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Focus on The Pantry, Part 2 of 2: Assess & Address

Marks sees hurdles and some "low-hanging fruit" as he takes over chain leadership
[This is the second in a two-part series featuring the goals and strategies of the new president and CEO of The Pantry, Terrance Marks.]CARY, N.C. -- In the two months since Terry Marks took over as president and CEO of The Pantry, he has spent time analyzing the business, looking for places to improve and developing plans based around some very basic convenience store principals.

"Now more than ever, consumers are clear about what they want in their shopping experience," Marks said on an earnings conference call Wednesday. "They want to get in and get out quickly, [image-nocss] they want a clean store with friendly service, and they want the items they're looking for to be in stock and competitively priced."

Using these basic tenets, Marks has already developed several initiatives to improve The Pantry's store performance. (Click here to read part 1 of this series, which outlines those plans.)

But there's definitely more to be done. From taking advantage of the 1,663-store chain's scale, to improving private-label initiatives, to rationalizing product assortment, Marks hopes to take The Pantry from a chain known for its quantity of stores to one known for quality.

"We must do a better job going forward of leveraging [our] advantages to serve our customers and create value for our shareholders," he said.

Marks' plans were developed partially from the point of view of a supplier. After spending years with Coca-Cola Enterprises, most recently as the president of the company's North American Group, he comes to The Pantry with a unique perspective often not afforded retailers.

"Having spent the past 22 years in consumer packaged goods, I've had the benefits of working extensively across a wide breadth of retail channels, and none more so than convenience retail," he said. "I spent a good portion of my two months on the job visiting our stores and meeting with our associates, and this experience has left me both impressed and energized by the commitment and dedication of our people, and it's a privilege to be part of their team."

Thus, on this week's earnings call, Marks' first with the company, he offered the following observations about the industry, in general, and The Pantry, specifically.

On fragmentation within the c-store industry: "The evolution of the business is one that... it's a very fragmented business, in part due to the sheer number of locations [that have been built] over time and the amount of change that's going on in the structure of the industry from an ownership standpoint.

"I don't know that you're going to see any rapid consolidation in the near term. There are some factors in the environment that would suggest that the conditions are beginning to ripen for further consolidation, but there are others, frankly, that run very counter to that. One thing we have seen, and it's a very recent change, is that the overall number of stores has declined, and that is a change in a long-term trend, and that's one of the things that suggests that we could consolidation in the relatively near term, but I think that's something that will need to play out."

On The Pantry's private-label strategy: "Our private-label offering's not doing well. It's been down over some period of time; it's a relatively small portion of our mix....We're going to sit down, spend some time to determine what categories we need to be in from a private-label standpoint.

"[Our new] on-the-go meals [strategy], that is principally going to be a private-label approach.... So if you're thinking of private label more holistically, there's no question we're going to be increasing our footprint in private label in a very meaningful way. If you're thinking of it within traditional grocery or beverage, [we need to determine] a more targeted approach."

On the leveraging The Pantry's size: "The benefits from a scale standpoint that The Pantry has are in many cases unleveraged. We have..some great stores and we have some great locations in some very good markets in a very desirable part of the country. But we don't have a brand identity that's consistent across the entire business.

"And so from a scale standpoint, that's one of our major opportunities, both in terms of the brand that's on the outside of the box, as well as the brands that are inside the box. So to the extent that we have a private-label strategy, we would seek to have some consistency between the name on the outside of the box and our private-label offerings. So I think we have a bit of low-hanging fruit from a scale standpoint."

On rationalizing product assortment: "The entire management team believes that we have a not-insignificant opportunity to clean up our stores, if you will, and reduce some of the clutter. We have a lot of shippers and a lot of free-standing racks, some of which can be repurposed, others that can be removed. And the combination of all of those things is what will provide the additional square footage required to execute the kind of on-the-go meal solutions and concepts that we're thinking about now."

On getting prices right: "If you look at our historical margins over time in stores, one could argue that the strategy has principally been one of a higher-unit-margin approach and less dependency on sales velocity. Our belief is we're going to have to walk toward a more balanced model, and to do that well, it requires us to have a really clear understanding of the performance of categories down to the SKU level in terms of what's in the basket when a certain item is purchased. And today we simply don't have that level of granularity."

On how consumers view The Pantry's stores: If we surveyed customers, "I'm not sure that what I'd like to see out of that survey will lineup with what we see [in our stores]. I suspect it won't, which is the fundamental reason for the initiatives that we're undertaking."

Based in Cary, N.C., The Pantry is an independently operated convenience-store chain in the southeastern United States and one of the largest independently operated c-store chains in the country. As of Dec. 2, 2009, the company operated 1,663 stores in 11 states under select banners, including Kangaroo Express, its primary operating banner.

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