Typically, I dedicate this column to discussions and perspectives on mergers and acquisitions, and financing these transactions. This month, I have decided to take a giant step back, view the economy from 10,000 feet, and then come up with specific and effective strategies for fuel jobbers and retail chain operators to consider going forward.
At the time of this writing, both Republican and Democratic conventions have concluded and, although President Obama maintains a lead in the polls, it is uncertain whether we will have four more years of the Obama administration or a new president. Unemployment and underemployment remain high, interest rates are being kept artificially at historic lows, Europe’s financial crises continue, and China’s manufacturing and growth rates are steadily declining. Also, real income in the United States is down, prices for most commodities and basic consumer goods such as food and transportation are up significantly, GDP growth worldwide is anemic, and corporate profit warnings and large-scale layoffs continue.
Despite the uncertainty, weak economic indicators and the fighting of two wars (albeit both are winding down), U.S. financial markets are approaching all-time highs, with the Dow as of late September off by just 3.5% from its Oct. 1, 2007, peak. How can this be? I am quickly and hauntingly reminded of Alan Greenspan’s December 1996 irrational exuberance speech. Because the theories that the economy exists in a general state of equilibrium, and that markets are efficient, are clearly in a condition of extreme disorder. Since 2008, these long-held theories have been turned upside down. So where can we turn for some concrete answers and direction? In a burst of inspiration, I have looked to 20th century economist John Maynard Keynes.
Capital Keynes
During my years at Lehigh University in the ’80s, we studied Keynesian Macroeconomic Theory, which served as the economic model for the United States and other Western industrialized countries from the end of the Great Depression through stagflation in the 1970s. Keynesian economists believe that aggregate demand (total spending capacity in the economy) does not necessarily equal aggregate supply (the total productive capacity of the economy). Instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment and inflation. Looking back, naïve as it may have been, I thought that if I learned these theories, I would be in a great position to execute successful strategies once I got into the business world. Unfortunately, Keynesian theory fell out of favor before Reaganomics.
The melting down of our financial system in 2008 prompted the most widespread and overreaching public policy decisions witnessed since the Great Depression. Interestingly, Keynes was the first economist to popularize the notion that governments should intervene in the economy to alleviate the unpleasant effects caused by unemployment. In fact, to stimulate growth and lead us out of the Great Depression, he argued that the solution was a combination of low interest rates (monetary policy) and government investment in infrastructure (fiscal policy).
Sound familiar? Well, it worked, along with a catalyst known as Roosevelt’s New Deal and massive government spending that continued through World War II, also resulting in mounting U.S. debt. As that famous New York Yankee Yogi Berra once said, it’s déjà vu all over again.
So, post-election 2012, fanned by numerous negative economic indicators, will the monetary and fiscal policies of our government and the Federal Reserve Board, which have been in place for the past four years, work in the future? If history repeats itself, and it often does, they will work no matter who is in the Oval Office. Yet it will be another few years for our economy to fully recover, at which time, to quote my neighbor Bill Clinton, “you will feel it.”
Get in Position to Succeed
In the interim, there are steps that fuel jobbers and c-store chain owners can take to weather the continuing gloom and get into a position to capitalize on the eventual recovery and economic expansion.
- Take advantage of low interest rates. If you have not already done so, consolidate your debt and refinance it. With rates that have gone even lower than imaginable since early 2012, there is no reason not to. Closing costs will quickly amortize with the lower monthly payments. And, with lower interest costs, you can afford more leverage, taking additional equity from the assets and building up a cash reserve.
- Identify expense-saving measures and project-manage them. The larger your organization, the greater the opportunities to cut OPEX. If you can consolidate jobs, do so. Find ways to lower input costs such as property taxes, supplier costs, utilities, maintenance and other services. Once identified, assign responsibilities and manage through completion. But do not stop there. Treat expense controls like a devout religion, with an ongoing program to study and manage them.
- Invest in programs and fixtures that result in higher profits. Develop revenue sources that make money. Upgrade c-store interiors with improved sandwich and coffee offerings, and upgrade merchandisers, lighting and graphics, which produce greater customer appeal and a better shopping experience. If you are a jobber with a dealer-operated chain, package these items for dealer purchase, and both parties win. Some of my clients, in fact, have asked for such assistance given that there is no longer major oil marketing support and grocery suppliers have mostly eliminated their programs as well. Install LED price signs and upgrade dispensers and canopies where this makes sense. The additional volume generated along with the typical cents-per-gallon support from the majors for these items should make economic sense at keeper sites.
- Seek asset investment opportunities. Quality assets (terminals, wholesale contracts and retail stores) are still coming to market, from small to midsized jobbers ready to retire or otherwise exit, as long as you know where to look. Engage an expert with the knowledge and an industry network to assist. While prices paid recently (EBITDA multiples) are on the rise, opportunities to strike a reasonable deal exist if you know how to find and value them, and you employ effective negotiations.
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