For the first 40 years of its existence, The Pantry lagged behind the pack. That’s not to say it didn’t accomplish much in those four decades. It grew into one of the nation’s largest independent convenience retailers, with 1,625 stores in 13 states. In that time, it mastered the art of deal making through dozens of acquisitions, each one a negotiation with a specific strategic purpose.
But while the industry was chasing foodservice, expanding it to 17% of in-store sales, according to the NACS State of the Industry Report of 2009 Data, The Pantry was eking out only a 9% contribution, including fountain beverages. As other retailers focused on winnowing their reliance on fuel for profits, The Pantry generated more than one-third of its profits from the forecourt in 2009—compared to just more than 27% for the industry average.
It is a level of underperformance that reflects just how much making acquisitions has consumed company leaders’ attention and kept them from grabbing the reins of store operations and being a true contender. “We were like this sleeping giant, and we continued to lose market share,” says Brad Williams, senior vice president of operations for The Pantry, whose Kangaroo Express brand flies at 80% of its sites. “In markets where you have a really strong 50- to 60-store chain that we compete with, it took us a long time to react.”
But a new senior executive team, led by president and CEO Terry Marks, has jolted the company with an enthusiasm for change and big plans for the future, encapsulated by The Pantry’s Fresh Initiative. Build up foodservice by first establishing a solid, highly competitive coffee program. Simplify everything from store assortment and bonus plans to the POS systems. Harness technology to measure the progress and ensure execution. Like a jockey steadying an unruly horse, The Pantry is attempting to regain control of an untamed vast retail network.
But each of these efforts hinges on an even greater task: building a culture of empowerment among an employee base accustomed to following direction. The trick lies in sparking within the workforce a sincere, emotional connection to the company’s new vision, says management consultant Larry Wilson. The author of “Playing to Win,” Wilson literally wrote the book on culture change for retailers such as Quick Chek Corp. Unfortunately, he says, many business leaders don’t have a clue what it takes.
“For most, it’s, ‘Leave your emotions at home; this is a business,’ ” says Wilson. “But clearly, what they’re trying to appeal to are people’s emotions. First, it’s about their employees and then … their customers.”
It’s a challenge that Marks and his team are keenly aware of as they attempt to transform The Pantry into a meals-and-snacks destination, powered by the people. And as leaders of a publicly owned company, they know that success will not necessarily goose the stock price right away. “The improvement in the caliber of the team and evolution of the culture is something that happens at a level beneath the investors,” says Marks. “They want strategy to work and the stock price to go up.”
The two evolutions taking place within The Pantry—one at the surface, in the stores; and one just underneath, within the culture—have begun grinding into gear.
But after tens of millions of dollars are invested, will The Pantry be a fundamentally better retailer? And equally important, as a publicly traded entity, will its shareholder value grow?
What is exponentially clear is that the company, which last fiscal year reported close to $6.4 billion in revenue, will deliver improved in-store results and discussing how to work together. “It takes a while for a new team to not only know each other and learn, but also continue to build trust and continue to inch closer to industry averages on core categories. But will The Pantry be better than average?
After an exclusive interview with The Pantry’s executive team, along with several store visits and interviews with more than a dozen other analysts and industry observers, several opportunities and challenges become clear:
Indications from observers and Pantry employees reveal a new optimism. An uncompromising embrace of the “fast, friendly and clean” mission, investments in store remodels, remerchandising, technology and an emphasis on foodservice are key steps toward improving same-store sales.
Executives can say they value people, but to develop a truly empowered and invested workforce, leaders must abandon the traditional “command and control” management style, says Wilson. Will the Marks team—with many of its execs new to the industry—be up to the task?
By the end of 2011, only onequarter of sites will have adopted new initiatives, so improvements in samestore sales will be difficult to assess. As one consultant put it, “You’re going to have to come back and write the real story two years from now, when they can measure what impact [these steps] have made.”
In that same vein, the culture piece remains in an embryonic stage, with crucial components still in the start-up phases. A standardized rewards system, the folklore or stories that define its culture, and a history of successes toward a larger goal all have yet to be put in place or occur.
