Business / Corporate | FOCUS

Loeb's pick to run 7-Eleven operator faces next task: boosting margins

by Shigeru Sato

Bloomberg

The head of 7-Eleven convenience stores in Japan survived an attempt by his boss to remove him and emerged as president at Seven & I Holdings Co. His next hurdles: turn around weaker units and navigate a leadership transition at the country’s largest retailer.

Ryuichi Isaka’s promotion Tuesday ended weeks of boardroom drama that resulted in the resignation of Chairman and Chief Executive Officer Toshifumi Suzuki. Activist investor Dan Loeb intervened in a letter dated March 27 — first reported by Bloomberg News — saying Isaka should instead be rewarded for Seven-Eleven Japan Co.’s strong results.

The controversy has cast an international spotlight on Seven & I and sparked discussions of Japan’s corporate governance, a pillar of Prime Minister Shinzo Abe’s efforts to invigorate the nation’s economy.

With the succession now in place, Isaka and the new slate of leaders are now tasked with how to deal with less profitable divisions that Loeb pushed to be restructured or divested. Isaka will also need to mend the rifts that saw his boss quit the company.

“The combination of expectation and uncertainty exists when looking at the near-term future of Seven & I,” said JPMorgan Securities Japan Co. analyst Dairo Murata. “Some expect Seven & I under Isaka’s regime to move ahead with downsizing low-profit businesses, whereas others may express concern the corporate culture will change.”

According to Seven & I’s results for the fiscal year ended Feb. 29, its superstore operations, which includes the Ito-Yokado Co. unit, had an operating profit margin of about 0.4 percent despite being the second-biggest division by sales. Convenience stores, the largest unit, had a margin of about 11 percent.

Seven & I should focus on convenience stores, restructure Ito-Yokado and divest retailers, including Sogo & Seibu and Barney’s Japan, said Loeb, whose Third Point LLC first disclosed an investment in the retailer in October.

Seven & I rose as much as 1.5 percent to ¥4,809 in Tokyo trading Wednesday. The stock has been on a roller-coaster ride in the past month as Isaka’s fate at the company hung in the balance, and was also roiled by a series of earthquakes that hit the Kyushu region last week and hurt Japanese shares.

Seven & I also appointed Chief Administrative Officer Katsuhiro Goto vice president of the group, while executive Kazuki Furuya replaces Isaka as Seven-Eleven Japan president, the retailer said in a statement. Suzuki and Noritoshi Murata, the current president and COO, will step down from their posts, it said. The changes take effect May 26.

All 15 directors including Suzuki took part in a board meeting Tuesday and unanimously agreed to the management changes, said Mayumi Ito, a Tokyo-based spokeswoman for Seven & I. Suzuki, 83, had announced his resignation April 7 when the board came one vote short of removing Isaka.

Isaka, 58, joined Seven-Eleven in 1980. He was in charge of the food product development division and rose to head the convenience store unit in 2009. The convenience store operator has boosted sales for 43 consecutive months, even as a sales tax increase during the period weighed on broader consumption in Japan. Now, Isaka faces the challenge of boosting sluggish revenue at other company units, too.

“The new leader of Seven & I would have to aggressively be creative and move faster to set a trend to keep attracting retail customers — who seem to get easily bored with one product nowadays with a slew of attractive goods and services raining down on them from many retailers,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.

In his letter to Seven & I’s board, Loeb praised Isaka as “instrumental to the success” of the profitable convenience stores unit and said the executive should be promoted for his contribution to shareholders. He also raised concerns about Suzuki’s “chronic health problems” and claimed the CEO planned to anoint his son as successor.

Loeb also said his push for changes at the retailer were consistent with Abe’s corporate governance focus. Abe’s government has set a shareholder-return target, backed a stock index that only companies with high profits can join and passed a stewardship code that enlists investors to engage in dialogue with firms about improving performance.

Revenue led by 7-Eleven stores accounted for 44 percent of the group’s total in the fiscal year that ended in February, up from 35 percent in 2012, while the proportion from department stores fell 4 percentage points to almost 15 percent.

Seven-Eleven, which operates 58,711 convenience stores worldwide, including directly-owned outlets and franchises, has been beating McDonald’s Corp. at feeding customers in Japan, and its wide range of hot meals make it the country’s largest fast-food chain by sales.

The convenience stores unit posted its best results on record April 7 with operating income of ¥304 billion ($2.8 billion) for the fiscal year ended February. The unit contributed to 84 percent of Seven & I’s operating income, overshadowing all other divisions including superstores and financial services.