How many uplifting moments can you experience at one conference? Attendees of Outlook Leadership 2013, held Nov. 9-12 at the Fairmont Scottsdale Princess in Arizona, no doubt have lots of stories to share. Retired astronaut Mark Kelly and his wife, former congresswoman Gabrielle Giffords (above), brought everyone out of their seats and touched more than a few hearts. Rex Griswold and Tom Gillard, whose brave fight against MSA captured the attention of the CARRE Foundation and our industry, had nothing but big smiles and hearty hellos for everyone.
And of course, plenty of fascinating figures shared their views on everything from the global economy to the state of the industry. Walter Zimmermann and Andrew Busch predicted the worst and the best, respectively, for what’s in store for the world. Two NACS high flyers, Dave Carpenter and Brad Call, took us back to the ’80s as they discussed c-store numbers. And Doug Rauch talked about how Trader Joe’s has become a paragon of strong company cultures.
Read on for our coverage of the event.
A New Mission
To the casual observer, he is the dutiful husband supporting his wife, a courageous congresswoman shot nearly three years ago by a deranged gunman.
The story of Gabrielle Giffords, the Tucson Democrat who was shot in the head on a Saturday in January 2011 in an attack that killed six others, is well known. Perhaps less public are the accomplishments of her husband, an Irishman from the gritty Jersey town of Orange, who went from an ambulance volunteer in some of New Jersey’s toughest neighborhoods to flying sorties in the Persian Gulf theater under George H.W. Bush and becoming one of the premier astronauts of America’s space program.
Kelly appeared with his wife on the opening day of the conference. As Giffords continues to recover and build on her speech, her words were few and sincere. “I am working hard … a lot of speech therapy,” she said to an appreciative of audience. “I am fighting to make the world a better place.”
And indeed, Giffords, a moderate Democrat who with Kelly have since founded a political action committee called Americans for Responsible Solutions, remains a powerful symbol of bipartisanship and political moderation—qualities sorely lacking in today’s national politics of shutdowns and verbal body-slams.
While Giffords is the woman who exceeded expectations from her childhood years, Kelly shared his path as one replete with challenges and an emerging sense of purpose, a young man not interested in academics who would soon find his way. And as the 49-year-old father of two girls shared his tale, he buffered it with lessons applicable to a business audience:
▶ Groupthink: A prominent pilot who shuttled to space four times, Kelly shared a pivotal lesson not from his tenure on Endeavour or Discovery, but rather in the aftermath of the 2003 Columbia disaster, in which he said he literally collected the bodies of several of his friends. The explosion caused a laborious, sober investigation. There were sayings on the wall, Kelly recalled, including, “None of us is as dumb as all of us.”
The point? Groupthink can lead to poor decisions that no member of the group would individually support. This perspective took on added poignancy when, shortly after Giffords was shot, the medical team proposed a complex surgical procedure to her brain. Kelly surveyed the doctors involved. But instead of asking the lead surgeon first, he sought out the opinion of a young woman, an ophthalmology student.
▶ Patience: Aiding a loved one in chronic distress is a challenge few others can truly appreciate. The loss of normalcy and the absence of consistency can undercut the finest of virtue. Kelly is no different. Giffords’ injury caused aphasia, damage to the brain that affects speech. “I was not sure I could be patient enough,” said Kelly.
Would he have the patience to help Giffords with a recovery that has no time limit? He thought back five years earlier when the two met Stephen Hawking, the brilliant English physicist and cosmologist who was diagnosed with ALS when he was 21 and today communicates via a speech-generating device.
Kelly said he briefly tried to engage Hawking, but to no avail. Then Giffords approached. “Gabby came to him, bent down, looked him eye to eye and asked, ‘How are you?’" She waited. Five minutes later, the device responded, “Thank you. I am fine.”
A Tale of Two Economies
Is the economy slowly trudging toward recovery or is it poised for yet another collapse? It depends on whom you ask: Two economists provided differing views of the nation’s financial future.
On the optimistic side, economic conditions in the United States have “stabilized,” according to Andrew Busch, editor-in-chief of The Busch Update and global currency and public policy strategist for BMO Capital Markets’ investment banking division in Chicago. “It’s not 2008,” he said, referring to the year the most recent recession began. “For those looking in the rearview mirror, it’s not catching up—it’s getting further away.”
