Like Death & Taxes, Change Is Inevitable
Dollar-store competition heightens competitive environment for c-store retailers
Recently, I had someone mention to me that there are three things that you will not be able to escape from in life. Having heard this before, I already knew they were going to say death and taxes, but I had forgotten about the third one: change.
I have discovered over the years that the one thing most feared by the majority of the people in this world is change. Why? Because change is extremely hard for the majority of people to accept.
Whenever you are involved in something that involves change, you are dealing with the unknown, and the unknown frightens people. What do people generally do when they are frightened or fearful? Nothing. They continue to do the same things they have been doing in the past and ignore the change that is occurring.
Sometimes this is called denial. It reminds me of the definition of insanity: “continuing to do the same thing but expecting different results.”
So what does all of this have to do with the convenience store industry? A lot because convenience stores have to change their way of thinking if they are going to continue to thrive and grow.
I have been involved in the convenience store industry for more than 15 years, first as a convenience store owner and operator then as a business broker who specializes in the sale of convenience stores, and now working with multi-store owners and major convenience store chains around the country in the acquisition and selling of convenience stores. So I am fortunate to have a very broad view of the industry from the single-store owner to the multi-store owner operating anywhere from dozens to sometimes hundreds of stores.
I have a rule of thumb about the profitability of convenience stores regardless of whether the store is owned by a large company or an independent. Generally, when an operator owns a number of convenience stores, one-third of the stores will be what I call “A” stores.
An “A” store is relatively new the building is of adequate size to contain all of the necessary products to serve the customer base in its market area; it has a large lot for parking; and it has a great location. These stores are generally cash cows. They generate consistent cash flow and everyone loves owning an “A” store and wants to have nothing but “A” stores.
The next one-third of stores are good stores that at one time were “A” stores, but have gotten older and their locations are not as good anymore, or competition has come into their market. The store is profitable but it is not an “A” store and chances are it never will be an “A” store again.
Finally the last one-third of the stores are “dogs.” They are generally breakeven stores that over the years have continued to drop in sales and profitability. Their location is now poor or mediocre at best because the traffic pattern of the area has changed; the building and lot are too small to service the marketplace; and maybe the demographics of the area have changed too. The place is a drain on the operational staff and it generally has the weakest employees therefore exposing the operator to greater liability from theft slips and falls, loss of product and other bad things.
If there are 149,220 convenience stores in the United States and my rule of thumb is that one-third of the stores are “A” stores, then there are approximately 49,243 stores that are really good cash cows.
Meanwhile, let’s look at the growth of the dollar-store industry. Dollar General has 11,000 stores and has publicly said it is going to be opening another 650 stores. Dollar Tree has 4,800 stores and Family Dollar has 8,000 stores. With the planned growth of Dollar General and the other various dollar stores in the United States, you are above 25,000 stores and growing at a very rapid rate.
Convenience store operators rightly worry about dollar stores, which are selling or have announced they will soon be selling more food and tobacco products. Some are even testing the sale of gasoline. All of these are key product categories at c-stores. The dollar-store competition is coming and these chains are not going to be opening next to your middle one-third or your “dog” stores. They are going to be building as close as they can get to your “A” stores.
I understand that not all of their stores are in “A” locations either, but they have the upper hand of building from scratch and a multitude of commercial real estate investors who are anxious to do build-to-suit stores for them, which reduces their entry costs into the marketplace. So, unless you are located in a high-growth area of the United States (and to my knowledge, there are not very many growth areas in the U.S. presently because we are still trying to dig out of the economic hole we have been in for the past five years), you had better get ready for this new competition.
I was educated lately about dollar stores when I had the opportunity to sell a chain of convenience stores to Circle K, an excellent c-store operator. When the issue came up that a dollar store might possibly build on a parcel of land that my seller owned, Circle K immediately wanted the property deed restricted to deter the building of a dollar store. You should read the language that was put in the deed restriction.
I hope I’ve revealed to you the reality that change is coming to a convenience store market near you — but that change doesn’t have to be all doom and gloom.
Remember my rule of thumb about one-third of the stores being cash cows or “A” stores, one-third of the stores being “B” stores, with the remaining one-third labeled “dogs.” Operators need to get rid of the dogs immediately. Sell them, lease them, convert them to another use or close them. Whatever you have to do, get them off the books. Remember, they are a liability.
I have sat in front of too many convenience store owners with the profit and loss statements revealing they were dogs. Although they said they would close them, the minute I walked out the door they would change their mind. And you know what? They are the ones I read about later who sold or lost their business because of their own procrastination and not taking action to get rid of their underperforming stores.
After getting rid of the dogs, operators must immediately work on making their “A” stores great. One of the best pieces of advice I ever got was from one my vendors in Cleveland, Ohio, when he asked me what I was doing one day and I said that I was busy working on some of my underperforming stores and trying to make them more profitable. He said you are looking at the situation backward. He said you never want to invest your time or money trying to make your bad stores good, but instead you should be working daily on making your good stores great!
That is why he was a very successful businessman and he instilled in me a lesson I never forgot. I hope his advice makes its way to you so that you will be ready and ahead of the coming competition and change in the marketplace by working to make your best stores great in the marketplace. I wish you much success in the future, and embrace the upcoming change.