“They’re not like a petroleum company; they don’t have upstream to fall back on,” says David Bishop, managing partner of consultancy Balvor LLC, Barrington, Ill. “They’re in this for the long haul. They have to make it work.”
Culture War
To position themselves for a successful retail strategy anchored by foodservice, The Pantry leaders must change the character of operations from dispassionate to passionate.
For consultant Wilson, the more fundamental challenge lies in tossing aside any “command and control” issues, and an environment in which “Do what you’re told” and “Cover your [butt]” drown out creativity and distracts employees from customer needs.
“It’s fair to say that there was a culture of waiting to be told what to do,” says Marks, who just wrapped up his first year as head of The Pantry. Indeed, the board’s selection of Marks, the former CEO of Coca-Cola Enterprises, over viable internal candidates, was a clear statement that an executive shake-up was in order.
“What we needed to do was to empower the management team and ensure ownership of the business, with respect to their areas of responsibility,” he continues. “We made a lot of changes in the management team because the sense of urgency and sense of ownership that we wanted to have in the leadership team is something that not everybody can get there.”
That meant a cleaning house of sorts. Marks and the board replaced the CFO and the senior vice presidents of marketing, human resources and information technology with candidates from outside the c-store landscape and who, they felt, shared the sense of urgency and new company vision. They also needed to gel as a team, a dynamic that had been lacking, says Marks. He suspects an unclear company vision and little accountability as root causes.
“Culturally, the need for effective collaboration across functions can only take place when the entire team is clear on what the goal is, and they also understand what the parameters are and you empower them to operate within those parameters,” says Marks. “But if you’re not crystal clear in where you’re going and … on what you’re allowed to do in the pursuit of that objective, you can’t interact effectively with the other functions.”
Keith Bell, senior vice president of fuels, has been with the company since 2006. He describes previous weekly senior executive team meetings that were strictly focused on metrics, with little discussion of individuals’ plans or goals. “There wasn’t a view of including your peers in enterprise decisions,” he says of the previous executive structure. “It was really a thing of, ‘I made that decision, so you don’t need to ask anyone else. Just speak with me about it.’ ”
The lack of communication and accountability becomes readily clear when, for example, a new initiative was rolled out to stores. The sales and operation teams would assume success if they did not hear any complaints. The reality was that district managers did not have a vehicle to provide feedback or assurance that it would be received well.
Team building needs to replace the command-and-control structure, says Wilson. It’s a strategy that removes competitiveness and replaces it with collaboration. The best results occur when employees stop competing with each other and start helping the larger group succeed.
Pantry executives appear to be taking those fi rst steps. In November, the senior executive leadership team completed personality profi les and, under the guidance of a consultant, spent an entire day reviewing the results and relationship with each other so that when we’re moving fast, it’s always easier to know we’re on the same page and trust in the other individual to do the right thing for the company and not just their own function,” says Keith Oreson, senior vice president of human resources, who joined The Pantry last June from Advance Auto Parts. “It speaks volumes that the executive team was willing to go out for a full day and do hours’ worth of prep work prior to the meeting, all in the interest of how we can work better as a team.”
“They’re bringing fresh ideas and new perspectives, and they all have their strengths in their function,” says Williams, who, with 13 years under his belt at The Pantry, is the veteran among the team. “But what’s different than in the past is they can all sit down and we can share with one another.”
Power of the People
At a fi rst-ever sales rally this past summer, 1,640 Pantry store sales managers congregated at one of 18 Budweiser distributor warehouse meeting rooms around the country to watch a Webcast led by Brad Williams and John Fisher, senior vice president of marketing. Their charge was to deliver the four sales and operations goals for 2011:
Sell an average of 100 cups of coffee per store. Here, The Pantry’s Bean Street Coffee Co. program serves as the wedge to give The Pantry a better foothold on foodservice.
