Japan convenience stores: changing buying habits offers revival chance 

Convenience once bred contempt among investors in Japan. “Conbini” stores in the country had gone ex-growth. A chronic labour shortage, and a declining population supported the market’s pessimism. Yet all-time record sales last year at the local chains suggest the sector is not finished yet.

Convenience store sales in Japan rose 4 per cent from 2021 to a record ¥11.2tn ($87bn) last year. The number of customer visits also increased for the first time in four years, while average spending per customer hit a fresh record.

The most significant shift is that same-store sales at the seven main local convenience store operators rose for the second consecutive year. Until last year, new stores provided nearly all sales growth. Return on capital had been on a steady decline over the past decade.

Things got so bad that in 2018 Seven & i, which runs the largest convenience store chain Seven-Eleven Japan, splurged on a $3.3bn deal to take over 1,100 US convenience stores and gas stations from Texas-based Sunoco LP. Net debt to forward ebitda has since hit a historically high 2.8 times. Its reasonable valuation of 18 times forward earnings is about a tenth below rival Lawson.

But the pandemic has provided new life for these local chains. A quick stop at a convenience store to pick up instant noodles, a lunchbox set or soft drinks had been the norm among consumers.

During Japan’s lockdowns in early 2021, consumer habits changed to buying large stashes of daily necessities and groceries at the nearest convenience stores. These habits have stuck, contributing to record sales. As tourists return this year, especially from China, a further sales boost should be expected.

Moreover, Japan’s ageing population, which prefers nearby shops to driving to larger supermarkets or using ecommerce, could boost footfall further. Competition is easing too. Last year, the total number of convenience stores fell for the first time in four years. All this hints that investors could return to these stores as well.