The deals that riveted the convenience-store industry in 2014 with their sky-high multiples, territorial acrobatics and massive scope remapped the top-ranked chains, creating a tenuous king-of-the-hill game in which firms can be up or down depending on the latest mind-boggling agreement.
With tax incentives from master-limited partnership (MLP) status and historically low interest rates, the itch to consolidate has become a full-blown rash, with many players positioning themselves for a big run.
“The trend toward consolidation is definitely going forward,” says former retailer Jeff Kramer, now managing director of NRC Realty & Capital Advisors, working in Denver. “And it’s great as long as it’s a proper acquisition, one that’s well thought out and fits with the existing organization, has synergies in the form of buying power and economies of scale, and the ability to cut overhead.”
The two deals accounting for the biggest shifts in rank were Enon, Ohio-based Speedway’s $2.8 billion purchase of the New York-based Hess and WILCOHESS stores, as well as the $1.8 billion deal giving Dallas-based Energy Transfer Partners a Texas jewel in Susser Holdings of Corpus Christi.
The Speedway-Hess deal—forging a new entity of 2,740 stores—vaulted the new behemoth from No. 6 and No. 7 as two companies last year to No. 3. The Susser buy raised ETP up to No. 7, behind The Pantry, Cary, N.C.
While involved in the third major acquisition that happened in 2014 (as of press time), San Antonio-based CST Brands still dropped from No. 3 to No. 4. But with its $85 million purchase of Allentown, Pa.-based Lehigh Gas and the procurement of MLP benefits, the spun-off retailer is sure to step aggressively into the game of store counts and chain ranking.
In the larger scheme, Kramer says, going from No. 6 to No. 3 won’t matter. “It’s not going to change your buying power, corporate strategy or profitability,” he says.
What will matter is how long the current financial environment will last. Multiples are higher, MLPs are trading well and money is cheap.“A lot of times values get to extremes,” Kramer says. “And usually something happens and things revert back to a norm.”
But what that normal means remains to be seen. With the recent mega-mergers, each party had levels of expertise to bring to the newly created firm. Can they combine strengths, eliminate weaknesses and emerge a more competitive chain?
An example would be Susser’s vibrant foodservice program and its potential to transform Sunoco, says Kramer. While not all of Sunoco’s stores are large enough to execute on the basic concept, the right combination of people, temperament and skill set could allow for a formidable melding.
But it’ll be tough to pull off, Kramer says.
Others agree. Though saying M&A is “not part of our DNA,” Mike Thornbrugh, manager of public and government affairs for Tulsa, Okla.-based QuikTrip, believes the biggest stumbling block to success is culture. “Our guess is that key ingredient would be very difficult to transfer,” he says.
Industry veteran Bill Douglass, chairman of Douglass Distributing, Sherman, Texas, says, “If roll-up or scale is the name of the game, then the corporate mindset will be about their specific interests and will preclude customer-centric or superior service standards.”
From his experience, Kyle McKeen, president and CEO of Alon Brands Retail, Odessa, Texas, says what normally occurs is a “battle of the cultures” if leaders fail to manage the process aggressively.
“I can’t say that I have been part of a flawless culture meld,” McKeen says. “I have seen large chains—100-200 stores—merge with same-size or smaller chains and successfully blend cultures with a lot of effort. It is obviously very difficult.”
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How the Big Get Even Bigger
Speedway’s Speedy Rewards program features nearly 30 category- and brand-specific clubs that reward members for frequent purchases. Some estimate this creates one to two more purchases per customer.
Sophisticated foodservice programs have led to the growth of many of the top 10 companies on our list. Specifically, Laredo Taco Company, purchased as part of Susser by ETP in April 2014, was an attractive commodity and added to the retailer’s value.
It makes sense that profitable retailers are experts at SKU rationalization. The decision to add, retain or delete a certain product is vital to growth-centric retailers. At Speedway, all product decisions are based on whether they help profitability per square foot.
Methodology
Ranking reflects combined company-operated and franchised store counts in the United States and Canada as of Nov. 30, 2014. It does not include licensed or dealer locations, or military stores. It does include grocery chain c-stores.
- The Couche-Tard/Pantry (Nos. 2 and 6) merger announced in December is not reflected in the list.
- Sunoco Inc. (No. 7) includes Stripes and A-Plus stores; Sunoco LP (No. 57) includes MACS and Aloha Petroleum locations and eventually will comprise the Stripes stores.
- Tesoro Corp. (No. 16) includes company-operated stores only.
- Western Refıning (tied at No. 39; see following bullet) does not include Reay’s Ranch locations; the sale is not yet complete.
- Almacenes Distribuidores de la Frontera (tied at No. 39) is included because its buying team is based in El Paso, Texas.
- VPS Convenience Store Group (No. 55) stands alone on the list; its sale to GPM Investments (No. 22) is not yet complete.
- Blarney Castle Oil (No. 83) does not include Blodgett Oil locations; the sale is not yet complete.
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