He cited growth in gross domestic product (GDP) at 2.8% and recent unemployment figures falling, with recent reports adding 204,000 jobs. Firms less than a year old should be credited for the new jobs created, he said, and that government needs to ultimately grant tax advantages for all corporations to keep the economy on the right track.
On a more pessimistic note, several economic signs point to yet another economic downturn to come, suggested Walter Zimmermann, vice president and chief technical analyst for United I-CAP. “Striking parallels exist between current trends and 2007 [leading up to the recession],” he said. “Investors are bullish and complacency is rampant.”
Market signals on the S&P 500 regarding commodities resemble July 2008, when the last economic bubble burst. In addition, the derivatives market, which played a critical role in the last downturn, was at $500 trillion in 2007 and today is at $710 trillion.
One of Zimmermann’s biggest concerns was median household income, which he described as having fallen sharply. “Billions of dollars are being poured into [nontraditional] advertising like Twitter,” he said. “But what if the problem is median household income? Can Twitter meet expectations?”
The goal of advertising is to generate new spending, Zimmermann pointed out, but what if the middle class simply doesn’t have more money to spend? Then there’s a disconnect. Showing a chart plotting income compared to upward mobility, he said the United States has a divergent pattern, with incomes high but mobility being one of the lowest in the world.
Offering a more optimistic view, Busch said that globally, conditions look promising, especially in China, where enough progressive forces are in play to potentially privatize land. Such a move in a traditionally communist nation rich in property could be key to that country’s prosperity.
The panel’s moderator, Richard Karlgaard, publisher of Forbes magazine, also added his perspective to the discussion, citing that the “top line” view was essentially not good. He said annual growth during the current recession was 2%, whereas in past recoveries it was 3%.
Karlgaard characterized the current recovery as having a wide “disparity” in that some parts of the country or even parts of any given state are experiencing record growth, while others are at the other extremes in hardship. In parts of North Dakota where the energy sector is booming, he said, fast-food cashiers are making $20 and hour, compared to cities such as Stockton, Calif., which is experiencing 20% unemployment.
Conscious Culture
In talking the talk, Doug Rauch appears to be walking the walk, espousing a more spiritual corporate ethic while at the same time working to better local communities.
Speaking in the conference’s closing session, Rauch, who spent 14 years as a president of Monrovia, Calif.-based Trader Joe’s, a revered service-oriented grocery chain, addressed the importance of corporations valuing culture and ultimately a higher purpose as a critical factor for business success today.
Along these lines, Rauch said retail has moved from a product focus to a focus on relationships. “If you’re not actively creating a relationship with your customer, you’re missing the boat,” he said. “Whether it’s through humor, education or customer service, it’s about making life better … but you have to be authentic.”
To that end, companies also need to connect with their employees, “especially millennials—they want to know they’re doing well and doing good,” he said.
Companies need to think beyond profit (which he described as the “air we breathe”—important to the life of a business but not particularly exciting) and define for themselves a greater good that the company’s efforts continually strive to achieve.
“Every one of you has opportunity and obligation to anchor your community,” he said. “As retailers, you are the touch point for the community to interact. In today’s world of [smartphones and personal technology], you could go through your entire life and never interact with anyone. Retail has the opportunity to anchor and offer meaning and purpose like nothing else can.”
Rauch has gone on to live the kind of values-driven life that he speaks of. In 2011, he was named head of Dallas-based Conscious Capitalism Inc., a not-for-profit that gathers leaders of corporations in an effort to spread the ideas of value-based behavior among big businesses.
He is also in the process of launching a grocery-store concept based on sourcing food that has passed its sell-by date at low prices to people in disadvantaged communities. Having moved to the Boston area, he started Daily Table, a concept he hopes to get off the ground with its first store in early 2014.
In an exclusive pre-session interview with CSP editors, Rauch said that 40% of the food grown in the United States is never eaten. He spoke of how sell-by dates are not indicative of how edible or safe the food is, and neither are blemishes on food that render it undesirable by most shoppers. The Daily Table concept would channel such donated food into a format that appears upscale to a degree, with produce and grab-and-go meals of high nutritional value.
Rauch also addressed the current state of obesity in America, in which malnutrition comes not in the form of thin individuals but in the form of empty calories. And yet Rauch understands the challenges. Part of his burden is to persuade consumers to purchase food deemed of lesser value, as well as the whole notion of embracing food that is good for you.
