Construction Investments Slowing

It’s costing more than ever to build new convenience stores, according to the NACS’ 2009 State of the Industry report. This news comes at a time when the economy is dragging down sales and profits. As a result, operators face a crucial challenge as they try to grow business organically: build or renovate?

The answer will hinge on a variety of factors. But with the economy in the doldrums, finding that right answer is more critical than ever.

The c-store industry isn’t alone. Ken Simonson, chief economist for Associated General Contractors, a construction trade group, said even with federal stimulus money in the pipeline, nonresidential spending on construction could fall as much as 9% in 2009.

“Declining retail sales and other factors, in addition to poor economic conditions, are providing little promise for the remainder of the year,” Simonson said.

Retailers need to proceed with caution, said Dan Bendall,  principal of FoodStrategy Inc., a consultancy in Rockville, Md. “First, location is everything. Renovating a successful location may be a good move, but if your location is not currently successful, first evaluate whether you have the right location. If you don’t, no great remodel is going to save you.”

Second, renovating can be a good way to keep existing customers and drive new customer visits. “Most consumers want new, clean, efficiently-designed stores,” he said. Customer satisfaction will undoubtedly go up, and employee morale will follow.”

It also can prove less costly and take less time to renovate, Bendall added, assuming you don’t have to do much to the infrastructure. “A facelift can go a long way and be done quickly. A new building can take years with design time, government approvals and construction.”

There are two schools of thought when it comes to whether the downtime in renovation will negatively affect your current business volume.

“Sometimes the store will not recover as quickly in recapturing its existing and new customers. You must be careful as to how to plan the renovation,” Simonson said. “Then when you are finished you find the changes have greatly impacted what your clients think about the looks, service and range of products offered.”

The other school of thought, “is that you are usually opening a new store when you are expanding your business, where you can negotiate with the landlord for cost-savings in mechanical services and free rent until you open,” Simonson said. “In renovation mode this does not happen. Location is key and savvy operators know how to maximize returns at minimal cost.”

Location and Regulation
Despite the economy, some retailers are pushing on with new store growth. “Like I always say, if you’ve got a poor location, whether it has a unit on there or it doesn’t, you shouldn’t be building,” said Henry Bays, general manager for 32-store NOCO Energy Corp. in Tonawanda, N.Y. “If you have the right location then you definitely should build or rebuild. If you can buy the property, build a new site that’s even better because that’s additional gallons and inside sales that you never had. I’m all for building if it’s the right location.”

At the same time, Bays was quick to add you should make sure the decision is a good one. “In this economy today, if it’s only a marginal site—if you don’t have 100% good faith in it—then it’s probably not the time to build.”

NOCO recently bought a 3,000-square-foot former Sunoco station in North Tonawanda just two-tenths of a mile from one of its own locations, which it closed. The 24-hour unit was renovated “at a much lower price, $250,000, than we could have built it for, and we’ve actually doubled our sales already,” Bays said. “If it’s a good site and you know you can increase your sales and get the right return on investment, why wouldn’t you rebuild?”   

Another big factor to consider is the government’s role, which can crush some projects. NOCO is looking at building a 1,000-square-foot-plus addition on one of its stores. “With the permitting and the licensing, at the earliest, we won’t be able to get started until late winter, and in Buffalo how much sense does that make?” Bays said.

The company’s architect added that, at best, it will take six months just to get through the permissions stage. “At some point you say to yourself, ‘is this really worth it?’” Bays said.

Appreciation for Depreciation
NOCO is hardly alone in its frustration with government bureaucracies.

“If somebody doesn’t have an approved property to construct on, remodels are a good investment because of the accelerated depreciation laws in existence for 2009,” said Scott Hartman, president of 56-unit Rutter’s Farm Stores. “If you get a building up and open by the end of the year there are some great tax advantages. Taking a 15-year asset and getting accelerated depreciation puts cash back in your pocket early. It’s a great year to do it if you have an approved property.

“If you don’t, you’re not going to get it in this year, and nobody knows if accelerated depreciation will be there next year,” Hartman added. “Renovate if you’re looking to spend capital to upgrade your stores, image and brand.”

Part of what separates Rutter’s in the c-store industry is it owns 85-90% of the properties it operates. The company opened two ground-up stores this spring, hopes to add another by year’s end, and has two more going through the approval process. The average cost to build, including land, building and equipment, is about $5 million.

“First and foremost, before [c-store operators] spend the money, they have to make sure their balance sheets are very strong,” Hartman stressed. “I’ve been saying for some time we now live in the year of the balance sheet, which is unusual. In years past it was all about how much profit you made.”

This year you need a strong balance sheet to make sure you can absorb the cost of opening new stores. “If you don’t have a strong enough balance sheet, look at what you can afford on the remodel side,” Hartman said. “Make sure cash flow is good, because this is not the time to find yourself in short supply of cash.”

Real Estate and Reuse
“That old saying goes, ‘If it ain’t broke, don’t fix it,’” said Stan Pyne, a manager with Hirschberg Design Group in Toronto. In this economy he said to ask yourself “has your store got a good customer base you could improve by building? Now is the time to buy real estate, and the economy will improve, which means your bottom line expands, both in customer base and in real estate assets. If you have the funds and backing to build for investment purposes, I say do it. However, if you are contemplating building and have to find the money to invest, then I think not.”

Companies shouldn’t be afraid to use and reuse what they have, said Diane Chiasson, president of Chiasson Consultants, Toronto. “Cosmetic renovations are easy and inexpensive. Focus on branding and home-meal solutions.” She also urged c-store operators to keep their money until the economy is better.

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