Beantown Booming

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Beantown Booming

By Mehgan Belanger - 04/16/2007
Affectionately called 'Beantown' by out-of-towners, Boston is home to a true melting pot of cultures that boasts something for everyone at any hour of the day. Convenience retailers in the market benefit from this 'get it now' society, but also face challenges from local competition and tough state regulations. Those that call the area home have come up with unique solutions to the obstacles and believe that the area's potential is unmatched.

Home to many prestigious schools of higher education, including Harvard, Boston College, Boston University and Tufts University, the area has nearly 86,000 people enrolled in college or graduate schools, according to the U.S. Census Bureau's 2000 records. Of the city's 18-24 year olds, 58 percent shopped at a convenience store in the past seven days, according to Scarborough research from September 2005 to August 2006. Out of the region's total population – by the Census Bureau's 2005 estimate– 49 percent of Scarborough respondents shopped in a convenience store in the past seven days.

Within its diverse population, the city ensures that convenience retailers can find a niche in any ethnic offering. Irish, with 15 percent, is the largest ethnic group, followed by Hispanics at around 14 percent, then Italian, 8.3 percent, and Asian, 7.5 percent. Of the 28 groups tracked by the 2000 Census, "other" at 37.7 percent, is the largest segment.

Real Premium
Despite all the fertile ethnic niches ready to be developed and served, opening a c-store in the Boston market can be problematic. Leo and Paul Vercollone, who co-own VERC Enterprises, a 20-location chain of convenience stores in Boston and southern New Hampshire, said perseverence is how they developed their brand in the region.

"Massachusetts is probably a lot harder than other areas to get permitting [for buildings]," said VERC Enterprises vice president Paul Vercollone. "Massachusetts' government bureaucracy and the permitting for the town and state" are obstacles to retailer development.

This is especially the case for gas retailers, noted VERC CEO Leo Vercollone. "They really restrict the gas stations," he said. "In fact, you'll find that most stations we're in now are grandfathered

One property VERC purchased in October will take nearly a year to obtain the correct permits for renovation, even though the site is already a gas station site. After permits are in order, construction is expected to take six to eight months before the new c-store is completed.

Another barrier to entry is the scarcity of developable retail land. "When you look at an area like Boston, there's not a whole lot of open property or open land like you'll find in other parts of the country," Leo Vercollone said.

"It would be very difficult for a grassroots chain of convenience stores to develop in this marketplace without acquisitions," he added. "The marketplace is somewhat fragmented; there's a couple of big chains in the area – Cumberland Farms, Tedeschi and Hess Express are three of the biggest."

Oftentimes, companies that are not from the area do not understand the barriers to entry and the high costs associated with retailing in the Boston market, said Joel Kadis, partner and senior vice president, leasing and asset management, of Burlington, Mass.-based Linear Retail Properties, a real estate acquisition firm that focuses on convenience-oriented properties. "I frequently hear the complaints from local real-estate representatives. They say 'corporate just doesn't get it.' Corporate doesn't understand how expensive it is here and how they have to be flexible to what the building is going to look like," he said.

Linear Retail entered the convenience channel in the Boston market with a sale-leaseback transaction of 15 New England Pantry White Hen stores. While evaluating the potential of the sites, the company's executives had to learn what made a convenience store successful in the Boston area.

"The demographics [for White Hen] are really strong," said Kadis. "There is a lot of people, but in most of these properties' cases, not a lot of people live near the property."

The firm also found that it must be flexible with its choice of locations. "Ideally, you try to find an intersection that has a traffic light and you can access it from two different directions, on a corner," said William Beckeman, president and CEO of Linear Retail. "In our marketplace, you don't always find that, but it doesn't mean that's the only place you can succeed as a convenience store. Some would say 'well, this is a mid-block convenience store, I'm not touching it,' but then you realize what kind of properties are on the corners, and we said 'well, that's not going anywhere ever, nor would you ever get a convenience store in that location.' So mid-block does work.

With competition for prime space so fierce, how does VERC evaluate potential sites?

First, a site must meet VERC's high standards. "Our ambition is not to go out and acquire a 30-something chain. Our ambition is to acquire two or three stores that are the best in the area," said Leo Vercollone. "I guess the best way to describe it is we're interested in 'A' locations, versus 'B' locations."

Sites must have high gasoline volumes and property near a major interchange or a heavily-raveled road, he said. In addition, the site must be able to support the company's format, which includes an ATM and a Dunkin' Donuts, Subway or similar type of foodservice program.

Inside its stores, VERC carries traditional c-store offerings with some special touches that make the stores stand out. One of them is a fresh flower display from a local vendor that supplies and stocks the flowers for the stores that offer them.

Also, the company recently launched a "Focus" promotion where the retailer takes two popular items and puts them at the lowest price possible, even making them a loss leader.

"Today we're running a gallon of milk at basically our cost, and two energy drinks for a price that's very hot," said Leo Vercollone. "We don't think that there's anyone in the marketplace that would be below our price," he added.

The promotion has already generated a sales increase of 300 to 400 percent for those items. "We're not making the total gross profit that we were making in the past, but sales are significantly increased," he said. "Hopefully we'll build a reputation as being known as the lowest price around."

