Branching Out

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Branching Out

By John Lofstock - 11/19/2001
Forget Tom Cruise. Never mind the high-tech gadgetry. Scott Stevens and Andy Weber are on a mission, and it's not impossible. But unlike the movies, there is no script for this mission, and a couple of bad moves could spell the difference between a blockbuster hit and a box-office disaster.

Stevens is the star of a new convenience store trilogy headlined by an all-star cast of industry veterans. As COO of convenience store operations for Eagan, Minn.-based Roundtree Markets Inc., an investment group managing three convenience store subsidiaries, his mission is clear: to continue the kind of growth that propelled his convenience store and petroleum business onto Convenience Store News' list of Top 50 Convenience Store Companies this year.

Roundtree's August acquisition of 106 stores from Owatonna, Minn.-based Avanti Petroleum places it even with Altoona, Pa.-based Sheetz Inc. for 46th on the list with 237 stores.

The three convenience store chains operated by the Eagan-based retail company are:
* Good Times Stores, a 56-store chain in the El Paso, Texas, market, all under the Chevron brand.
* Twin Cities Stores Inc., with 75 Oasis Markets in Minnesota, with the majority (63) branded Amoco.
* Twin Cities Avanti Stores LLC, also in Minnesota, which consists of 106 stores under c-store brands such as Oasis Market, Food 'N Fuel, Budget Marts and Happy Dan's. Of the 106 stores, 74 are branded Mobil, 13 Texaco and 19 are unbranded.

Understanding how this complex consortium of convenience companies works is a lesson in economics. Roundtree Markets is a division of Roundtree Capital Inc., a private investment company with a strong focus on retail business. California entrepreneur Bruce Nelson, who developed Roundtree Markets to serve as the company's retail marketing arm, chairs Roundtree Capital.

Stevens and Weber, the company's CFO, are quietly transforming Roundtree into one of the dominant convenience store companies in the Midwest. So while many businesses in the United States are seeking bankruptcy protection, this dynamic duo is committed to working long hours each day in an effort to make the company more profitable than it was the day before. It's this drive and persistence that has Roundtree Capital on the fast track to industry stardom.

"Unlike many other businesses, this industry requires a high level of dedication from the top down to store-level employees," Stevens said. "We all like to see good results. But employees have to believe in management and believe in the company's strategic direction so they can go to work every day confident in their abilities and with a clear understanding of what their objective is."

Roundtree recruits and keeps employees by offering benefits and incentive programs. The company also encourages employees to feel ownership for their stores and take pride in what they do. "When employees enjoy what they do they pass that energy onto the customers," Stevens said. "It's contagious and it contributes to a pleasurable shopping experience."

Growing the Business
Roundtree's aggressive growth strategy and strong financial portfolio can be traced to its chairman. "Bruce Nelson brings a career of Wall Street experience to our financial management of the company," Weber said. "With respect to acquisitions, we are flexible and creative in their structuring and enjoy the financial engineering to accomplish them. Our growth has come primarily from acquisitions; however, we are after profitable growth, not simply increasing store count."

Avanti was an excellent fit for Roundtree because of its good locations and strong potential for increased sales. The majority of stores were new, situated on high-volume corners and concentrated in the Twin Cities market, where Roundtree already maintained a stronghold.

"Of the 106 stores we acquired in Minneapolis, there were maybe one or two conflicts at the most," Stevens said. "We saw a lot of opportunities for corporate synergies within our organization and we already had the infrastructure set up in this market so our entry costs were very minimal. Yet, the biggest issue we felt was that the stores were underperforming."

While poorly performing stores are a bane to many operators, finding a cluster of stores not reaching their potential in a competitive market like the Twin Cities is like discovering gold for Stevens. "When we began doing due diligence on the Avanti stores we saw good assets with proven sales and an excellent staff. That's the perfect infrastructure for building a winning business," he said.

What the stores lacked, however, was guidance. The synergies between the acquired Avanti stores and Roundtree were noticeable. For example, both chains used PDI's accounting system "so incorporating technology for reporting purposes was easy," Stevens said. "We had a good comfort level with the understanding and interpretation of the data yielded by the PDI system. Although it required a lot of work, it wasn't anything we were unfamiliar with."

