How Will Couche-Tard Stock The Pantry?

LAVAL, Quebec — 7-Eleven Inc. is still the largest convenience store chain in the United States, but there is a new No. 2 in town. This year, Alimentation Couche-Tard Inc. jumped up from No. 4 on the Convenience Store News Top 100 ranking thanks to its $1.7-billion purchase of The Pantry Inc.

The mega-deal closed on March 16 of this year and what’s emerged is a bigger, stronger Couche-Tard that added approximately 1,500 convenience stores to its Circle K Southeast division. As a result, the Canada-based retailer operates a total of 5,373 U.S. c-stores and 7,800-plus in North America.

CSNews recently polled convenience store industry insiders to get their thoughts on what’s to be expected from Couche-Tard given its new status. The general consensus is that the company is now on a journey of combining the best of its Circle K stores and the best of The Pantry’s Kangaroo Express stores in order to further stake its claim as a convenience retailing powerhouse.

"From within the store, when you think about the aspects of Circle K's strategy, Circle K in my view was further along with supply chain efficiency," said Ben Brownlow, equity research analyst at Raymond James & Associates Inc., noting the retailer is utilizing Core-Mark, the second-largest distributor behind McLane Co. Inc. "Core-Mark is well known for spearheading foodservice offerings that you don't typically expect at a c-store."

For its part, The Pantry maintains a supply agreement with McLane. "I think you'll see some improved execution on the foodservice side at Kangaroo sites, possibly some more consistent product offering that is also better tailored to regional demographics," Brownlow said.

On the fuel side, the merger brings improved purchasing scale and mutual shared data on fuel pricing between the two companies. "Consumers could possibly see more competitive pricing at the pump. But ultimately, I think the savings if any that consumers see will depend on how much Couche-Tard management balances competitive pricing vs. reinvesting cost savings for future growth," Brownlow explained.

Looking at what The Pantry brings to the table, he points to the retailer's success with promotional activity. "The Pantry, before it was bought out, had undertaken a multi-year initiative to deliver more relevant in-store product offerings and improve its promotional execution, like the Roo Cup promotion. The Pantry was very successful with that promotion and they are still running that promotion," he said. "While I think Circle K is further along in the product offerings, I think the company still can benefit from that promotional data and even some of the demographic data The Pantry has harvested."

Tim Powell, founder and principal of Think Research & Consulting, believes Circle K brings "excellent national recognition and is also adept at branding, particularly beverages. We may see some merging of proprietary brands, but I expect Kangaroo Express to keep to its brand to maintain a loyal base."

Strategies of The Pantry that may survive the transition include its foodservice execution and its ability to know its customers, Powell explained.

From a real estate perspective, there's a chance not all stores will survive the acquisition.

"It's kind of like apples and oranges because they have different business models," said Dennis Ruben, managing director at NRC Realty & Capital Advisors LLC. "About 75 percent of The Pantry's properties were leasebacks that involve negotiating a lease with a landlord. How many of those Pantry sites wind up staying in the system in the next five years is anyone's guess."

Analyzing the portfolio will take time, according to John Sartory, managing director at Petroleum Capital and Real Estate LLC. "I think it's going to take a while for everyone to figure out how to rationalize those assets. There are a number of Pantry sites [Couche-Tard] will probably not hold on a long-term basis," Sartory said. "They may sell some for alternative real estate use, or sell them to dealers and look to have nothing more than a supply relationship."

As for what the newly combined company means to other players in the convenience channel, Brownlow said anytime you combine the scale of top operators in the industry, smaller operators with less capital will be increasingly challenged to keep up, both in-store and on the forecourt.

For more analysis from the 2015 Convenience Store News Top 100 report, look in the July issue of Convenience Store News.