2014: What a Year!

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With a surprise second-half freefall of oil prices ending in $2-a-gallon gasoline and industry pretax profits 46.5% higher in 2014 than the year before, retailer Billy Milam could only declare: “October 2014 was our best year ever.”

Oversupply of crude, with an extra 9 million barrels a day in U.S. production alone, created a domino effect through the supply chain, boosting fuel margins in the fourth quarter, increasing discretionary income and sending in-store sales to historic highs.

The U.S. convenience-store industry had record in-store sales of $213.5 billion in 2014, higher than overall industry sales in 1998, according to figures released by NACS. Combined fuel and inside sales for 2014 reached $696.1 billion, 0.1% over last year’s sales of $695.5 billion.

Pretax profits jumped a whopping 46.5% in 2014 vs. 2013 to $10.4 billion, compared to a slight dip of 2.4% in the previous time period last year.

The association announced the c-store industry’s preliminary 2014 key economic indicators at the NACS State of the Industry (SOI) Summit in Chicago, with the statistics representing 213 contributing companies running 19,262 stores.

The industry’s in-store sales increased 4.6% over 2013, which was itself a record year. Still, although retailers sold more gallons of fuel in 2014 than 2013, total industry fuel sales decreased by 1.8%, due to gasoline prices that were 4% lower in 2014 compared to the previous year.

“In 2014, we saw a lag in the [fuel demand] trend line in the first part of the year, but in 2015, not as significant a drop,” said Milam, president of RaceTrac Petroleum Inc., Atlanta, during his presentation. “It may be a good sign that fuel consumption will rise.”

Milam, who addressed the estimated 500 operators, suppliers and supporters of the convenience and fuel retailing business, said operators must stay vigilant.

While indicators point to continued low gas prices, decent demand trends and continued profitability, significant clouds darken the landscape. “[The year] 2014 was a great year, and it’s easy to pat yourselves on the back,” Milam said. “But Carl Bolch, who led RaceTrac over the years, would see through that.”

Profit gains can easily mask rising expenses, shifts in consumer tastes and competitive challenges, Milam said, including channel blurring, industry consolidation and impressive new-to-industry locations.

Industry Snapshot

While each convenience retailing business, on each corner, in communities urban, suburban and rural, has its specific challenges from both within and cross-channel, the industry as a whole continues to build fortitude.

The U.S. convenience-store count increased to 152,794 stores as of Dec. 31, 2014, an almost 1% increase (1,512 stores) from the year prior.

Overall, 83.5% of convenience stores (127,588 total) sell motor fuels, a 0.7% increase (930 stores) over 2013, according to the 2015 NACS/Nielsen Convenience Industry Store Count. The growth of convenience stores selling motor fuels is double the overall growth in the industry, as fuel retailers add convenience operations and convenience retailers add fueling operations.

Convenience stores also account for 33.9% of all retail outlets in the United States, according to Nielsen, which is significantly higher than the U.S. total of other retail channels, including drug stores (41,799 stores), supermarket/supercenter (41,529 stores) and dollar stores (26,572 stores).

Convenience stores remain an important employer, with 2.43 million people receiving paychecks last year (a 10.6% increase from 2013). Overall, c-store sales represent about 4.1%—or one out of every 24 dollars—of the entire estimated $17.7 trillion U.S. gross domestic product.

C-store retailers have been providing tangible, organic growth as well, upgrading and building new-to-industry stores, while the single-store owner-operator population is on the rise because mega-mergers often lead to store rationalization, Milam said.

A look at the top 20 c-store chains in terms of numbers shows four of the top five having had extensive growth through acquisition in the past few years, while four of the top 20 companies built through ground-up locations.

With different models in the mix, Milam said that energy will continue to change the makeup of the industry and affect its results.

Focusing on the master limited partnership (MLP) trend, he said, “When chains merge, you don’t see more stores built, but you do see greater efficiencies, greater economies of scale. Everything we’ve seen, earnings, [store valuation] multiples, you’ll see more of in 2015.”

All of the activity reflects a vibrant industry, speakers agreed. “These numbers demonstrate that Americans turn to us for their daily needs,” said NACS chairman Steve Loehr, vice president of operations support for La Crosse, Wis.-based Kwik Trip. “We are a vital part of consumers’ daily lives and the U.S. economy. We also continue to innovate and deliver on our promise of providing fast, one-stop shopping to consumers, whether they are on the road or in their communities.”

