Japan’s famously fabulous conbini, or convenience stores, are in the midst of yet another transformation, possibly taking them to a Star Wars level.  Well-known for being omnipresent life support waystations, Japan’s harried, busy commuters frequently visit the tens of thousands of 7-Elevens, Lawsons, and FamilyMarts for a massive variety of prepared meals, snacks, and drinks. These stores are also lifelines for knocking other errands—paying bills, buying train tickets, or picking up online shopping deliveries—off their lists.  Each of Japan’s 125 million residents visits a conbini an estimated ten times a month, making them a cornerstone of retail life.

KDDI certainly sees the Lawson convenience store acquisition as a sandbox for its more sci-fi-oriented “phygital” retail concepts. But more pedestrian strategies likely drive its decision: KDDI is reportedly looking to consolidate storefronts and leverage its physical assets by folding in service stations that sell the mobile operator’s products and services (which include life insurance and other financial services in addition to its traditional mobile subscriptions, handsets, and accessories) into Lawson shops. This is a shift in response to Japan’s shrinking, aging demographics.

Why Telecom Wants Japanese Convenience Stores

Recent M&A activity at Japan’s second largest conbini operator Lawson, however, is threatening to loosen that cornerstone. Telecom operator KDDI is in the process of buying 50 percent of Lawson’s shares, delisting the convenience store chain in the process. KDDI’s stated aims are to seek synergies with its own sales and service operations and to transform and scale up the conbini business through digital technology. KDDI owns a little over two percent of Lawson shares, with trading house Mitsubishi Corp owning 50.1 percent.  KDDI has started to invest ¥500 billion ($3.4 billion) through a tender offer which it plans to complete in September. This move will take Lawson private and make KDDI an equal co-owner and operator with Mitsubishi.

The deal represents a union of two second-place giants of Japanese retail. KDDI, with 67.8 million mobile subscribers as of March 2024, has 32 percent of Japan’s mobile market, behind the country’s market leader NTT DoCoMo’s 42 percent. Lawson has 14,600 stores across Japan and an estimated 10 million daily customers, second only to Japan’s conbini king 7-Eleven’s 21,500 shops.

Conbini Consolidation

Some market observers are connecting the dots between KDDI’s bid and the delisting of third-place conbini chain FamilyMart in late 2020 by parent company Itochu. They suggest that these moves smack of desperation: Retailers are battening down corporate hatches to conserve cash in troubled times. Japan’s franchise giants are indeed trying to operate leaner with less capex (more on this below) and Lawson plus others compete in a terrifically competitive market. But conbinis are relative superstars in Japan’s otherwise dismal retail landscape. Japanese consumer spending has been falling continuously for over a year, but the Japan Franchise Association reports that the country’s 55,713 conbinis grew their collective sales by 4.3 percent in 2023, to some 11.2 trillion yen ($71.4 billion).

KDDI certainly sees the Lawson acquisition as a sandbox for its more sci-fi-oriented “phygital” retail concepts. But more pedestrian strategies likely drive its decision: KDDI is reportedly looking to consolidate storefronts and leverage its physical assets by folding in service stations that sell the mobile operator’s products and services (which include life insurance and other financial services in addition to its traditional mobile subscriptions, handsets, and accessories) into Lawson shops.  This is a shift in response to Japan’s shrinking, aging demographics, according to analysts.

High Tech or High Touch?

“It’s plain and simple diversification, but they are effectively killing several birds with one stone,” says Marc Einstein, Tokyo-based Chief Analyst of ITR Corporation.  Shrinking, aging Japanese suburbs mean KDDI needs to close more capex- and labor-intensive stores; “the Lawson shop near me has ten full-time staff serving only a few customers a day.” But Einstein says that neither can KDDI go all-in on becoming a virtual telco because their older customers still prefer to settle their bills and ask service questions in person. A KDDI outlet within Lawson allows them to service those customers “where they already shop every day. It also expands what they can do with their loyalty points program and their digital wallet services.”

Robert Clark, a Hong Kong-based analyst who covers Asian digital technology markets, agrees. “Japan retail is a high-touch retail market and Lawson’s huge number of locations, and the breadth of products parallels the wide range of services KDDI offers, with obvious synergies in payments, ecommerce, and fulfillment. It is also a promising bet on Japan’s future Work-From-Home market expectations and aging demographics, which are driving people out of CBDs and into the suburbs and regions.” Clark also sees these strategies possibly ‘exported to Lawson’s network of over 6,200 stores in the Asia-Pacific, mostly in China but also the Philippines, Indonesia, Thailand, and Hawaii.

