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Top 202 2019: The Growth Imperative

Retail lures major oils and foreign buyers as regional chains double down on new builds
Typography by Charles Williams

CHICAGO — For Greg Parker, convenience retailing today is a contact sport.

Despite the industry’s record-shattering 5.8% surge in overall profitability to  $11 billion in 2018, convenience-store retailers face stalling traffic counts, declining core categories and scorching heat from both cross-channel competitors and retail disruptors.

Still, Parker, CEO of Savannah, Ga.-based The Parker Cos., intends to add 15 new stores this year to his current network of 57. Why? Not because of a successful 2018 but the promise of things he has yet to completely master: foodservice, technology and an evolving c-store consumer.

“If you’re not positioned as a warrior in this era of retail, you will get defeated,” he says.

Parker’s confidence is apparently shared by other retailers in the channel. Collectively, a diverse range of industry players built, bought and sold in 2018 to make CSP’s latest Top 202 ranking of the largest chains in the c-store industry a vivid snapshot of consolidation, scale and aspiration.

On its face, the chain rankings stood firm, with 7-Eleven continuing its reign at the top. But 7-Eleven’s store count expanded to 9,200 U.S. stores with its completion of the 1,030-site acquisition from Sunoco. Alimentation Couche-Tard held at No. 2, with a modest pickup of about 40 sites. And Marathon Petroleum’s Speedway LLC stayed at No. 3, but it expanded to more than 3,900 sites with its acquisition of the Andeavor network. (CSP set Dec. 31, 2018, as the cutoff date for its annual store count, which means many of 2019’s biggest deals are set to transform the top 20 further.)

While shareholder activism shaped c-store ownership in previous years, the main players in 2018 and 2019 have been foreign investors and major oil companies. The most significant story of the past year has been Big Oil’s renewed interest in retail [CSP — Feb. ’19, p. 24; and March ’19, p. 20]. From Marathon’s Andeavor deal to BP’s (No. 7) formation of a joint venture to acquire the 191-store Thorntons chain (No. 38), many of the largest U.S. refiners and producers have set their sights on retail.

“For a long time, the majors tied up a lot of operators with long-term contracts,” says Roger Woodman, managing director of financial advisory firm Raymond James, St. Petersburg, Fla. “Now you’re seeing many of those contracts coming up for renewal, so the question is how to continue to lock up gallons for their supply.”

Other factors behind the major-oil push, Woodman says, are the long-term decline in fuel volumes and continued growth in store profitability. “You’re seeing the majors revisiting the benefits of in-store profits … to offset declining gasoline [volume],” he says.

Not to be outdone, foreign investors were significant contributors to M&A in 2018, accounting for about 1,300 c-stores and travel centers changing hands. One of the most surprising new entrants to the Top 202 is U.K.-based EG Group, which stepped into the top 10 with its purchase of Kroger’s 762-strong c-store network. It also padded its store count after buying 225 Minit Mart stores from Westlake, Ohio-based TravelCenters of America (No. 29).

Private-equity groups also maintained a presence as industry players. ArcLight Capital Partners took the lead on the BP-Thorntons deal, and Brookwood Financial Partners backs the Yesway chain (No. 43), one of the most aggressive acquirers in the industry today.

The remaining growth occurred largely among regional players that continued to bring several hundred new-to-industry stores online in 2018. These include stalwart brands such as Wawa (No. 9), QuikTrip (No. 11), Kwik Trip (No. 13), Sheetz (No. 14), RaceTrac Petroleum (No. 16), Kum & Go (No. 18) and Martin & Bailey’s Huck’s chain (No. 50).

None of these regional chains seems likely to sell to larger ones anytime soon. That said, in April 2019, Oil Price Information Service (OPIS) reported that 562-store Cumberland Farms, Westborough, Mass. (No. 15) had begun to explore a potential sale—a move that would not only boost any potential acquirer’s Top 202 ranking but also alter the dynamics of many Northeast and East Coast markets.

