On August 19, Seven & i Holdings, the Japanese parent company of 7-Eleven received an offer to acquire the business from Alimentation Couche-Tard (ACT), the Canadian owner of rival Circle-K convenience store chains.

The deal, if accepted, would create a worldwide convenience store goliath. But those of us who love the remarkable and unique convenience store culture in Japan are holding our breath, hoping the deal doesn't go through.

What's So Special About Japanese Konbini?

Visit Japan and one of the most remarkable things you'll discover are the wonderful convenience stores. Known in Japan as konbini, you can find one, or four, on nearly every busy corner.

If you're used to convenience stores in the U.S. or elsewhere, they may look the same on the outside, but inside they're very, very different.

The konbini are convenient of course, but more than that, they're truly great. Just-made bentos fill the shelves at lunchtime, a huge selection of onigiri rice balls, nikuman buns, and oden for dinner, or fresh sandwiches and salads if you're so included. Every month the stores release new seasonal specials to offer the variety Japanese consumers demand.

In fact, konbini food is not only inexpensive and convenient, but delicious. My first meal whenever I arrive jetlagged in Japan is a nikuman and a beer from the closest konbini to the hotel. The last thing I buy is food for the trip home at the airport konbini because it'll be a hundred times better than what's served on the airplane.

The konbini is guaranteed to have any kind of drink you want, from water to tea, or whiskey. Along with just about everything else you need for daily life somehow fitting on the narrow shelves. All at the same price as the supermarket.

Plus you can pay utility bills, buy tickets, use the ATM, or ship packages. You can live your whole life in Japan without having to go anywhere other than the konbini and the equally great 100 yen shops. They even act as distribution centers for stricken communities during natural disasters.

Japanese tourists who walk into a 7-Eleven in the U.S. are in for a terrible shock. The shops are disgusting. The food selection consists exclusively of greasy hot dogs heated on the grill for days and stale donuts. Prices are inflated to up to three times the cost at the supermarket. But where else can you buy a 32-ounce cup of Coke?

Their main draws are alcohol, coffee, and cigarettes, for which they are indeed convenient. For the standalone convenience stores, you have to be pretty desperate. At least in my city, there are usually a few homeless passed out (or dead) in front of the door, and more living in tents behind. (The shops attached to gas stations are better.)

You Thought 7-Eleven was an American Company?

You can be excused for thinking 7-Eleven is an American company because it used to be.

The 7-Eleven chain started in 1927 in Dallas, Texas, in the days before refrigeration, as an ice house that also offered eggs, milk, and bread. They even put an Alaskan totem pole in front of the stores to emphasize the cold, naming the chain Tote'm.

In 1946, the franchise was renamed 7-Eleven to emphasize their 7 am to 11 pm opening hours, a major convenience in an era when everything else closed at 7 pm. The green, red, and orange stripes glowing in the darkness became a beacon to a pack of smokes or a cold beer. Many a young mother relied on the stores to find diapers and milk late at night.

In 1973, the Japanese supermarket chain Ito-Yokado bought the franchise rights for 7-Eleven in Japan and began opening convenience stores. By 1989, 7-Eleven Japan had 3,251 stores and was growing like crazy.

The U.S. headquarters, however, ran into financial difficulties. So in the case of the child eating the parent, the Yokado Group acquired 75% of 7-Eleven. In 2005, they acquired the remainder and created the corporate structure of Seven & i Holdings, combining Ito-Yokado supermarkets, 7-Eleven, and Denny's Japan (which Ito-Yokado also owned and is million times better in Japan than their original American counterpart.)

The company also owned the iconic Seibu and Sogo department stores but sold those off in 2023. In 2021, they acquired the Speedway chain of 4,000 convenience stores around the U.S.

Seven & i is a public company in Japan, listed on the Tokyo Stock Exchange. In 2023, the company had revenues of over $80 billion, but an income of only $1.6 billion. And therein lies the problem.

Who the Heck is Alimentation Couche-Tard?

I have to admit I'd never heard of Alimentation Couche-Tard before their audacious offer to buy 7-Eleven.

Maybe that's because they're Canadian and Canadian companies rarely make the news. Or maybe it's because they operate convenience stores under a variety of different names in different countries. I'd heard of Circle-K, of course, the strange name on an occasional gas station shop.

Here's the surprising thing: ACT has 16,700 shops around the world. 7-Eleven has 86,000. But the company has revenues of $72 billion, roughly the same as 7-Eleven's $80 billion.

Most importantly for our discussion, ACT has a market cap of $57 billion compared to about $29 billion for Seven & i before the merger offer bumped up the share price. In other words, despite having a fifth as many stores, ACT is worth twice as much as 7-Eleven. No wonder ACT offered to buy them.

What gives? The low value of Seven & i is a perfect illustration of the many ills that infect Japanese businesses.

Why is 7-Eleven Japan So Cheap?