Conbini Base Stations

Einstein, says that there are many other bird-killing stones on KDDI’s technology roadmap. He notes that the physical store properties make handy (and rent-free) spots to erect more costly 5G mobile base stations. Drone delivery services, which combine 5G-enabled Internet of Things (IoT) with the growing presence of conbinis in the home delivery sector (Lawson has had a food delivery agreement with Uber Eats since 2019) is another potential opportunity.  “They are also certainly looking at the ways ‘XR’ (extended reality), smart logistics, autonomous stores and delivery robots using 5G connectivity” to create more efficient stores that can showcase KDDI’s technology solutions.

Convenience Store Tourism Boost

KDDI’s acquisition is also exploiting other bright spots in Japan’s retail landscape, such as the country’s booming international tourism sector.  A post-covid tourism explosion and a weak yen have made Japan Asia’s top travel destination: monthly overseas arrivals have been over three million in the first quarter of this year, as opposed to two million monthly last year and a million monthly visitors in 2014.

Tourists, particularly from China, largely attributed to Japanese snack and novelty retail giant Don Quixote’s 5.8 percent revenue growth to $13 billion in fiscal 2023. Shopping and eating at Japanese conbini has long been a favorite activity of younger travelers to Japan, who revel in their quirky, copious variety of instant noodles, rice balls, fried chicken and in particular tamogo (egg salad) sandwiches. Social media is awash with videos of international tourists feasting on conbini smorgasbords; Lawson’s tamogo sandos have had their praises sung for years on social media, by food critics and influencers, and even Anthony Bourdain.

Lawson’s reputation with tourists is not always positive: the town of Fujikawaguchiko erected a huge mesh barrier across the street from a Lawson store to discourage hordes of foreign tourists from littering and trespassing while taking photos of Mount Fuji. Undaunted, aggressive tourists have poked around 10 small holes in the mesh screen, making the screen itself a new tourist attraction.

International Expansion with Caveats

Given the growing global awareness of conbinis, international expansion is another obvious growth strategy. However, Japanese convenience store firms, so rooted in plumbing the depths of their branding and SKU strategies to meet the exacting requirements of a fussy, shrinking domestic market, are finding that they may not have enough marketing creativity left over to effectively manage their brand in other markets.

In Malaysia, where performative support of Palestine has long boosted populist politicians’ Islamic bona fides,  FamilyMart’s 277 stores had come under a boycott threat because of an agreement between an aviation subsidiary of Itochu and an Israeli defense company Elbit Systems. Itochu ineptly, if not somewhat cravenly, avoided the boycott by canceling the Elbit deal and refuting any support of Israel.

Financial Shenanigans

The KDDI-Lawson deal likely has more to do with a larger delisting trend in Japan’s capital markets. The Tokyo Stock Exchange has for several years been enhancing the power of independent directors on the boards of publicly traded companies through additional governance. Over 130 Japanese firms took themselves private in 2023, including venerable electronics conglomerate Toshiba, as management has attempted to wrest back control. As a Japan desk sales trader at an Asian investment bank explains, “stricter corporate governance rules are not to everyone’s liking, especially in Japan’s traditionally top-down management approach.” In addition to getting rid of meddlesome external board members (many put into place by activist investors), delisting is providing a means for extracting value for buyers: “There are a number of fairly asset-rich companies on the exchange that trade at below book,” and KDDI’s purchase of Lawson may be a means of doing just that.

Hidden Agenda

KDDI may be looking to leverage its brick-and-mortar real estate assets rather than use Lawson as a platform for retail 4.0 digital transformation, “but it is definitely doing both—it’s just that the latter sounds better. Telcos are realizing that zero or slightly negative subscriber growth is their best scenario,” says Einstein. Even two years ago, mobile operators in Japan (and elsewhere) envisioned 5G services would bring them increased revenue opportunities, from new types of services like network slicing and enterprise “Industry 4.0’ applications. “These things just never materialized,” observes Einstein, “now it’s all about using GenAI to automate your networks; if there isn’t a revenue upside you can at least control your costs.” He believes this technology-driven cost rationalization is also informing many of the plans KDDI has for its Lawson retail footprint.

Increasing a presence in physical retail does have its risks for KDDI: “Brick-and-mortar retail in Japan is a fiercely contested, fast-changing business sector,” says Clark, adding that this could create additional capex and reputational risks as much as it eliminates others. KDDI’s acquisition of Lawson is largely driven by considerations more physical than digital, but this does not mean that most will have more transformative ramifications for Japan’s retail landscape.