PROVIDENCE, R.I. -- The c-store industry is booming. Low gas prices coupled with an improved economy and greater employment has led to increased driving, which in turn has led to increased in-store spending. According to the NACS State of the Industry Report, fuel sales and in-store sales rose in 2015—27.7% and 5.8%, respectively—buoying c-stores profits to $10.6 billion. As we enter the final months of 2016, these positive trends should continue, and industry experts forecast another record-breaking year. As a result, many c-store operators will have amassed large cash reserves and, while more cash is undoubtedly good, the dilemma of what to do with it can be difficult.
What to do with large cash reserves
Cash reserves are strong strategic assets, and it’s important to maintain a healthy cash balance to prepare for the inevitable volatility the c-store industry and economy will face. There are already a number of omens pointing to potential trends that could negatively affect the c-store industry.
- More government regulations affecting the ability to grow and operate efficiently.
- Signs of a bubble in asset valuation.
- Higher interest rates and RIN impact.
But in my experience, it’s what we are unable to foresee that often has the greatest effect. There are always surprises in this business, and they are rarely pleasant. Cash on the balance sheet is the best salve for these challenges.
And that is why maintaining a majority of your cash reserves is so important. A large cash reserve allows for more strategic flexibility, which can be used to gain advantages over peers in this highly competitive environment. Shorter-term moves—such as taking advantage of early-payment discounts, testing new ideas, making minor store upgrades and executing opportunistic marketing campaigns—are wise ways to spend your cash. These tactical moves can help you build a stronger market position and drive traffic, positioning your operation for long-term success.
For wholesalers, these cash reserves serve as a cushion when oil prices spike. In this scenario, the wholesaler’s costs rise while the dealers sell the lower priced gas in their tanks. This creates an imbalance between payables and receivables that can lead to severe effects on working capital with the potential to cripple an unprepared company.
What not to do with large cash reserves
It can be tempting to spend today’s cash reserves on long-term projects, but the decision to do so may be shortsighted because it leaves you with a reduced cash cushion in case of an unexpected event or downturn. Instead, I believe long-term growth projects should be matched to long-term financing. In fact, financing these types of projects has a number of distinct advantages.
- Right now, capital is historically cheap. Rates are as low as they have been in decades, and operators can lock in these rates for today or future spending.
- Debt is often cheaper than the opportunity cost of forgoing a well-thought-out growth strategy.
- Financing can also reduce taxable profits, making the initial cost of capital cheaper.
- Products such as development lines of credit allow operators to move quickly on new opportunities and take into account not only the current equity of an operation, but also the equity of what is being acquired.
In less quantifiable terms, taking on debt to finance growth increases the financial discipline of any business. Capital planning forces businesses to consider every aspect of their strategy, a mindset that is beneficial for all involved. On top of this, operators gain a vested and experienced capital provider and financial partner to help advise their endeavor.
Our experience has shown that industry speculators will continue to leverage their cash reserves to capitalize their long-term strategies during better economic times, but experienced and more forward thinking c-store operators will maintain them, instead focusing on more advantageous strategic capital planning to finance their growth.
Mike Phelps is national director of Citizens Bank Convenience & Retail Fuel, Providence, R.I. Contact him at mike.phelps@citizensbank.com.
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