CHICAGO — Executives from BMO Harris looked at the scenarios for the convenience-store industry’s pandemic recovery from the lenders’ perspective during a recent Outlook Leadership Community Innovation Forum, Lending to the C-Store Industry: A Bank Market Update.
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Jonathan Graham and Doug Chinery, regional relationship managers,and Michael Koehler, assistant vice president, joined Bill Thomson, managing director and team leader for the fuel services and convenience team at BMO Harris Bank, the Chicago-based U.S. operating subsidiary of the Bank of Montreal, to discuss market conditions and the latest industry trends.
“Everything came to a halt in the middle of March,” said Graham. Sales and transactions decreased as shoppers consolidated trips; however, they purchased more at higher prices, he said. “Inside sales and volumes troughed in April and then started to bounce back. By June, trends were starting to normalize.”
For the first few months of 2020, margins were tracking slightly higher than 2019 with an average of 21.50 CPG. In early March, Russia, Saudi Arabia and OPEC-plus started flooding the market with product, Graham said. Then the pandemic created significant demand destruction, with sales down 40% to 50% year over year in some states.
“We heard from some operators that their volumes decreased even further, but looking past the volume degradation, the good news was margins,” he said. “Margins shattered historical industry highs at the end of March.”
The single-day high margin of 95.50 cents per gallon (CPG) occurred on March 23, he said, citing the Oil Price Information Service (OPIS). The weekly average high of 88 CPG occurred on the week ending March 30. For the week ending Sept. 7, national margins were running about 11 cents higher than last year's average, about 32.50 CPG, he said.
Before the latest spike, states had all reopened to some degree, said Graham, and over the last few months, volumes have been recovering since the lows in April, although they have stalled at about 10% to 15% down from last year.
“We're predicting that traffic will be back to normal towards the end of this year,” he said. “And total miles driven for 2020 is expected to only be down about 10% from 2019.”
Bear Scenario
Looking toward a recovery, Graham addressed the more pessimistic bear scenario first.
- Working from home will become institutionalized. “If this becomes permanent, it'll have a negative effect in miles driven,” he said.
- A resurgence of cases and deaths. “If larger gatherings commence prematurely, if music festivals, sporting events and other large social interactions occur, these could cause super-spreading events,” he said, “or if a vaccine is delayed or ineffective, dosages aren't available or people just refuse to get the vaccine at all.”
- Grocery and restaurant restaurants continue to evolve and adapt. “We're already seeing an increase of curbside pickup and delivery, and many are expanding the product mix,” he said. “Alcohol delivery restrictions have been relaxed and restaurants are offering more pre-packaged items to help offset loss of sales.”
- Environmental reasons. “Pollution was significantly reduced during the early months of the pandemic, which could cause a further push for reform. This could be through regulation in urban areas, increase in [electric-vehicle] production and demand or the increased use of bicycle platforms, electric scooters or other low-carbon modes of transportation,” he said.
Bull Scenario
Moving to the bull side, Graham looked at some of the factors that could increase miles driven.
- Cabin fever. He said cabin fever already started surfacing in the summer, citing “pent up demand for services that were closed during the pandemic, concerns with safety of airports and airplanes and the increase in the number of families taking road trips for vacations.”
- Public transit safety concerns. “Whether because of crowds, cleanliness or both, people will continue to avoid public transportation, which will result in more cars on the road,” he said.
- EV delays. EVs may no longer catch on as quickly. Car manufacturers looked to cut costs, he said. “Investments in EV could be delayed. The auto industry could lobby that certain regulations are costly, and relaxing their compliance could help reduce costs globally,” he said.
Silver Lining Playbook
Despite all the challenges faced by operators, convenience retailing has benefitted over the last six months, he said. “There's definitely a silver lining for the industry,” said Graham.
- Cleaner stores. GasBuddy recently announced that “really clean” c-stores drove 17% more visits than average stores. This will have a long-term effect as it raises the bar for overall cleanliness standards, he said.
- Capabilities have accelerated, operationally and technologically. Services such as curbside pickup, contactless pickup and delivery will only continue to grow, he said.
- People. “The pandemic has helped recognize company's most important assets, their people,” he said. “Customers are now more appreciative of employees and employers have increased benefits as well, either through enhanced pay or hero pay, paid sick leave or additional benefits and other measures, which should result in additional employee retention and loyalty.” And because of higher unemployment, some of the challenges to find good employees have been mitigated, and there should be less wage pressure.
Loan Landscape
Chinery offered BMO Harris’ assessment of the lending landscape.
He said that loan activity has decreased because opportunistic financing has paused due to the risks related to the recession, as well as the pandemic. Loan pricing has remained “remarkably stable” in recent years, but it started to rise with the recession because of increased economic uncertainty. “No one really knows the breadth of the depths of this recession,” Chinery said, “but the trends we've been seeing show that prices have remained a little bit elevated.”
Because of the risks and uncertainty, many banks have just looked at temporary facilities to extend what's existing or additional facilities that provide just enough of a short burst of liquidity to get through the uncertainty, he said.
And with new waves of COVID-19 arriving, as well as the flu season, the uncertainty continues. Such mechanisms as London interbank offered rate (LIBOR) floors—a key benchmark interest rate that indicates borrowing costs between banks—which had become less common, are being put in place again in nearly 80% of all deals, he said, and they are likely to continue throughout the rest of the year.
“Now, what this means for you is that banks are still open, terms are available, but you need to start thinking ahead,” said Chinery.
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