Inside the Clark Collapse

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Inside the Clark Collapse

By Mitch Morrison - 07/14/2003
Tanned and brimming with confidence, Brandon Barnholt, CEO at Clark Retail Enterprises Inc., called up leading vendors to a dais at a posh Amelia Island, Fla., resort. His purpose on this warm autumn evening in 1999 was to recognize their role in helping build one of the fastest-growing convenience brands in the country.

Less than four years later, that confidence is gone. Clark is liquidating. The great rollup company, unable to fulfill its mission to consolidate the fragmented midwestern market, will be carved into small and medium slices. Clark will be remembered as one of the industry's great underachievers.

A spinoff of refiner/marketer Clark USA (now Premcor), Clark Retail rode into the 21st century on the enthusiasm of cocky 30- and 40-somethings who exuded self-confidence and were backed by a well-financed New York investment group called Apollo Management LP.

Led by executives Barnholt, CFO Jeff Jones and Director of Marketing John Matthews, Clark, cut from its refining moorings, embarked on a purchasing frenzy, picking up eight chains totaling 500 stores.

With the acquisition of the venerable White Hen Pantry, and also Jacksonville, Ill.-based Wareco Services and Bowling Green, Ky.'s Minit Mart Foods, Clark stood among the elite of the convenience retailing universe — or so it seemed.

The deals kept coming, but internal cracks grew wider. So when the company filed for Chapter 11 reorganization last fall and then months later said it would dissolve, industry players were not necessarily taken aback.

"I'm not the least bit surprised," said Jay Ricker, president of Ricker Oil Co., an Indianapolis retailer that directly competed against Clark in several markets. "In my opinion, they created their own problems."

Ricker was referring to Clark's notorious gas-slashing approach. While some likened it to that of ARCO, a West Coast bottom feeder that generally stays a nickel or so below street price, Clark's pricing, in truth, was far more aggressive — and agitating.

"It was ludicrous," said Ricker. "You never want to see somebody go out of business. I don't wish ill on anybody, but their pricing was so erratic. They caused a lot of their own problems. They drove margins to the floor and forced everyone to go down with them.

"They could have been the low pricer in the market, but they went down so low that I couldn't imagine how they could make a profit," he observed. "What I heard was that the manager of a store could change the prices. I don't know if that's true but it sure seemed that way."

Executives at Clark and Apollo Management declined comment for this story.

But more than a dozen interviews with industry executives, financial experts and former Clark officials show a retail company that was driven on image and acquisition, not operations or product quality.

Moreover, Clark, once brimming with some 1,300 stores, was saddled with a heavy load of small lots dotted with kiosks or footprints that barely exceeded 600 square feet. With so little store space and bottom-dollar gas prices, the company wrote a recipe for cashflow misery.

"The only thing that surprised me was that they lasted as long as they did," said one former Clark official, who spoke on condition of anonymity because of close connections within the company. "Their whole focus was about image and buying more chains, not about operations and running the company.

"I would say that their greatest asset was to get other people to give money. They were masters at that," said the official. "It seemed like the plan was to grow it fast enough to go public and then sell it. To me, it was all smoke and mirrors."

Industry Shaken

Clark is merely the most recent in a string of convenience chains to fold or be put for sale. But the loss of the industry's 14th-largest operation should not be dismissed or understated.

Put into perspective, Clark's peak store count of 1,300 nearly equaled that of Swifty Serve, Dairy Mart and Fas Mart combined.

"This is pretty big. Others should take notice," said Joseph Sands, partner at Spectrum Capital Group, the restructuring/bankruptcy consultants based in Albuquerque, N.M. "Personally, I see more trouble ahead. We continue to receive inquiries from companies for help. We're seeing more companies getting their heads out of the sand because there are real problems that are not going away."

Sands, echoing comments from other industry leaders, foresees a substantial fallout over the next five to 10 years. "Everyone says we're over-stored and we could see a haircut of 30 percent. Where that 30 percent comes from will be interesting."

