What Makes Casey's ' Casey's

A look at what makes "atypical" retailer tick; expects subs to be next in-store success story

ANKENY, Iowa -- Less than a year after fighting off a hostile takeover by Alimentation Couche-Tard Inc., Casey's General Stores Inc. has settled back to doing what it does best, reported The Des Moines Register: finding new ways to make money and expand in a slow economy.

New money-making efforts include the addition of a foot-long sub sandwich, much to the dismay of the Subway chain, which is trying to block Casey's from using the term "footlong" in advertising, and delivery pizza, which Casey's is testing at a store in Clive, Iowa.

On the expansion front, [image-nocss] Casey's added 88 stores--74 through acquisitions and 14 through new construction--during the nine months that ended January 31, bringing to more than 1,600 the number of convenience stores it now operates in Iowa and 10 surrounding states.

The publicly traded company began as a collection of gas stations in rural Iowa towns in the 1970s. It has been the only major c-store chain to target communities of fewer than 5,000 residents, and it is now positioned to have a much larger footprint.

"Today, you can go about 500 miles in any direction and run into a Casey's," CEO Robert Myers told the newspaper.

Recent growth has occurred despite the hostile takeover attempt a year ago by Laval, Quebec-based Couche-Tard, which operates nearly 5,900 c-stores in North America, including more than 3,800 Circle K stores (click here for previous CSP Daily News coverage.)

That takeover battle cost Casey's more than $27 million, plus a $500 million debt restructuring that allowed it to buy back 25% of its own stock, said the report.

The seven-month effort helped convince shareholders of a truth that management has always known: Casey's is an atypical operator whose strengths are not always appreciated.

Another traditional Casey's strength has been a strong balance sheet, which had very little debt before the takeover effort. That strong balance sheet, coupled with an undervalued stock price and Casey's position as an industry leader, made it an attractive target in early 2010 for Couche-Tard, the Register said.

Founders Don Lamberti and K.C. Fish launched the business in the late 1960s.

When Lamberti retired in 2002, he said the best decision he ever made was during the Arab oil embargo of 1973-74 when gas stations were failing in waves. Casey's was just beginning its first round of major expansions, and officials worried whether they would have gasoline to sell.

"We determined that the cost of the stores could be carried by inside sales," Lamberti told the paper in 2002. "We said, 'If we have to, we'll just put black bags over the pumps and not use them until gasoline is available'."

As it turned out, they never needed the black bags.

But that early concept of boosting in-store sales of high-profit items, especially prepared food such as pizza, put Casey's years ahead of most competitors, said the report.

Casey's jumped ahead again in the 1990s by being one of the first chains to voluntarily replace underground storage tanks in advance of government regulations. Many operators refused to remove the tanks until new regulations required it. By then, many smaller operators could not afford the expense and had to go out of business, creating another expansion opportunity for Casey's.

Myers made self distribution work. His service with the company began in the 1980s, when Casey's built its headquarters in Ankeny. A key part of the campus was the warehouse and distribution center, which the company continues to use more than 20 years later to deliver goods to its stores.

Myers grew up in the same area as Lamberti. Myers was nine years younger than Lamberti, and after high school went into the Army. That was in 1966, two years before Lamberti and Fish bought their first station in Boone. By the time Myers retired from the Army as a colonel in 1988, Casey's was nearing completion of its headquarters and distribution facility. That's when Lamberti made what may have been his best hiring decision ever, the report said.

Much of Myers' military career had been in logistics. Lamberti figured: Who better to run Casey's new distribution chain than a military logistics officer, who had been responsible for figuring out complicated schedules to make sure soldiers were fed, clothed and armed when, where and how they needed to be?

Myers took the job and worked his way up the chain of command, becoming CEO in 2006.

The key to Casey's success has always been its in-store sales of grocery items and prepared foods, said the Register. It was one of the first chains to begin selling prepared foods, including doughnuts, coffee and pizza in the early 1980s.

The key to Casey's success is its profit margins of roughly 30% for grocery and nonfood items and 60% for prepared foods.

For more than a decade, the signature product of Casey's has not been gasoline, or cigarettes or beer. It's pizza, which Casey's introduced in 1984. With a profit margin of around 60%, it's easy to understand why the chain's managers love pizza. They are now experimenting with pizza delivery at a store in the Des Moines suburb of Clive.

So far, Myers said, "we're very pleased with the numbers we are seeing out of pizza delivery. But the question is: Are we making money? Are we making that 60% gross?"

"We've made it very lucrative for the delivery people," Myers said, noting that like most places, Casey's charges $2 to deliver pizza. But unlike most places, he said, Casey's gives the full $2 to the delivery person, plus tips, instead of the traditional $1, plus tips.

So far, he said, the addition of a delivery service has boosted carryout sales along with delivery sales.

But before adding pizza delivery at other stores, he said, "We're going to be careful about this. We're going to have to make sure that it is profitable for us. And then we are going to have to be really sure about the markets that we adapt this program to."

Moving too quickly can lead to costly mistakes, the report said. Not long after Casey's introduced pizza in 1984, it added fried chicken. Fried chicken looked like it was going to be a big seller until managers discovered it had a much shorter shelf life. Unlike pizza, chicken could not be safely kept under a heat lamp for more than about half an hour, and the product was dropped.

Myers said he expects sub sandwiches to be Casey's next in-store success story. The chain is in the process of enlarging many of its stores to handle more products and more traffic and include a small seating area.

"A down economy does not treat us like it does other retail sectors," Myers said. "It presents us with opportunities."