Is This the Golden Age?

“Retail continues to perform well.”

“Our retail segment performed well, achieving record fuel sales volumes.”

“[We] experienced significant sales growth in all major areas of our business, especially inside our stores.”

“In our retail business, we saw an increase in same-store fuel volumes, fuel margins and merchandise sales, resulting in a record quarter from a profit perspective.”

“The U.S. continues to perform better than most of the rest of our geography. Miles traveled are very strong.”

These statements, made by executives at Alon USA Energy Inc., SuperAmerica LLC parent Northern Tier Energy LP, Casey’s General Stores Inc., Western Refining Inc. and Circle K parent Alimentation Couche-Tard Inc., respectively, were just a sampling of the comments CEOs made in November about strong convenience store operations for their 2015 fiscal third quarters.

Despite an economy showing signs of both strength and weakness, several pure-play, publicly traded convenience store operators and retail divisions of larger oil companies alike reported record earnings in the latest quarter for which results were reported. And even for those retailers that did not report record results, most could at least boast that their 2015 third-quarter earnings far outpaced what was achieved in the same quarter the prior year.

Convenience has certainly bucked the trend of most other retail channels, which have struggled mightily in recent months. Is this the golden age of c-store retailing? Are low fuel prices the sole reason for these record results, or is something much bigger at play?

Dennis Ruben, executive managing director of Scottsdale, Ariz.-based NRC Realty & Capital Advisors LLC, believes it’s not a stretch at all to say now is one of the best times in history to be a convenience store retailer. C-store operators are taking advantage of perfect conditions in their industry. Low gas prices are combining with dramatically increasing fuel margins, according to Ruben. Gas prices are expected to remain low for the immediate future, another positive on the side of c-store retailers.

“Everything is coalescing,” he said. “People have more money to spend. Instead of just buying gas and struggling, they are going into the store and buying an extra hot dog or pack of cigarettes. People have more disposable income, so it is providing a dual effect for [c-store] retailers. They are having bigger profits on the fuel side and significantly greater in-store sales.”

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, has been bullish on c-store industry pure-play stocks, citing the same factors mentioned by Ruben. “We believe in-store sales continue to benefit from lower retail gas prices, which is driving increased foot traffic for in-store purchases and consumers’ ‘up-trading’ to premium-branded merchandise,” she said.

During Convenience Store News’ Fuels & Tech Summit in Riviera Beach, Fla., last month, a group of 15 convenience store retailers were asked if now is the best time ever to be a c-store retailer. Although the respondents certainly expressed concerns about stiff competition in their markets and were skeptical how long this excellent environment would last, most agreed today is at worst a “really good” time to be a c-store operator.

“It’s a great time for a lot of retailers,” said one attendee. “We are seeing great margins.” Another remarked, “Warm weather is really helping in-store sales.” And a third retailer summed it up this way: “We knew if we got through the tough times of a few years ago, things would get good.”

COMPETITIVE ADVANTAGE

Unlike other types of retailers, c-stores have one distinct advantage. The industry is what Ruben calls “recession-resistant” and unlike other retailers, c-store operators don’t need to worry about online retailers like Amazon.com disrupting their business models.

“People will always go to the convenience stores,” stated Ruben. “The question is how much they spend there. As long as people need gasoline, they are going to stop and buy some other things. The convenience store industry isn’t as affected by economic trends.”

In fact, c-store operators are doing so well in terms of both forecourt and in-store sales that it could cause a slowdown in merger and acquisition activity, Ruben hypothesized.

“Even though purchase price multiples are at an all-time high right now, people are struggling with the idea if they should sell or not,” he explained. “They are making so much money, they don’t want to sell. Also if they sell, they are questioning how they could get the same kind of returns by investing the cash they receive [from selling]. There are a lot of dilemmas for people because of the success they are having. They want to just ride this wave right now.”

IT’S NOT ONLY ABOUT FUEL

Of course, low fuel prices — corresponding with high fuel margins and more money in consumers’ wallets — is the primary driving force for the record c-store earnings. However, the stores still need to have something customers will want when they enter, or they will choose to use their discretionary funds at local standalone restaurants or fine-dining establishments.

C-store operators have greatly expanded the size of their newest stores to ensure top-notch foodservice offerings are provided. CST Brands Inc. is just one c-store chain to take this approach. Its large-format stores, which the parent company of Corner Stores calls new-to-industry locations, have continued to outperform legacy stores due to strong foodservice.

The San Antonio-based retailer stepped it up another notch on Nov. 19, when it unveiled a dramatic new look and feel at a San Antonio-area location. The new store model reflects the company’s new service promise: “Simply Fresh. Always Friendly.”

Going forward, the chain’s largest stores will be known as Corner Store Markets and offer an expanded selection of fresh produce, quick meal fixings, and a made-to-order food menu with pizzas, sandwich melts, soups, salads and more. This will be in addition to Corner Store’s already popular, freshly-prepared kolaches, tacos and whoopie pies.

“Looking to the future of our industry, it’s crucial that Corner Store continues to establish a clear retail identity broader than our fuel offerings. Inside our stores, food and beverage sales are a vital and stable profit generator. With this exciting brand initiative, we are looking to not only expand those offerings, but to call more attention to the great food, beverages and service we already offer,” said Kim Lubel, chairman and CEO of CST Brands. “Ultimately, we believe this pivotal new direction will energize our existing customers, draw new ones to our stores, increase overall revenues and enhance shareholder value.”

Casey’s General Stores has also made foodservice expansion a top priority. Prepared food and fountain beverages continue to achieve double-digit increases year over year for the Midwest convenience store chain, with its most recent quarter no exception.

The Ankeny, Iowa-based company has found another solid source of additional revenue in its pizza delivery service. It continues to expand this program, setting a goal to bring the service to an additional 100 locations by the end of its 2016 fiscal year on April 30.

Just this month, Casey’s made ordering pizza and other foodservice items even more convenient with the launch of a mobile app. This move followed Casey’s recently completed implementation of online ordering across its more than 1,900 convenience stores in 14 states.

“Casey’s values our customers’ time and need for convenience,” said Robert J. Myers, the company’s chairman and CEO. “We consider innovations such as online ordering and a mobile app additional ways we can make our products and services more accessible to our customers.”

GOOD TIMES AHEAD

According to multiple reports, gas prices are expected to remain low at least for the next couple of years, meaning convenience store retailers can keep pumping out record or near-record profits.

Even when the fuel price environment is less favorable, though, c-store retailers will still have some things to fall back on — namely, high-margin foodservice items.

Since economic conditions do not often derail the convenience store industry either, the future for c-stores looks excellent and the golden age of convenience retailing should continue.

“Looking to the future of our industry, it’s crucial that Corner Store continues to establish a clear retail identity broader than our fuel offerings. Inside our stores, food and beverage sales are a vital and stable profit generator.… We are looking to not only expand those offerings, but to call more attention to the great food, beverages and service we already offer.”
— Kim Lubel, CST Brands Inc.