What’s the difference between a venture capitalist and a convenience-store chain CEO?
For Arie Kotler, it’s five years, a marriage, kids, the U.S. financial crisis and an entirely new perspective.
“I used to be in the business of buying and selling to make a profit in a very short time. That’s still great, but I don’t believe in it anymore,” says Kotler, the owner and CEO of GPM Investments. More recently, “I was looking at something I could grow, something I could be proud of.”
Kotler’s actions back up his words. In the two years since regaining ownership of the Mid-Atlantic chain of Fas Mart and Shore Stop convenience stores, Kotler and his team have shown remarkable drive. And the team plays a significant role: With Chris Giacobone leading operations and Mark King overseeing financials, the extended team—from vice presidents to the employees in the stores—is quietly keeping the company on the cutting edge of store-count growth, operating systems, in-store programs and even the product offer. It’s a quality Giacobone stresses when working with employees, letting them know that they can make a difference at GPM.
In recent months, the company has:
- More than doubled its store count with the purchase of VPS Convenience Store Group LLC’s Southeast division of 263 sites.
- Established a Southeast division of its own to operate the former VPS stores and set up a platform for further growth in the Carolinas.
- Launched an updated foodservice program with healthier options and a refreshed coffee program.
- Launched a fuel-price-rollback debit card and loyalty program.
- Developed a reputation for selling unexpected products—e.g., baby wipes and mobile-phone contracts—in significant quantities.
CSP sat down with Kotler and his leadership team for an exclusive interview in his office in Richmond, Va., to get the lowdown on these advancements, discuss his return to GPM and find out what the future may hold for what is now the 15th largest c-store chain by store count in the country.
Back Where We Started
When Israeli businessman Kotler started GPM Investments in 2003, he took a back seat. At the time, as the 28-year-old CEO of Tel Aviv-based Arko Holdings, a venture-capital firm, Kotler saw opportunity in the U.S. c-store industry—namely, the ability to get in cheap and grow as several well-known chains (Swifty Serve, Acme, DB Marts, etc.) were entering bankruptcy and being liquidated.
He was prepared to start modestly, initially eyeing a 16-store chain.
“The purpose of the small company was to acquire through it, to make a platform to acquire more companies in this arena,” he says.
But soon he came across Fas Mart, then a down-and-out chain of 169 stores in and around Virginia that had declared bankruptcy and was in search of a new owner.
“Fas Mart was the largest bankruptcy ever in the state of Virginia,” says Kotler, who has lived in the United States since 1997. “It was a $360-million revenue company with $169 million in debt.”
It was perfect: a relatively cheap entry into a growing industry with a good mass of stores.
“We closed the deal on March 19, 2003,” Kotler recalls. “I remember that date because that was the day [the United States] went into Iraq. Fuel went through the roof; we made half a million dollars in one day.”
While consistently preaching as chairman of GPM the desire to grow the business, as well as the others in which he was invested, he allowed others—specifically David McComas, CEO at the time—to direct the company.
“We plan to acquire six or seven smaller chains with 10 to 35 units each,” McComas told CSP early in the decade. “We’ll avoid trouble this time around because there won’t be any 100% financing from lenders for roll-ups.”
And McComas did lead the company through three major acquisitions over seven years, leaving GPM in September 2010 when it owned 213 stores.
By then, Kotler had long since collected his paycheck, having sold the company in 2006.
“The investors that I brought in got an offer. The offer was tens of millions of dollars in profit in a very short period of time, and they took it,” Kotler says. “We made close to 10 times on our equity, and when you do 10 times on your equity, you can’t say no.”
Thereafter, while Kotler dealt with other businesses in Israel and Germany, he kept tabs on the c-store industry and GPM Investments.
“From the day I sold my interest in GPM, I kept in touch with the company,” he says, “and when I saw the opportunity [to get back involved], I grabbed the opportunity with two hands.”
That opportunity came in 2011.
Deja Vu
Almost five years after Kotler and his investors had cashed in, GPM reportedly was again in tough financial straits, unable to fund the acquisition-based strategy and reputation on which the company had been founded.
While some sources suggest GPM Investments was close to filing bankruptcy again in 2011 after years of poor management and poor retailing (“They narrowly avoided the banks,” says one financial insider), Kotler and his team say that’s patently untrue.
“No, it was not the company,” Kotler insists. “[GPM] wasn’t in a financial crisis from a company standpoint. The owner of the company (and Israeli businessman) borrowed money from a hedge fund, and the interest rate from the hedge fund was [onerous]. It was totally not related to the business.”
