ambitious 30 (!) year long environmental plan:
In my 7-Eleven article (link HERE) I showcased that the biggest hurdles for convenience stores’ profit growth is the sharp increase in labor costs in core markets, such as USA and Japan. FamilyMart suffers from the same issue with decreasing profit margins, especially in Japan.
To combat it, FamilyMart has a bold plan to become the leader in unmanned convenience stores. The company is already planning to open over a 1,000 unmanned convenience stores by 2024 just in Japan. Compare that to Amazon Go, the most hyped-up unmanned store concept, which only has 22 operating stores worldwide and no concrete expansion plans.
Opening automated store will cost FamilyMart about 20% more than regular stores, but labor costs can be greatly reduced because employees are needed only to receive and stock items. As labor accounts for 60% of operating expenses at franchise stores, the potential costs savings are enormous.
The FamilyMart (ITOCHU) Stock
After July 8, 2020, FamilyMart is effectively a 100% controlled by ITOCHU. Hence, to get access to FamilyMart, you need to buy the ITOCHU stock (ticker: 8001).
As you can see from the table below, ITOCHU is such a massive conglomerate that FamilyMart’s overall performance only has a minor impact on its bottom line.
However, the CEO of ITOCHU, Masahiro Okafuji, points how strategically important FamilyMart is to their core business:
“FamilyMart is positioned as the most important base of ITOCHU’s strategy. By its flexibility, convenience stores have become the most evolved form of the retail industry. I heard that customers currently prefer shopping at nearby convenience stores over supermarkets to just buy what they need as their mood changes…” (Words from the CEO, Annual report, 2021)
On top of this, ITOCHU has vertically integrated almost every part of FamilyMart’s operations with their other divisions:
So even if FamilyMart itself does not stand for a big part of ITOCHU’s bottom line, it fuels a lot of the company’s overall operations. In fact, everything from FamilyMart’s IT systems, payment applications, clothes collection, and food items are from ITOCHU’s other companies.
Even more noteworthy, even though 7-Eleven has a much bigger footprint as a convenience store, FamilyMart with its vertically integrated divisions have a higher overall revenue.
Still, ITOCHU’s massive size still dwarfs all revenues FamilyMart brings in. So owning the ITOCHU stock is not a play on the future success of convenience stores.
With that said, ITOCHU is a very interesting stock. The ITOCHU stock is criminally undervalued with a a P/E hovering around 7-9(!) and considering its profits and Return on Assets (ROA), it is by far the most undervalued stock between 7-Eleven and Lawson (it’s like comparing apples to oranges, but still), and one of the most undervalued stocks on the Japanese stock market.
One prominent value investor that has noticed the value of ITOCHU is none other than Warren Buffet, whose company Berkshire Hathaway have invested over $6 billion in the stock!
Conclusion
A deeper analysis of Itochu will be made in a later article, but in summary, its an incredibly undervalued stock that should be on your radar even if FamilyMart is only a small part of its overall revenue.
FamilyMart is however not irrelevant to ITOCHU’s growth. As the CEO of ITOCHU has stated, FamilyMart is the most important part of ITOCHU’s marketing and growth strategy, and any successful innovations in FamilyMart can propel ITOCHU’s other ventures to new heights, especially in its consumer facing endeavors.
Also, FamilyMart’s ambitious environmental goals will definitely be seen as a litmus test for how well ITOCHU as a whole can adapt its more carbon intensive businesses to a greener standard. A failure for FamilyMart to reach these goals will likely result in stock selloffs due to investors disbelief in ITOCHU ever reaching ESG status.
So in a way, even if FamilyMart is just a minor part of ITOCHU, analyzing how its doing will likely be a window into predicting of Itochu’s future performance. In any case, I consider the ITOCHU stock to be a strong buy!