MACS wants to make a mark. Leave a distinct impression on customers. Think tattoo. Well, if not that extreme, at least the company wants that “wow” factor.
Its sharpest tool: the Circle K brand.
With a skilled team brought in to inject greater value into this investor-assembled platform of 70 company-ops and about 230 dealer sites, MACS must transform itself into something more to people than gas and smokes.
“We ask ourselves, ‘What do we want to be famous for?’ ” says Derek Gaskins, senior vice president of marketing and merchandising for Mid-Atlantic Convenience Stores (MACS), Richmond, Va. “Where do we ultimately want to get credit?”
So far, those marks of distinction include “brand developer” status with the nation’s second largest c-store brand; a working partnership with Circle K’s parent—the 6,100-store Alimentation Couche-Tard—including a high degree of autonomy for MACS; and an initial, pared down go-to-market strategy involving fountain, coffee and roller grills.
The MACS model is a new phase in c-store consolidation, made up of refined players and ramped up circumstances: the private-equity firm Catterton Partners, Greenwich, Conn.; a veteran set of c-store executives with backgrounds ranging from Pittsburgh’s Giant Eagle GetGo chain to the mother of all M&A champs, Cary, N.C.-based The Pantry; and now the decision to join ’em vs. beat ’em in the highly contested but Circle K-free zone of the Mid-Atlantic.
With those forces in play, the MACS story goes beyond what customers see. It is not just another equity investor playing in the convenience landscape, nor is it promising to pioneer a new retailing design. For an industry keen on market trends and insight, MACS’ journey brings the spotlight back to one of the industry’s biggest consolidators, Circle K; finds commonalities in what drives both major oil companies and investment houses; and ultimately circles back to the competing forces of corporate consolidation vs. entrepreneurial spirit.
The drivers and choices are more Wall Street than Main Street, more corporate than mom-and-pop. But what has to happen—the magician’s trick at the store level—remains the same: get to the heart of the consumer.
That’s the bulls-eye, according to Dan Pastor, the company’s new CEO. And that’s where this new team believes it can add value.
As Pastor rhetorically asks, “When you put 300 locations together that aren’t uniform, how do you position that both at retail and wholesale to be impactful to consumers?”
Big Baby
MACS had a fast start. Just two years ago, the Catterton Partners-assembled platform emerged amid an all-out retrenchment of major oil companies from retail. For the newly formed MACS, as with similar investor-backed amalgamations in the Midwest, Southeast and to a degree on the West Coast, the industry expected yet another new c-store brand.
But surprisingly, MACS zagged instead of zigging, tying its future to the Laval, Quebec-based Couche-Tard and its nationally known Circle K name. The entities whittled out a “brand developer” partnership, combining Couche-Tard’s buying and infrastructure strength with a high degree of autonomy for MACS.
With the deal done, the physical changeover commenced in September. The first dozen company-ops finished conversion by the end of the month, and four more sets were scheduled for rebranding by Thanksgiving.
The reasons behind MACS’ branding decision become more evident as the details surface. But from a broad perspective, Pastor saw two choices: create a brand from the ground up, or partner with an established name. The backdrop of this decision was the reality of playing in one of the country’s toughest convenience playgrounds, amid the likes of Wawa, Sheetz and a few other top-notch mid-size companies.
“We had no brand equity on day one, from an equipment perspective, a marketing perspective, with brand recognition,” says Pastor. “It was going to take a lot of time to make that brand known.
“But as an alternative to that, we asked ourselves: Were there other brands we could partner with? And if so, who and what resources, capital, leveraging was out there? What better equipment, better buying, better advertising, better offering?”
The questions led MACS to Circle K in what appears to be a fixed agreement to rebrand current sites and fill in with new locations. “We looked at the advantages they had and looked internally,” Pastor says. “Then there was the big idea to join forces and capture the market together— that’s what we’ve done.”
Why a Win-Win
One of most blatant, compelling reasons for this partnership was an obvious omission. Simply put, for all its acquisitions and growth, Circle K remained largely absent in the Mid-Atlantic region of Virginia, Delaware, D.C. and Maryland. “I was shocked,” Gaskins says of the brand’s near-invisibility in the area.
Couche-Tard began its run in the United States in the early 2000s with the dramatic purchases of midsized chains followed by an aggressive, previously unheard-of acquisition of a chain double its size: ConocoPhillips’ Circle K. Taking its decentralized model into new territory, the company established autonomous business units divided by region, with the closest one to MACS the Great Lakes region in the Midwest.
Though Circle K did not respond to CSP’s request for comment, Dennis Tewell, vice president of franchising for Circle K, said in a statement the company was “excited and proud” to be working with MACS, calling the partnership its “first footprint” for the brand in the Mid- Atlantic.
