More than a Dose of Leadership

Herd on the Street

Economist says group-think mentality is setting up economy for another fall

Like wildebeests moving in packs to protect themselves from predators, a mindless “herd mentality” permeates the stock market, potentially setting up another financial crisis in the United States, economist Walter Zimmermann said dur­ing the conference’s opening session.

Accompanied by two retailer panelists who developed strategic directions based in part on his forecasts, Zimmermann, chief technical analyst for United I-CAP, New York, warned attendees that signs of a bullish enthusiasm among investors has historically signaled a dramatic fall.

Pushed by low interest rates, highly computerized trading and aggressive investors such as pension funds desper­ate to meet goals, a herd mentality cre­ates unwarranted buy-in, leaving markets vulnerable to influences ranging from Iran’s pursuit of nuclear muscle to the European debt crisis.

“Looking at the New York Stock Exchange, it seems they’re all bullish, they’re all-in again,” Zimmermann said, citing that historically the Olympic Games ignite a euphoria that affects the markets.

The herding phenomenon shows itself most vividly in how prices for gold, gaso­line, copper and other commodities have all begun to merge into similar patterns, as if in lockstep.

“If you see stock prices go up, 15 minutes later the price of gasoline goes up,” Zimmermann said. Roller-coaster highs and lows work against the kind of confidence that fosters new investment and consumer spending, he said.

In times like these, Zimmermann said, the industry needs to support “visionary leaders.” He suggested that leadership can come in three forms: passive, toxic and visionary. Passive leaders are reluctant to make decisions and often delay them. “For passive leaders, success depends on being lucky,” he said.

On the other hand, “toxic leaders think ethics are for losers,” he said, add­ing jokingly, “That’s 10% of Wall Street.”

Visionary leaders, according to Zim­mermann, “make the right decisions and avoid a herding mentality.”

Discussing other factors that could influence global markets, he focused on Iraq’s pursuit of nuclear energy and the European debt crisis. Regarding Iraq, Zimmerman said the country has no reason related to energy to pursue nuclear power. In that region, he said, 1% of the world’s population lives on 25% of the world’s natural gas. He suggested Iraq’s motives are more political, further fueling instability in the resource-rich region.

For Europe, debt issues with Greece, Portugal and Spain are bound to pull the entire region into a “vicious cycle swirl­ing in one country after another … with repercussions for the U.S. and China.”

While Zimmermann’s forecasts were gloomy, some retailers have found ways to turn bad news into sound strategy. For Scott Hartman, president of Rutter’s Farm Stores, York, Pa., Zimmermann’s forecasts from before the recession of 2008-2009 encouraged him to not only seek the economist’s ongoing advice, but also to slow down his company’s new-build plans and stockpile cash instead, preparing for scenarios of flat growth and a 10% to 15% drop in sales.

“Preparing your balance sheet is key,” Hartman told the group. “Cash is king and too much debt is a problem.”

Deflation forces retailers to review their assets, Hartman said, which led his chain to slow land acquisitions and rene­gotiate loan durations.

On the other hand, retailer Greg Parker, president of The Parker Cos., Savannah, Ga., opted to take advantage of lower real-estate prices, cheaper build­ing costs and favorable interest rates to secure new funding. “Bet the dollar long and build, build, build,” he said. Parker has built six new locations in the past 15 months, has two more coming on line soon, and he’s planning for 17 more in the near future.

“Let’s not let the tail wag the dog,” Parker said. “The strong companies are out there building.”

Hand-in-hand with chain expansion is the need to build rapport with custom­ers, Parker said, describing the kinds of community initiatives and charity work his company does.

Zimmermann agreed with the strat­egy. “Consumers are hurting,” he said. “Income is not up. There’s no job secu­rity. Any program where you’re giving back will win people over and gain that stickiness you want in a customer.”

