7 Companies That Could Acquire Kroger’s C-Stores

CINCINNATI -- Not surprisingly, active buyer Alimentation Couche Tard Inc. is at the top of most retail industry observer and analysts' list of retailers that could acquire The Kroger Co.’s nearly 800 convenience stores if the supermarket giant puts them up for sale.

The Cincinnati-based grocer intends to explore strategic alternatives for its c-store business, including a potential sale, the company said ahead of its annual investor conference on Oct. 11.

Kroger's c-store business operates under the names Turkey Hill Minit Markets, Loaf 'N Jug, KwikShop, Tom Thumb and QuickStop. Neither its supermarket fuel centers nor its Turkey Hill Dairy is included in this review, the company said. Kroger's convenience-store division ranked No. 20 on CSP's 2017 Top 202 list of the largest c-store chains in the United States.

Here's a look at who might buy the stores and some background on the c-stores and their value …

At the end of 2016, Kroger operated five convenience-store divisions with a total of 784 convenience stores (726 with fuel) in 18 states, according to the Kroger Fact Book:

• 129 Kwik Shop c-stores in Iowa, Kansas and Nebraska (based in Hutchinson, Kansas)
• 170 Loaf ‘N Jug c-stores in Colorado, Montana, North Dakota, Nebraska, New Mexico, South Dakota and Wyoming (based in Pueblo, Colo.)
• 101 Quik Stop c-stores in California and Nevada (based in Fremont, Calif.)
• 117 Tom Thumb c-stores in Alabama, Florida, Mississippi and Tennessee (based in Crestview, Fla.)
• 267 Turkey Hill Minit Markets in Indiana, Ohio and Pennsylvania (based in Lancaster, Pa.)

Typically built on a parcel of 1 to 2 acres, new Kroger c-stores range from 1,130 to 6,110 square feet, averaging 2,954 square feet. They generally have a large fuel offering with six to eight fuel dispensers.

In 2016, the c-stores accounted for 4% of Kroger’s total sales. The c-stores also offer a variety of Kroger private brands. The average weekly merchandise customer count is 6,216. The typical c-store stocks about 3,600 items, with about 75% of nonfuel sales being in five categories: packaged beverages, beer, snacks, candy and tobacco. The foodservice category of Kroger’s c-store business accounted for about 12% of nonfuel c-store sales for 2016. Fuel sales represented about 65% of Kroger’s total c-store sales in 2016.

The c-stores partner with Kroger supermarkets on fuel rewards. Nearly all of the c-stores offer its loyalty-card program.

Kroger’s decision to explore strategic alternatives for its c-store resulted from a review of “assets that are potentially of more value outside of the company than as part of Kroger,” it said.

"Our convenience stores are strong, successful and growing with the potential to grow even more. We want to look at all options to ensure this part of the business is meeting its full potential. Considering the current premium multiples for convenience stores, we feel it is our obligation as a management team to undertake this review," said Mike Schlotman, executive vice president and CFO of Kroger.

"It just looks like the economics make sense to do it," Kroger CEO Rodney McMullen told Fox Business News concerning a sale. "It's obviously a decision you don't do lightly. The c-stores have been in the business for a long time."

He said the move toward selling the division was part of a routine analysis of the company's assets conducted several months ago and not in response to Amazon's Whole Foods acquisition.

McMullen said he didn't know if the company had bidders yet or how long it would take to decide whether to sell or not.

In announcing the possible sale, Kroger said that the convenience-store business generated revenue of $1.4 billion and sold 1.2 billion gallons of fuel in 2016, and that the business unit has delivered 62 consecutive quarters of identical store sales growth.

This information created some confusion among investors. Shares of Kroger were halted briefly until the company issued a statement clarifying the revenue number, reported TheStreet. Kroger said the $1.4 billion “only reflects inside sales. Including fuel, Kroger's convenience-store business generated $4 billion in total sales last year.”