Improve customer service. A recent participant in the CSP/Service Intelligence Mystery Shop program, The Pantry is now using it as a benchmark for improving customer service. The goal: reach an average score of 90 out of 100 on internal mystery shops, an ambitious target that would rank them among the likes of Kwik Trip and QuikTrip in store-by-store execution of fundamentals such as inside and forecourt cleanliness, in-stock inventory, and merchandising.
Sell an average of 26 bundles per store. The promotion bundles a food item—candy bar, hot dog or sweet snack—with a beverage and a free bottle of a Nestlé Pure Life water for $2.50.
Sell two incremental cartons of cigarettes a day per store. A bigger marketing staff will enable The Pantry to focus on growing the category as opposed to simply putting out fires.
“If we do those four things, the boat will rise,” says Fisher, another Coca-Cola alum, who joined in March 2010.
Beyond the communication effort—“the first time ever that all the store managers heard the same message from marketing and sales at the same time,” says Fisher—what made the rally remarkable was that logistics were arranged by The Pantry’s new beer category manager, Bob Gulley, who previously was with BP. In the past, it had been every man for himself, and a beer category manager would have had nothing to do with a larger initiative.
“All we talked about were out-ofstocks, coffee and bundles,” says Fisher, citing that part of Gulley’s task is to support these goals through the beer category. “The category teams are working against the big objectives.”
Similarly, an event in Atlanta brought together 330 of The Pantry’s district managers and division leadership for a three-day immersion in the company’s goals for 2011. Two board members attended the meeting, which also included breakout sessions on the Fresh Initiative and two of the new technology initiatives: a workforce-management program, CARES Planner; and PriceNet fuel pricing software from KSS.
“And it was the first time the company had done it in 15 years,” says CFO Mark Bierley, who joined last September from bookstore chain Borders. “You get a lot of people in a room, and there’s a lot of energy that can come out of it.”
You’ll hear a lot of talk about “energy” from members of the senior leadership team. The company is banking on the success of this new people-power culture to overcome the biggest tripwire confronting execution of its goals: dramatic inconsistency in store size and conditions. Little more than one-half of all stores in the network are 2,501 square feet or larger; more than 60 are 1,200 square feet or smaller.
“A dumpy little store without any investment can almost be as successful as a store we spend $150,000 in,” Fisher contends. “It’s all about the store manager. We want people to take ownership so they’re not a drag.” The Pantry’s average investment in Fresh Initiative stores is $30,000 to $45,000, with a five-year payback expected.
To foster that sense of ownership— in reality, a very tough notion to measure, define and control—The Pantry is offering incentives and tools to make working there more rewarding. It has simplified incentives for store managers in 2011, focusing them on two areas they can control: merchandise sales and profitability. The bonus maximum, meanwhile, has grown more than 50%. It’s a definite shift in focus meant to trigger an ownership mentality among employees.
“We had five different measures before, where we tried to have bonus plans micromanage parts of the P&L, like shrink,” says Oreson. “Now we’re saying, ‘We want you to think as an owner,’ and owners think, ‘What are my top-line sales, and what am I bringing to the bottom line?’ ”
This past December, The Pantry implemented the CARES Planner, a workforce-management program that will provide a means for sales, operations, marketing and merchandising to keep track of the various initiatives being rolled out at the stores and assign new tasks. All users have the power to decline a directive if it does not pass through the company’s “fast, friendly and clean” filter. While some retailers may use a mission tagline to fill out their letterhead, The Pantry has been using it as a divining rod for what is—and is not—worthy of effort.
Consider the suction-cup rack, a common sight on many c-store cooler doors. The Pantry had been using them to display single bottles of beer. The sales operation team suggested removing the racks, because they seemed to conflict with the clean-store mantra. After a 200- store test, they discovered they could eliminate the racks with no effect on single-beer sales.
Later, in a meeting of the departments, merchandising and marketing pushed back. The suppliers invested money in these racks, they argued. What if we used them only for new products?
“I said, ‘Did we really run this through the ‘fast, friendly and clean’ filter?’ ” Williams recalls. The answer was “no” on all accounts—they were a hassle for employees to stock, were always falling down and breaking, and cluttered up the cooler door. Problem solved.
