The foundations for other industries lay in the product. The film industry pumps out movies. Pharmaceuticals companies manufacture drugs. Publishers print magazines.
For convenience stores the world over, the foundation is literally the foundation.
“It comes down to location, location, location, just like in real estate,” said Jeff Lenard, vice president of communications for the National Association of Convenience Stores (NACS).
Finding an ideal location to deliver the products and services that c-stores sell–primarily convenience–is an essential component of the business, and one that gives the industry its name.
However, building a store on a new site has grown increasingly expensive due to rising construction costs. No matter which market a convenience store tries to enter, real estate costs are driven up by competition from other industries like 24-hour pharmacies and supermarkets. In most cases, companies have to rely on complicated financing in order to procure a site.
Even when a site is determined to be ideal, many stores often face local challenges, such as higher taxes or enforcement of a color code, which affects branded gasoline companies. The latter is the kind of problem being faced by convenience stores trying open new locations in growing markets such as the coastal areas of South Carolina, where zoning laws require a certain colored paint and restrictions on signage. Retailers in Alachua County, Fla., faced with local property tax increases say this is forcing them to raise the price per gallon of gasoline by 5 cents.
These costs and other challenges also affect stores that have to be remodeled, because to stay competitive, stores often have to undergo entire transplants.
“I think change is a necessity in our business,” Lenard said. “Times have really necessitated that some stores be absolutely turned around and completely changed.”
Show Me the Site
It used to be that when someone wanted to find the right corner to build a convenience store, they would simply count the number of cars that drove by.
“Sometimes you just have to sit at an intersection and record the traffic,” said Joe Sheetz, executive vice president of finance, accounting, IT and real estate for Altoona, Pa.-based Sheetz Inc. “I’m sure every company has some sort of traffic counting mechanism.”
Of course, the practice has become more sophisticated over the years. For example, Sheetz has seven people designated to a certain zone in six states around Pennsylvania whose job it is to find an ideal site and its owner, and then work out a deal to purchase the site and eventually build another company-owned store. The site selectors work in conjunction with district supervisors and are well abreast in the company, the industry and real estate.
Like other major convenience companies, Joe Sheetz said his site selectors research the potential revenue a certain location might bring, what local traffic generators are, such as area attractions, housing developments, and commercial or office areas.
Since all Sheetz locations also sell the company’s own brand of fuel, the site selectors emulate the daily driving patterns of the potential site’s future customers.
“In some ways they try to recreate the way the general population travels,” Sheetz said. “They will try to determine what road a typical person going to work would be on, or what road they are on to get to a mall. You get a feel for traffic patterns and you get a feel for traffic volumes.”
Terry Lehman, senior vice president and chief operating office of Spartanburg, S.C.-based Lil’ Cricket Food Stores and the president of the South Carolina Association of Convenience Stores (SCACS) breaks site selection into three categories: traffic volume, population size, and accessibility of the potential location.
Increasingly, marketers are also looking not only at population numbers but also at who makes up the population.
“In the old days, they used to look for a location that intrigued them and count the number of cars that went by to gauge a potential new opportunity,” Lenard said. “I think that today it goes far beyond that. I think you want to know who the customer is. There’s much more analysis put into the demographics. We are literally seeing stores being designed and merchandised specific neighborhoods.”
Lenard said one example of a marketer designing a convenience store for a neighborhood is Alimentation Couche-Tard Inc. of Laval, Quebec, the Canadian operator of 5,513 convenience stores, which will change its appearance and production selection based on population demographics.
After the site is located and determined to be ideal, most companies then run an analysis of how much revenue they anticipate from the site versus the cost of procuring the property and construction costs. Mark Radosevich, president of PetroProperties & Finance of Coral Gables, Fla., a mortgage broker for motor fuel marketers, said many c-stores often rely on outside consultants such as New Image Marketing of Fort Myers, Fla. to get this type of assessment.
“It’s not an easy slam dunk,” Radosevich said. “You’ve got to know you’re market, find an appropriate site, then do a site study to give you the verification that a site will do what you assume it will do.”
Most industry executives and experts estimated that the minimum cost of purchasing a lot then building a 3,000-square-foot convenience store with at least six multiple product fuel dispensers is somewhere in the range of $2 to $4 million.
Although costs can be offset by renting out a portion of the property to a third-party, such as a dry cleaner or other retailer, through competitive bidding processes, or by leasing the property instead of purchasing it, the initial investment is still large. Gasoline providers sometimes encourage rehabilitating an existing site with image allotments in exchange for long-term distribution deals.
That is the case when it comes to upgrading existing gas dispensers, Lehman said, but may not extend beyond that. “They will assist you when you’re first branded, but not as an ongoing part of business,” said the executive from Lil’ Cricket which operates 90 convenience stores, all but three that have gas stations with more than 40 of them flying the Valero fuel banner.
Nonetheless, it might be worth it if an analysis shows revenue will exceed the expenses.
“The worst thing I see is these beautiful facilities that can’t do well enough to cover their debt,” Radosevich said, hence the important of getting an accurate read on what a store will make in terms of revenue.
Most retailers, according to Radosevich, finance their purchases, or construct complicated loans with lenders. The loans are complicated because of their high margin and because lenders are likely not willing to risk lending money on such a high figure and having it default. Companies that have at least 10 or more stores and have consistently built new ones year by year typically fare better than startups because stability is important in financing.
Industry leaders are optimistic though that construction costs will come down and that property values will also come down because the residential industry is facing some difficulty. But everyone acknowledges that other factors lead to higher prices.
But even if prices come down, the sites that convenience stores want are still the same sites that other retailers are interested in.
This is especially the case in growth areas, such as the major markets like Atlanta, said Jim Tudor of the Georgia Association of Convenience Stores (GACS).
“There’s no question that real estate costs are certainly continuing to rise only because when you have a good location, a convenience store is not the only retailer that is looking at it,” said Tudor, whose organization represents nearly 2,000 c-stores in the state. “Certainly in a lot of markets, there might be a location that previously a convenience store would want to acquire, but now it might be acquired by a Walgreens.
“That’s certainly true in the metro Atlanta area. When Walgreens came into the market, they were certainly seeking to get many locations and up and going. That action in itself will raise the asking price for sellers.”
The competition is hardly limited to Atlanta.
“For decades, convenience stores based their retail proposition based largely on convenience operations and extended hours,” Lenard said. “Now that pretty much every channel has considered extended hours and essentially everyone is a convenience retailer, our channel has evolved. They may look the same at the register, but speed of service is a huge differentiator at convenience stores. What’s important for our channel is that regardless of having a great site and a great offering, you have to deliver speed of service.”