Ultimately, he says it’s the job of the retailer to communicate its values through its actions and cues. “Are you consciously cultivating values that resonate?” he asked his audience during the final moments of the Outlook conference. “[Customers] want to know their values line up with yours.”
The 411 on the ACA
It’s pretty safe to assume that Nick Tate, author of the “ObamaCare Survival Guide,” presented to a somewhat skeptical audience. It’s no secret that much of the c-store industry views the upcoming insurance mandates with a wary eye.
And Tate did little to defend it, but he didn’t do much to knock it down a few pegs, either. When asked if he was for or against it, his answer was “both, neither …” And then he spelled out why.
First, he tried to sum up, out of the 11,000 pages of regulations, how the Affordable Care Act—called ObamaCare by many, including the president—will “change the game for businesses and consumers.” The hope is that the law will be responsible for potentially 45 million new insurance customers. It seems far-fetched, considering early numbers indicate far fewer than initially projected are purchasing health-care policies. Regardless, it means changes are afoot for how the c-store industry deals with health care and its related costs. Some details:
▶ Oct. 1 marked the first day consumers could sign up for health insurance in one of four varieties: bronze, silver, gold and platinum.
▶ Consumers can choose their plans from either state-sponsored marketplaces or the slow-to-its-feet, federally run Affordable Healthcare Exchange.
▶ By Jan. 1, all Americans must have insurance or pay a penalty to the IRS.
▶ Insurers will not be able to bar those with pre-existing conditions from having insurance.
▶ In 2015, companies with more than 50 workers will pay a fine to the IRS if they do not offer health-care insurance.
▶ Consumers can choose their plans from either state-sponsored marketplaces or the slow-to-its-feet, federally run Affordable Healthcare Exchange.
▶ By Jan. 1, all Americans must have insurance or pay a penalty to the IRS.
▶ Insurers will not be able to bar those with pre-existing conditions from having insurance.
▶ In 2015, companies with more than 50 workers will pay a fine to the IRS if they do not offer health-care insurance.
There are benefits for consumers and companies alike, Tate said:
▶ Small companies that employ 25 or fewer workers can use the new exchanges, and they can apply for a tax break if they cover their employees’ health insurance. These companies can qualify for a tax credit of up to 35% of their premiums. In 2014, it will rise to 50% for those that purchase insurance through the new Small Business Health Options Program (SHOP). These programs are estimated by some to help lower annual premiums for businesses by 1% to 4%. (According to Tate, full implementation of the SHOP program has been delayed until 2015.)
▶ Many insured Americans, as well as the companies that insure them, have already received rebate checks under a new set of rules that require insurance companies to spend 80 to 85 cents of every $1 on medical care.
▶ Many insured Americans, as well as the companies that insure them, have already received rebate checks under a new set of rules that require insurance companies to spend 80 to 85 cents of every $1 on medical care.
It’s a different, and seemingly more complicated, story for larger companies. There are more rules, more fees and more stipulations. The gist is that if large companies do not offer their employees insurance plans that meet the law’s requirements, they could pay up to $2,000 in fines per worker to the federal government. What was originally set for Jan. 1, 2014, has now been postponed a year by the Obama administration.
One of the new mandates is the quality of plans and whether or not they fit the strict criteria of the law:
▶ The insurer must cover at least 60% of an employee’s medical expenses.
▶ Deductibles are limited to $2,000 for an individual and $4,000 for a family.
▶ Premiums can’t be more than 9.5% of an employee’s total gross income.
▶ A $3,000 fee will be levied against companies that do not offer their workers plans that meet the government’s specifications of affordability and minimum value.
▶ Deductibles are limited to $2,000 for an individual and $4,000 for a family.
▶ Premiums can’t be more than 9.5% of an employee’s total gross income.
▶ A $3,000 fee will be levied against companies that do not offer their workers plans that meet the government’s specifications of affordability and minimum value.
Pioneering Mobile Payment
Believing in the transformative nature of mobile payments, three c-store retailers came together to discuss why they chose to join cross-channel competitors such as Walmart, Target and Best Buy in the development of a new mobile-wallet platform.
Among several other c-store retailers to opt into the project, representatives from Alon Brands, Wawa and RaceTrac explained their goals and tried to dispel any myths about the Merchant Customer Exchange (MCX).
“The way [plastic payment] works today, all the rules were written against us, done by a third party that never touches our business,” said Tim Patterson, general manager of payment card and retail systems for Dallas-based Alon brands. “They were set from a distance. The consumer never sees what goes on and the merchant takes the brunt of it.”