Riding Resilience

C-stores stay above recession, but health care, economy loom

While c-stores continue on a healthy track despite the past four years of global economic struggle, ominous factors such as impending health-care reform, continuing swipe-fee challenges and Euro­pean debt cast grave concerns.

Tom Robinson, NACS chairman and president of 34-store, Santa Clara, Calif.- based Robinson Oil, pointed out the highs and lows of a relatively successful year for convenience retailers.

Some of the highs include:

• A record year of $681.9 billion in sales, according to NACS State of the Industry Report of 2011 Data and its CSX LLC industry survey tool.
• An 8.8% increase in overall sales, with an increase inside the store of 5.4% for January to April 2012 over the same period the year before.
• An overall increase in profits of 5.3%, with in-store profits going up 6.0% and fuel profits up 2.9%.
• An increase in foodservice sales of 11.6%, a healthy sign for an industry try­ing to wean itself from declining demand for tobacco and fuel.
• Double-digit increases in sales and gross-profit dollars in categories such as salty snacks, packaged beverages, candy and other dairy.

Unfortunately, the same research num­bers reveal the industry’s weaknesses:

• Flat to negative numbers for core categories of fuel and tobacco, with fuel volumes up only 1.7% and cigarette sales down by 4.7% for January to April 2012 over the same period in 2011.
• An increasing disparity between the top-quartile chains and the bottom, with many key financials double for top firms.
• Ongoing credit-card swipe-fee issues, with the challenge hardly diminish­ing after legislators passed reforms in 2010.
• The European debt crisis and its potentially chilling effect on the global economy, which could slow U.S. recovery.
• Health-care reform and its dead­lines edging closer, causing uncertainty and potential volatility as implementa­tion in 2014 approaches.
• Middle East unrest and the poten­tial of another “Arab Spring” of 2011, possibly bringing more swings in the price of crude, thereby affecting U.S. sup­ply and demand.

Still, Robinson was very optimistic about the industry and its ability to bring in profits despite the larger economic picture. “We are a resilient industry,” he said. “We’ve had a solid year considering how poorly the rest of the economy did. Every year, we’ve had a positive increase in sales.”

Robinson showed a comparative graph involving annual sales for six dif­ferent channels, with c-stores never dip­ping below zero and maintaining a stable growth rate. That picture is diminished by credit-card companies and the dynamic increase in credit-card fees that continues today. The record-breaking c-store profit edged into the $7 billion range, but credit-card fees by 2011 hit $11.1 billion.

Switching to issues that will affect retailers going forward, Robinson touched on many challenges. He said health-care costs leading up to President Obama’s initiatives will be a topic of con­cern for retailers, as will issues under the Food and Drug Administration (FDA). Such FDA issues include menu-labeling and tobacco regulation.

“It’s going to take work with the FDA to get requirements that work in this space and that are fair,” Robinson said.

Taco Bell CEO Extols Power of Social Media

When Taco Bell CEO Greg Creed, a self-professed “Australian selling Mexican food to Americans,” walked onto the stage at Outlook Leadership, he urged the crowd of c-store execs to accept that the world is an evolving place.

Taco Bell’s policy of adaptation allowed the company to recognize that the customer’s requirements are chang­ing. Food is no longer being used for fuel; it is being used as experience. The company changed its tagline from “Think Outside the Bun” to “Live Más” to, as Creed said, “become a lifestyle experi­ence, not a food experience.” It unleashed its incredibly popular new Doritos Locos Tacos. It also created a new, more upscale product—the Cantina Bell menu—for its changing demographic.

“You are no longer in control of your messages. Your customers are in control,” Creed said.

Taco Bell is harnessing the customer through the power of social media. It hosted a hometown “tweet-off” in which the company awarded a Doritos Locos Taco party to the writer of the most re-tweeted Taco Bell-related tweet. The winner became an overnight sensation in his city, and Taco Bell turned him into an unofficial spokesperson through TV ads and additional social media efforts.

“Our fans inspire our advertising,” he said. “You have to create conversations in the language they use.”