Here are some of the  main drivers of M&A activity in 2018 on the “buy” side:

  • Fuel margins. Retailers saw another year of strong fuel margins in 2018, boosting profits, earnings and multiples.
  • Cheap money. Low interest rates spurred the big to get bigger.
  • Record profitability. Despite flat fuel volumes and an increase in credit-card fees, c-store sales grew 8.9% to $654 billion, while profitability rose 5.8% to $11 billion, according to preliminary figures from the NACS State of the Industry Report of 2018 Data.

Here’s what’s fueling the “sell” side:

  • High multiples. Buyers with deep pockets—led by major oil, foreign investors and private-equity groups (see yellow boxes)—have driven up multiples on high-quality assets, luring many strong regional names to contemplate selling.
  • Succession issues. The ongoing challenge of succession in family-owned chains for a channel that is facing paradigm shifts is unrelenting.
  • Falling foot traffic. Despite record profits, the industry experienced another year of decreasing traffic counts and overall rings, leading many to wonder if c-stores—much like retail in general—can survive today’s disruptive landscape.

What does remain clear is that interest in investing in the channel is up. “We’ve seen a period of unprecedented consolidation continue, and not just from one source but a broad base of buyers and investors focused on the sector,” Woodman says.

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Mega deals among the top 10 retailers stood out in 2018, but the overall activity was spread over a variety of operators.

While not numbering in the hundreds, other recent purchases of note were Pittsburgh-based Giant Eagle’s (No. 28) acquisition of the 56-store Ricker’s chain of Anderson, Ind., that closed in late 2018 (bumping the chain up 10 spots from No. 38 in 2017); Waltham, Mass.-based Global Partners (No. 26) buying 47 stores in two separate deals in 2018 (rising from No. 29); and then Marathon’s purchase of 33 stores from the small but high-profile NOCO Energy Co., Tonawanda, N.Y. (No. 162), in early 2019.

One reason for the active M&A picture is the industry’s ongoing profitability, Woodman says. “The industry as a whole held up well,” he says. Despite multiple challenges, the c-store channel has been able to “change its stripes” over the years and adapt to convenience shoppers’ changing demands.

“Today, there’s lots of profit centers in stores, and those can change,” he says. “It’s a flexible offer that has withstood downturns and disruption where other channels haven’t.”

“If you’re not positioned as a warrior in this era of retail, you will get defeated.”

Executives with Global Partners echo that sentiment. The vertically integrated energy supply and distribution company, which includes 297 Alltown and Xtra Mart c-stores, told CSP, “Industry data and consumer behavior over the past several years has proven that guests’ needs are shifting toward healthier, on-the-go options and eco-friendly alternatives.”

Global Partners has introduced a new “fresh convenience market” concept called Alltown Fresh, which offers healthy, fresh-food choices and organic, natural, vegan, vegetarian, gluten-free and locally sourced options. “[We] will always be a guest-driven company,” Global Partners officials say. “And our offerings will always align with what our guests are looking for.”

Major Deals

For the major oil companies, a return to retail is simply part of a recurring cycle—a love-hate relationship that’s heating up again. But Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Chicago, sees heightened incentive backing this round.

“They’re looking for ways to reinvent themselves,” Ruben says. Much in the same way master limited partnerships, or MLPs, stimulated M&A about five years ago, he calls the oil companies “the new MLPs.” However, instead of a corporate tax advantage that allowed MLPs to pay top dollar, oil companies “have access to supply and cheap throughput,” he says.

That advantage may certainly be helpful, but Scott Garfinkel, managing director of the convenience store and fuel products distribution group within Raymond James, says the core driver is the ability to move product.

“They still want to lock up fuel supply, and a lot of those 15- to 20-year deals are now coming to end,” Garfinkel says. “Operators can technically go unbranded or convert to another oil company brand, so [the majors] could lose that supply.”

The refineries are still running at a high capacity, Garfinkel says, so oil companies must make sure they have an outlet for their product. “But they also could benefit from the rich inside margin—the upside in the store,” he says.

Another difference is competence. When the oil companies were running their own stores back in the 1980s through the early 2000s, they struggled with the high labor costs and penny margins, Woodman says. Things today are different.

