OAK BROOK, Ill. -- For Toot'n Totum Food Stores, Amarillo, Texas, cutting ties with an underperforming store can be a little like juggling two chainsaws and a bowling ball.
Because it operates 66 stores within the city limits of Amarillo (pop. 200,000), Toot'n Totum can't afford to create new competitors. But it must also maximize payback when selling a dog store, while doing right by employees. Despite such challenges, chief executive Greg Mitchell and his team have become experts at pulling off such daring feats.
If I sell a [image-nocss] store to a new owner, we'll do that with a deed restriction so they won't have tanks in the ground, Mitchell told CSP Daily News. We also have to look at the different personalities in the stores. We're not going to lay-off anyone [if we close a store], and you have situations where a store has been serving a community for 25 years, and they know and love a particular manager.
In scrutinizing each of its stores, Toot'n Totum considers market conditions, volume and, of course, overall site profitability. Just recently, the chain decided to reduce operating hours at a handful of stores, from 24 hours to 18, prompting internal discussions about the effects such a move would have on the marketing area as a whole.
If we shut down a store or go from 24 hours to 18 hours, where will that volume go? Mitchell said. Will [customers] go to a competitor's store, or if they do stay with us, does our store down the road have the parking capacity and lot size to take on that volume? Every move you make has ramifications on something else.
Last year, business conditions made it too difficult for Bill Collins, president and owner of BC Oil Co., Greensburg, Ky., to maintain his portfolio of seven stores. At the same time, his 75-year-old business partner decided he'd had enough with the unpredictability of retail. Collins' store count shrank to two in June 2005, after selling four stores to a large southeastern chain and leasing out another.
When we sold the stores it wasn't a case of the stores not being in our plans; they were high-volume stores, but for us it was all about the margins, Collins says. If you're making good money, you can afford less volume. But if you're losing money [from a fuel-margin perspective], what's the increased volume going to do?
Collins' situation may signify a growing trend, whereby chains have no option but to maximize their size to distribute the pain associated with fuel-margin volatility, according to Tom Kelso, managing director of Matrix Capital Markets Group, Richmond, Va. But this shift is being guided by more than just a bigger is better mentality.
We'll continue to see this evolution in the industry, where people need to get larger or get out, Kelso told CSP Daily News. You combine that with generational profiles of a lot of the people in this industry and you have this confluence of events. You're looking at these people exiting the business to get the best economic benefit to them because the market is so good.
Some larger chains, to keep their portfolios fresh, churn about 5% of their stores every year. William Trefethen, managing director of Trefethen & Co., Scottsdale, Ariz., said the best way to rationalize a store portfolio is to compare each store's current return on its market value, or its implicit return (calculated by dividing a store's cash flow by its current market value), to the company's current required rate of return on new investments.
For example, if a store has a market value of $1 million and the current cash flow generated by the store is $100,000, then that would equate to a 10% implicit return, said Trefethen. If the company could redeploy the sale proceeds and achieve a return in excess of 10%, the store should be sold. Retailers must be thinking along the lines of: What's the store worth if I sell it, and can I alternatively invest that money to get a higher return?
[Watch for more on retailers' portfolio-management strategies in the cover story of the February 2006 issue of CSP magazine.]
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