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Morningstar | Lawson's Efforts to Lift per-Store Sales yet to Deliver Results; Shares Overvalued

The merger of FamilyMart with Uny has put Lawson in a less favorable position as the smallest of Japan’s big three convenience-store chains. Although Lawson remains a touch ahead in terms of per-store daily sales, a key indicator of retail profitability, we think the company is forced to invest to sustain growth. Lawson is determined to achieve aggressive growth in per-store sales and new store expansion, but we view the former as unlikely, given industry experience of a negative correlation between per-store sales and new store openings. We are taking a cautious stance on the firm's margin recovery, as we think competition is more likely to keep investment levels elevated, while acceleration in new store openings might depress the margins of the convenience-store business, which represents more than 80% of group profits.Management seems convinced that expanding the chain will lead to cost savings and quality improvement for its original and private-label products, and will therefore help close the gap of 20%-plus difference in per-store daily sales between Lawson and market leader 7-Eleven. Although Lawson believes otherwise, we think it has operated at sufficient scale and the fundamental issue behind the difference in per-store sales lies in the retailers’ capabilities regarding product development and execution.Lawson’s CEO, Sadanobu Takemasu, has lowered the priority of an expansion target of a 2,500 net increase in store count, after the C-store chain struggled to draw new customers and maintain a positive growth in its same-store sales. Management has apparently come to realize that the strategy of aggressive expansion will dampen its efforts to improve existing-store sales. On the other hand, rising labor costs and increasing difficulty in securing part-timers, particularly for night shifts, are burdening franchisees, who are responsible for staff recruitment and costs. Lawson has been testing possibilities to cashier-less stores, but the new technologies might not be employed until 2025. With rising investment needs, we see increasing per-store sales as a key priority for all the C-store operators, as it is critical to sustaining returns and growth.