FRAMINGHAM, Mass. — A friend in the investment banking industry recently asked for my single biggest worry about the threats to the convenience-store and retail fueling industry. This was in response to my praising the strength and resilience of the industry in the face of an onslaught of potential threats.
He, of course, was focusing on the tremendous values being placed on truckstops and convenience stores, evident in the double-digit multiples paid for many chains by financial and strategic buyers, including Warren Buffett. Did this valuation fly in the face of:
- Conventional wisdom that electric vehicles would wipe out liquid fuel demand?
- Increasing taxes on tobacco coupled with a possible prohibition of menthol, vaping and flavored tobacco?
- The end of the oil era and possible increased fuel regulations, including temperature correction, a carbon tax and other climate-change initiatives?
- Higher state and federal fuel taxes?
- Increasing attacks on salty snacks, sugar and large drinks?
- A shrinking labor pool and higher minimum wages?
Without sounding too sanguine, I addressed each of these six deadly threats individually.
Fuel demand destruction
We currently have 300 million vehicles in the United States, and sales have topped 17 million for each of the past four years. And not only is the number of EVs on the road at only 1 million but there is also a record number of households with two or three vehicles, showing there is no sign that Americans have given up their passion for the independence and freedom of the open road in owned and operated vehicles.
While we are currently seeing about 26,000 EV sales per month, sales data shows a definitive preference among consumers for conventional SUVs, crossovers and larger vehicles, including light trucks such as the Ford F-Series, which remains the top seller for the 36th consecutive year. As of November 2019, U.S. liquid fuel consumption was 3.9 billion gallons, a new record.
While overall smoking is declining with the disappearance of cigarette machines, pharmacies not selling tobacco and the nonthreat from internet tobacco sales, convenience stores have taken share and are the only effective way of controlling who buys tobacco. Most retailers have successfully transitioned away from the old convenience playbook of “smokes and Cokes” to food and fountain beverages.
Not only is the the oil age not over, but it's also not even in its final act. This year, the United States will establish the record for production of more than 14 million barrels per day—greater than any other country, including Russia and Saudi Arabia. And while the Permian Basin and shale oil are leading the way, nothing in the production or reserve data indicates a decline on the horizon. In fact, total extraction costs have fallen for every one of the nine major producers in the Permian. As with every dire prediction of resource exhaustion over the past 100 years, from food, timber and minerals to natural gas, technology and commercial ingenuity will disappoint the Cassandras.
It is hard to argue against taxes rising, given government’s insatiable appetite for easy revenue, but fuel taxes are by statute in the Highway Trust Fund to be used for badly needed infrastructure, which will only make the desire for the open and pothole-free road more desirable. Given, as well, that fuel taxes are among the most regressive, it is challenging to hear requests for more money than the current $240 billion we give to the solar and wind industry and $25 billion to the EV industry, while intimating that the average American who is already paying $264 per year on fuel taxes should pay more.
I agree the “nanny state” is going strong, but even politicians realize that good retailers sell what the customer wants and not what we think they should want. And while more than 70% of Americans are overweight or obese, obesity correlates more with income and education level than with the frequency of convenience-store visits. So maybe our public officials should be working harder to raise per capita income and educational attainment and educate themselves on the history of success with prohibition of any product in any country.
While the tight labor pool is a near-term concern, smart retailers understand that it is the quality of the store associate and manager more than the hourly wage that drives store performance. Many retailers have already begun paying higher wages, offering generous profit participation, increased benefits and more flexible working hours to attract talent. The convenience and fuel retailing business employs 6 million people directly and indirectly out of 160 million workers. It has a higher proportion of females and minorities in key positions by 5 percentage points than the overall U.S. industry, and it has been the first job for 500,000 young workers every year. And the convenience and retail fueling industry employs 500,000 legal immigrants.
The brick-and-mortar force
What has changed in the 45 years I have been in this industry is the cross-channel challenge. Today in the United States we have:
- More than 350,000 quick-service restaurants.
- 67,000 pharmacies.
- 35,000 dollar stores.
- 2,000 club stores/hypermarts.
- 3,000 grocery stores selling fuel, including Kroger, Giant Eagle, Hy-Vee, Safeway, Albertsons and Stop & Shop.
I may be an unreformed optimist, but after viewing this industry and its outstanding entrepreneurship, leadership, resilience and history of transformation, it would be foolish to bet against it. Rather, we should recognize what some of the brightest investors already understand: In brick-and-mortar retail, there are none better than c-stores.
Joe Petrowski serves as director of fuels for Yesway, where he oversees all operations of the fuels team, including pricing, procurement and management of the firm’s fleet services program. In addition, he works closely with the company’s senior executives to help manage Yesway’s growth, improve operations and implement the firm’s business plan. Prior to joining Yesway, Petrowski was CEO of Cumberland Farms Gulf Oil Group, a diversified petroleum and retail convenience-store holding company located in 29 states with more than 8,000 employees and $13 billion in annual revenues. After leaving Cumberland Farms, he founded Mercantor Partners, a private equity group focused on downstream energy distribution and retail convenience. Petrowski remained chairman of Gulf Oil through 2017 and oversaw the sale of Gulf Oil to ArcLight Capital Partners in 2015.