Indeed, the convenience and petroleum channels should take note of the swift fall of these leading chains, said Evan Gladstone, founder of Chicago-based National Real Estate Clearinghouse, the auction house charged with selling off 632 Clark stores and service stations in nine states. "The industry is undergoing massive changes. With Swifty Serve and Clark going out of business, it's important for the industry to know what are the opportunities, what are the pitfalls, what went wrong with Swifty, what went wrong with Clark.

"It's clear five years from now that the whole landscape will be significantly different. The bankruptcies are just the symptom of deeper problems."

A few years ago, excitement was in the air. It was the second half of the 1990s. Investors known as The Blackstone Group walked in, plunked down a lot of money and bought Clark USA Inc., a refiner/retailer operation.

For Barnholt's retail division, however, enthusiasm swiftly ebbed into boredom. While Blackstone invested generously in the refining assets, it showed little interest in the retail side. "Having everything being put on hold was very frustrating," John Hamer, former operations executive vice president, said in a 1999 interview, reflecting on the Blackstone experience.

Then a bolt of opportunity struck. Blackstone split the divisions and put the retail unit on the market. An aggressive New York investment group, Apollo Management, swept in with $230 million for the 671 company-run and 200 franchised stores.

In the next year, the refining wing changed its name to Premcor Inc. and the retail entity became Clark Retail Enterprises Inc.

With new beginnings came a generous expense account that encouraged Clark's leaders to go shopping — not necessarily for bargains, however, nor for the best in quality. While Clark plucked some fine operations, most notably White Hen Pantry — which experts today describe as the portfolio's crown jewel — it also acquired tired, aged units that it continued to run with only cosmetic touchups, at best.

"They were not known for investing much in their assets," said a chief executive at another sizable convenience store chain. "It didn't help that the original Clark stores that Apollo bought were old, small and strictly one-dimensional — gas."

Ricker agreed. "They were old, obsolete locations," he said. "What I remember best is that they used to carry mulch that they sold outside their stores in the summer. And it might sit and sit and they'd still be selling the mulch in the fall."

The Clark team seemed to thrive on the hustle and bustle, the excitement of the game. Clark was like a skilled gambler, attracting high rollers to the table, enticing investors, sellers and industry types. But sources say the company's paperwork was sloppy, accounting rarely accurate and its leaders without patience when putting together a deal. That lack of staying power at the negotiating table, while not the achilles heel behind Clark's descent, resulted sometimes in overpayment for feeble locations.

Further, Clark relied too much on store managers to go up against some strong competitors in the markets, yet did not deliver the assets to offer wide-ranging cooler programs, expansive foodservice or other high-revenue generators.

"They had so many structural and operational problems that were not comfortable," said the official close to the company. "They have a lot of bad stores. Those kiosks and little biddy stores couldn't generate enough money. The only thing that kept them going this far was White Hen Pantry, which is a franchise operation. When the franchisees are doing a better job, that tells you what poor operators they [Clark's leadership] were."

Bill Krause, president of Krause Gentle Corp. in West Des Moines, Iowa, has battled Clark in several markets the past several years. He does not deprecate Clark's competence nor does he revel in its demise.

Rather, he attributes the chain's fall to its portfolio. "Too much debt, too many gallons," he said, noting the hundreds of smaller lots. "They depended on too many gallons as opposed to inside store sales."

The way Krause sees it, Clark's collapse, like that of the growing list of financially failing companies, portends a frightening reality for the convenience channel. "When blood is flowing faster than the Mississippi, you don't have any choice. This is why c-stores have such low resale value. You cannot generate enough profit if you have anything but the ideal conditions.

"Too much debt was created by overzealous lenders and, as a result, too much perceived value left these chains vulnerable. Then the lenders left."

Looking at Clark and its chief investor, Apollo, Krause said, "A successful business needs luck, timing and money. If you don't have luck or timing, money doesn't always make a difference."

He also said that once Clark voluntarily filed for bankruptcy protection to ward off creditors, its fate had been sealed. "What was the last success story that came out of bankruptcy? I'd say Circle K, perhaps 7-Eleven. You can write a lot of stories about those that didn't make it and there's a reason for that. There's no wiggle room in your income statement to do anything. You're stuck."

