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It's good to be a convenience store these days.Despite pressure on gas margins and declining demand for cigarettes, sales and profits are improving. Some of the industry's biggest players are acquiring some of the smaller, less efficient operators, and many of the regional players are dominating in their niche."This is a huge industry in terms of store count - the 10 most important players account

It's good to be a convenience store these days.

Despite pressure on gas margins and declining demand for cigarettes, sales and profits are improving. Some of the industry's biggest players are acquiring some of the smaller, less efficient operators, and many of the regional players are dominating in their niche.

"This is a huge industry in terms of store count - the 10 most important players account for about 25% of the stores, so that leaves a highly fragmented industry where there is going to be consolidation going forward," said Michael Fortin, chief financial officer, Alimentation Couche-Tard, the Montreal-based parent of the Circle K chain, in an interview with SN. "With our Circle K division in the U.S., we are going to be a part of that consolidation process."

The National Association of Convenience Stores, Alexandria, Va., estimates that there are more than 140,000 convenience stores in the U.S., generating annual sales approaching $500 billion.

Couche-Tard is among a handful of dominant convenience store operators that have sought to take advantage of the fragmentation of the industry by purchasing regional c-store chains around the country and converting them to their own systems. Just this month Couche-Tard - which also operates convenience stores in Canada - agreed to acquire 236 Shell Oil locations.

Other consolidators include The Pantry, based in Sanford, N.C., which has become a dominant player in the Southeast through a series of acquisitions, and to a lesser extent Casey's General Stores, based in Ankeny, Iowa, which has built a 1,400-store chain in small towns throughout the Midwest. The largest player in the channel, 7-Eleven, was itself acquired by Japanese firm Seven & I, but is itself still a consolidator. It recently acquired the White Hen Pantry chain in Chicago.

By emphasizing food service and other high-margin, in-store categories like coffee and fountain drinks, c-stores have found a formula that works to offset the lower margins they reap from two of their principal traffic drivers, cigarettes and gasoline. National chains like 7-Eleven have long used this model, but it is becoming increasingly prevalent in the marketplace as the largest and most acquisitive c-store chains gobble up smaller players and bring their efficiencies to bear on the channel.

"There's a level of sophistication that's coming into the industry that wasn't there before, and I think that is a result of these large players with resources available," said Neil Stern, senior partner, McMillan Doolittle, Chicago.

At the same time that some of the larger traditional convenience operators are gobbling up the smaller players, some of the major oil companies - flush with cash from their refining businesses - are exiting their lower-margin retail operations by sloughing off company-owned convenience/fuel centers to independent operators.

It's a situation that observers said could inject more local merchandising acumen into the stores run by these "dealer-operators," as they are known, although it creates challenges for manufacturers who would like to have fewer points of contact for pitching their products to the industry, according to David Bishop, a convenience-store specialist at consulting firm Willard Bishop, Barrington, Ill.

"While most think the industry is consolidating, actually it is fragmenting," he said. "People like The Pantry and Couche-Tard are acquiring sizable chains, but others like BP and Shell are divesting their company-operated stores. For manufacturers, it complicates their go-to-market strategy relative to call points."

On the other hand, Bishop said, deconsolidation among the big oil companies may work to the industry's benefit if it allows individual operators to pay more attention to local market tastes. The ability to tailor merchandising to individual markets has been one of the strengths of 7-Eleven, he pointed out.

Local Focus

At Circle K, Fortin said maintaining a local focus has been a key to the success of that company's acquisitions.

"We have very strict criteria to go ahead with an acquisition, and so far all of the ones we have closed in the U.S. have been profitable for the company," he said. "All corporate stores are converted as soon as they are acquired to the Circle K banner, and we try to rebuild the stores according to the need and the taste of the surrounding community."

Jeff Lenard, a spokesman for the NACS, pointed out that as some of the biggest players in the industry seek to get even bigger through acquisitions, the key to their success will be to retain that local-market focus even as they expand.

"To keep the local feel when you are a national or multinational chain is critical," he said. "There is no retail channel where the shopping radius is tighter. Most of the shoppers are coming from within two or three miles."

Analysts said the acquiring companies seem to have found a formula that works.

"The public players see a lot of opportunity to use their leverage and their scale to go out and find attractive assets at pretty good valuations," said Lee Giordano, an analyst with Merrill Lynch, New York. "There are a lot of independents out there that they can consolidate, so they can go out and find accretive acquisitions. This is the most fragmented segment of retail, and you are going to see a long road ahead for these players."

He said companies like The Pantry have been able to gain scale and bring efficiencies to the fuel side of the business through a string of acquisitions, ranging from a few stores to the hundreds. Among its acquisitions was the 2003 purchase of the Golden Gallon chain from Ahold, which sold the 138-store banner in the wake of its financial implosion that year.

Other recent Pantry acquisitions have included the Lil' Champ chain - as well as Kangaroo Express, which is serving as a new flagship banner for the chain as it converts many of its stores to the format.

