Many convenience-store operators are receiving unprecedented offers for their businesses from consolidators and see an incentive to cash out. Other veteran retailers, however, view this interest as validation of their business models and choose not only to remain in the game but also to double down on their stake. These owners, passionate about the operational aspects of their businesses, are actively buying and developing new sites while honing their completive offering.
The ever-resilient convenience store and retail fuel industry is as strong as ever, and the same factors that made it appeal to discerning entrepreneurs over the decades still do today.
Seeing Opportunities
Why is the c-store sector lucrative for so many? Two fundamental factors affecting value stand out: site quality and focus on operations. Proper site selection coupled with strong operational execution translates into some of the highest commercial property values per square foot in the country. A high-performing portfolio of fee-owned c-stores yields an excellent return proposition for the investment dollar.
Along with valuable and appreciating real estate, the industry’s backcourt offers attractive profit margins. Inside gross margins can reach 30% or higher. In 2014, in-store sales increased by 4.6%, according to the NACS State of the Industry Report of 2014 Data. Steep declines in oil prices and increasing “street discipline” have made today’s fuel margins more robust and less volatile. These combined elements make up business or enterprise value, commonly expressed as an EBITDA multiple. This valuation component has soared because the investment community increasingly recognizes the attractiveness of our industry.
History has also shown that our industry enjoys relative stability. During the Great Recession, while the general U.S. retail sector was suffering, the convenience segment netted positive growth. Sales and store count increased, earning it the descriptor “recession resistant.” In fact, in the past 35 years, there has been only one year in which total industry sales declined. Since 2009, sales have soared by $190.4 billion.
An Attractive Sector
There’s more to the c-store story to love. The industry remains a great choice for those who thrive on entrepreneurial independence, and it’s no coincidence that 63% of convenience stores are owned by single-store operators. The operators we work with take pride in what they do, answer to no one but themselves and often use the business as a vessel for family legacy, passing it on to the next generation.
Also, c-store operations are attractive to lenders who understand the value of both the physical assets and the enterprise. Operators often own not only valuable and appreciating land, but also the buildings, tanks, canopies and equipment. Knowledgeable lenders have also grown comfortable with the environmental risk factors inherent in the space.
Additionally, the convenience segment possesses an active secondary buy/sell market for sites providing timely valuation and liquidity. Business or enterprise value is an increasingly reliable component of market valuation. This promises secured financing that works for both lenders and operators.
Finally, as lenders immersed in the industry, we’re constantly impressed by and always learning from our customers’ business acumen and operational skills. The fact is, c-store ownership is a tough “pennies” business. It’s a competitive industry with no shortcuts to success, and weaknesses are revealed quickly. Success in this business demands of the operator a mastery of many diverse subjects and factors. In our opinion, this repository of experience and skill is the true industry “golden goose.”
Here’s to Evolution
Another factor that excites the industry is its continuous evolution, especially in a rapidly transforming economy in which new technologies and young consumers’ penchants are spurring dramatic change in the grab-and-go sector. Everything from store footprint to SKU counts and food offerings evolve every year. The new-products display at the annual NACS Show spotlights the industry’s imagination and vigor as it searches for the next hit product or service.
As we look ahead, our confidence in the industry and our clients is as strong as ever—a fact that is further supported by a recent study in which 83% of convenience-store operators were optimistic about their business’ future. Why? Because the c-store industry still provides the business opportunity, financial appeal and entrepreneurial freedom that has attracted operators for years. We in the banking industry see no reason why this will stop, and we look forward to being a part of it.
Mike Phelps is national director of the Citizens Bank Convenience & Retail Fuel team in Irvine, Calif. Reach him at mike.phelps@citizensbank.com.
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