“Pardon our dust may be what the sign says at a conveniencestore undergoing a remodel, but retailers moreinterested in building new are putting up a differentsign: “Eat our dust.”
By all accounts, the industry’s best-in-class chains arein hyper-expansion mode, leading a drive into so-calledunderserved markets that is bringing the latest and literallybiggest convenience-retailing concepts to market.
With more pumps, more in-store square footageand advanced foodservice offerings, these new-generationsites absorb market share like giant sponges,soaking it up from established retailers that are tooslow or simply unable to react.Last year was a tipping point for such new builds.Wawa jumped over several states from its regional Pennsylvaniabase to launch a five-year, 100-store thrustinto Florida. QuikTrip built 45 stores in 2012 to breakinternal records. Kum & Go was not far behind with itsown record of 43. Kwik Trip, RaceTrac, Sheetz, Tri Star,Thorntons; smaller chains such as Savannah, Ga.-basedThe Parker Cos.; and former single-store operators suchas Oak Brook, Ill.-based Power Mart are seeing profi tsin expanding with newly crafted convenience models.
Prior to its 2012 record year, West Des Moines,Iowa-based Kum & Go’s previous year-end tally of new builds was less than half—21—in2009. “Competitors are contracting, [andconsidering] the economy in the c-storespace and the markets we wanted to enter,timing was right to do it in 2012,” saysDavid Miller, chief marketing offi cer forthe chain of now 430 stores in 11 states.“While it’s hard to say we’ll do 43 againthis year, we plan to be just as aggressive.”
And the trend is not limited to burgeoningsuburbs or unexplored ruralterritory. A sluggish economy and thenew absence of major-oil turf wars hasopened up midsized cities and even large,inner-city neighborhoods, where pent-updemand for new development presentopen frontiers for those able to lay claim.
For retailers in this mode—as opposedto M&A specialists—the reasons behinda new build, or what some would call anorganic strategy, center around the seductivequalities of new construction:
Getting what they want: Newconstruction means building a site toa retailer’s exact specifi cations. In manycases, revamping an existing site orbuilding in an area where land is notoptimal means compromise. New buildshold the potential for concept perfectionand greater portfolio consistency.
A better ROI: Whether an acquisitionor new build, any new investment isa commitment. Many retailers believe therisks are better and the assets more easilyassimilated with ground-up. As one Texasretailer said, it’s “more interesting.”
The lure of new: Communitiesinevitably gravitate to new retail offers,representing greater immediate potential.
Large formats trump the competition.In many areas, the standards forconvenience retail are low, which meansa bigger forecourt, bigger store and betterinside offer can grab a disproportionateshare of the market.
The recession and its aftermath—often the source of blame for strugglingoperators—in fact laid the groundworkfor this emerging 5,000- to 6,000-squarefootformat, almost double the size of the3,000-square-foot layout that was standardjust a few years ago. Vacancies left by majoroil and prolonged periods of other propertyvacancies are creating entry opportunities,especially for c-stores, which asa channel has proven itself a stable bet intough economic times.
“Aggressive companies are seeingopportunities in trade areas that havebeen abandoned—not in terms of[number of stores] but new development,”says Jim Fisher, CEO of retail siteanalysis fi rm IMST Corp., Houston.
Citing how companies such as Wawa,Wawa, Pa., and QuikTrip, Tulsa, Okla.,won’t jump into a well-developed, highlycompetitive market, he says, “If I’m servingthe market and constantly supplyingthose needs, the competition is notgoing to come in. But when I start livingthe life and forget what’s been given tome, then: Oh my—there’s a Wawa.”
Why Now?
Labeling the current boom in new buildsas an overnight phenomenon wouldbe oversimplifying the trend, as wouldpinning it on depressed land values andconstruction costs.
For Miller of Kum & Go, the processesand the development of each individualsite had their own unique path. “The storeswe built in 2012 took many months ofpreplanning, sometimes years to the daybefore they were built and opened,” Millersays. The chain has moved in recent yearsinto northwest Arkansas and ColoradoSprings, Colo. “For us, 2012 was the culminationof a market-by-market approach,[considering] the best location, the bestprice and then negotiating and buildingstores in favorable locations.”
Still, for many well-positioned retailers,the recession and its byproducts didpropel today’s push to build new. Oddlyenough, the main drivers speak more towhat doesn’t exist that what does.
Big Oil withdrawal: Prior to theirretail pullout two or three years ago,the majors practiced a fuel-pricing andcontractual structure that kept manycompetitors out of metro markets. Sincethe turnover of thousands of sites to areajobbers, those roadblocks no longer exist.