So, barring a private-equity play, who are the potential buyers for this large c-store network?

Coming off of its recent acquisitions of CST Brands and Holiday Stationstores, as well as a long string of previous large deals, Couche Tard is a front-runner among potential Kroger c-store buyers.

Irene Nattel of RBC Capital Markets, Toronto, told The Canadian Press she would expect that Couche-Tard will give careful consideration to the potential acquisition. "While Couche-Tard is determined to grow in the U.S. and extend its long track record of successful acquisition activity, we expect the company to remain disciplined with respect to price," she wrote in a report cited by the news agency.

“The acquisition of Kroger’s c-stores would give Couche Tard exposure to Pennsylvania, which is a market that Couche Tard hasn’t penetrated yet,” said Motley Fool contributor Joey Frenette. “It really does seem like a perfect fit for Couche Tard, and if a deal is done, earnings would gradually enjoy a bump over the medium term as synergies are gradually realized once integration finishes.”

Laval, Quebec-based Couche-Tard's network consists of nearly 9,500 c-stores in North America, including more than 7,550 stores under the Circle K name and other banners in 42 U.S. states and all 10 Canadian provinces. It operates a retail network across Scandinavia, Ireland, Poland, the Baltic states and Russia with about 2,750 c-stores. Also, licensees operate close to 1,700 c-stores under the Circle K banner in 13 other countries and territories worldwide, which brings the total network to more than 15,000 stores.

Another obvious potential buyer for Kroger’s c-stores is 7-Eleven Inc., which is battling with Couche-Tard to become the largest convenience-store chain in North America, Christopher Mandeville, an analyst at Jefferies, New York, said in a research note provided to CSP Daily News. He said, "Expect the usual suspects to get involved."

7-Eleven is in the process of acquiring about 1,100 c-stores in the United States from Sunoco LP, Dallas.

Irving, Texas-based 7-Eleven Inc. operates, franchises or licenses 10,900 c-stores in North America, nearly 9,000 of those are in the United States.

Ryuichi Isaka, recently appointed president of 7-Eleven’s Tokyo-based parent Seven & i Holdings Co. Ltd., said he plans to increase the number of 7-Eleven c-stores in the United States to boost overall market share amid slowing demand in Japan and as the chain contends with intensified competition.

7-Eleven is striving to reach 10,000 c-stores in North America, Isaka said. “We will speed up expansion in North America by accelerating acquisitions.”

A previously announced plan for long-term expansion had called for up to as many as 20,000 stores within several years.

Couche-Tard and 7-Eleven are the "most likely" buyers for Kroger's c-stores should they go up for sale, "but don't count out Casey's," Mandeville said.

Casey's General Stores Inc. has nearly 2,000 convenience stores in 15 states, most of them in the Midwest. The Ankeny, Iowa-based retailer has added a second distribution center in Terre Haute, Ind., in an effort to expand into more states, and it is considering a third facility.

“We’re certainly gearing ourselves up for future accelerated growth pace,” Terry Handley, Casey’s president and CEO, said during the company’s third-quarter fiscal 2017 earnings call.

And at the company's Investor Day presentation in July, Casey's "management indicated it needs to improve its messaging to the industry that it is willing and able, with hundreds of millions of dollars in buying power, to acquire assets, including outside its geographic footprint, as it seems to have missed out on several recent opportunities including Holiday and PDQ,” said Bonnie Herzog, managing director of consumer equity research for San Francisco-based Wells Fargo Securities LLC.

Couche-Tard acquired Holiday in July. Also in July, La Crosse, Wis.-based Kwik Trip Inc.acquired 34-unit Wisconsin chain PDQ Food Stores Inc.

"Given the company's recent declaration of wanting to become more acquisitive, we also believe Casey's could have an interest in at least some portion of the [Kroger] assets," said Mandeville. The West Coast and Florida Panhandle assets may not fit, he said.