Yet, there were hopes within Clark that it would emerge as a 500- to 600-store operator, riding the White Hen Pantry coattails while divesting itself of the smaller, more cumbersome units. "There was a good plan, which was to leverage the larger stores and the White Hen Pantry stores. The Clark people just ran out of time," said a source familiar with the bankruptcy proceedings, who spoke on condition that neither he nor his affiliation be identified.

"The problem was that Clark was hit with a credit squeeze and a cash crunch," the source said. "They were sophisticated analytically and financially, but the credit terms, especially concerning gasoline supply, could not be met. At the end of the day, it became clear Clark wasn't going to make it."

Early Hope

Actually, some reorganization experts held out hope that Clark would recover. When it filed for bankruptcy, Sands, the restructuring expert at Spectrum Capital, praised Clark, contrasting them favorably with Swifty Serve, the North Carolina chain that abruptly shut its doors last fall and left several thousand employees without work or health coverage.

At the time, Sands said Clark posed as the model for how to seek bankruptcy protection. He wasn't alone. Others praised Clark for assembling an impressive entourage of legal firms and financial experts to survey each unit and lease, and prudently prune the lame fruit from a potentially healthy business.

Indeed, Clark smartly secured a $56.2-million debtor-in-possession (DIP) financing from Apollo to finance continued operators and payment to vendors and employees. It also retained Latham & Watkins, a prominent law firm; and investment banker William Blair & Co. to separately handle the sale of White Hen Pantry, the 250-store division that was not included in the bankruptcy filing.

At the behest of financier GE Capital Franchise Finance Corp., Clark also began paring weaker stock from its portfolio. According to the docket filed in U.S. Bankruptcy Court's Northern District of Illinois, Clark sold 98 stores in the Michigan and Ohio markets to Fast Track Ventures LLC (Simon Holdings), 13 units in Michigan to Blarney Castle Oil Co., and several single sites to assorted buyers.

There were questionable decisions. After Clark sought bankruptcy protection last fall, industry veterans expected the embattled chain to overhaul its operations, to hike fuel margins, dump cash-poor stores and bring in a turnaround operations specialist.

Other than relinquishing units, the chain did little to improve its operations. Now it has moved forward to auction off its 600-plus company-controlled stores, as well as seeking a single buyer for White Hen. "Clark intends to work through this process carefully so that all alternatives can be properly evaluated, and the highest value can be achieved for the estate and its constituents," said John Matthews in early May. Matthews was vice president of corporate communications at the time. He has since accepted a position as president of a casual dining chain.

Two years ago, Robert Katz, senior partner at venture capitalists Apollo management, made a bold prediction: "We could get this chain to 3,000 or 4,000 units within the next few years."

A year later, some of the luster started to tarnish. After 12 months of silence on the acquisition front, Clark, facing intensifying pressure on fuel margins from suburban big-box giants Costco, Dominicks and Meijer, acknowledged that times were tough. Indeed, in May 2002, a CSNews Online headline read: "Is Clark Retail for Sale?"

Sources said yes, but Clark's top officials denied it. A former ranking Clark employee said then, "Apollo bought them at a premium price. They were expecting a high return and they never got it."

In interviews at the time with CSNews, Clark CEO Barnholt confirmed the chain was divesting stores in low-concentration markets and had furloughed dozens of employees to shrink overhead. He also admitted that revenues had been injured by falling gasoline margins. But Barnholt — and Apollo's Katz — reinforced the image of a stable company keen on long-term growth.

Said Katz, "I can say categorically that there's been no decision to get out of the convenience store industry or to sell Clark."

In spring 2002, Clark switched wholesalers, supplanting Fleming with McLane. It also worked to streamline many of its diverse assets.

In a few months, those changes would matter little. The company filed bankruptcy in the United States Bankruptcy Court in the Northern District of Illinois. Fitch Ratings blamed Clark and Swifty Serve for more than half the $450 million in new defaults in the convenience and gas sector in the fourth quarter alone.

"Had they been a little more responsible, they might still be in business today," Ricker said of Clark. "But based on the properties I saw, there was no way in hell they could stay in business."