Most of the convenience-store real estate deals completed in 2022 involved small to medium-size companies and portfolios, ranging from five to 50 stores, a far cry from the hundreds of stores that changed hand in the previous year.
Furthermore, the divestiture initiatives of the larger companies in 2022 brought a significant number of small and medium size operators to the bidding process. In the transactions in which NRC Realty & Capital Advisors was involved, there were literally thousands of prospects who requested information, and, in most cases, there were multiple bidders for each property being offered.
Consequently, notwithstanding the issues facing the U.S. economy in general and our industry specifically, the demand for quality convenience-store companies, portfolios and assets remains strong and extremely active.
Here are some of the issues facing merger and acquisition (M&A) activity moving into 2023 …
Industry Headwinds
The Economy. There are certainly a number of issues confronting the economy that have had a direct impact on the c-store industry. The war in Ukraine has had a negative effect on all aspects of the economy and has resulted, directly or indirectly, in significantly higher fuel prices at the pump. Inflation is at a 20-year high, and that has adversely affected consumers’ willingness and ability to spend as they would otherwise like. Consumers have had to focus more on basic necessities and have been forced to cut back on more expensive items, such as automobiles, houses, etc. In an effort to slow inflation, the Federal Reserve has raised interest rates—a total of seven times—during 2022, to the highest level in 15 years. That has had a direct impact on merger-and-acquisition activity since the cost of capital is a common issue for all potential purchasers, both large and small.
Electric Vehicles. The focus on electric vehicles has been a major topic at all industry events and conferences. The current administration in Washington has made significant efforts to promote the use of electric vehicles through tax credits and funding for charging stations along Interstate and other highways, and California has mandated that no new gasoline powered vehicles could be sold in the state after 2035 (a law that has been adopted by a number of other states). Most major automobile manufacturers are increasing the number of electric and hybrid models they offer, and Tesla’s success has certainly been a major influence on the automobile industry. However, there is still a wide difference of opinion among industry participants about how to respond to EVs.
Some are encouraging operators to add charging stations to their convenience stores. However, the technology does not yet allow charging to be done quickly, and it is uncertain whether customers would stay in a convenience store long enough for their vehicle to charge, or whether they would be willing to pay a significant amount for a charge. Charging stations are expensive, and the technology is evolving rapidly. A charging station at a c-store today may very well be outdated in six months or a year. Furthermore, many businesses, offices and shopping centers already provide charging stations—for free. And most EV owners are able to charge their vehicles at home. Although the major oil companies are focused on adopting a meaningful EV strategy, the jury is still out on the best way for both the oil companies and c-store operators to approach this issue.
Gasoline Prices. The higher cost of fuel at the pump has generally resulted in lower volumes for many operators. Fortunately, the higher fuel margin for most operators has offset, or more than offset, the reduced volumes. Fuel prices have generally been coming down for the past month or two in most parts of the country, and that should translate into higher volumes, but it is a bit too early to see the result of this.
Hiring Challenges. Labor shortages and high turnover rates continue to plague the industry. Hourly wages have increased fairly dramatically, and many states have enacted laws raising the minimum wage. Many employers are faced with having to offer signing bonuses to attract and retain quality employees. Fortunately, the supply-chain issues that were present in 2021 seem to improve last year, as have the additional costs that the industry was forced to incur for personal protective equipment in the stores due to the pandemic.
Purchase-Price Multiples
Purchase price multiples were at all-time highs during the years prior to 2022, due in large part to historically low interest rates and the number of very large transactions that were completed. In the larger deals, bidders were generally able to offer higher multiples due to the synergies that they felt they would realize from the combination of the two companies. In reporting their deals, most public companies that completed large transactions made a point of providing both the store-level EBITDA purchase-price multiple as well as the multiple that they believed they effectively were paying after taking into consideration the benefits of the combination.
Of the transactions that closed in 2022, NRC observed some downward pressure on purchase-price multiples. Again, there are several reasons for this.
First, the current interest-rate environment has had a direct adverse effect on the amount that acquirers are able to pay for companies and portfolios.
In addition, where a large component of a company’s EBITDA consists of higher fuel margins, with somewhat lower volumes, many bidders have been reluctant to give full consideration for the higher margins, since they believe that such margins are not sustainable in the longer term. Profitability from fuel has always been the more volatile component of c-store income, and companies that have had strong inside sales and sales margin, as well as a vibrant food program, have tended to fare better when it comes time for a potential sale.
Finally, most of the transactions that were completed in 2022 consisted of smaller to midsize companies, and many of them were in secondary or tertiary markets, as opposed to major metropolitan markets, which has, in our experience, tended to result in slightly lower sale multiples.
Notwithstanding the foregoing, we believe that there will continue to be strong interest in well-run convenience-store companies having strong fuel volumes and margins, as well as robust inside sales and margins and a compelling food program.
Dennis L. Ruben is executive managing director of NRC Realty & Capital Advisors LLC, Chicago. Reach him at dennis.ruben@nrc.com.