Dollar-flow analysis

For us to be comfortable investing in SEVN, we needed to have a better view into the health of its franchisees and have a better understanding of how SEVN manages them. In our interviews with SEVN's regional heads, they provided us with samples of their monthly franchisee performance reports. Through it, we were able to discern the amount of granularity SEVN has into the performance of its franchisees. Our surveys with franchise owners and operators gave us comfort on the overall strength of their partnership with SEVN.

Due to 7-Eleven stores predominantly transacting in cash (95%+ of its sales), another concern we had was the risk around cash management and of stores getting robbed. We were able to get comfort following our understanding of the cash management process at the store-level. Effectively, only a de minimis amount of bills are held in the cash register (PHP3k to PHP5k). When certain thresholds are met, the store manager will physically deposit the overflow cash into the onsite ATM, which is available at ~90% of its stores. The ATMs are not owned by SEVN, but by its banking partner and the contents are fully insured in the event of a robbery. We were overall impressed with their cash management operations.

Key Insights

Our key insights into SEVN is derived from the extensive on-the-ground diligence we have performed in building conviction around its key differentiators and right to win. The key differentiators can be summed up as: a) significant RTE selection, b) ability to browse, refrigerated drinks, and air conditioning, c) large selection of US branded products, and d) strong logistics network. Each key differentiator in isolation may not seem like much, especially when viewed in the form of our quarterly letter, but this is where primary diligence is of core importance in building conviction in our portfolio companies.

During our most recent diligence trip to The Philippines, we visited all three island groups of Luzon, Visayas, and Mindanao. We started our diligence in Manila (Luzon) where we visited ten 7-Eleven stores, five Lawson's, five Uncle John's, three Alfamart, two Dali, and two O!Save – the last two were hard discounters. We also had an on-site translator to better dig for information even though the vast majority of Filipinos spoke proficient English. In addition, we visited three major malls and met with the CFO, Head of Investor Relations, and Head of Business Development of SEVN. Subsequently we traveled to Cebu (Visayas) where we met with the regional manager of SEVN and had an in-depth walkthrough of the region's main distribution center. From there, we visited sari-sari stores on the outskirts of town, wholesalers who cater to sari-sari stores, value supermarkets, and mid- to high-end supermarkets. Afterwards we traveled to Davao City (Mindanao) where we met with the regional manager of SEVN and had a similar walkthrough of the region's distribution center. We visited seven 7-Eleven stores and three Central Convenience stores which is a regional convenience store competitor. From there, we drove three hours to the southernmost city in The Philippines, General Santos (hometown of Manny Pacquiao). We visited a few factories alongside several more convenience store drop-ins. We finished the trip back in Manila where we met with private equity firms and well known Filipino family patriarchs who were meaningfully invested within the broader consumer sector to learn from their experiences. Along the way we met with and interviewed stakeholders across SEVN's ecosystem: franchisees, customers, store employees, store managers, warehouse workers and supervisors, regional managers, and business development teams, etc.

RTE: SEVN dedicates roughly half of its floor space to RTE products including a significant amount of available seating for customers to eat after purchasing their food. This is much more than Lawson's and Uncle John's where RTE is roughly a quarter of the available floor space (including seating room). In addition, SEVN has the largest assortment of RTE products.

Ability to browse, refrigerated drinks, and air conditioning: A big part of overall retail sales is still through sari-sari stores which are local mom/pop shops. They represent roughly ~40% market share of the broader market sales which is 8x larger than convenience stores at just 5% market share! As GDP per capita increases, we believe convenience stores have the right to win market share from the sari-sari stores.

Large selection of US branded products: As mentioned above, Filipinos are fond of US branded goods, which are readily available in 7-Eleven stores. In Alfamarts, there are a lot more local branded products and private labels as Alfamart is part of SM Group, a domestic conglomerate. It becomes even more apparent when we look to the hard discounters, Dali and O!Save. Although these hard discounts have been expanding rapidly (only Luzon, not in Visayas or Mindanao), their selection has close to zero foreign brands and focus predominantly on private label. This insulates SEVN from their aggressive expansion plans.

Strong logistics network: SEVN is the only convenience store operator in Visayas and Mindanao, while providing multi-modal logistics (land, sea, air) and reverse logistics to all its stores. It is also able to deliver RTE products and cold chain logistics to the vast majority of its stores in both bulk and pick and pack sizes. This complex logistics network, which was built through decades of refinement would make it hard for its existing competitors to replicate.