Despite the ending of CST Brands and the unknown of Amazon, Kwik Trip and other retailers are pieces of an evolving industry.
By David Bennett, Senior Editor
When CST Brands Inc. had closed the deal on Nice N Easy Grocery Shoppes at the end of 2014, it allowed the San Antonio-based retailer a substantial foothold in the Northeastern U.S. market.
At the time, CST Brands, parent of the Corner Store convenience chain, was considered one of the most progressive operators in the industry, integrating modern platforms that put customer service at the forefront.
In fact, in a short span CST Brands had strung together a few c-store acquisitions with the help of its general partner CrossAmerica GP LLC, a wholly-owned subsidiary of CST Brands. The capper came at the end of 2015 with the addition of Flash Foods Inc., a highly touted 164-store chain in Waycross, Ga.
In the spring of 2016, Kim Lubel, president and CEO of CST Brands told Convenience Store Decisions that both acquisitions were viable, despite criticism from some investors that the publicly-traded CST Brands had overpaid for the Flash Foods chain.
“The recent Flash Foods acquisition was accretive to CST,” Lubel said at the time. “Like our Nice N Easy acquisition, we expect to leverage some of the industry leading practices from Flash Foods, including their loyalty program and inventory management program. At the same time, we can leverage our distribution expertise and food offerings to enhance the Flash Foods network.”
It was only a short while later, in August 2016, when Alimentation Couche-Tard Inc. shook the industry with the announcement it was purchasing CST Brands for $4.4 billion, providing the Canadian convenience giant a gateway into the lucrative Texas market.
Among its many retail operations, Couche-Tard also owns the Global Circle K brand.
As part of the deal, Couche-Tard acquired 1,263 CST Brands c-stores, primarily operating under the Corner Store, Nice N Easy and Flash Foods banners, as well as adding as a partner CrossAmerica, which operates a master limited partnership or MLP. Lubel announced recently that she was leaving CST.
A FISH STORY
If there’s a moral to the story, it’s that in any industry, big fish will always get gobbled up by bigger fish. And while the acquisition of CST Brands caused ripples across the convenience channel, most companies look upon Couche-Tard’s growth plan as another wrinkle in the evolution of the c-store industry.
Some observers might say that consolidation in the industry is making it harder for smaller convenience operators to compete in a channel evolving at a rapid clip. However, the word rapid can be attached to every retail channel today. For instance, by 2020, the fast-casual dining market in the U.S. is expected to reach $66.9 billion, according to the research firm Technavio.
Retail disruptors including Amazon, Walmart, Dollar General, Kroger, Starbucks and Panera Bread aren’t just planning their next innovations—they are hatching initiatives to further dominate their respective channels.
That’s not to say the c-store industry is void of innovators. The list of leading chains is long: Casey’s General Stores, Wawa, Sheetz, RaceTrac, Kwik Trip, QuickChek and QuikTrip, to name a few. From the ground, c-stores still fit the retail landscape because they still meet the needs of the American consumer. Still, the industry is as challenging as ever.
Nick Lacaillade, vice president of retail & corporate development for Certified Oil Corp. in Columbus, Ohio, accepts that the industry is becoming less fragmented with some corporations holding a strategic advantage.
“I think it only makes it harder and harder for the independent chains to compete on cost, given the scale that these large chains are creating,” said Lacaillade. “That said, we operate mainly in Ohio where Speedway is dominant so nothing has really changed in our competitive landscape.”
In his assessment, some convenience chains are getting bigger and some are getting better at what they do best. More and more, foodservice sales are replacing the profit void that cigarette sales used to fill.
“M&A (mergers and acquisitions) is the strategy of Circle K and 7-Eleven with very few new-to-industry stores being built. Their business model is very different than a Sheetz, Wawa, RaceTrac, QT (QuikTrip) or Kwik Trip. These guys know what they need to build to cater their more sophisticated food offer, and it really can only be done organically.”
