Behind EG Group's Entrance Into the U.S. Market

BLACKBURN, U.K. -- When The Kroger Co. said in October 2017 that it would explore strategic alternatives for its c-store business, speculation began immediately. Would it sell the stores? Who might buy them?

Kroger’s c-store business generated $4 billion in total sales in 2016, with $1.4 billion from inside sales, accounting for 4% of total company sales. In 2016, it sold 1.2 billion gallons of fuel. The business unit has delivered 62 consecutive quarters of same-store sales growth.

While interest was high and the list of potential acquirers was long, the winner wasn’t on anybody’s radar screen. EG Group, based in Blackburn, United Kingdom, won the bidding for Kroger’s 762 c-stores. The $2.15 billion acquisition, announced in February, thrusts EG Group, a company with no previous U.S. presence, into the ranks of the top 10 U.S. c-store chains by number of company-operated retail outlets.

EG Group will establish its North American headquarters in Cincinnati, where Kroger is based, and it will continue to operate the stores in 18 states under their established regional banners: Kwik Shop, Loaf ‘N Jug, Quik Stop, Tom Thumb and Turkey Hill Minit Markets.

Private-equity firm TDR Capital LLP, London, provided capital for the deal. The companies said they expect to close the transaction in the first quarter of Kroger’s fiscal year.

Here's a look at how the company might fit into the U.S. retail landscape ...

Brothers Mohsin and Zuber Issa founded the business that would become EG Group as Euro Garages in 2001 when they acquired a single gas station near Manchester, United Kingdom. Over the next decade, they built the business by acquiring sites from ExxonMobil, Shell and others.

TDR, which initially invested in Euro Garages in 2014, created EG Group in 2016 by merging Euro Garages and its 360 U.K. sites with European Forecourt Retail Group (EFR), which had more than 1,100 retail sites in the Benelux region (Belgium, The Netherlands and Luxembourg) and France. During its due diligence of EFR, TDR saw an opportunity to combine the two businesses “to create a leader in the industry.”

Following the Kroger acquisition and several major European deals, EG Group will own and operate about 4,400 sites.

The U.S. c-store market appeals to EG “given the scale of opportunity” it represents, says EG spokesperson Chris Hopper. The company is “keen to enter the U.S. market” as part of its “aim of being one of the world’s leading petrol forecourt convenience operators,” Hopper said.

It’s the continuation of a trend in foreign investment in the U.S. c-store business, which includes Laval, Quebec-based Couche-Tard’s numerous acquisitions, Santiago, Chile-based Compania de Petroleos de Chile’s (COPEC) acquisition of Delek U.S.’s MAPCO and Dublin-based Applegreen’s acquisition of Pitt Stop.

“Foreign strategic buyers continue to see opportunities in the U.S. convenience-store sector,” said Roger Woodman, managing director of investment banking for Raymond James, St. Petersburg, Fla. “The convenience-store industry in the United States has performed quite well in recent years, and given the overall domestic economic environment, future prospects remain very positive even in the face of potential industry disruptors.”

EG Group has been successful in the U.K. and Western Europe through its partnership approach, says David Gray, senior retail analyst for PlanetRetail RNG, London. “It works with various retail and foodservice partners enabling their forecourt locations to go beyond simply a place to stop for fuel,” Gray said.

In the United Kingdom, EG Group works with foodservice brands such as Subway, Starbucks, Burger King and KFC alongside c-store operators such as Spar, providing a place to shop, eat and buy fuel. In Europe, it uses this partnership approach with retail giants such as Carrefour. “It’s likely Euro Garages will look to bring its unique partnership model to the U.S. following the acquisition of Kroger’s forecourt business,” Gray said.

“We have had much success across Europe, and we firmly believe the Kroger assets present a fantastic foundation to overlay our retail experience and know-how in the U.S.,” said Mohsin Issa, EG Group co-founder and co-CEO. “We are committed to investing in the Kroger network, partnering with leading retail brands and working with the exceptional management team and associates transferring across to deliver a comprehensive retail offer.”

One of EG Group’s recent actions in Europe offers insight into its retail strategy. When EG Group acquired more than 1,000 Esso sites in Italy in February, the company said it planned to review the network’s retail potential, partner with and invest in a few locations with recognized global and local retail brands, understand the market dynamics and consumer perceptions and then accelerate growth and development. “Reflecting the habits and demands of the … consumer is going to be critical to success,” the company said in a statement at the time.

Christopher Mandeville, equity analyst for Jefferies LLC, New York, believes EG Group has reason to be cautious to avoid the pitfalls that have ensnared previous foreign businesses that have gotten into U.S. retail. “This is the company’s first venture into the United States; a lot can go wrong if EG hasn’t done its homework and doesn’t understand U.S. culture and shopping habits,” he says.

“It will be interesting to see whether EG Group can make the transition from the kind of stores they have been operating in Europe to the way stores should be operating in the United States,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Chicago. “EG Group has not been

traditional c-store operators in the sense that we think about here. They will either transfer what they’ve done in Europe to the United States or adapt what they’ve done to the demands of U.S. consumers.”

“Starting with the profitable, stable and strong base of the Kroger stores will be a great advantage for EG Group,” says New York-based c-store consultant Gerald Lewis. “If they are content to take their time and learn before they leap, they might be successful. On the other hand, bearing in mind the high price they have paid, this probably won’t generate quickly enough the required return on their investment. So if this causes them to make quick changes before they understand the competitiveness, complexity and sophistication of the American market, they will pay the price.”

If EG Group’s “ ‘secret sauce’ is to introduce the type of roadside food-court facilities that they operate in the U.K.,” Lewis says, “they will find out that what they did in the U.K. was reinvent the rest stops that already exist along major U.S. toll roads, and that there is no need for these in the areas that are served by the Kroger stores. So EG may be in for some surprises.”