CONTINUED: Banner Year, Bold Challenges

Banner Year, Bold Challenges

Convenience-store pretax profits increased in 2014 to $10.4 billion, due primarily to higher profit margins as wholesale fuel costs decreased. The industry saw a 17.1% increase in fuel margins this year, at an average of 21.9 cents per gallon for 2014 compared to 18.7 cents per gallon in 2013. In a same-firm comparison, the number also rose from 5.4% to 6.8%, a significant increase over 2013.

Retail gas prices will probably remain low, with the Energy Information Administration (EIA) predicting an average of $2.40 a gallon vs. $3.36 a gallon last year. American consumers end up winning, with the average household spending $1,187 in gasoline this year vs. almost double that ($2,513) last year.

That discretionary income may prove a windfall for retailers agile enough to capture those dollars; while motor fuels continued to drive sales, in-store sales drove profit dollars. Overall, 69.2% of total sales were motor fuels, but motor fuels accounted for only 39.5% of profit dollars.

Milam also pointed out numerous challenges facing potential c-store profits in 2015:

• Minimum wage is up. With companies such as Bentonville, Ark.-based Wal-Mart Corp. pledging to increase wages and several states instituting higher minimum-wage thresholds, costs and competition for labor increases.
• Tobacco’s decline. As cigarette sales continue to decline, what’s replacing them?
• Income bifurcation. As the top 20% of Americans get richer, the bottom 80% are struggling, with 72% of  Americans believing the economy is still in recession, Milam said. Disposable income for the poorest consumers has decreased, with 52 million Americans—up 30%—projected to be in the government’s SNAP program in 2016.
• Credit-card fees. Though the industry made gains against credit-card fees as gas prices fell, the toll rose 2.3% to $11.4 billion in 2014.

Same Firm Sales, Profits

The picture with same-firm sales, or comparisons of firms that reported in previous years, mirrors overall trends but with a store-level perspective.

Total inside and fuel sales are down, primarily because of lower gas prices, down 0.2% in 2014 vs. 2013, at $596,004 per store per month vs. $597,069. Fuel sales were down 1.8% to $477,390, while gallons were up 2.3% to 143,780.

Inside sales, on the other hand, were up 4.6% to $146,049 compared to $139,680 in 2013, with foodservice leading the increases at 9.7% growth over the previous year. Still, at $28,170 per store per month, foodservice is a far smaller percentage of overall sales, with merchandise coming in at $118,403 per store per month, a 3.4% increase.

CONTINUED: A Look at Industry Totals

But profit speaks volumes. Total gross profit per store per month was up 11.8% to $81,833. Profit in the last reporting period was 4.4% at $67,769 in 2013. Same-store pool margins were 20.1% last year vs. 2.3% the previous year. In-store percentage increases were also higher: 6.2% last year vs. 4.5% the previous year.

While increasing profits, retailers also managed to hold back expenses. In a key development, Milam said industry gross-profit dollars grew two times over expenses last year (counting only firms with five consecutive

years of data). While profits in this group rose 12.8% in 2014, expenses grew only 5.6%, with the numbers from 2013 being a 6.8% profit increase and a 4.9% increase in expenses.

In summarizing an extraordinary year, Milam said the industry continues to innovate while remaining true to the business models that have brought it success.

Review of 2014: Flat Sales, Fat Profits

Much about 2014 seemed uneventful—at least for a channel proving its resilience in a recession. Store count in 2014 was 1% higher than the previous year, coming in at 152,794 c-stores nationally. Total sales were up barely a whisper at 0.1% to $696.1 billion from $695.5 billion the year before. Then pretax profits, boosted by the sudden drop in crude prices and eventual chain reaction down to the pump, saw a 46.5% vault to $10.4 billion from $7.1 billion in 2013—a historic marker in and of itself. Pretax profits since 2010 have been higher than past profit levels going back two decades.

Sources: Nielsen, U.S. Energy Information Administration, preliminary figures from the NACS State of the Industry Survey of 2014 Data and CSX LLC

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