First, convenience has shifted to a higher-margin foodservice model. And while the majors lost their store-level infrastructure when they divested from the retail business, they’ve been partnering with experienced groups to operate the stores or are bringing in the required talent.

Second, Woodman says, they’ve expanded globally both organically and through mega-mergers—most notably Shell and BP. That expansion has led to a growing expertise abroad, precisely in convenience and foodservice, that reflects favorably back into U.S. retailing.

“The oil companies now have a lot of marketing and store-level operational expertise internationally,” Woodman says. “Why not operate stores in [the United States], the healthiest economy in the world?”

Foreign Affairs

Continuing its plunge into the U.S. market, EG Group announced in April 2019 the acquisition of the 52-store Fastrac chain (No. 124) based in East Syracuse, N.Y. While the U.K. company was a new name to American retailers in 2018, EG had spent some years acquiring oil company retail assets in Europe—about 2,200 stores from Esso and ExxonMobil. EG bought about 1,000 Esso sites in Germany last fall, and in early 2018, it bought 97 stores in the Netherlands and about 1,100 in Italy.

Then a new player to the U.S., Enex (No. 166), a subsidiary of Los Condes, Chile-based Quinenco SA, bought 38 travel centers in August 2018 from Road Ranger, Rockford, Ill. EG and Enex join other relatively recent international companies that include Dublin-based Applegreen (No. 96) and another Chilean company, Santiago-based Compania de Petroleos de Chile S.A. (COPEC, at No. 21).

Of course, the country’s two largest c-store chains, 7-Eleven and Circle K, started out as U.S.based companies but are now subsidiaries of Tokyo-based 7-Eleven Japan and Laval, Quebec-based Alimentation CoucheTard, respectively.

Foreign-owned companies appreciate the c-store channel for many reasons, Ruben of NRC says. “It’s a way to have a solid business but also have good street corners,” he says. “Companies want good real estate. That’s what we’re seeing a lot of.”

Another reason is instant visibility. “The most appealing reason is to … get into markets with a bunch of stores, right away … vs. one at a time,” Ruben says.

“If you don’t have a business intelligence department in your organization, you’re missing out.”

In addition, the economics of new builds are challenging. “Finding good locations are difficult,” he says. “Construction and land costs are high, and it may take a couple of years [for the business] to ramp up.”

Ruben also says some new builds may never meet expectations. “Site selection can be a roll of the dice,” he says.

These foreign-owned buyers are disciplined, Woodman of Raymond James says: “They only want strategic, quality assets and are willing to pay a premium for the right acquisitions.”

Private Equity

One of the more active players in both 2017 and 2018 were private-equity groups. Investment guru Warren Buffet got into the game, with his Berkshire Hathaway investing in Knoxville, Tenn.-based Pilot Flying J (No. 12) and, more recently, ArcLight Capital with its BP joint-venture purchase of Thorntons.

Such influxes of capital are generally healthy for the industry, Ruben says, despite their relatively short, three- to five-year horizons.

Garfinkel of Raymond James says the investment model is valid. In a private-equity group’s lifetime, it can own dozens of companies. It has deep access to capital from a variety of sources and the flexibility to address the capital structure of a transaction in unique ways. Private equity can also bring in management techniques, incentive compensation, operational logistics, sourcing and many other underused opportunities for chains.

“Private equity has a great track record of improving operations and getting the most out of their portfolio investments,” Garfinkel says. “Because of the many techniques they can implement and the focus by the entire team, they are often able to improve cash flow over time.”

“The economy is strong. But at some point that’s going to turn, and when it does, it will impact the underlying profitability.”

But that means the acquired chains themselves likely have to change. Garfinkel says private-equity groups can be “somewhat demanding and require  accountability, such as monthly reporting of key performance indicators—things many companies haven’t been required to do before. They’re good at professionalizing a business.”

Private-equity groups also tend to keep management in place, “allowing owners to take their chips off the table but continue to drive the business forward and participate in the upside,” Woodman says.