No new development: The effectsof the economy—including handcuffs onlending and consumer-price consciousness—put the brakes on new investmentin general, leaving many city, county andtownship coffers thirsting for revenue.Properties once off limits are now freeingup, and many local communities arewooing reputable c-store chains to winfresh tax revenues and employment.
No new ideas: In many communities,especially older, well-establishedones, new retail concepts are few and farbetween. Entrants with new ideas andnew formats may immediately attract aswell of traffic in older neighborhoods,percolating pent-up demand.
That’s why many companies are consideringa backfill strategy, Fisher says,describing how some retailers are revisitinginner-city areas and older residentialcorners to get at those lost opportunities.
So what becomes important is notthe age of the neighborhood, but theage of the asset. “We find the older assetshave difficulty competing against anewer build,” says Scott Hartman, presidentof Rutter’s Farm Stores, York, Pa.
That key truth puts a fresh spin onnew-build growth, Fisher says. Whilean acquisition that makes the newswill announce a 30-, 75- or 150-storetransaction, the number for a chain’sannual new-build plan may be six, 12,23 or, of late, 45.“The point is that it’snot 45 1,800-square-foot stores withfour MPDs,” Fisher says. “It’s 45, 23 or12 4,000-square-foot stores with eightMPDs.”
One new site could take on the volumesand sales of three older ones. Fromthat perspective, Fisher says the industry is both saturated and not. “Florida andTexas have the highest numbers of locationsin the industry, but it doesn’t meanthat Florida and Texas are saturated,” hesays. “Yes, these markets are saturated—saturated with old [assets].”
Where Specifically
For Kum & Go, two areas in particularhave been catalysts for growth: northwestArkansas and Colorado Springs,Colo. As of two years ago, they werebrand new markets, but both fit Kum& Go’s criteria in terms of population,demographics and a “welcoming businessenvironment.”
Today the company has 10 new storesin the state of Arkansas, and nine inColorado, with eight of those new sitesin Colorado Springs.
Part of QuikTrip’s expansion intothe Carolinas was based on how manymiles people drive on a daily basis.“Miles driven per day equates to howmuch gas you burn,” says Chet Cadieux,chairman, president and CEO of Quik-Trip [CSP—March ’13, p. 79]. With thechain’s business model so dependent onhow much gasoline volume a locationcan draw, gasoline demand, howevergauged, is critical to site selection.
As Wawa and other chains can attest,growing markets are another majordraw. For Steve DeSutter, presidentand CEO of Stripes LLC, the retail armof Corpus Christi, Texas-based SusserHoldings, that demographic pull meansstaying put—and building new.
Being located in a growing statemakes all the difference. “For me thisis really a Texas issue,” says DeSutter.“When you’re growing like Texas and itsmajor metropolitan markets and youwant to get into developing marketsearly, you are probably going to want tobuild and take advantage of the developmentactivities and other retail traffic asit develops around your store.”
Still, growth in terms of populationis only one of many factors, accordingto Greg Parker, president of The ParkerCos., Savannah, Ga. “In our part of theworld, everyone knows Parker’s. They’refamiliar with our programs,” he says.“The efficacy of the dollar spent is muchmore robust in the areas that we are in—instead of jumping to Atlanta, Athens orCharleston. And we think the best way todo that is organically.”
For QuikTrip, which in the pastdecade has broken into Arizona and,more recently, the Carolinas, new buildsrepresent the only course. “We’re a veryhigh-cost organization,” Cadieux toldCSP in an exclusive interview. “We paya lot. We pay for really high-quality realestate.
“We spent a lot of money on thefacility, so it’s really got to run a lot ofvolume in order to make money for us.… It’s got to be good for gasoline; it’s gotto be good for food. We can’t go somewherewhere any of those isn’t going tobe great.”
As for bucking the M&A modelembraced by Laval, Quebec-based AlimentationCouche-Tard and, in recentyears, Dallas-based 7-Eleven, Cadieuxtalked about the difficulty of managingan uneven portfolio of store formats andsquare footages and transforming theminto a consistent customer experience.“That’s a talent some organizations haveand we don’t,” he says. “It’s not somethingwe’re good at, and we know it. Sowe don’t do that.”
The New Store
Of course, one of the main reasons leadingedgeretailers prefer new builds is foodservice.For DeSutter, Stripes’ Laredo TacoCompany occupies about 20% to 30%of a store’s footprint, with serving areas,preparation areas and dining areas pushingthat up to about 40% in its newest models.
