The Pantry Remakes the Deal

New leadership inserts geographic diversity, value into acquisition equation

Samantha Oller, Senior Editor/Fuels, CSP

[Editor's Note: Following is the first of three installments on The Pantry, the subject of CSP magazine's January 2011 cover story. Each installment will examine a different facet of the retailer's comeback story. Today's focus: rethinking acquisitions.]CARY, N.C. -- When The Pantry acquired Presto Convenience Stores in September 2010--the first acquisition under new president and CEO Terry Marks--analysts were somewhat surprised by the purchase. Kansas, where the bulk of the 47 sites were located, was far from The Pantry's sprawling Southeast footprint.

But [image-nocss] for Marks and the new Pantry leadership, the Presto purchase was a recast of the acquisition mold.

"If we're presented with an opportunity to make a really good acquisition within our footprint here in the Southeast, we'd do it," Marks told CSP Daily News. "But we are equally interested in acquisitions that allow us to build that portfolio diversity. And it takes time to build scale, but maybe even build countercyclical balance within the portfolio. Presto was a good first step in that direction."

Marks wrapped up his first year as head of the company this past September.
[Click here for an interview with Marks on his first year at the helm.]
Before anything else, The Pantry is a consolidator--a master acquirer that, during the late 1990s and throughout the rest of the last decade, has vacuumed up chains large and small in an effort at building scale. Today, with 1,625 stores in 13 states, the consolidator is revisiting its standards on acquisitions, led by a new senior management team that favors balance.

Presto gave The Pantry 44 sites in Kansas, which as of press time, enjoyed one of the lowest unemployment rates in the nation, and a low density of c-stores compared to the retailer's Florida, South Carolina and North Carolina stomping grounds. The buy also included three sites in Missouri.

Part of the westward momentum is "risk management," said Mark Bierley, senior vice president and CFO. The newest member of The Pantry's senior management team, Bierley joined in September from bookstore chain Borders. Consider that 35% of The Pantry's sites are located in coastal, tourist and resort areas, while Florida, a home-building mecca, has more than one-quarter of the locations. But it also opens up a large fill-in opportunity.

"You can see we're well concentrated in the Southeast, and have a gap now between Kentucky, Tennessee and out to Missouri," said Bierley. "By putting that anchor out there in Kansas, it gives us the thought process to start looking to fill in around those geographies."

Beyond geography, value is also a key focus for The Pantry's new management team--that is, adding value to its acquired chains.

"There have got to be real synergies," said Bierley. "Historically, if there's a really well-run operator that we've bought, and there are not as many synergies, then you're really not adding a ton of value. You're just bolting it on."
For the Presto sites, this means fully understanding the "consequences," as Marks termed it, of rebranding them to The Pantry's own Kangaroo Express brand. The stores continue to carry the Presto branding. "The first thing we have to do is understand the strength of the brand in the market," he said. "What does the brand mean to its consumers? Until we have the answer to that question, it'd be tough for us to go in and automatically flip those locations to Kangaroo Express."

The brief pause of acquisition activity in late 2009 and early 2010 was driven by an awareness, Marks said, that some recent acquisitions were made without considering the impact The Pantry business model would have on an acquired company. While he did not name chains, Petro Express, a high-volume, 67-site North Carolina retailer acquired in 2007, may be an example. Many analysts suggested The Pantry overpaid for the sites, which were finally rebranded to Kangaroo Express this past fall.

"The Pantry had a history of overpaying for acquisitions and paying for it by sale-leaseback and to maximize capital, [which leads to] higher-paying leases and higher rent," said an analyst that follows The Pantry but requested anonymity. "They've kind of put themselves in a corner and have to fight their way out."

Bierley and The Pantry team are currently examining the profitability of the chain's stores from a real-estate perspective, with plans to negotiate lower rents where it does lease, and getting out of underperforming stores.

The analyst said the retailer's intense focus inside the store is another step in the right direction.

"Ultimately, I think the biggest return we're going to get, the quickest with the least amount of capital, is everything on the energy side of the equation," said Bierley, noting The Pantry's efforts as part of its Fresh Initiative at cleaning up stores and clearing them of clutter, improving lighting, resetting the coffee bars with its improved Bean Street Coffee Co. program, and focusing on its "fast, friendly and clean" mantra.

Foodservice currently provides 9% of Pantry in-store sales. If it can reach the industry average--17%, as reported by the NACS State of the Industry Report of 2009 Data--within the next three to five years, "that's good living," said the CFO.

And organic growth such as this will position The Pantry to make better-quality acquisitions, said executives. "As we continue to improve our business model," said Marks, "then the universe of acquirees expands."