The Future of Convenience
VERC's executives expect the future marketplace to reflect similar changes taking place around the country. "The competitive landscape will be tougher," said Leo Vercollone. "I don't think it will be from the mom and pops, but the big wholesalers and big-box retailers." He added: "If anything, in five years the landscape will be more competitive, but higher volume as well."

In the future, consumers "will be more value-oriented," he explained, with "a stronger demand for our products as there is now." To stay in touch with consumers, the chain plans to expand its Focus promotion to include more items.

In spite of the challenges, Leo Vercollone has great pride for his market.

"I love Massachusetts. It's a great market to be in if you are here. If you're not here, you probably wish you were here," he concluded.

Investing in Convenience with White Hen
Linear Retail Properties ventured into the convenience store channel with the sale-leaseback of 15 White Hen Pantry stores in Boston last November.

Hearing Linear Retail Properties' executives speak about their sale-leaseback transaction for 15 of New England Pantry's White Hen stores, you'd think they were loyal customers.

"We love White Hen!" exclaimed Joel Kadis, partner and senior vice president of leasing and asset management for Linear Retail, a real estate investment firm based in Burlington, Mass.

Linear Retail began a little more than three years ago, when president and CEO William Beckeman left Burlington, Mass.-based real-estate investment firm Finard and Co. to begin his own venture in real estate acquisitions. Linear Retail focuses on "convenience-oriented" properties in eastern Massachusetts, southern New Hampshire, Rhode Island and southern Maine.

"The genesis of the company was convenience-oriented real estate. We really understand how customers operate 'right-in, right-out,'" said Beckemen.

The sale-leaseback contract was made with convenience stores in the Boston metro area. What started as a discussion about tenancy and a lease transaction for one of Linear's already-acquired shopping centers in Danvers, Mass. turned into a conversation on recapitalizing and a possible sale-leaseback transaction.

The logistics took more than a year to finalize. "[Sale-leasebacks] are not easy, but they are a worthwhile transaction for both the seller, White Hen, and us," said Aubrey Cannuscio, partner and senior vice president of acquisitions for Linear Retail.

With the White Hen deal, store properties were sold to Linear, and in turn, Linear signed long-term lease agreements – for approximately 20 years — with White Hen, the 'tenant' of the property, and Liner the 'landlord.' The deal is a win-win for both parties, Linear explained, as they own the property without being too involved in its operations, while White Hen can operate the property as it pleases, using the money from the sale to reinvest into the property, pay off debt, invest in employees or whatever it chooses.

Linear Retail remains confident in its transaction with White Hen, and looks forward to more in the industry. "I think if tomorrow morning a White Hen store came along again, we'd jump on it," said Kadis. "We love White Hen, and we're very happy to have done it."

However, another such venture in the Boston market would be difficult. "We would do another White Hen sale-leaseback transaction if it was available to us in the marketplace, but it's really not there. There's Tedeschi, and 7-Eleven is trying to penetrate the market, but aside from that, I don't know of any other chains that are available for sale-leaseback," said Cannuscio.

A Family Affair for VERC
VERC Enterprises, a 20-store chain headquartered in Duxbury, Mass, began as a car wash business in the 1970s, but is now known as a convenience company in growth mode.

VERC Enterprises began when father and son team, Paul and Eugene Vercollone, jumped into the car wash business in 1975. Their first car wash had Exxon-branded gas – their initial venture into the world of petroleum retailing. From there, the team "just worked very hard with a lot of perseverance and a hard work ethic to grow the company," said Leo Vercollone, Paul's brother and CEO for VERC.

Leo Vercollone got into the family business after graduating from Boston College in 1977. At that time, VERC obtained a gas station in Duxbury, Mass., and the father-son team convinced Leo to join in and operate the new location for the summer. "Fall came and fall went, and I just happened to stay on. What started as three or four months turned out to be for 30 years," Leo Vercollone explained.

When he joined in the late '70s, VERC operated gas stations with repair bays, body shops or car washes. Convenience stores did not come into play until the mid '80s, when the family-operated company obtained a small kiosk-style convenience store at one of its stations.

Today, the company operates 20 convenience stores and two car washes in Massachusetts and New Hampshire, and acquires two to three convenience store/gas stations per year. The company boasts a high employee retention rate, with many of its staff recruiting members of their families to work for the company and staying for the long haul – a decade or more in many cases.

Benefits, including 401k, profit-sharing plans and above industry-average wages make the company a valuable employer, and one of the best in the Boston area, according to the Boston Business Journal's 20 Best Places to Work in 2005. The survey, which is conducted through companies' employees, named VERC as one of the best mid-size employers in the area

Part of its success is management that allows freedom for employees to develop their own plans of execution."We like to create a roadmap to where we want to get to, and then we leave it up to managers with their skill sets and their abilities to manage projects to get it done," said Leo Vercollone. "It's like, there are many different ways to skin a cat, and we're not so much interested in doing it our way, we're interested in achieving results. And that's why you need good people to do that."

In the future, VERC looks to grow to 30 locations, rebuild and add profit centers to existing locations, including in-bay automatic car washes.

"We're just having too much fun right now to leave. The industry is still very strong. People still need c-stores; they still need gas, and we provide both in a fast, efficient and friendly atmosphere," said Leo Vercollone.