To fully harness the power of social media as it relates to the Taco Bell brand, the company put together a social media command center, staffed with a small group of twentysomethings. Their main focus is to troll Facebook, Twitter, Instagram—anywhere people are chat­ting about Taco Bell on the Web—and respond in clever, meaningful ways.

“It’s a massive commitment in people and money. And it’s the best investment I’ve made as CEO of Taco Bell,” Creed said.

Through this effort, many posts have gone viral, and some of the company’s most effective marketing campaigns have sprung from it, including a recent spot it did on a small town in Alaska. In the ad, Taco Bell responds to a hoax that had residents believing they were going to get their very own Taco Bell. When the town and its residents were crushed to realize it wasn’t true, the company airlifted a Taco Bell food truck and hand-delivered thou­sands of tacos to the residents. It made for some great TV—and an excellent market­ing opportunity.

“We really think [social media] is transforming who we are as a brand,” Creed said.

A-B InBev CEO Reveals Platinum Upsizing

As part of his presentation on best-in-class leadership insights, Carlos Brito, CEO of Anheuser-Busch InBev, announced the rollout of a 22-ounce version of Bud Light Platinum.

Introduced earlier this year, Bud Light Platinum has been the most successful new beer launch of 2012, accord­ing to the company. More than a million barrels of the product sold in five months. The new 22-ounce package, created specifically for the c-store industry, was introduced in mid-August.

Brito also spoke about the company’s pending acquisition of the remaining 50% of Grupo Modelo. He said he’s “very excited” about what having the Corona brand in the AB InBev stable, along with a stronger foot­print in Mexico, will mean for the company on a global scale.

When asked about beer’s role in the future of the c-store industry, Brito said the first thing is having a “quick in and out and having what consumers want. Understand their trips and have the assort­ment and layout designed around those needs,” he said. Second, the advantage this channel has to offer cold beer and the right beer in the right assortment is crucial.

The next goal for AB InBev, Brito said, is to make Budweiser (his favorite beer) a global beer brand. “Budweiser essen­tially represents the American dream in a bottle,” he said.

And the company’s ultimate goal: “Our dream is to be the best beer com­pany in a better world.”

Exercising Value

Panelists use hypothetical company to talk valuation, business assessment

Buying a fictitious Florida conve­nience chain may sound naïve if not downright ignorant. But the exercise was a way for six panelists to discuss the nuances of company valuation.

Talk of the fake 50-store Florida chain—40 fee sites and 10 leased sites— along with 15 dealer operations proved enlightening for session attendees, many of whom were potential buyers and sellers.

The exercise set up a list of statistics and historical data set to mimic the finan­cials of “ABC Convenience Stores Inc.,” complete with total fuel gallons in the $70-million range annually, merchandise sales at about $50 million and store-level EBITDA at about $13.5 million.

Naming some of the pros of pur­chasing such a chain, the retailer on the panel, Jeff Kramer of Prima Marketing, Fairmont, W.Va., cited strong cash flow, good ratio of income to expenses and a solid number of high-performing stores (vs. just one high performer). In addition, the stores are located in Florida, where the demographics and economy (despite housing struggles) are promising.

(As a side note, Kramer was in the process of selling his locations to Dallas-based 7-Eleven at the time of this panel.)

Some of the cons Kramer named were the competition rushing into Florida, including Wawa, Thorntons and Sheetz. He also said the asking price for the ficti­tious chain was high at about $1.8 million per store and that the lot sizes at 2,800 square feet on average were not ideal for stores of the future. “But beauty is in the eye of the beholder,” Kramer said. “We’ve gotten used to an urban location, whereas a chain like Casey’s has done outstanding in rural areas.”

In many cases, chains eager to grow find acquisition a logical route, bypassing barriers to entry as well as the upfront costs of building from the ground up.

