Sliding into Second

It can be said that 2014 was a rollercoaster year for The Pantry Inc. The Cary, N.C.-based operator of Kangaroo Express convenience stores began the year challenged by an investor group called Concerned Pantry Shareholders (CPS). Spurred by an underperforming stock price, CPS proposed the election of three independent board of director candidates.

CPS argued that the current board had presided over a “prolonged underperformance,” noting “The Pantry has had four CEOs in the past five years and continues to lack a strategically coherent plan to stop the value destruction.”

The group’s concerns were heard and in March 2014 The Pantry’s shareholders voted for change, electing three new members proposed by CPS to the board of directors.

The Pantry again grabbed headlines late in 2014 with news that it had quietly put itself up for sale. Alimentation Couche-Tard Inc. emerged as the winning suitor. The roughly $1.7-billion acquisition agreement closed March 16 of this year — almost a year to the day that The Pantry’s shareholders cast their votes for new blood on the board.

What’s emerged now 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 7,800-plus stores in North America.

So, what happens now? According to industry insiders, Couche-Tard embarks on a journey of combining the best of Circle K and The Pantry’s Kangaroo Express and further stakes its claim as a convenience retailing powerhouse to be reckoned with.

“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 deal brings an 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 that The Pantry has harvested.”

Tim Powell, founder and principal of Think Research & Consulting, believes that 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 added.

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 involved 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.”

Finally, what does this combined company mean to other players in the convenience channel?

The way Brownlow sees it, anytime you combine the scale of any of the top operators in the industry, smaller operators with less capital will be increasingly challenged to keep up, both with the in-store offerings as well as the competing fuel prices.

“Broadly speaking, what you’ve seen with not just Couche-Tard and The Pantry, but with ETP [Energy Transfer Partners] and Susser [is that] the industry consolidation as a whole is a greater threat to the mom-and-pop operators vs. operators like 7-Eleven, which are better adept to keep up with these changes,” he said. “7-Eleven always has the scale and capital to compete. It is on the same footing.”

Speaking of 7-Eleven, the No. 1 c-store chain does not need to start looking over its shoulder, according to the industry experts.

“I don’t see it directly affecting 7-Eleven. There is still no national c-store chain. There is no McDonald’s in our industry. 7-Eleven will focus on expanding in those areas in which they can logistically,” said Brownlow.