In addition to having to pay what he feels are inflated interchange fees, Patterson said issues of risk often fall back to the merchant.
Joining a retailer-led effort instead of other mobile wallets that have emerged was a way to take control from a retailer perspective, solidifying more reasonable cost structures and allowing each merchant to own their customer data, said Jay Culotta, treasurer of Wawa Inc., Wawa, Pa.
“Who better to own the data than the merchant who knows what our consumer wants because we’re living with them day to day?” said the third retail panelist, Will Alexander, vice president of information systems and special projects for RaceTrac, Atlanta. “We think we can provide a better solution.”
The group started as members from the Merchant Advisory Group, a trade association of payment specialists based in Minneapolis. Members believed mobile payments were going to be the first truly transformative payment method to come along in years and it would be a missed opportunity not to influence its development, according to Patterson.
Talk of MCX began more than two years ago but became official with the start of MCX about a year ago. Today, the group represents 36 merchants and 90,000 locations, about 50,000 of which are c-stores.
"It was part of the reason we felt we would succeed in that as a group we represented $1 trillion in payment transactions a year, a number of locations and touch points,” Patterson said.
Addressing the concern that large retailers such as Bentonville, Ark.-based Walmart may have a greater influence on the development of MCX, Alexander said processes were in place that would make all voices heard equally.
“It’s collaborative, I would say, [at least] fundamentally,” said Culotta of Wawa. “But once we get to execution, there will be differences based on the retailer. Some will have to do things differently because some of us have to do, for instance, table service. But the technology should be consistent across our different worlds.”
Declining to establish a timeline for development and rollout of the project, Dodd Roberts, representing MCX, Irving, Texas, said the group would rather move at its own pace to develop and execute the steps necessary to build the platform.
“What you will see is us taking an approach to do first and talk later,” Roberts said. “We will have things in the market before making any public announcements. We’ll start simple and slow.”
Numbers from the Flyboys
Maverick and Goose presenting industry numbers? Did someone steal Doc Brown’s DeLorean? Is this the mid-’80s?
No, we’re talking about Brad Call (above, right) and David Carpenter, two accomplished convenience operators who are, respectively, chairman and most recent past chairman at NACS.
Paying homage to an era that embraced embracing two terms of Ronald Reagan and Gordon Gekko’s Wall Street, Call and Carpenter pedaled onto the Outlook stage in aviators and flight suits. Call said he had given up his suit and tie for what he feared would be the “dumbest, cheesiest, stupidest presentation of your life.”
Honoring the spirit of a film that preceded the birth of the digital generation, Call and Carpenter—who also head up their own businesses, Maverik Inc. and J.D. Carpenter Cos.—referenced “Top Gun” songs to introduce a few targeted, rapid-fire themes.
It started with “Take My Breath Away” by Berlin. “Overall, industry sales took my breath away because they are so amazing,” Call wailed, scooting around like a lab mouse trapped in a labyrinth.
It was nice to learn that the c-store channel was No. 1 among retail channels in the sale of gas, cigarettes, OTP, beer, candy and lottery. It was pretty cool to appreciate that the industry’s 160 million transactions per day topped by nearly 50% the number of households who watched last year’s Super Bowl.
But surely such figures could not compare to Call’s somewhat flat rendition of The Righteous Brothers’ “You’ve Lost That Loving Feeling.” When Carpenter queried what connection the song could have to the c-store industry, Call replied, “It’s about getting back what you lost.” And that meant two things: gasoline and cigarette sales.
To which Carpenter, at least for gas, chimed in, “It’ ain’t coming back, folks. It could get worse.” In a moment of seriousness, he cited declining fuel consumption since 2007 and Café Standards that by raising mileage standards will only hasten the decline of trips to the pump. And both agreed that cigarette sales would continue their decline, hopefully offset in the near future by a robust e-cigarette sector.
Delinquent Gone Good
Sean Parker has always been ahead of the curve. He started Napster when some of us were still listening to CDs. He was the first president of Facebook and was portrayed by Justin Timberlake in the film that told the story. He is a major investor in Spotify and a committed philanthropist, the founder of the organization Causes. And now he’s taking his record of entrepreneurship to the c-store product mix with e-cigarettes as an investor in Scottsdale, Ariz.-based NJOY.
“I typically see something systemic or a product or service that is missing from the world,” he said. “It’s a haunting feeling … and I’m guided by that mission.”