With the exception of a few stores in Maryland, Circle K had no presence in metro areas such as Washington, D.C., Richmond and Baltimore. From its alliance with MACS, Circle K suddenly cuts a sizable swath through what Gaskins describes as a combination of rural, suburban and urban areas.
“We are based here in one of the largest growth corridors in the nation,” Gaskins says. “When you look at population density, people moving in, income levels, job factors … it’s a very powerful region.”
From an outsider’s perspective, reducing competition was a major win for both MACS and Circle K, says David Bishop, managing partner of Balvor LLC, a Barrington, Ill.-based c-store consulting firm. “Given the lack of overlap, it allows Circle K to expand in the Mid-Atlantic … [while giving MACS] control over the level of competition in the area,” he says.
The compelling choice of Circle K over its more obvious rival, Dallas-based 7-Eleven, may have been about existing market presence, with 7-Eleven already holding share in the same markets. But the implication then is that 7-Eleven could have offered brand equity and consumer awareness, while Circle K did not.
So why Circle K? Bishop says Circle K and 7-Eleven can provide support, programs, services, scale and buying power. Both could supply MACS with established, turnkey programs with preset graphics, equipment and vendor agreements, allowing for details such as the fountain presence of two competing cola manufacturers, and an appealing price point.
If infrastructures were comparable and competitive issues were tipping the scales in favor of Circle K, then flexibility appears to have been a deciding factor. And MACS executives are adamant about their independence from Circle K. (Pastor emphasizes that MACS was not purchased by Couche-Tard but is an independent company.)
“We’re trying to leverage the best of both worlds,” Pastor says. “We believe we have a sense of what consumers want. What are great programs for Circle K may need our flair of merchandising because our demographics [are different].”
Brad Williams, senior vice president of operations for MACS, agrees on the need for a degree of autonomy. “We want to be able to do the right things,” he says. “It goes to what’s best for developing the brand in this particular market. One of the benefits is that we can look across [Circle K’s] portfolio and figure out what’s working in Florida, Southern California and the Midwest, and make something our own, something that can resonate in this region.”
Even at the stores, MACS’ plan is to give managers a level of independence, with plan-o-grams and selection decided on a store-by-store basis. “We’re not going to take the cookie-cutter approach and just hope it works,” Williams says.
Profit Pressure
Though the reasons for the Circle K choice may appear evident, Bishop says other factors may have contributed, with MACS’ private-equity history a big driver. Catterton Partners started the platform in 2010 with the purchase of the Richmond, Va.-based Uppy’s convenience chain and a subsequent buy of 230 stores and fueling stations from Houston-based ExxonMobil. (See timeline on p. 52.)
For any investment firm, return on capital employed (ROCE) is a priority. Seeing a return sooner is obviously better than later, and it may have spurred the Circle K choice with its ready-made infrastructure.
But motivation for a quicker return may also lie in the ever-changing investment landscape. Returns fluctuate over time, with consequences for companies such as MACS if other, more attractive investment opportunities should arise. As an example, return on petroleum exploration and extraction was at a general metric of 10 or 12 in the early 2000s, says Bishop, a range in which retail investments could compete. In the mid-2000s, upstream returns jumped to 25, triggering a scramble by the majors to back off from retail.
While comparing upstream with downstream ROCE may be apples and oranges, Bishop says that historically, retail returns were comparable to many other investment options—and were probably safe bets during the uncertain days of the recession. Today, a more promising economic picture may lure private equity firms toward more aggressive investments.
Of course, different businesses also evaluate ROCE from a range of perspectives, not just the bottom line. While a major oil, for instance, may fall out of passion for c-stores, a competing retailer may find the price and the ability to enhance brand presence attractive.
“Expectation is changing because of who’s interested in the business,” Bishop says. “Wall Street has a different set of expectations vs. retailers.”
That said, Bishop believes private-equity firms are more likely to measure investments the way a major oil would, continually looking for the best return across channels, industries and opportunities. Companies such as MACS are pressured to perform sooner rather than later.
What Customers Will See
With motives set, the task remains. Redefining an established brand for a new set of customers is an enviable position for a two-year-old entity, an opportunity that would not have materialized if any of a number of market forces failed to align.
But MACS has quickly turned the opportunity into a concrete, back-lit reality, as a walk into a newly revamped store in the D.C. suburb of Sterling, Va., showed this fall, initially revealing clean lines, shoulder-height shelving and a vibrantly designed, back-lit fountain area. It’s a regionally developed Circle K program called Polar Pop, and it anchors a three-part remodeling that includes an upgraded coffee offer and expanded roller grill.