GROWTH SPURTS
But it could also be a sign that some companies are finding it hard to increase profits organically by selling more goods, or improving margins. The big deals struck by Couche-Tard and 7-Eleven are shaping the industry measurably. 7-Eleven this year entered into an agreement to buy 1,108 convenience stores, mostly on the East Coast and Texas, from Sunoco for $3.3 billion.
Along with the store locations, 7-Eleven, which has been building its fresh food platform in recent years, is gaining a whole new menu of breakfast and lunch tacos with Laredo Taco Co. and the Stripes convenience chain.
It’s reminiscent of another acquisition, when the retail giant acquired 182 Tedeschi Food Shops, located across the greater Boston region and New Hampshire in May 2015.
David Bishop, managing partner of the sales and marketing practice Balvor Inc. in Barrington, Ill., said while both Couche-Tard and 7-Eleven are growing bigger, each is distinct from the other in terms of operational strategy.
“Couche-Tard and 7-Eleven fundamentally have different operating models as the former operates most of its stores while the latter franchises the majority,” Bishop said. “Both are attracting more supplier support and resources as they build scale, which will be less for others. Couche-Tard’s organizational structure has fueled a fair amount of innovation related to store design, merchandising and fresh food programs, and their recent acquisitions will help drive more to come.”
Jonathan Polonsky, president and chief operating officer of Plaid Pantry, based in Beaverton, Ore., said such acquisition activity is evolving out of necessity.
“Everyone is looking for growth and if the big guys want to move the needle they have to make significant acquisitions,” said Polonsky. “I would expect this type of consolidation to continue as long as money is cheap and organic growth is muted. I don’t see any dramatic impact to the overall channel due to these deals.”
Rather, he said Plaid Pantry, which operates 110 c-stores in Oregon and Washington State, holds an enviable position because its footprint is adequate to operate efficiently within the communities it serves.
“No question there are some competitive advantages to being very large but having 110 stores has its advantages too. We can execute programs that the very large and the very small chains can’t. Vendors like to partner with us because we are willing to take calculated risks and we execute as promised. I am not sure that is always the case with the mega chains or franchise model.”
ORGANIC OPPORTUNITY
Kwik Trip Inc. is fully vertically integrated with a 176,000-square-foot dairy and food kitchen to complement the bakery. It also owns a 360,000-square-foot distribution center, and produces more than 6,000 food products regularly, and the transportation network that delivers them to stores fresh seven days a week.
The 500-plus store chain values acquisitions as well as organic growth. For example, when Kwik Trip, which is based in La Crosse, Wis., was looking at expanding in the city of Madison, Wis., the opportunity came this summer with the purchase of PDQ Food Stores, a 34-store chain.
“The company’s philosophy on acquisitions has always been to take them as they come,” said Carl Rick, a leadership development specialist for Kwik Trip and a third-generation owner. “No matter how many acquisition opportunities there are, we have to be disciplined enough to only take the ones that fit our strategic initiatives in a given market. Acquiring for the sake of acquiring would only hurt us in the long run. The current economic climate has really only confirmed our need to be disciplined in our approach to acquisitions.”
PDQ was a good fit for the growing retailer in a number of ways, he said.
“As we looked at PDQ, we saw how they excelled at customer service and quickly realized they would be a great fit,” said Rick. “The more we have worked with their coworkers in the last few weeks to work through the details we have come to see that our cultures are very similar.”
Kwik Trip has stated a goal of building 50 new stores this year, and is now eyeing central Minnesota—a target of opportunity for the growing chain.
“Quite frankly, it was the biggest hole on our map. We’ve been filling in holes in Wisconsin and building in northeastern Minnesota for several years now,” said Rick.
“Last year, we started in St. Cloud, Minn. because we could move product there easily over the highway system from La Crosse. Plus, having several stores in the market makes our truck routing that much more efficient.”
COMMUNITY PARTNER
Acquiring a fleet of stores is the most expedient means for a convenience chain to gain instant access to a community. For some chains such as Des Moines, Iowa-based Kum & Go, which currently operates 412 stores in 11 states, organic growth is just as important—and is a measured part of its business plan.