Kramer had other pieces of advice, including focusing on capital expendi­tures. Retailers need to know additional costs required to properly bring the new store back online. He also said to con­sider fuel brand and the option of going unbranded. “It’s huge regarding the flex­ibility it gives you,” he said. “But if you’re unbranded, you ought to bring a strong [c-store] brand to the area; if you choose an oil-company brand, they’re looking for longer and longer terms.”

The topic of sale-leaseback deals emerged. Stephen Horn Jr., senior vice president of acquisitions for National Retail Properties Inc., Orlando, Fla., said one of its main criteria when reviewing a possible buy is whether the tenant is bankable or not. “We’re in love with rent vs. land,” Horn said, citing how the value of the asset itself and historic cash flow are also strong indicators.

Panel moderator Dennis Ruben, exec­utive managing director of NRC Realty & Capital Advisors LLC, Chicago, provided attendees with a list of valuation assump­tions and methodologies, including:

• Valuation multiple ranges are cal­culated on store-level EBITDA in the case of retail operations and total dealer fuel income for wholesale operations.
• Valuation multiple ranges are cal­culated on the most recent 12-month income statement period.
• Typically, each store is analyzed separately. In the absence of individual store-income statements, the mul­tiples are calculated on total store-level EBITDA.

Bankers and the market in general are more interested in the value of the wholesale business, said Brock Rule, COO of Hopkins Appraisal Services, Indepen­dence, Mo. “In the past it was all about the real estate and the retail business,” he said. “But as the jobber class has matured and grown, people now see value there and are looking to perhaps lend against it.”

Energy Evolution

Global demand will keep traditional forms of fuel viable for decades

Will electric cars replace gasoline-powered ones in the next 30 years? Not if energy costs and global demand play a role. Supply and demand and the cost effectiveness of the world’s current fuel-distribution system will keep liquid fossil fuels in the mix, with electric­ity making gains but not taking over.

Why? The simple answer is people, according to Vincent Yuskiewicz of ExxonMobil. Yuskiewicz, energy adviser with corporate strategic planning for the Houston-based major oil company, said the 7 billion people on the planet will increase to 9 billion by 2040, he said, requiring 30% more energy than today.

On the retail front, Yuskiewicz said U.S. demand for fuel will continue to fall as more people work from home and vehicles become more fuel efficient, further heightening competition. The extensive use of hybrid vehicles to further soften demand will not become a factor, he said, until they achieve price parity with regular cars (in about 2025, he said).

But when price parity occurs, “with 30% more fuel economy, sales of hybrids will increase.” In addition, vehicle size will come down, he predicted. Overall, U.S. transportation demand will fall by 10%.

Demand for energy in general will slow as economies mature, fuel efficien­cies increase and population growth moderates. From 2010 to 2025, the global population is expected to grow by 20%, but from 2025 to 2040 population growth will hit only 10%. China’s population, for example, is forecast to grow over the next two decades and then flatten out as its economy and population mature. India and Africa will be the areas of strongest population expansion and gross domestic product (GDP) growth going into 2040.

Worldwide, a disparate energy picture will evolve between developing and devel­oped countries, he said. Using ExxonMo­bil’s parameters of countries belonging to the Organization for Economic Coopera­tion and Development (OECD) and those that don’t, Yuskiewicz said energy use in OECD countries will nearly flatline, while demand in non-OECD countries will grow by close to 60%. In those countries, billions will be working to improve their standards of living, requiring more energy.

By ExxonMobil’s forecast, the biggest change will be the rise in the use of electric­ity, which by 2040 will account for more than 40% of global energy consumption. It’s a growth rate of almost 80%.

Cleaner fuels such as natural gas and alternatives such as wind and solar will grow. Natural gas will overtake coal for the No. 2 position behind oil, leaping by 60%. Wind, solar and biofuels will account for about 4% of global demand; wind power will be the fastest-growing source, at 8% a year.

Energy-related emissions worldwide are expected to grow but level off by 2030. For the United States and Europe, the shift from coal to alternatives such as natural gas will contribute to the trend.