COO Giacobone, Kotler’s second in command at GPM, agrees.
“When our ownership was in Israel, we were doing our own thing here,” says Giacobone, who joined GPM in 2005 as part of its acquisition of DB Marts. “We were operating well throughout that time, but we were tight when it came to maintenance and capital expenditures and growth in general.”
Instead, much of the income GPM was bringing in was going to pay the ownership’s interest rates rather than being invested in the company.
“Revenue-wise, GPM was a solid company; profitability was growing year after year,” Kotler says.
In a sense, the tight purse strings were good for the company, forcing it to spend wisely. When it did invest, it was in infrastructure and technology.
“We have one of the best operating platform [in the industry]. Management spent money on the right items,” Kotler says. “That shows you how good the company is.
Companies in those situations—when the shareholders are in trouble—those companies usually have issues. This company was solid; everything was running smoothly. I’m sure they had a hard time in terms of reporting [to the parent company], but it never affected operations.”
It did, however, give Kotler the opportunity to get a foothold in his old company, buying back in through a $50 million injection of credit, paying off the hedge fund and taking the top role at the company in August 2011.
And for a self-described control freak with a history as the “financial guy,” is CEO the right role for Kotler?
“For the past two years, I’ve lived, dreamed and eaten just convenience stores,” he says. “I got tired of buying a company, selling a company, buying a building, selling a building. … Today we have a company with over $2 billion in revenue and over 600 stores. So yeah, I think I can consider myself a convenience-store guy.”
The CEO title, he says, is more to show employees that the owner is someone who cares about this company. “Even when I’m not here, I’m connected,” he says.
Giacobone backs him up: “I agree. He’s involved in marketing and operations, and he understands it all. He’s not just a financial guy.”
“That’s not to say I’m not interested in making money,” Kotler adds quickly, “but I want to take this company to the next level.”
Doubling Store Count
Kotler’s passion—and his entire team’s passion—for GPM is evident.
Having returned to Richmond at midnight from Wilmington, N.C., where he was working on the integration of the 263 sites purchased from VPS, Kotler met with CSP following a lengthy conference call with investors in Israel, illustrating the 24-7 drive of the 39-year-old.
“I had a lot of hope when Arie came back,” Giacobone says. “He’s obviously ambitious and dynamic, and he’s got a lot of energy. And he sincerely wants to do what’s right for the company, grow the company. … And he has money, which is something we didn’t have for a long time.”
Adds the financial insider, who requested anonymity, “I think he’s really smart. I think he’s the right guy and well suited to take [GPM] to the next level.”
And Kotler has opened the company’s wallet wide since returning to lead. While GPM grew by fewer than 100 stores—due largely to skyrocketing multiples on purchases, followed by a collapsing capital market, he says—in Kotler’s first go-around with the company, he’s made a much quicker and larger impression in the past two years. Starting with 213 stores in 2011, the chain stands at 615 stores today, mostly due to the VPS acquisition, which closed Aug. 5.
The VPS purchase gave the retailer new and stronger presences in North Carolina, South Carolina, Tennessee and Virginia.
“Contiguous growth is always easiest, but we evaluate every single deal that comes in here,” Giacobone says. While the company wasn’t specifically looking to nearly double its store count, the deal fit GPM’s ultimate strategy: “Growth is our goal.”
With the VPS deal, GPM took on six additional store brands—Scotchman, Young’s, Li’l Cricket, Everyday Shop, Cigarette City and BreadBox—via a separate deal underway through VPS at the time. At the same time, GPM also bought five Get & Zip c-stores from Hurst Harvey Oil Inc. in the northern neck of Virginia. For the time being, at least, those names will continue to stand.
“They have a bunch of strong brands. So it’s not our initial goal to go out there and rebrand everything,” Giacobone says. “In the long term, we’ll respond to what the customer wants.”
And with the large jump in size comes a new density for GPM in the Carolinas and Tennessee. To meet those needs, a new division dubbed GPM Southeast will oversee the sites, working from the former headquarters of VPS Convenience Stores in Wilmington, N.C.
“There’s 200 stores in North and South Carolina … and that will be a larger version of our regional office,” says Giacobone. “We have a lot of accounting people there; we have marketing and advertising people there. It’s a whole separate division in terms of store operations because there’s a big concentration of stores there.”
Not big enough, according to Kotler, who says the creation of the Southeast division requires GPM to continue to grow in that region.