All store-level managers and employees were retained, but executive personnel was cut at Avanti's corporate offices. Despite having 106 stores in the Twin Cities market, Avanti operated three offices, one each in Denver, Eagan and Owatonna. Within weeks, Stevens went to work closing the Denver and Eagan offices and forwarded a plan to close Owatonna. Avanti's operations are now in the process of being consolidated to Roundtree's Eagan facilities. "This is a game of pennies and it needs to be managed that way," Stevens said.

Consistent with its goal of achieving economies of scale in its marketing areas, Roundtree looks for a concentration of 30 or more stores in a market before moving in. For example, the company has more than 175 stores in the Twin Cities market, which makes it more attractive to fuel suppliers and wholesale distributors, who also are looking to streamline their businesses.

The group has taken advantage of the concentration of stores in the Minnesota market. "There is a tremendous benefit to leveraging your existing asset base," Weber said. "We didn't necessarily start out with that plan, but as we got bigger we began to see just how much buying power we had as other companies began fighting for our business."

Though it has the Twin Cities market covered, Weber said the company might continue to grow there. "We are always looking for good opportunities and we would love to continue finding new business in our own backyard," he said.

Roundtree believes today's economic climate is ripe for expansion. "If you look at the convenience store market, there are a lot of struggling chains," Stevens said. "We feel we have the formula for turning around underperforming companies and the ability to optimize existing operating units — all of which is upside."

"In the long term, to survive in this industry companies need to get bigger," Stevens said. "More and more you see new competition and tighter margins, and you need to make up for it by finding efficiencies within your organization or you're not going to have enough profit to support overhead."

Weber agreed. "We see continued opportunity in our industry for acquisitions, especially for operators who have weathered the recent challenges — whether they are economic, financial or competitor related. From our company's perspective, we are fortunate to have good relationships with our lenders who are willing to partner with us for the right opportunities."

When considering a potential acquisition, Roundtree closely evaluates its possibilities and how they would fit into the company's corporate culture. Stevens and Weber prefer to target chains that have good store-level management, but are underperforming.

"Those are the companies that make good acquisition targets for us because of the strength of our management team," Weber said. "We excel at identifying trouble areas and implementing strong leadership to create the synergies and economies of scale convenience companies need to overcome low margins."

The key, Weber added, is acquiring stores that are a good fit. Factors such as location, competition and target consumers all play a part in the company's due diligence.

Stevens said conflicts were limited to a few instances where Roundtree previously operated a store on a corner opposite an Avanti unit. The company is still evaluating the stores' sales data to make sure it's not cannibalizing sales or hurting margins in the market. In terms of organizational conflicts, the only problem the company encountered was having stores with exclusive soda distributors.

Technology is helping the company streamline operations and integrate the new units. All of the stores are currently scanning, with the exception of the recently acquired Avanti stores, which are being retrofitted to include the POS system.

"We anticipate going through each store and doing major resets and implementing technology to take advantage of scanning," Stevens said. "We want to work toward item-level receiving and electronic invoicing and the other advances that would put us in front of the pack and not behind it."

The company's POS solution was a shared effort between Pricebook Solutions, a local technology firm, and an in-house MIS staff in both Minnesota and Texas.

With respect to daily operations, Weber said the company is very analytical in its approach. Roundtree prefers investing in programs that historically have a strong return on investment (ROI), but also have the potential to provide for long-term stability. These ventures include car washes, foodservice programs and implementation of technology. Other areas, such as marketing programs, supplier contracts and cost containment are evaluated regularly.

"Our willingness to invest in technology is one example of how we are gaining a competitive edge over other marketers," Weber said. "It allows our store associates to focus on sales, customer service and store issues rather than the paperwork. At the same time, it gives us more and better data to serve our customers. The productivity increase is harder to measure, but is certainly a part of our consideration in technology investment."

Food for Thought
While companies throughout the industry are struggling with the current economic downturn, combined with poor margins and the volatile tobacco category, Roundtree's convenience stores are reaping the fruits of its foodservice investments.

Roundtree recognized the importance of foodservice nearly five years ago and operates according to a mandate of close management, seamless distribution and accurate planning. According to Stevens, foodservice margins are precarious and, if not managed properly, could become nonexistent. To maximize foodservice profits and effectively meet the demands of on-the-go customers, the company parted ways with its co-branded partner, a national sandwich chain, to develop its own line of products for company-owned stores.

