BONUS CONTENT: The Supply Side of M&A, Part 2
NATIONAL REPORT — Competition in the convenience store industry is fierce and only getting fiercer as the large convenience store chains get larger, increasing their scale and purchasing power.
All of the merger and acquisition activity in the industry over the past two-plus years is not only stoking the competitive fire among c-store retailers, but also the convenience distributors that service them.
"With all the acquisitions occurring, there are fewer but larger retailers. This intensifies the competition [among wholesalers] for those that remain in the business," said Steve Montgomery, president of b2b Solutions LLC, a consultancy based in Lake Forest, Ill.
Supply chain integration is, of course, part of the transition process when one convenience store retailer acquires another. The acquiring retailer weighs several factors in deciding which distributor, or distributors, it will partner with going forward: competitiveness, a good track record, and the ability to meet corporate objectives in regards to service, cost structure and flexibility.
As industry insiders told Convenience Store News, it really comes down to the who, what and where.
Sometimes, there can be a logistics issue for a wholesaler; it may not service that area. For example, Core-Mark Holding Co. Inc. and McLane Co. Inc. are both national companies, but Eby-Brown Co. LLC is a more regional provider and may have difficulty going to Denver, noted David Dresser, vice president of industry affairs for the Convenience Distribution Association, the trade organization working on behalf of convenience store distributors in the United States.
Existing contracts can also come into play, Montgomery pointed out. Most acquisitions are asset based, meaning the acquiring company is not bound by the seller's contracts.
"Most larger wholesalers have a clause in their contract that [says] should the retailer buy or open additional locations, their existing agreement would remain in place and automatically cover the new locations," Montgomery explained. "This generally means that the acquiring retailer's distributor takes over supplying the new locations."
In those occasional cases where the buyer's distributor does have coverage in the area, an arrangement may be made whereby the seller’s distributor maintains some or all of that existing business.
Most distributors are well-prepared for M&A situations and have well-thought-out transition plans in place to assist retailers in integrating newly acquired stores.
The first step, Dresser said, is asking: What can the distributor do to make the transition fit the retailer's needs? He speaks from experience as he is a retired Core-Mark executive.
"Let's assume a highly branded name buys a regional chain. One of the things that gets involved real fast is proprietary labeling. Will it go into the new stores right away? Will the wholesaler need to put the retailer's product in the stores right away? That's something that has to be worked," he said. "If they do need some type of cup or mug, whatever it may be, it has to be ordered right away or in conjunction with the rebranding at the store. That's a critical thing.
“Just like those proprietary items, some of those smaller chains that get acquired don't want any change or try not to make any changes to their product line. Others may say 'we are carrying this can of corn instead of that one,’” he continued. “That's the big step once the decision is made to change wholesalers. Can the wholesaler deliver the ability to distribute the things that are required?"
WHEN THE STARS ALIGN
While integration of the two supply chains is an integral part of any M&A transition, it can run rather smoothly if both retailers already use the same wholesaler.
“Relatively easy” is how George Abdoo, vice president of business development at S. Abraham & Sons Inc. (SAS), describes the transition process when one retailer currently serviced by Grand Rapids, Mich.-based SAS acquires another SAS-served retailer.
"We establish customer numbers for the newly acquired locations, route the new locations, and ask for volume information by item, by customer for the new locations, then add that information to our ordering systems to ensure adequate inventory levels to supply the additional locations," he explained.
"Then, we coordinate the merchandising team to reset and tag the locations the first week we begin serving the stores. The stores are reset and tagged following the retailer's existing planograms."
On the other hand, when a retail chain account is new to SAS, the company begins with those same steps outlined above, but a UPC item listing from the chain's price book is matched to SAS' current inventory to identify manufacturer discontinued items, in and out shippers, and any items the wholesaler doesn't currently carry. The identified items are then reviewed, with SAS recommending substitute items.
Once the item list is approved and finalized, it is downloaded into a custom price book with the retailer’s recommended retails. SAS will also make arrangements to stock the proprietary items the retailer currently utilizes.
In either scenario, the key to keeping on track is communication. For instance, SAS holds weekly conference calls to ensure all transition steps are completed within the established timetable. These conference calls include personnel from the retailer's operations, marketing and IT departments.
As the vice president of business development, Abdoo is the one who leads the SAS team, which has a comprehensive checklist and timetable established to use as a guideline.
The week before the transition, meetings are conducted with the store managers and other key personnel. There may be several meetings held depending on the geographic territory and timing of the transition, according to Abdoo.
He acknowledges that a retailer may choose to use more than one distributor, but said it could be "a little more cumbersome for them to do so. They have to maintain two price books, one for each wholesaler they use; duplicate communications and promotional activity with both distributors; as well as communicate these activities for both wholesalers to the vendor community.”
Many times, a key deciding factor in choosing a wholesaler is price. SAS, for one, recognizes this and understands its pricing needs to remain competitive. Aside from price, Abdoo cited value and quality of services offered as additional key deciding factors.
There are many questions a retailer may ask:
- What distinguishes SAS from the competition?
- What “value-added” programs and services does SAS offer?
- What is the level of customer support?
- What are the criteria for bringing in proprietary items?
- What is the speed to market on new items?
- How does SAS assist customers with planogram development and technology support?
- What is the timeliness of responses to questions or issues?
"It's very difficult to put a dollar figure on these 'value-added' services and programs. This assessment of quality and service is a key component in the decision process as their value is multiplied long term to our customers," Abdoo concluded.
Editor’s note: Check out the March issue of Convenience Store News for our full report on the c-store M&A market, including this year's ranking of the Top 20 Growth Chains. A digital edition of the issue can be accessed by clicking here.