Flat demand and resource discov­eries in North America may pave the way for growing energy independence and even the United States becoming a viable exporter of crude, Yuskiewicz said: “Energy use will evolve when it makes commercial sense.”

Mystery Shop Underscores Importance of Interaction

If you go beyond the numbers, the results of the eighth annual CSP-Service Intelligence Mystery Shop show the importance of a critical part of c-store retailing: customer and employee interaction.

The nine chains in the study this year were Kwik Trip, Casey’s, Thorntons, 7-Eleven, Sheetz, Quik-rip, Stripes, Quick Chek and Kum & Go. For the third time in four years, Kwik Trip landed in the top spot (CSP—Aug. ’12, p. 44).

Interaction between customers and employees was most evident in a new feature for the program: the inclusion of comments from the mystery shoppers. They ranged from the terrific (“She was cleaning when I got there, and the store looked fresh and nice,” about a 7-Eleven) to the unpleasant (“The store smelled horrible from the second I walked in”). When it came to praise, about a third of the shoppers identified the store employee by name. In the criticism, nam­ing names rarely occurred.

When delivering feedback to such employees, it’s critical to reward and incent them so they want to do it the right way, said Cameron Watt, executive vice president of In-Touch Insights Systems/ Service Intelligence.

“When you create a culture of positivity, you increase loyalty” with employees, agreed Mitch Morrison, vice president and group editor of CSP Busi­ness Media. That loyalty trickles down to customers, he said.

The study also showed that customers don’t mind waiting in line if the employee at the register is efficient and effec­tive, and if he or she is courteous and friendly during the interaction. Shoppers much prefer that to no line and an unpleasant experience with the employee, which was cited in one out of 15 comments about the checkout. “The line isn’t as much of an issue,” Watt said. “It’s more about the quality these days.”

Another change to the study was measurement of loyalty programs and suggestive selling, which some of the chains didn’t want to be graded on because their employees are not encouraged to practice it. However, when that question was taken out of the score for the top overall chain, nothing changed: Kwik Trip was still No. 1, Sheetz No. 2 and QuikTrip No. 3.

“The reality is that the industry is not suggestive selling or pushing loyalty pro­grams much,” Watt said. Forty-six percent of the locations visited had some type of credit card or loyalty advertising but “weren’t talking about it,” he said.

In-Pump Video, Mobile Payment Gain Momentum

With the growing commonality of non-traditional TV networks and versatility of smartphones, retailer discussions of both video advertising and mobile payment at the pump is hitting critical mass.

Matthew Stoudt, CEO of in-pump media network Outcast Media Inc., Santa Monica, Calif., said pumps are beginning to offer three important func­tions: loyalty, gender-targeted marketing and local marketing based on area events and weather. “You’ll see ads for ‘fully loaded’ soda for men [at the pump] and healthier choices for women,” Stoudt said. “And instead of an old-school pay­ment system [at the pump], there will be mobile payment.”

Stoudt said his company has produced award-winning marketing campaigns tied to weather, with one in particular for a cough-drop company. When the pollen count was high for an area, the in-pump network ran a cough-drop ad. The sales lift in its internal studies was as high as 35%.

In terms of use of mobile payment at the c-store and the pump, John Theiss, vice president of sales and mobile com­merce merchants for Isis, New York, said his company is conducting tests in Austin, Texas, and Salt Lake City.

The mobile-commerce joint venture, created by three major phone carriers (AT&T Mobility, T-Mobile USA and Verizon Wireless), has partnered with two dispenser companies, Austin, Texas based Wayne and Greensboro, N.C.-based Gil­barco Veeder-Root.

The technology involved is near-field communication (NFC), Theiss said. It works off a chip implanted in the phone and relies on radio frequencies to acti­vate and inform the payment device. “People want choice, privacy and secu­rity,” Theiss said.

How Not To Die – And How To Grow

“If you don’t pay attention to what the culture wants, you die. If you do something the public tells you they want, you win.”