The Oasis marketing brand has grown to include:
* Oasis Markets bottled water;
* A proprietary Dakota Coffee line;
* Oasis Kitchen hot and cold sandwiches and burritos; and
* Oasis Kitchen bakery, which consists of cookies, cakes, muffins and breads.

The company operates two commissaries under its foodservice subsidiary, Sundance Foods Inc. The Oasis Kitchen commissary handles the foodservice demand of company-operated stores in Minnesota, while regional foodservice supplier La Cocina shoulders the load for stores in the Texas market.

"We developed the foodservice line to get rid of old paradigms that said you couldn't get fresh food at a convenience store," Stevens said. "Our stores provide value-driven, high-quality products and excellent customer-service support."

Proprietary foodservice, according to Stevens, offers "positioning and points of differentiation, in terms of offering an alternative to what other traditional c-stores are offering." And, since Roundtree also does its own direct-store distribution (DSD) through a company-owned fleet of 10 trucks, it can ensure timely deliveries and control cost.

The commissaries also fill a valuable role for store managers by doing all of the ordering. Thanks to the company's POS system, foodservice category managers at the commissaries can look at each store's sales data and determine popular items not to mention spoilage on a day-to-day basis. In addition, they can set appropriate inventory levels to minimize that spoilage. And since the company manages its own DSD network, it can schedule additional deliveries to a particular store during a particularly busy period.

The commissaries opened more than three years ago, but the company is still evaluating just how effective they have been. Since the company implemented POS last year, it's been difficult to quantify how much sales have improved. Still, Stevens asserts, sales are improving. "What we have noticed is that certain products do well in some stores and other products do well in other stores. The key for us has been matching product mix with the demand," he said. "Now with the implementation of scanning we can do more fact-based decision making that we previously could not do to make sure that we are not missing an opportunity, no matter how small, at any one of our stores."

Howdy, Partner
Solidifying relationships and partnerships is one of the most challenging aspects of the convenience store business. But as Roundtree continues growing it needs to use its "muscle as a large-scale retailer to create favorable buying situations," Stevens said. "The bottom line is you have to have local management to do that."

The lack of local management hurt Avanti. Under Stevens' leadership, he is confident the stores can reduce expenditures, lower overhead costs and enhance their buying power. "The opportunities to increase profits are not always visible. You need to stay committed to a strategy and be willing to get down in the trenches to identify them and go after them," Stevens said. "That's how the game is played."

Stevens entered the game after relocating from the East Coast to Minnesota. "I live and sleep this business, and that is all part of getting the job done right," he said. "You have to be here and you have to be committed. I want to get [the Avanti] acquisition fully integrated and then I want to grow the company again."

Front-line employees are a crucial part of Stevens' strategy. "The beauty of our business is that we have good assets, proven sales and great people working for us. Certainly that is going to make us successful going forward," he said. "But I always remind our employees that it's fun to be a part of a team that is growing and expanding, but now comes the hard part. We have to play the game. We are going against a fierce opponent who doesn't want us to win. That's the way we have to treat our competition."

The competition in the Minnesota market includes Holiday Station Stores and Speedway SuperAmerica. BP plc was a player in the market after its 1999 acquisition of Amoco. But as part of the Federal Trade Commission's consent for the takeover, BP was forced to shed some of its midwestern assets. In fact, Roundtree benefited from that deal by gaining the distribution rights to eight BP convenience stores in Minnesota.

Eye on the Prize
Roundtree's ability to focus on the long run can be seen in some of the decisions the company made several years ago. For example, Stevens developed a plan to consolidate the operations of acquired companies to Eagan long before the Avanti acquisition. When the company opened its Eagan headquarters in 1998 it acquired a warehouse available next door at a cheap rate. "I said, 'We're going to grow the business. This is the perfect vehicle to grow our corporate office,'" he said.

The financial team agreed, Weber said, and construction began to link the two buildings together. "We are going to move Avanti's operations right into our own building with very little cost," he said.

As Stevens and Weber continue to battle the competition using technology, foodservice and business savvy, they are keeping an eye open for their next move. Though they declined to identify potential new targets, they warned to stay tuned for part four of their convenience store mission.