“Now you have a tool to challenge the status quo,” says Williams. “As long as everything is within the operational framework, no one can argue with you—not even Terry Marks.”
Cup by Cup
Just as the effort to build a collaborative workforce continues, so does the push to bring order to The Pantry’s public face. It wasn’t long ago that The Pantry had more than a dozen monikers across its retail swath.
An excessive number of retail brands remains a sticky wicket despite the fact that Kangaroo Express heralds 80% of Pantry sites. A stable of other names linger from previous acquisitions: Golden Gallon, Lil’ Champ Food Store and Presto Convenience Stores, among others. This lack of uniformity brings its own degree of inefficiencies. But The Pantry doesn’t take the decision to rebrand lightly.
“The first thing we have to do is understand the strength of the brand in the market,” says Marks. “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.” So, for example, Presto Convenience Stores, a 47-store chain acquired in September 2010, is keeping that name for the time being.
“Quite frankly, we’re not sure what the Kangaroo is yet,” says Fisher, admitting that the Kangaroo Express brand has no equity with consumers. “From a branding standpoint, it was one of the chains the company acquired, and the CEO liked the name, so we spread it around. But what does it mean, and what does it stand for?”
Bean Street Coffee Co. serves as a crucial piece of The Pantry’s redemption story. While the new team continues to study Kangaroo Express and position it around on-the-go meals and snacks, the coffee brand serves as the flag bearer for the chain and a material hook for the operations team.
“You can measure a million things in this business; we measure coffee cups,” says Fisher. “It’s product, it’s package, it’s people, it’s cleanliness. It’s all those things we talk about. When coffee’s up, everything’s up.”
Coffee is such a key driver for The Pantry that its sales are tracked on a flat-screen TV in the corporate lobby. The company has dedicated employees— hospitality associates—tasked with maintaining the coffee bar and cementing relationships with customers. The effort is showing initial signs of success. Olivia Oaks has become the main draw for customers at No. 3479 Kangaroo Express. A local who “likes socializing with customers,” the young woman tends the bar and greets guests as if she were running her own café— and the store has been rewarded with better coffee sales. Compared to a company average of 52 cups per day, Olivia is slinging 185.
One customer even confessed that, thanks to Olivia, he didn’t feel like a customer anymore but rather a member of the family, says store manager Paul Searles, a former 7-Eleven store manager. With the Bean Street program and fresh-food focus, Kangaroo Express “is getting closer” to the level of his old 7-Eleven site, he says.
Cristina Whithey, manager of the No. 823 Kangaroo Express, recounts the story of a new Bean Street fan. “She gave up Starbucks to come to this store because it’s so clean,” she says. The site is selling 102 cups of coffee a day, up from only 63 cups a day only a few months ago.
The sales and marketing teams have also created focus in the rest of the store. Before, high gross margin and supplier rebates largely determined product placement; now, space to sales is the rule. For example, candy, which often consumed 16 feet of floor space, has been downsized to reflect its 4% contribution to instore sales. Most shippers are out. The entire novelties category has gotten the ax. The company is even considering dialing down space to sales to a store-by-store level; it will test the approach in Raleigh this month.
Suppliers are “excited” about the shift, Fisher says. “All of them wanted to be here because we were so big,” he says. “But every year they invested more money and weren’t growing. Their return on investment was declining.” The Pantry is now giving suppliers the opportunity to use its massive footprint as a launching pad for new products. Creativity and a fit with the “fast, friendly and clean” filter are the main criteria.
The Fresh Initiative also brought shortened gondolas, wider aisles and the “fresh” piece: salads, cut fruit and cheese trays, packaged sandwiches and baked goods, all from local suppliers. The company started with its Raleigh- Durham, N.C., sites in May 2010, with plans to roll it out to 130 sites in North Carolina by year’s end, and to 400 to 500 by end of 2011.
Here’s where cultural and store transformations meet. In preparation for the Raleigh rollout, The Pantry turned over a number of its district sales managers and its store managers. It was a careful purge, because the company had to recognize the diamonds in the rough.