“Our thought process is: Since we’ve got a big Southeast office and a lot of key positions [over there], instead of concentrating on how to consolidate the business, we’re thinking the other way around,” he says. “We’re concentrating on how to expand the business.”
‘The GPM Way’
There will be sharing of ideas, however, as the executives compare and contrast each chain’s major programs and unique offers to find where they can learn from one another and develop efficiencies.
“We want to take the best of both worlds and work those programs into one another’s systems,” says Bill Reilly, senior vice president of sales and marketing. “Let’s take the best of an acquisition and see how it can work the GPM way.”
While the first in-store priorities are to align pricebooks and point-of-sale platforms—GPM uses VeriFone Sapphire POS, PDI back-office software and fuel pricing through KSS—executives say they’ve already identified several programs they’ll transfer to other divisions “if it makes sense.”
Mike Welsh, senior vice president of operations, says, “I visited with 26 VPS managers in Tennessee [the week the deal closed], and the thing they wanted to know was when can they pick up our measurement of suggestive selling,” a GPM program that rewards cashiers who upsell the most customers. “I was jazzed they’d heard about and wanted to adopt it. This was two days after the deal closed!”
Reilly established the suggestive-selling program—and the goal of measuring it and rewarding employees—soon after he joined GPM in May 2012. A list of products to be pushed for the next week is distributed each Friday, and the company’s POS system measures the number of each items sold during each shift.
“That’s what I preach: Engage the customer; change the conversation,” Reilly says. “The way to change the conversation is to ask a question: ‘Are you thirsty today?’ … This is now part of our fabric.”
For Welsh, he’s interested in learning about the VPS stores’ doughnut program. While GPM sells Krispy Kreme in several of its legacy stores, the Southeast stores have their own successful proprietary doughnut program, one GPM may be able to expand to generate larger profit margins. “I can’t wait to get a look at their pastry program,” Welsh says.
“We’ll go to them and say, ‘Show us the model,’ ” Reilly adds.
Meanwhile, several GPM programs will likely get a trial in some of the newly acquired stores, including:
- A decade-old fried-chicken program for which GPM’s Fas Mart stores are known.
- The recently rolled out Fas Cash debit-card program, which provides consumers with discounts at the pump.
- And perhaps most notoriously, a willingness to merchandise atypical products, such as hand sanitizer and hand wipes, in high-traffic areas.
The wipes “have a cult following,” Giacobone says.
“We have days when we sell close to 9,000 packages a day. Last year, we sold close to 500,000 packages in just a few months,” Kotler says. “We bring things to the stores that people need day to day, but maybe they’re not something you expect from a convenience store. We’re looking for things that make sense and are very valuable.”
Meanwhile, Fas Mart is testing a new foodservice program—Red’s—as an update to its Fas Lane Café, a concept that’s changed little over the past decade.
“The Fas Lane Café menu was built on fried chicken. And it’s super-high-quality fried chicken. It’s fresh, never frozen. It’s all hand-battered. It’s a great product,” says Giacobone. “But it’s fried chicken; if I don’t like fried chicken or I don’t want to eat fried chicken every day, I want to be able to go in the store and find a healthy option, and that’s the change with Red’s.”
Fully operational in only one Fas Mart store as this story went to press, Red’s adds to the Fas Lane Café menu with salads, sandwiches and yogurt parfaits made on site, as well as paninis made to order.
“It’s got a healthier menu in addition to the fried chicken, which we are very well-known for. It’s the old menu plus some new items, with a facelift,” Giacobone says.
Developed by Reilly, whose c-store experience includes stints at Sheetz and MAPCO, Red’s aims to keep the current clientele happy while adding something for new customers.
“We couldn’t get rid of the chicken,” he says. “There are people who come in three or four times a week for the chicken.” In fact, as CSP toured stores with Reilly, more than one customer—without any prompting—shared his love of Fas Mart chicken.
“But we needed something else. We didn’t have a lot of grab-and-go food; you can’t really eat fried chicken while you’re driving,” Reilly says. “We’re in markets where we compete with Wawa and Sheetz and a lot of c-stores with great foodservice programs. So we needed to have something for that other end of the spectrum: fresh-made salads, fresh fruit, paninis. …
“Food is our future. We’ve got to make it work.”
Various GPM stores also are homes to Subway, Taco Bell, Quiznos, Dairy Queen and Blimpie franchises, depending on the market.