“When we evaluate existing storesto acquire in our retail chain, the size of property, parking and the store footprintare key filters,” DeSutter says. “So we’regoing to look at the overall investment,the potential we see for the site andcompare it to starting fresh in a nearbylocation if one exists. The size of theproperty and store are not as importantwhen we are thinking about locations toadd to our dealer network.”
Stripes plans to build 29 to 35 newstores in 2013. All of the new stores featurethe proprietary Laredo Taco Companyauthentic Mexican food brand,which currently is found in about 60%of Stripes stores. “We’d like to have it atthe 100% level,” DeSutter says. “ We’veowned some stores for over 20 years,and there just isn’t enough room to addour fresh food offering in them, unfortunately.”
The story is similar at Kum & Go,where Miller says that while the companystill embraces its acquisition history,things are different today. “Whata new-store build allows us … is thestore prototype and footprint we wantto build,” he says. “It adds to brand consistencyand the standard we want toachieve across all company [stores].”
The chain’s new prototype is 5,000square feet vs. its legacy footprintof 3,400. The new stores are LEEDcertified,boast attractive architecturalelements and feature a robust madeto-order pizza program, along with delisandwiches and breakfast offers.
“When you look at others that have[been acquiring], it fits their strategy,”Miller says. “We’re not going to grow byhundreds of stores, but we have madethe conscious decision that to build newstores is our best path forward.”
The Time Is Now
For those in the position to grow, a hostof positive factors have fallen into place.For Parker and his chain of 30 locations,expansion is a no-brainer.
He describes a seemingly perfectstorm of opportunity. For one thing, he’sbeen able to take advantage of extremelylow-interest loans, borrowing $10 millionwith a 15-year fixed rate of 3.03%interest, 85% loan to value. “Money isso cheap,” Parker says.
His company is building six storesthis year, which will cost $15 million to$19 million total. And with the cost offinancing so low, he’s made a decision togrow organically going forward.
And that doesn’t mean a large foodservicesolution for every new store,either. “We’ve created two prototypes.One has a food concept; one does not,”Parker says
“I’ve come to the realization thatthere’s a lot of opportunity to growwithout spending $3 million per store.”That doesn’t mean Parker is averse toacquisition. “I’m not leveraged enoughas a company … [and] to properly growI should look at acquisition,” he says. “Ifthe right opportunity presents itself, [wewill acquire]. But we want to grow inareas that are growing, and in concentriccircles around where our brand value isgreatest, so our advertising dollar goesfurther.”
Keeping Up
Growth may not mean the same thingto all retailers. For some it’s new stores,and for others it’s about reinvestingin given assets. Bill Weigel, chairmanof Weigel’s Stores, Powell, Tenn., justupgraded all the pumps at his 80 storesto a single, state-of-the-art line, allowing for increased levels of data security, cardprocessing and flow speeds
“Pumps don’t last forever, so it justmade sense to me,” he says. “It’s a decisionfor the long term.”
For Weigel’s stores, the new pumps,supplied by Austin, Texas-based Wayne,a GE Energy Business, provide anupgraded look for his forecourts, hesays, citing how customers respond tomodern-looking sites. The change alsoincreases fueling flow speeds and solvescalibration issues he was having withhis older pumps. It also helps positionhis chain for pending government anddata-security mandates. While decliningto give specific costs, he says the efficienciesalone help establish a strong case forreturn on investment.
“Some companies build to sell andnot to last,” he says. “We’re a familycompany. It’s about this generation andthe next generation. For us, it’s the rightthing to do long term.”
From Fisher’s perspective, retailerscan still compete with the new breedof c-store coming online. “Just becauseWawa comes in doesn’t mean you haveto throw your hands up and sell,” he says.It’s both an issue of commitment toa chosen business strategy and the factthat the channel has proven that manydifferent models can thrive in today’smarket
Hartman of Rutter’s agrees. “In thisindustry, they’re really is no right orwrong model,” he says. “There have beenplenty of people who have taken olderfacilities and figured out how to makemoney, just as there have been peoplewho have built from the ground up andmade money from that.”Ultimately, for the industry, the pictureis an optimistic one.
“It’s a great time to grow becauseproperty is cheaper, unemployment isstill up [in parts of the country], contractorsand subcontractors are lookingfor work,” Parker says. “And when theeconomy starts to heat up, we’re sittingthere in the sweet positions.”
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