As any good businessman, Parker (pictured at right) obviously cares about the company and its bottom line, but he’s also driven by more missionary objectives. And he’s aligning himself with NJOY and its stated quest to make cigarettes obsolete: “These are harm-free products. You know what’s coming in and you know what’s going out,” he said. “We have the potential to make the world a better place.”
His beginnings as a powerhouse in the world of technology began when he and a friend, still in their teens, co-founded the music-sharing service Napster. The self-described “delinquent” wasn’t hiding under the bleachers smoking cigarettes with the rest of the teenagers fighting the establishment; rather, he jokes, he was a part of “an elite underground committee of cybercriminals.”
When asked about the future of technological advancement, Parker told the audience that he didn’t see a lot of potential for innovation in the area that has garnered him the most notoriety and the most success: the Internet.
“Consumer Internet is kind of tapped out,” he said. “Everything that has been tried is done.”
Instead, he sees the future of technological advancement in the area of life sciences, calling it the “invisible revolution.” He sees an emerging phenomena of “garage biotech” that could start in the same way the Internet and social media revolution did: “I think we will see a theme of innovation coming from unusual places.”
And Parker believes he’s capitalizing on this wave by investing his time and money with NJOY. On a basic level, as he told the audience, getting people to stop smoking is “an incredibly good idea.” But on another, he buys into the belief that true success can come from surrounding yourself with people that are smarter in ways that you are not.
“One of the things I value most is intellectual curiosity,” he said. “These are the types of people that are the most inspiring to me.”
Multiple Mayhem
What started out as a workshop on structuring the financing of a c-store acquisition led to talk of increasingly high multiples, even in the face of a store’s falling fuel volumes.
While multiples—or the number placed against a store’s historic cash intake to determine overall value—have been in the range of 5x to 6x in the past four or five years, more recent deals have been in the range of 9x to 11x, said Denny Ruben, executive managing director of NRC Realty and Capital Advisors, Chicago.
Cheap capital, a growing number of lenders and the proliferation of master limited partnerships (MLPs), or the splitting of retail assets from semi-major oil companies, has led to deals in California as high as 11x. Other purchases in the Western states have seen 8x to 9x, and in Tennessee recent multiples have been in the range of 7x to 8x.
At least one panelist suggested buyers proceed with caution. “We as an industry invite a bubble,” said Michael Phelps, senior vice president of RBS Citizens, Providence, R.I.
“There’s a lot of liquidity and cash flow. I see now [proposals] with structures I’ve not seen since the early 1990s. Everyone wants to buy at a 2x to 3x multiple and sell for 6x to 7x. We’re seeing a lot of that.”
“What it tells you is demand exceeds supply for quality assets,” Ruben said.
Determining factors appear to be quality and nature of the real estate, store size, urban or rural location, predictability of cash flow and strategic fit, which in some cases allows even the old kiosk-style property to sell for a higher multiple. Ruben said that while he’s been seeing this trend grow, “At a certain point you have to ask, ‘Does this make sense in the long run?’ ”
The panel of five representing both lenders and retailers reviewed a hypothetical purchase of a chain in Vegas, reviewing the structure of its initial purchase and then watching the value of the asset dwindle over three years. Set up as a 50-store operation, the hypothetical deal broke down into high- and low-performing stores and a third grouping of average “core” stores.
Some raised issues to watch out for. Don Bassell, chief financial officer for Mid-Atlantic Convenience Stores, Richmond, Va., which recently was purchased by an affiliate of Sunoco, said, “You have to ask, ‘How steady is that fuel margin and what’s the predictability of that cash flow?’ Reliance on fuel is an issue.”
For lenders on the panel, the structure of the deal was sound because of the collateral. “We’ve got the dirt,” said Kevin Shea, vice president of Getty Realty Corp., Jericho, N.Y. “That’s our security.”
In the fictional example, the company’s cash flow took a hit. Three years down the line, it showed a drop of per-store earnings of “core” stores from $4,402 to $693.
From his perspective, Phelps said his worry with the stores is with management, especially in light of an acceptable amount of fuel volatility. However, any sign of trouble would typically be caught sooner than later because normal reporting between borrower and lender would have triggered the need for immediate discussion.
Other panelists included Richard Claes, executive director of Mesirow Single Tenant Properties, Chicago; and Brock Rule, COO of Hopkins Appraisal Services, Independence, Mo.
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