As any tourist knows, the yen is really cheap now. Really really cheap. That's great for tourists coming to Japan, and for foreign investors out bargain hunting.

The Economist estimates the yen is 44% cheaper than it should be, meaning the exchange rate should be around 110 yen/usd instead of 150. A reasonable exchange rate alone would lift Seven & i's market cap to $36 billion and make it a little harder for a foreign company to swallow.

But the bigger reason is that for good and bad, Japan has never fully embraced American-style shareholder capitalism.

Sure, there's the Tokyo stock market with lots of big companies that you can buy shares of. It would take an entire book (of which there are already quite a few) to explain all the ways in which the interconnected pieces of Japanese corporate culture differ from American (and Canadian) versions, but in a super-simple over-simplification, let's just say shareholders don't matter to Japanese management. This means share price, which is driven by growth and profitability doesn't matter either. Japanese companies stay safe in their own protected bubble. ACT earns a 10% profit margin compared to 4% for Seven & i.

Then one day, former PM Abe declared that to revitalize the Japanese economy, the country would embrace shareholder capitalism and all its implications. Cross-shareholdings that protected companies from acquisition would have to be eliminated. Mergers and acquisitions that promote efficiency and competition would be encouraged.

But just because the politicians declare it, doesn't mean anything changes. At least not quickly. A few attempts at joining the world stage with foreign CEOs at Nissan and Olympus ended in disaster.

Acquisitions mean merging companies and cultures. They mean laying off redundant staff to save money to justify the merger. Both are anathema to Japanese corporate culture. Warren Buffet buying shares in the big trading companies is welcomed, but full takeovers of Japanese companies by the barbarians are greeted with a cold stare.

Of course, the government's bureaucrats would have to approve such a large merger, the biggest foreign takeover of a Japanese company ever. Seven & i holds a banking license so it can operate ATMs and make it easy to pay bills from its stores, and even has a securities license. Nikkei reports that the Japan Finance Ministry has said the company is in a protected category requiring government approval for foreign ownership.

But the bureaucrats know the world is watching. Japan says it's open for business, but is it really? Prohibiting the merger would mean the end of considering Japan a part of the world economy. Allowing the merger would open the door for the chaos and short-term thinking that animates American business.

America to the Rescue?

America is a strange place. Despite our professed belief in full-fledged capitalism, we've increasingly come to demonize big business and the people it's made into billionaires.

We used to be fairly lax about mergers and acquisitions. Under the current administration, that's changed.

The government, of course, reserves the right to prohibit any acquisition that endangers national security. A takeover of a company making fighter jets by a Chinese entity, or Russian or Iranian, is a non-starter.

But now, even the acquisition of troubled US Steel by Nippon Steel is being called a danger to the country for no reason other than politics. The merger of two large grocery chains is being fought in court over anti-monopoly concerns.

And here's where things get interesting. In the U.S., 7-Eleven and Circle-K are the two largest chains of convenience stores by a large margin. Together they have 20,000 stores in the country. The next largest has only 3,000. Expect the U.S. government to take a skeptical look at the proposed merger.

It seems strange that the U.S. government could prevent a Canadian company from buying a Japanese one. Technically, they couldn't stop the corporate merger, but they could prevent ACT from operating 7-Elevens in the U.S., defeating the point of the deal. The Canadians would also have to agree, but there's little reason they'd object.

I'm sure the bureaucrats in Japan are hoping their U.S. counterparts step in to prevent the deal. If not, they'll be under enormous pressure to approve it, too, despite a strong desire to stop it.

What Would a Konbini Merger Mean for Japan?

If Circle-K bought 7-Eleven, I doubt anyone in America would notice. There's no brand loyalty here. One convenience store's bad coffee is the same as another's.

Japan, though, is a different story. 7-Eleven, Lawson, and FamilyMart are in an intense war for customers. Which is better? Everyone has a favorite.

Since Circle-K is minor in Japan, there'd be no reason not to continue the 7-Eleven brand. But they'd need to do something about that meager 4% profitability.

It'll be hard to raise prices when there is a Lawson across the street and a FamilyMart on the next corner. But to cut costs, will they keep the same service? Will they keep the same quality of the wonderful onigiri and bentos? Or would they deliver fresh supplies to the store less frequently?

We can only hope the new Canadian owners don't mess up what makes the konbini in Japan so wonderful. But that's not what usually happens when one company takes over another and the bean counters look for any way to cut costs without understanding the business.

So should the Japanese and U.S. governments allow ACT to acquire 7-Eleven Japan? Yes. But I sure hope they don't.

If they do, perhaps the Canadian headquarters will do what the U.S. headquarters of 7-Eleven did long ago — let the Japanese operation run itself as a separate subsidiary. Then later, when ACT is struggling, 7-Eleven Japan can take over ACT and maybe one day even bring onigiri and bentos to Americans and Canadians. We can only hope.