"Even the smaller acquisitions are nicely accretive, because The Pantry can go in and improve its buying power and use its expertise at merchandising inside the store and its technology and systems to improve efficiency at the fuel pump," Giordano said.

Casey's, meanwhile, has been able to roll out its in-store kitchens to acquired locations to install its high-volume, high-margin pizza and sandwich offering. Its recent purchases include 51 Gas 'N Shop stores from a single owner in Lincoln, Neb., that strengthened its position in that state, and the 33-unit HandiMart Food Stores chain in Iowa.

The results of these acquisitions have been visible on the bottom line. At Couche-Tard, revenues have grown at a compound annual growth rate of 56% since 2001, reaching nearly $10.2 billion last year, while net income grew at a 67% compound annual growth rate in that time, to $196.2 million.

At Casey's, sales for the year that ended April 30 totaled $3.52 billion, vs. $2.8 billion in the prior year and $2.33 billion in the year before that. Net income in that time has nearly doubled, from $36.5 million to $60.5 million.

The Pantry has also seen its revenues and net income climb in recent years. Last year the company reported $57.8 million in net income on about $4.4 billion in sales, up from $15.7 million in net income on $3.5 billion in sales in the preceding year.

While the rising price of gasoline also has contributed much to revenue growth, the margin improvements in many cases are the result of improvements in other areas of the stores and the increased efficiencies that come with scale.


As supercenters, supermarkets and club stores increasingly install gas pumps at their outlets, and retailers of all stripes, from Blockbuster to PetSmart, add convenience foods and beverages at the checkout, c-stores have sought to differentiate themselves through their prepared food offerings.

"You are seeing an increasing number of retailers who see themselves as restaurants that sell gas rather than as gas stations that sell food," said Lenard of NACS.

Many of the players in the industry have worked hard to cultivate an image that is more conducive to food service, Bishop explained, by brightening stores and cleaning up the inside of the store to distance themselves from their greasier, less appetizing gasoline divisions that still account for the bulk of their sales.

Bishop cited a case where some independent Shell operators switched from the company's branded coffee program, Jumpin' Java, and used cups with the Shell logo instead.

"Consumers associate the Shell brand with oil and gas, so some of those independent business owners learned that lesson the hard way," he said.

C-store operators have taken different paths to implementing their food-service programs, from proprietary offerings like those at Wawa to franchised, in-store quick-service restaurants with national name recognition, such as Subway.

"Food service is two or three occasions per day trip," Lenard said. "Gasoline is a once a week. So these retailers are trying to generate more trips, and with a business that has healthier margins than gasoline."

For the past four years, coffee producer Folgers, a Procter & Gamble brand, has partnered with Marathon-bannered convenience stores in the Midwest to offer Folgers Cafes, a coffee program that trades on the name recognition of the supplier. For many c-stores, using a nationally recognized name like Folgers, Blimpie or Subway lends credibility to a food-service program. That is the strategy favored by The Pantry, which operates about 200 quick-service restaurants in its stores, including Subway, Quiznos, Hardee's, Krystal, Church's, Dairy Queen and Bojangles.

Other convenience store operators, such as Wawa and Sheetz, have built local credibility on their own with their own food-service programs - in the greater Philadelphia area, Wawa is one of the top sellers of coffee and sandwiches.

At Casey's, the company offers its signature store-made pizza in more than 1,300 of its locations.

"Management believes pizza is the company's most popular prepared food product, although the company continues to expand its prepared food product line," the company said in a recent filing with the Securities and Exchange Commission. That program also includes sandwiches, hamburgers and hot dogs, and a variety of breakfast foods and snack foods.

Casey's said that although sales of non-gasoline items only accounted for about 33% of total revenues during the past three years, they generated 76% of the profit.

"Gross profit margins for prepared food items, which have averaged approximately 61% during the last three fiscal years, are significantly higher than the gross profit margin for retail sales of gasoline, which has averaged approximately 6% during the same period," the company said.

Fast Growing

Not only is food service profitable, it has also been one of the fastest-growing categories in the channel, building volume at a 37% compound annual growth rate from 1999 to 2004, according to the most recent data from NACS and Retail Forward, Columbus, Ohio. That compares with a 3% growth rate for fill-in grocery.

The enhanced emphasis on food service by convenience stores has thus far had little impact on the dinner daypart, however. Like quick-service restaurants, convenience stores capture most of their food-service sales during breakfast and lunch.

However, Lenard explained, some c-store operators are making inroads in capturing end-of-day food-service sales, a time period that already is heavily trafficked by consumers filling up their tanks or buying beer or cigarettes on the way home from work.

"The ones who are having success are the same ones that are selling wines and more premium beers," he said. "They have had some success cultivating a more upscale image."

Among the convenience retailers that have experimented with wine sales is 7-Eleven, which has merchandised endcaps with about 30 varieties at some stores, according to Bishop, along with some chilled white wines and single-serve four-packs.

The Famima!! chain in Southern California, which is owned by Japanese c-store giant FamilyMart - which has 12,000 locations in Asia - has been driving some evening traffic at its half-dozen U.S. locations with a mix of prepared foods and gourmet snack and specialty items, an executive at the chain told SN earlier this year.