While a step-by-step storyline for customers, the three core elements are meant to first communicate variety and value:
- Polar Pop: The 20-valve fountain carries competing cola brands, with marketing messages encouraging customization of flavors—all at a single 89-cent price point for small and large drinks. Gaskins says MACS’ value-focused strategy and Circle K’s established buying power led to what is arguably an eye-catching price.
- Coffee: Upscale gourmet blends with six options and state-of-the-art dispensers help deliver consistent, quality cups at a competitive price.
- Roller grills: An expanded setup covering all day-parts visually speaks to variety and commitment to the category.
“The biggest challenge is to make sure we’re communicating clearly and in a simple manner—that sounds easy, but it’s not,” says Gaskins. “With the holidays coming up, our people want to get into shippers, gift cards, sporting events and partnerships, but if it doesn’t fit in our ‘big three’ [focus] and what we want to stand for, we have to have the courage to not do it.”
Mid-Atlantic Circle K
Whatever the reasoning behind its decision, MACS is now presenting the industry with what may be a “best of Circle K” scenario. Its new store in Sterling, Va., is decidedly MACS, but future sites have the potential of aggregating Circle K’s best programs under a single canopy. Gaskins says Circle K had “dozens” of programs spanning core categories of center store, packaged beverages and foodservice for MACS to choose from, such as Living Well bottled water and Circle K-branded mugs. Though more than willing to comply with many standard Circle K specs, that degree of autonomy was pivotal for MACS.
Part of store upgrades meant cabinetry and shelving to match Circle K specs, says Dwight Aston, president of SHOPCO USA Inc., Houston, which implemented the changes. He describes the units as metal cabinets with wood-grain vinyl.
It’s a strategy that extends the parent chain’s philosophy of decentralization and local focus, while reaping the buying power and development resources of a major consolidator.
MACS’ core programs in this initial brand introduction are straightforward but precise:
- Value Plus Differentiation: In Polar Pop, MACS sees a point of differentiation. In the Midwest and South, Gaskins says, people think “pop” vs. “soda.” Not so in the Mid-Atlantic, so the word “pop” may literally “pop” in consumers’ minds. The single price point for large and small sizes suggests value, while the number of spigots and a choice of two types of ice suggests variety. Another slogan written on the dispensers is “Stays cold longer.” It refers to the use of Styrofoam cups, which can help retain the temperature of the beverage over paper or other cup material. Of all the in-house brands, Gaskins believes Polar Pop can be a “stand-alone,” one he can market outside the stores’ four walls.
- Elevating Existing Programs: While Polar Pop was an existing Circle K program, MACS felt it needed to elevate Circle K’s current coffee program because of the “sophisticated palates” of its market. Gaskins says its equipment was a “hodgepodge of glass pots and thermal brewers.” Now the equipment has soft thermal heating capability that keeps the quality of the product from breaking down over time. MACS expanded the selection from three to five main options and worked on blends to make them “meaningful and authentic.” Its core flavors are Circle K premium house blend, 100% Colombian dark roast, bakery blend, hazelnut blend and Circle K premium decaf. In addition, it will have limited-time offers of harvest spice, “Jamaican Me Crazy” and Peruvian blend.
- Foodservice Statement: As part of a broader foodservice statement, MACS decided to ramp up its roller-grill program, taking the number of machines at each store from one or two to four or five, according to Williams. The goal was to keep high-quality products in all day-parts. The expanded number of grills and forefront presence was important. “Having the breadth of offering says we’re in the business,” Williams says. “And we found that once we doubled the equipment, we doubled our volume.” Its offer is a combination of Ball Park, Home Market Foods and Ruiz programs for day-part variety, but managers also have options to cater to local tastes.
More Circle K
The partnership between Circle K and MACS will more than likely continue to reap mutual rewards, Bishop of Balvor says. He points out that Couche-Tard has begun to develop proprietary, low-tier cigarettes with its Crown offer, as well as a growing loyalty program.
On a broader front, Couche-Tard continues to improve in-store sales and foodservice, analysts say, but cigarettes continue to be an issue. Speaking to Couche-Tard’s overall growth, Martin Landry, equity research analyst for GMP Securities, Montreal, says in its last quarter, ending July 22, 2012, the company saw a 2.8% increase in same-store sales, which was below its historical average of 4%. Cigarettes were partly to blame, with the chain reporting that without cigarettes, the merchandise performance was 6.6%.
That said, Landry believes cigarettes remain a concern, albeit “the only dark cloud on the horizon” for Couche-Tard.
For MACS, its choice of Circle K and its brand execution will unfold quickly over the coming months, and the customers, Gaskins says, will decide if they made the right choice: “When they look into stores, hopefully they see a transformation and will be willing to trust it.”
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