These investors have “only scratched the surface” of the convenience space, he says. “It’s an attractive [opportunity] given the dry powder among private equity and the demand to put together deals, pay good premiums for right opportunity and … to keep employees in place.”

Regional and Local

Beyond the larger, more abrupt transactions within the Top 202, literally hundreds of companies made smaller acquisitions or built new stores in 2018, helping them inch up the store-count ranks.

Most recently, Colorado became a target for two major regional players. Tulsa, Okla.-based QuikTrip identified Denver as a new market, and Des Moines, Iowa-based Kum & Go said its next market would be Colorado Springs, Colo.

“The Denver metro area is really hot in terms of population growth,” says Mike Thornbrugh, spokesperson for QuikTrip. “With that type of population base, we think it could support a lot of our stores over a period of time.”

The moves mark similar expansions in the Southeast, with 2019 being the year when Florida moves past New Jersey as the state with the most c-stores for Wawa, Pa.-based Wawa Inc. Others include RaceTrac, Atlanta, which announced it will expand in Tennessee, and Lake Jackson, Texas-based Buc-ees Ltd. (No. 189), which took its 50,000-square-foot mega-convenience format out of the Lone Star state for the first time with a new store in Robertsdale, Ala.

But new builds these days are not cheap. Construction costs for new builds in an urban market went up 44.5% from 2014 to 2018, according to NACS CSX data. (Click here to see related data.) However, interest rates have maintained historic lows, with treasury bills hovering around 3%, said Billy Milam, chief operating officer of Atlanta-based RaceTrac, while addressing attendees at the 2019 NACS State of the Industry (SOI) Summit. “Money is cheap and the propensity to grow is too strong,” he said.

While financing growth may be easier, sustaining the business is not. The industry’s most successful retailers—those who fall within the top 25% in operating profits—are moving away from declining categories such as cigarettes and fuel into more profitable areas like foodservice.


The Shift to Foodservice

Recent NACS State of the Industry numbers show a continuing shift by retailers from fuel and tobacco to foodservice.


Source: NACS CSX data


One such retailer is Parker of Parker Cos., who says the paradigm is always changing. “I don’t know what we’ll be selling in three years,” he says.

Today, he focuses on foodservice, with a specialty in chicken tenders and other Southern comfort foods. But beyond actually selling product, Parker’s larger goals lie in technology. More specifically, he’s been applying predictive analytics to his everyday operations, trying to forecast how many chicken tenders and other prepared foods he’ll need at any given moment—a just-in-time supply-chain model he believes will give him a competitive advantage.

“If you don’t have a business intelligence department in your organization, you’re missing out,” Parker says. “Think deeply about what it takes to engender loyalty among your customers. And be honest. Do we deserve their loyalty?”

In his SOI presentation, Milam said much the same: “Build for the new industry paradigm, not the past.”

Future Forecasting

The future will likely bring more consolidation as big players get bigger and entrepreneurial types create more opportunities. For those on the sell side, the challenges will continue to grow, Ruben of NRC says.

“People are struggling to decide if they should keep doing what they’ve been doing, make an acquisition, build a new store or if it’s time to sell,” he says. “It’s about what they think the future looks like.”

“The industry has been doing very well in terms of fundamentals and profitability,” Woodman of Raymond James says. “It’s been the 10th year of a growth cycle, so the economy is strong. But at some point, that’s going to turn, and when it does, it will impact the underlying profitability.”

Garfinkel tosses in the future volatility and uncertainty of oil prices. If prices go up for an extended period of time, people have less money to spend and retailers get squeezed.

Signs of decline appeared for the first time in SOI numbers, with the industry seeing a 1.1% year-over-year decline in overall store count in 2018. Most notable, Milam of RaceTrac said, was the 2,198-unit drop among single-store owners, who lost five times as many sites as multistore operators gained last year.

But overall, Woodman says he’s impressed with the resilience of c-store retailers and their ability to adapt during a technological disruption.

“They’ve been close to the consumer, willing to invest and change over time,” Woodman says. “You’ve got to love the challenge that change will bring. But there are plenty who still operate under a dated business model. That’s not going to work.”

Click here to see the complete Top 202 report.

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