Murphy USA Inc. also could be in the running to acquire Kroger's c-stores if they go on the block.

Murphy USA is a retailer of gasoline and c-store merchandise with more than 1,400 locations in 26 states, primarily in the Southwest, Southeast and Midwest. Most of Murphy USA's sites are located near Wal-Mart stores. The El Dorado. Ark.-based company also markets gasoline and other products at stand-alone stores under the Murphy Express brand.

Murphy USA has been Wal-Mart's retail partner in operating more than 1,000 gas stations at the retail giant’s stores. Following a strategy shift by Bentonville, Ark.-based Wal-Mart in early 2016 to move forward with its proprietary gasoline brand, Murphy USA has been executing an independent growth plan that includes new builds as well as acquisitions.

Marathon Petroleum Corp. (MPC), which owns the Speedway convenience-store chain, could also be a candidate to buy Kroger’s c-store network if the grocer decides to sell it. MPC recently faced a similar decision as Kroger and decided not to spin off its retail network.

In 2014, MPC acquired about 1,250 Hess Express and WilcoHess stores from Hess Corp. and has converted them to the Speedway brand.

Enon, Ohio-based Speedway LLC, an MPC subsidiary, owns and operates approximately 2,730 c-stores in 21 states.

MPC, based in Findlay, Ohio, is the nation's third-largest refiner, with a crude oil refining capacity of approximately 1.8 million barrels per calendar day in its seven-refinery system. Marathon-brand gasoline is sold through approximately 5,600 independently owned gas stations and convenience stores across 19 states.

GPM Investments LLC is another company that might try to buy Kroger’s c-store network. Based in Richmond, Va., it operates or supplies fuel to more than 1,100 c-stores in 18 states.

The master limited partnership (MLP) is known for its acquisitions. Over the years, GPM has gradually moved its footprint to the West through numerous deals that have included Jiffy Stop, Roadrunner Markets, Admiral Petroleum, JiffiStop (a different chain), Apple Market, Gas-Mart, Village Pantry, Next Door Store, Road Ranger c-stores (not the truckstops), One Stops, Scotchman, Young's, Li'l Cricket, Everyday Shop, Breadbox and Cigarette City.

"We will continue to focus on growing this company through acquisitions," CEO Arie Kotler said in 2013 following GPM’s acquisition of close to 300 c-stores from VPS Convenience Store Group LLC’s Southeast division.

Global Partners LP, Waltham Mass., could also be a contender for Kroger’s c-stores if they go on the market.

The company will “remain active” on the mergers and acquisitions front and “continue to focus on investments we believe will contribute to the partnership’s future organic growth,” Eric Slifka, president and CEO, said on the MLP’s latest earnings call.

With 1,443 locations in the Northeast, Global Partners is one of the largest regional independent owners, suppliers and operators of gas stations and c-stores. Its family of brands includes Alltown, Alliance Energy and Xtra Mart.

None of the companies contacted by CSP Daily News would comment on the possibility of acquiring Kroger’s c-stores.

On the supermarket side, the grocer also announced Restock Kroger, a new plan “to redefine the food and grocery customer experience in America” and to combat rivals such as Amazon’s Whole Foods, Wal-Mart, Lidl and Aldi.

And Kroger could be in line to acquire another big U.S. supermarket operator as the war for consumers’ grocery spending heats up, one analyst speculated. Kroger could buy the U.S. operations of Dutch supermarket operator Ahold Delhaize, analyst Bruno Monteyne with Sanford C. Bernstein & Co. said in a report cited by The Cincinnati Business Courier.

Monteyne estimated Kroger would have to pay about $20.9 billion for the more than 1,500 U.S. stores. Ahold Delhaize operates about 6,500 stores globally, mostly in Europe. It has 1,100 Food Lion stores in the Southeast and 422 Stop ‘n Shop stores in the Northeast.

If acquired, Kroger could spin off Ahold’s European operations, said the report.