Dealing Behind the Scenes

Open Pantry’s Robert Buhler opens up about the  company’s future, missed opportunities and the financial wisdom offered by his board of directors.

By John Lofstock, Editor.

To make your mark in the convenience store industry, you are either growing the business or waiting for the rest of the industry to pass you by.

Growth can come in a variety of ways: increased store count, new and innovative in-store programs or simply focusing on upgrading great locations. But sometimes, even with access to capital, growth can be a difficult process, especially in a sluggish economy yielding short-lived, expensive hope. Chains with financial discipline may eschew acquisitions because the risk is too high.

Others are more than happy to play the risk-reward game, but often find themselves struggling to survive in just a few short years. The industry is rife with these businesses that have overpaid for acquisitions, which not only inflates the cost of expansion, but also pushes them dangerously close to financial ruin.

Open Pantry Food Marts of Wisconsin is one of those convenience store chains with financial obedience. Company President and CEO Robert Buhler is an investment banker by trade. Prior to taking over the family business from his father in 1998, Buhler managed the Capital Markets Group of Canadian Imperial Bank for nine years and then ABN-AMRO Bank for three years.

The Pleasant Prairie, Wis. chain more than a year ago engaged in a process to explore its strategic options for the future. It hired Axiom Financial to aggressively pursue finding a significant capital provider to team with and target large-scale acquisitions. This extensive financial exploration, conversely, convinced Buhler to reach a deal to sell 19 of the company’s 27 stores to 7-Eleven in June.

“The process for us began with a discovery phase to identify what we were capable of doing. We wanted to grow the business because we had an exceptional management team and a strong track record with our numbers having increased EBITDAR from implementing our proprietary operating and merchandising systems,” Buhler said. “We left all of our options on the table and when we couldn’t find a strategic investment group to make large acquisitions, we moved in a different direction.”

Open Pantry remains extremely committed to growing its convenience store model and has outlined aggressive growth plans that include rolling out an Open Pantry c-store brand to jobber-operated units across the country.

In addition to retaining the real estate in the stores it sold to 7-Eleven, the chain also kept the rights to its strong in-store programs, such as Willow Creek Coffee, Santa Fe Café, Open Pantry Gourmet Sandwich and Salads and the Frozen Tundra fountain program, so it has the brand equity and the experience to franchise a retail brand.

Combined with its financial resources and a focused board of directors, Open Pantry finds itself in a good position to fill a need for independent jobbers looking to grow their convenience store operations.

Buhler sat down with Convenience Store Decisions for an exclusive interview detailing the company’s growth plans, the opportunities it sees in the marketplace and its unique management strategy.

CSD: Open Pantry has been regarded as one of the more progressive convenience store chains in the industry. Why did you decide to move in a new direction?
RB: Having transformed our chain into a high-end offering and experience to attract incremental, nontraditional c-store customers, we knew this formula was of value. As such, we were originally contemplating arranging  a substantial capital raise with investors who wanted to be financial buyers who would allow us to grow exponentially, as opposed to modestly. Though we wanted to grow large, we started seeing 10- to 80-store chains getting picked up for ridiculous prices. We stuck to a discipline and refused to overbid. Others seemed to not care. Though they won the deals, most ended up wallowing after and couldn’t recover.

Did you envision Open Pantry becoming a rollup company?
That was the plan if the deals made sense. There seemed to be substantial capital in the market—private capital that was well positioned for our channel and very interested in a rollup platform. We came to the realization that we were going to have to do a much bigger deal with a larger capital investment in order to get to that next level.

Plus, I think Wisconsin and the Midwest logically makes sense for a rollup because the market has not really rolled in any significant way like the Southeast. I still think there is a tremendous opportunity in the Midwest.

What is the advantage of the rollup strategy?
The one trend you see with rollup deals is that some of the earlier acquisitions are offset by inexpensive acquisitions later. That’s how we went about it. We were saying, we’ve got the platform, we have the systems, we can pay up for the first or the second acquisition, but then with the third, fourth, fifth—once we get rolling—people will be coming to us. We can average down all this investment and we’ll have pricing power to enhance returns.

At what point did you make the decision to sell off the company-operated stores versus continuing with your initial plan to raise capital and be a buyer?

We put a lot of effort into this idea, and we had a very good plan to execute it. When we hired Axiom to begin to go after the capital, they indicated we should also set a price for our company. So while we were looking for financial buyers, we decided to let strategic buyers come and take a look at us too. We thought we would play it both ways and if the capital raise didn’t happen the way we thought it would, we would maybe take advantage of a strategic buyer and transition some of our assets for the right value.

By the second round of bids we had spent quite a bit of time with about three potential capital investment firms to get them comfortable with our strategy. We actually got down to the growth plan, and we very smartly talked with one investment firm about our first target—we dropped in the target name and the financials and how we would integrate their operations. It happened to be a chain of about 30 stores in close proximity to Open Pantry.

Unfortunately, when we got into the numbers, we began to disagree on how much capital expenditures would be needed to improve these stores to get them to Open Pantry standards. This proved to be the tipping point. We were able to tell that the financial player, though they seemed very good and they had the capital to make several big acquisitions, was going to be miserly when it came to capital expenditures. We didn’t want to be in a situation where we were forced to have two brands or be forced to cheapen the Open Pantry brand.