Stern of McMillan-Doolittle pointed out that most convenience stores and fast-food restaurants simply don't have the "quality" image that consumers look for in assembling an evening meal for their families.

"Dinner has always been a very difficult nut to crack," he said. "To be successful in all three dayparts is something very few companies have really truly mastered."

Other categories where c-stores have seen growth include alcoholic beverages, which c-stores often price competitively, and other beverages such as energy drinks, which c-stores often carry before their rivals stock them on their shelves.

In addition, Bishop pointed out that candy has become a fast-growing category for convenience stores - tracked by NACS and Retail Forward at a 13% growth rate from 1999-2004.

C-stores also have enhanced their longstanding status as purveyors of all things nicotine, mostly as other channels have backed away from the category. Included in that growth are more smokeless tobacco products. Cigarette margins aren't what they used to be, however, as the big tobacco companies have cut back on their promotional allowances in the wake of their settlement, according to Adam Sindler, an analyst with Morgan Keegan, New York.

In response to the growing competitive threats to their gasoline sales, some c-store operators have turned more toward points programs that earned shoppers gas discounts in exchange for shopping inside their stores.

Bishop cited the Speedway chain as one that has been successful with such a program.

"Gasoline is an important traffic builder," he said. "If someone is offering gas for less in your market, not only are you losing that gas business, you are losing the opportunity to convert them into an ancillary customer in the store. That is why convenience retailers are increasingly becoming interested in some type of loyalty-based program."

Convenience stores also have become better at communicating different in-store offers to customers while they are at the pump, he pointed out, in some cases allowing customers to order food while they fill up their tanks.

Cutting Back Grocery

As SN reported in July, Wawa has been scaling back on its offering of slow-moving grocery items, moving toward a 3- to 6-foot planogram from a 12-foot planogram a few years ago.

"You are either in or out of that business," said Stern of McMillan Doolittle. "You need assortment, you need pricing, you need to have legitimate range, and you need to have room for that.

"At Wawa, the question is, how frequently does this product get consumed, and can you eat it right away? If it can't meet those tests, then it doesn't belong in the store."

He said convenience stores historically have tried to provide too many of the products that people frequently run out of and might have a need for at the last minute.

"You run out everything every once in a while," he said. "Yes, you need ketchup on occasion, and you need laundry detergent on occasion, but you just don't need them that often.

"The question for c-stores is how do you want to use your space? Wawa, which is very good in fresh and very good in food service, decided to dedicate their space to those areas."

European Convenience Retailing

The American and European models for convenience retailing have evolved along separate tracks, but now they are on a collision course.

Tesco, the U.K.-based supermarket chain, is preparing to roll out a network of small-format stores across the U.S. Southwest next year, and observers said they expect the concept to offer a different take on convenience.

"In Europe, c-stores offer fill-in grocery and fresh product, and it's a very different kind of mix," said Neil Stern, senior partner, McMillan-Doolittle, Chicago. "The European progression has been to move from traditional c-store to fill-in grocery, and the U.S. answer has been to move from smokes and Cokes to sandwiches, growing the food-service side of the business."

He said he expects that Tesco's U.S. format, which it has described as a convenience store, will likely compete more directly with supermarkets than with traditional U.S. c-stores.

David Bishop, convenience store specialist at Willard Bishop, Barrington, Ill., agreed that Tesco will be more of a direct threat to supermarkets.

"Based on what we know, Tesco's stores will be significantly bigger than the average convenience store, which is less than 2,800 square feet," he said. "Also, Tesco's offering will probably be focused more on fresh, prepared meals that may more likely compete with supermarkets' home meal solutions centered around the dinner daypart, whereas convenience stores' fresh offering currently is focused more on the breakfast daypart first and lunch second."

He noted, however, that he expects Tesco to offer gasoline in the U.S., which would pose a direct competitive threat to traditional U.S. c-stores.

Another question the looming entry of Tesco poses is whether U.S. supermarket operators can ever successfully emulate the model of British chains that leverage their brands across both supermarket and c-store formats.

Although some U.S. supermarket chains - such as Pittsburgh-based Giant Eagle and Lakeland, Fla.-based Publix Super Markets - are trying to do this to a limited degree, the more typical model has been for the two formats to operate independently.

Cincinnati-based Kroger Co., for example, operates convenience stores under a half-dozen different banners (none of them Kroger), and sees little synergies with its core supermarket business, analysts said. Marsh Supermarkets, Indianapolis, operates the Village Pantry c-store chain, which is thought to be for sale, and others, including Ahold, also have operated c-store banners separate from their core supermarket operations.


Couche-Tard Growth

Alimentation Couche-Tard, parent of the Circle K convenience store chain, has seen revenues grow at a compound annual rate of 56% and profits at a 67% rate. The company acquired Circle K last year and has continued to acquire smaller, regional chains.

Revenues (in billions, U.S.)







Net Income (in millions, U.S.)