Along with the Red’s rebranding and improvements comes an update to GPM’s beverage program. While maintaining its Perfect Harvest Coffee Co. brand—supplied through Kraft—GPM brought new, updated equipment to all its stores and redesigned its cups and signage with a soft-purple logo meant to convey a message of freshness. The chain has also put Coca-Cola’s Freestyle fountain machines in several stores, drawing a lot of consumer attention.
These are things that longtime employees acknowledge could have been done sooner.
“When Arie came in, things really started happening,” says Welsh.
With the Red’s foodservice program in operation at Fas Mart’s Montpelier, Va., store only a couple of weeks, Reilly says the site is performing “extremely well,” with foodservice sales up 20%.
Risk vs. Reward
There is one instrument of growth that you won’t see used much by GPM Investments: new-build construction.
“I’m not a big new-construction guy,” Kotler admits. “I believe you’re buying cash flow, at the end of the day. And building a store can cost you anywhere from $2 million to $8 million. … With $2 million to $8 million, I can buy a company.”
He also cites the time and risk that comes with new construction: “Every time you build a store, it’s like a surgery. Even if everybody tells you it’s a simple procedure and you’re 100% safe, there always is a risk. And that’s not a risk that we want to take right now.”
It’s not bravado—well, maybe a little bit—but Kotler and his team have clearly defined themselves as an acquisition company, one with a great variety of store size, designs and layouts. Never, Giacobone admits, are all GPM stores going to fit a certain template or prototype.
“You look at a company like Wawa—they have to build because they have a very specific size and footprint,” he says. “They can’t buy 30 stores and reconfigure them to fit that footprint; they have to build from the ground up. Us, we’re not ever going to be what they are, and that’s OK. Instead, we can win customers by competing on fuel, customer service or selling items that they don’t.”
Still, a flagship Fas Mart store is under construction in Richmond, Va. “We are doing it because we own the site,” Kotler says. “But we will not go and look for a vacant corner. It’s a special situation.”
Instead, Kotler will continue to focus on acquisitions. Portfolios of c-store chains on the real estate market are stacked all around Kotler’s office, on his desk, a conference table and chairs.
Kotler and Giacobone say they review possible purchases “every day.”
“We look at anything that’s on the market,” Kotler says, becoming more animated as he talks. (“Arie lights up the most when he talks about ‘the deal,’ ” Welsh correctly points out.)
“However, I want people to understand: We are eager to purchase, we are capable of purchasing, but we are going to buy smart,” Kotler says. “I can’t tell you how many calls I got while we were working on [the VPS deal]; everyone thinks he’s the next one [we’re going to buy]. Anyone can be the next one if it’s in our region, in our territory. Consolidation is important, and as I said, it has to make sense financially before we even look at it.”
Others have noticed GPM’s “aggressive reserve” as well. “Historically, they haven’t been willing to pay some of the prices that some of the others have paid,” says the financial insider. “My sense is that they’re not willing to pay the multiples that some of the others are willing to pay.”
But if things go Kotler’s way, GPM Investments’ momentum will continue.
“We have control of 615 sites; we operate in 12 states,” he says. “We’ve got a team that works 24-7. And the objective is to grow the company. In two years, we doubled the size of this company, and hopefully in two more years, we can do it again."
Chemistry, Loyalty and Trust
These are the three attributes CEO Arie Kotler and COO Chris Giacobone cite when describing their ideal employees—and each other.
“Trust is important,” Giacobone says. “It’s no silos. We don’t like to see people that care strictly about their departments and not the overall company culture.”
That led to one of the major changes enacted at GPM Investments when Kotler bought control of the company in 2011.
“Before this role that I’m in, operations and marketing were separate,” Giacobone says. “It’s in operations’ nature to control everything: We don’t want to lose any money; we don’t want too many shortages. Marketing wants to sell, sell, sell, so they come up with programs, and then operations wants to put it behind the counter because they don’t want people to steal it. There was a lot of protecting your turf, and we’re a sales company. That’s what we do. There’s got to be a certain level of risk.”
“Loyalty and trust are the top things,” Kotler says. “I don’t have a problem losing a person because he made a decision to live [his life the way he wants]. I have a problem when people are actually lying to you. I think trust is No. 1, and you need to earn trust.”
As for moving Giacobone into the No. 2 spot in the company, Kotler says, “Chris is a detail guy. So am I. … We have disagreements; however, Chris is one of the guys—I’ve got two or three guys here—Chris is the No. 1 guy that when I need something to be done, I know it will get done. There’s no drama with Chris. We’ve got chemistry.”
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