The proposed acquisition comes after Seven & i rejected Couche-Tard’s initial offer, deeming it too low. Despite this setback, Couche-Tard remains interested in finalizing the deal.
Seven & i has since accelerated efforts to restructure its operations to meet the demands of certain investors. As the company prepares to release its quarterly results on October 10, the industry is watching closely to see how these developments unfold.
If Couche-Tard successfully merges with 7-Eleven, the newly formed chain will boast an impressive footprint in the U.S. market, with the potential to expand its reach to nearly 20,000 stores, including 12,601 7-Elevens.
This consolidation could enhance their bargaining power with major cigarette manufacturers like Altria and British American Tobacco, but the combined entity will still face significant threats from the illicit market, where flavored vapes and discounted cigarettes are readily available.
Despite the overall decline in cigarette consumption due to increasing health concerns, the U.S. cigarette market approached nearly $60 billion in sales in the year ending in early September, according to Circana, a market research firm.
The convenience store sector is crucial for tobacco sales, accounting for a significant portion of overall revenue. However, rising prices have caused U.S. consumers to shy away from name-brand cigarettes sold in major chains like 7-Eleven, with the net price of a pack of Marlboros soaring nearly 30% to $9.27 since 2019, according to Altria. Heavy taxation on tobacco products further exacerbates the issue, adding substantial costs per pack.
The potential $38.5 billion acquisition would significantly increase Couche-Tard’s presence in the U.S., allowing it to leverage its size to negotiate better prices and promotions from manufacturers.
Industry experts suggest that a combined chain would be able to capitalize on its scale to reduce prices on popular nicotine products, including pouches like ZYN, which have gained immense popularity in recent years.
According to Don Burke, a senior vice president at Management Science Associates, both companies are likely to capture the largest shares of U.S. tobacco sales, given their extensive store networks.
However, the competitive landscape is changing, as consumers increasingly turn to alternatives such as vapes, pouches, and cheaper brands.
The long-term decline in traditional cigarette sales has prompted manufacturers and retailers to scramble for the remaining market segments.
Burke notes that partnerships between convenience stores and tobacco companies may restrict their ability to compete with independent stores offering discounted cigarettes.
In exchange for financial incentives, convenience stores often prioritize shelf space for specific brands or ensure that those brands are among the most affordable in-store.
As a result, smokers priced out of premium brands like Marlboro or Camel may find a wider array of discount brands available in independent stores without such agreements.
In 2022, tobacco companies paid retailers like 7-Eleven and Circle K approximately $247.2 million for promotional activities, including displays and merchandising, a 5% increase from the previous year.
The majority of these expenditures were directed toward funding discounts on cigarettes at retail outlets, which totaled around $5.74 billion in 2022.
Despite their substantial presence in the tobacco market, large convenience store retailers have largely missed out on the rapidly growing sales of flavored vapes, such as Elf Bar, produced by the Chinese company Heaven Gifts.
The vast majority of these vapes cannot be legally sold in the United States, and retailers like 7-Eleven and Circle K find them too risky to carry. However, these products remain easily accessible at independent bodegas and smoke shops.
In an effort to counter declining tobacco revenues, Couche-Tard has implemented strategies such as adjusting prices and introducing loyalty programs for customers.
The growing popularity of nicotine pouches, driven by brands like ZYN, has also bolstered Couche-Tard’s profits from nicotine products. Executives have stated, “We are making more from nicotine than we ever have in the past.”
Looking ahead, the competition in the tobacco industry is expected to intensify, particularly as smoking rates continue to decline. Stuart, a managing partner at Cadent Consulting Group, predicts a surge in demand for less harmful alternatives and increased shelf space for new nicotine products.
“I think we’ll see a big push in the less harmful alternatives category… more items, more space, better merchandising beyond just the Marlboros of the world,” he stated.
As the potential merger between Couche-Tard and 7-Eleven unfolds, the combined entity will have to navigate the challenges posed by illegal flavored vapes and discounted cigarettes while seeking to maintain a dominant position in the U.S. tobacco market.
The future remains uncertain, but the implications of this acquisition will undoubtedly reshape the industry landscape for years to come.