OPINIONMergers & Acquisitions

Convenience-Store M&A Activity Remains Robust

The trend toward smaller c-store transactions is only expected to intensify in the coming years
Mergers and acquisitions
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The convenience-store sector continued to register healthy growth in 2023 amid persistent headwinds for the consumer.

Publicly traded players in the segment have maintained robust demand and healthy levels of profitability, despite an elevated cost environment. Notably, Casey’s General Stores expanded inside margin and fuel margin in its most recent quarter. Multinational sector player Alimentation Couche-Tard also improved gross margins in its merchandise and services and fuel segments. Public-equity markets rewarded sector players as total returns for Casey’s, Couche-Tard and Murphy USA all exceeded 23% in 2023.

Overall, consumer and retail mergers and acquisitions (M&A) encountered a largely lackluster year for transaction activity. The convenience sector, however, was one space that defied broader market trends. In 2023, c-store M&A volume improved 2% year over year to 51 transactions announced or completed. While large-scale deals dominated headlines, the majority of transactions were comprised of sub-50 store count operators. Notably, the average store count of sold convenience-store operators amounted to 41 stores, with a median store count of 10. Given the fragmented nature of the sector, with 63.1% of all convenience stores owned by single-store operators according to NACS, the trend toward smaller transactions is only expected to intensify in the coming years. Beyond these supply vs. demand dynamics, there are three important factors supporting this long-term trend:

  • Higher cost of capital: Elevated interest rates make it more cost prohibitive for existing owners to expand or re-invest in their aging stores. This puts them at a competitive disadvantage, as larger, more cash-flush players around them are able to modernize their stores, thus attracting more inside sales traffic and allowing them to be more competitive with fuel pricing.
  • Overhead costs: Smaller chains are unable to efficiently spread out their overhead costs, which have been under inflationary pressure in recent years, across their store portfolios. Elevated fuel margins over the past few years helped mitigate rising G&A costs, but the eventual fuel margin mean reversion is going to work against the chains that lack economies of scale.
  • Shift to Electric Vehicles: The migration to EV may be slower than expected and occurring at different speeds across the country, but it is already contributing to declining fuel volumes nationwide. Smaller chains are less able to withstand these fuel volume declines and, for the most part, are not investing in alternative fuels or EV charging stations to position themselves for the future.

Strategic acquirers continued to make up the majority of transactions in 2023, accounting for 90.2% of total deals, and should continue to eye attractive consolidation opportunities in 2024. A number of private-equity firms are searching for platforms in the convenience sector, with some already successfully targeting areas of distribution that serve the industry (i.e. wholesale fuel distribution, petroleum parts distribution, etc.).

Buyers Get Choosier

On the whole, convenience-store acquirers have become more selective than in years past, with premium multiples being reserved for high-quality operators operating across multiple regions. In a high cost of capital world, buyers are forced to be disciplined when it comes to capital allocation. They are constantly doing the buy-vs-build math when evaluating acquisition opportunities. Given evolving consumer preferences and the accelerating shift to EV, acquirers are also looking for chains with larger format boxes, ample parking space, easy ingress/egress, or available land to expand.

As a result of the above, we are preaching flexibility to our clients who are exploring a sale. We are spending more time upfront to carefully design a process and to target the right buyers, even if that means delaying a market launch or considering piecemeal sales to different acquirers to maximize value and surety of close.

The M&A market is expected to remain robust in 2024 with convenience-store buyers seeking geographic expansion, economies of scale, enhanced inside offerings and entrance into high-growth regions. In early 2024, strategics have wasted no time in pursuing inorganic growth. In January, 7-Eleven announced its agreement to acquire 204 stores from Sunoco, which includes Stripes convenience stores and Laredo Taco Company restaurants for an enterprise value of $950 million. All signs point toward the M&A tailwinds continuing for the remainder of 2024 and beyond.

Jesse Betzner is Senior Director at Capstone Partners, Boston. Reach him at jbetzner@capstonepartners.com.

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