Missing out on some acquisitions impacted your ability to gain critical mass. Did this eventually hurt Open Pantry in the long run?
Frustrated would better describe it. This situation is kind of like when the mortgage industry was making dumb loans. Everyone who followed the market knew they would eventually have a bad impact on the industry, but when? We knew the values we put on our bids were healthy and yet higher-priced, irresponsible deals eventually got done. This is very frustrating, particularly when the winning deals faltered shortly after, and several chains needed to be auctioned within a year.

You have extensive investment banking experience and tend to run your company through the eyes of a banker. What do you do differently and how has this management style benefited Open Pantry’s operations through the years?

Just because you may be in a small busin
ess, doesn’t mean you have to run it less professionally. I run my business very similarly to the way I approached investment banking. I have a board of directors that is very involved and tells it like it is. We have an exceptional management team—each member an industry leader in their area of focus. We meet weekly to share their issues and opportunities, and live the company vision. Problems are openly shared and all management team members are available to help resolve them collectively.

While your banking background helps give you an advantage when it comes to spotting bad deals, what are some of the financial mistakes retailers are making when it comes to managing their small business?

Investment bankers are trained to get invested capital back—quickly. As we invested capital via acquisitions or store upgrades we always asked the question, ‘How long will this investment take to earn back all principal dollars?’ Some answers were as long as 12 years, but we needed to make the investment. Most investments, however, stayed within our target zone of 2-5 years. If retailers hold to this type of basic analysis, even sometimes having to accept a poor return on capital, they would make fewer mistakes than those who do not take this step.

What can the industry learn from Open Pantry following this process?
We invested with a significant discipline, but also always preserving our brand value. The need to attract and retain new c-store customers by offering higher standards was costly, but allowed us to generate incremental gross profits, not just hope for them. Our board agreed with this important blend and clearly watched for results.

How has a board of directors influenced your management of Open Pantry?
I certainly would have made more mistakes, no doubt about it. I have found that the board’s insight is invaluable because they help keep you grounded and see things that you might be missing. Board members are not there to tell you what you want to hear. They are there to give you the reality of the situation and their recommendation.

Another clear advantage of having a board for your c-store chains is that it helps provide a better understanding of your finances. When I first came into the industry the EMAC’s, FMAC’s and other conduits to financing were making capital available to everyone, but they borrowed far too much and quickly became overleveraged. A conduit can make some sense, but you don’t borrow much more than probably 10% of your balance sheet on a conduit. You should not be financing the roller grill for 15 years.

Many chains in the late 1990s ignored that discipline and paid an extreme price. Numerous other classic industry examples of bad financial concepts have plagued the industry over the years.

Does a chain need a certain scale to have a board?
It would be my advice that a chain of any size have a board of directors consisting of talented people who have financial discipline. Entrepreneurs every day have all their capital in play with their companies. If you don’t get good, sound advice on how to get a return, while also protecting your embedded equity, you will have problems.

What input did you receive from your board on a regular basis?
We received input on maintaining financial discipline and not being tied to store count. We were able to grow adding one store, then five stores, then seven stores. But then we actively culled sites, selling off 10 stores here and three stores there. We were trading out about 10 stores every two years. With the board’s analysis of real estate investments and our balance sheet, we sold over 80 stores in a 10-year period, and we purchased more than 93 stores in the same 10-year period to end up with the 27 stores we operated.

You have expressed an interest in growing retail operations in new and innovative ways. What kind of growth do you anticipate for Open Pantry in the near future?     
Our focus will be on bolstering our current core of eight stores. We will look to smartly and incrementally add new properties as opportunities become available. That’s not going to be the exclusive focus; that’s going to be a modest focus. The other focus will be to test a whole new branding concept in early 2013.

We believe that we have enough embedded value with our store brands like Willow Creek Coffee and Santa Fe Café to work with other entities, such as jobbers or independent convenience store chains that are in need of a high-end look and strong retailing and merchandising programs. Open Pantry is a model organization for other companies in that we were able to reinvent our small chain and become a top quartile operator in the industry. I really want to roll our model out to other operators to help them be successful. It will help them think a little differently, but it will also give them the tools and the assistance to take their retail operations to another level, particularly by learning how to drill down on data daily.

What potential markets are you looking at for this rollout?
I think this is a national concept. I’ve talked to numerous, progressive jobbers on the West Coast, in the Midwest and elsewhere that have great locations, and they have strong fuel sales, but they can’t get the c-store offering right. They are committed to investing with their dealers, but need the experience we can offer them. My plan is to evaluate their needs and begin offering a brand package that will help them facilitate new growth.

What we can do also goes beyond branding. With our model we can step in and help a jobber pursue dealers coming off of a contract with a competing jobber and offer a better deal to include retail operations. They don’t have the drill down capabilities, or they may lack the buying power and the merchandising expertise that they need to make an impact. By offering structure and a plan, we can influence for the positive a company’s growth trajectory.

Open Pantry has its roots in the franchise business. How has that experience helped prepare you for your future plans?
When I acquired the chain from my father in 1998 I stepped into a franchise operation. I had to defranchise it in a very tough, rough-and-tumble way when we made the decision to operate only corporate units and build from there. So I know the value of controlling and owning corporate versus the lack of control you have with a franchise operation. What I would like to do now is work with jobbers and select dealers. If a dealer wants to become a merchandiser or a better marketer, to move beyond selling just gas and tobacco, we can offer them some structure on the inside that includes a foodservice solution, a soda fountain, coffee, etc. Our previous experience makes us uniquely qualified to understand the challenges of dealers and jobbers and help them grow.

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