Kristie Bell, communications director for Kum & Go, said maintaining a strong brand identity helps in that pursuit.
“Of course, there are some markets that are harder than others in which to grow a footprint, but part of our strategy is to build relationships in the communities where we operate stores and begin to understand the regulations, codes and capacity for each market to best understand the number of Kum & Go stores that is ideal for each market. There is no one-size-fits-all approach, but we do consider all of these factors as we determine our growth plans for existing and potential new markets.”
Exploring new markets is a full-time job for most convenience chains. A second job is tracking what the competition is doing. The job has become more complex with the growing shadow cast by e-commerce businesses—led by Amazon.
‘CART’ BLANCHE
Online is poised to become a bigger part of the overall grocery shopping equation as U.S. shoppers start moving the mundane task of shopping for regularly replenished goods—beverages, paper products pet food and other household basics—online.
In January 2017, the Food Marketing Institute and Nielsen released preliminary findings from a joint report indicating that, by 2025, online grocery shopping could reach $100 billion annually, or about 20% of the market share. Now, online groceries account for 4.3% of food and beverage sales in the U.S.
While the shift to online is not surprising, the rapid pace of the shift is.
Of course, Amazon will have a big influence on the numbers. In its buildup to finalizing its $13.7 billion deal for Whole Foods Markets on Aug. 28, the company announced that prices on a slew of Whole Foods items will drop. Products that will see a price cut include bananas, organic avocados, eggs and salmon. Amazon announced that certain Whole Foods products will be available through Amazon.com, AmazonFresh, Prime Pantry and Prime Now.
It’s no secret that Amazon is also eying the convenience channel.
At the end of 2016, Amazon unveiled Amazon Go, a new cashier-less convenience store in its hometown of Seattle that uses artificial intelligence and sensors to track which items consumers take off shelves. The Wall Street Journal reported recently that the Chinese e-commerce company, Alibaba had unveiled a cashierless convenience store concept that could become a model for Amazon’s convenience initiative.
“Of course, we don’t underestimate any competition and obviously Amazon is very good at what they do,” said Plaid Pantry’s Polonsky. “But even as they try to sell everything to everyone, I believe very strongly that c-stores will continue to be viable for a very, very long time. People will always want immediate consumables and it’s tough to replicate what we provide folks unless you have a store on the corner.”
If Couche-Tard has its way, that corner store will be a Circle K, or another name brand within its portfolio. The company recently acquired more than 500 Holiday Stationstores from Minnesota-based Holiday Stationstores Inc., moving the growing company into six new states.
Convenience Store Industry Still Expanding
A glance At the overall annual growth of store volume in the convenience industry shows a rapid acceleration between 1985-2005. At year-end 1985, the store count was 90,900 stores; at year-end 1995 the store count was 101,100 (11.2% increase) and at year-end of 2005, the store count was 140,665 (39.1% increase), according to National Association of Convenience Stores (NACS) data.
Comparably, from 2005-2010, the industry store count had increased a total of 4%. Since 2010, annual store count figures have narrowed even more:
• 2010: 146,341 stores
• 2011: 148,341 stores/ 1.4% increase over 2010
• 2012: 149,200 stores/ 0.6% increase over 2011
• 2013: 151,282 stores/ 1.4% increase over 2012
• 2014: 152,794 stores/ 1.0% increase over 2013
• 2015: 154,195 stores/ 0.9% increase over 2014
• 2016: 154,535 stores/ 0.2% increase over 2015
Jeff Lenard, NACS’ vice president of strategic industry initiatives, said that slowdown isn’t so much a sign of decline, but that the industry has reached a cooling off period compared to when it was eclipsing other channels by a good margin.
“Our store growth has slowed compared to a decade or so ago, but that’s because our industry is already so massive,” said Lenard. “Convenience stores (154,535) comprise 34.1% of all retail locations (about 453,000). And looking at the broader store count overall, small format remains strong. The only channels really seeing growth are convenience, drug and dollar.”