That’s a bold, black-and-white state­ment, courtesy of comedian, author and former TV personality Ross Shafer. In his session “Stay Relevant and Find Growth,” he offered six guidelines for how not to die in today’s ultracompetitive business world:

1. Don’t Kill Future Income by Cel­ebrating Yesterday’s Profits: Companies can’t keep making money the same old way. Take, for example, Kodak. The com­pany invented digital technology in 1976 and … ignored it. “The mighty fall because they get arrogant,” and it takes time to slip deeply into debt, Shafer said. Other recog­nizable names far into the red that may not make it are Avon, American Airlines, Eddie Bauer, Talbots and Six Flags.
2. Women Rule the World: “Start thinking about women the way you’ve never thought of them before,” he said. Women “buy everything”; they dominate every purchase category, even automo­biles (at 68% of purchases). The average satisfied female customer will recom­mend a service to 21 other people. Men will talk up the same experience to only 2.6 people. “Women don’t just buy a brand—they join it,” Shafer said.
3. Underthink Innovation: Some­times small, easy changes make a big difference. He cited Starbucks’ greeting, which is not “How can I help you?” It’s “What can I get started for you today?” That slight change in phrasing makes the visit an interactive experience.
4. Customer Urgency Has Replaced Service: “Broadband has created the on-demand customer” because the world is on demand now, Shafer said. You have to give them everything they want. Seventy-three percent of 18- to 45-year-olds will bolt after one bad experience—and 85% of them will tell people about it on some kind of social media.
5. Target Your Competitors, Then Get Tactical: “The only way to grow in a flat or declining economy is to take business from your competitors,” he said. Join competi­tors’ social media groups to find out what they’re doing and hear about what their customers think. And don’t forget to see what they’re saying about you, too.
6.  Discounting Is Over; Quality and Value Win Now: “If you sell quality, people will buy quality,” he said. Burger chains Carl’s Jr. and Hardee’s have never offered value meals—because they don’t need to. And more than 70% of Hilton’s next planned hotels are considered luxury or ultra-luxury.

“Stay relevant by paying attention,” Shafer said. Work hard and worry about your own legacy, he said. It’s all about what you leave behind.

Extreme C-Store Real Estate Consolidation Ahead?

Is it possible a healthy majority of c-store real estate could be owned by only three to five companies come the end of the next decade? Based on history and the growing development of MLPs—or master limited partnerships—in the industry, one finan­cial expert says yes. “Ten or 15 years from now, you will probably see three, four or five MLPs that control the c-store piece,” Mark Huhndorff speculated during a panel discussion on capital markets.

Huhndorff, managing director of Dal­las-based Raymond James, which recently acquired Morgan Keegan, compared the c-store industry to the propane industry of a decade ago. “Ten years ago, the propane industry was like c-stores today, very frag­mented,” he said. “Today, through MLP consolidation, there are really only three propane MLPs. They own the industry. … Similarly, we see a wave of consolida­tion coming in the [gasoline] wholesale/ distribution business.”

Huhndorff and his colleagues were quick to add, however, that even if the MLPs—a specific type of publicly traded partnership that allows the pass-through of operating results directly to unit hold­ers—do buy up c-store real estate across the country, they’ll still need multiple operators for the sites.

“Quality operators are still very neces­sary to make the MLP strategy work,” said Scott Garfinkle, also a managing direc­tor at Raymond James, citing that MLPs make their money on rent and gasoline margins. “Someone still has to operate the stores and make them work.”

Green And Baring It

CSP honor Royal Farms, Home Service Oil, Highland Chevron for environmental stewardship

There are many paths that lead to an eco-friendly business, including the desire to pollute less and the drive to cut energy costs, even as a marketing strategy. The following three retailers have each taken the road to make their stores a little more green, earning the honor of CSP’s Environmental Stewardship Awards.

Royal Farms

Executives with Royal Farms convenience stores like to say they were eco-friendly before it was cool.