“A lot of them have been here a long time; they’re local and have survived different layers of management,” says Fisher. “They just want to do their job. The minute you let them do their job, instead of worrying about things that aren’t important, they really start to shine.”
A Question of Time
Ben Brownlow, vice president of Morgan Keegan, Memphis, Tenn., says it is still too early to consider the full effect of all of the Fresh Initiative and technology investments on The Pantry’s balance sheet. The foodservice offering has touched only a minority of sites, about 6% by year-end 2010, while the revamped coffee is in less than one-third. “That’s a meaningful start to 2011 as they are rolling it out—just not enough to make an impact,” he says.
That said, even a small degree of growth is rewarding. “Most initiatives are so meaningful to the bottom line,” says Brownlow, citing the highmargin, low-labor foodservice and coffee programs. “It doesn’t take but a few hundred stores, which may be overshadowed, but internally, they should be able to see those returns.”
For many watching The Pantry, the question of success is not one of “if,” but “when.” A shift from a rollup strategy to one that focuses on its retail assets demands that the cultural transformation works. Consultant Bishop says “success” is a matter of time and cost.
If The Pantry crosses that finish line and at least matches industry benchmarks, then the ramifications are clear for its competition. While top-quartile companies will likely hold onto their market share, retailers in the same stage of foodservice as The Pantry will be hit hardest, including those who have just acquired major-oil sites, and smaller operators with fewer resources.
“It’s a question of: How do you compete?” says Brownlow. “Will [wholesalers] be able to offer smaller, independent operators something that will compete with what Pantry is implementing?”
Scale will eventually pull the advantage back to The Pantry. Bishop says that in markets where the chain has a high concentration of stores, factors such as distribution efficiencies, bulk deals and the ability to more effectively spend advertising dollars will all pull in its favor. In the short term, retailers competing directly with The Pantry have the weapon of time. “You’ve got an ocean liner there and The Pantry [leadership] is trying to get it to change directions,” says Steve Montgomery of b2b Solutions, Lake Forest, Ill. “You can easily get people to ‘mouth’ the new culture, with a senior vice president saying we’re going down this path … but getting the clerk to wipe the counter every five to 10 minutes … that’s tough.”
Fisher shares the story of a recent visit to a Kangaroo Express on a weekday morning. All six coffee urns are drained dry and, perhaps even worse, the store employees and manager are so engrossed in other tasks that they fail to greet him as he walks in to buy a cup.
“We are changing from an inventory-management group to a customer-service group,” he says. “It doesn’t happen overnight.”
Consultant Wilson says the question remains whether The Pantry’s new leaders are willing to own up to the cost of change. Workers will accept a culture change if they see their managers making personal, sincere efforts at it. “[For managers, it’s about] being more open, trying harder, seeing they have to change themselves before they can ask anyone else to change,” he says. It’s a shift the new Pantry team fervently believes it can—and must— make.
“Our growth is going to be around what people are doing in the store,” says Fisher. “And we’re focusing them to pay attention to coffee, cigarette inventory, being friendly, keep the bathrooms clean. Own the store. What’s up with The Pantry is something even they didn’t expect: They unleashed the power of the people.”
Fueling Brand Growth
Fuel is providing one foothold for growth of the Kangaroo Express brand. In July 2010, The Pantry signed a supply deal with Marathon Petroleum Co. LLC to supply more than 600 sites, including joint branding at 285. (Visit www.cspnet.com/marathonpantry to see the ad campaign launching the partnership.) What clinched the deal, says Keith Bell, senior vice president of fuels, is Marathon’s willingness to share the street sign and canopy with the Kangaroo Express brand.
“You go from a world where you’re almost nonexistent on the price sign and the store is hidden and overshadowed to where you have primacy, equality, size and presence on the canopy,” he says. “From our perspective, it helps further extend Kangaroo Express in the marketplace.”
Meanwhile, The Pantry is rolling out KSS PriceNet fuel-price-management software, which it expects to have in place by end of second-quarter 2011. “The KSS system really provides us with a good base for standardization around processes, compliance and execution,” says Bell. “It’s being able to execute and push the prices out to the site.”
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