Wells Fargo Forum Takes Stock of C-store Industry
LAS VEGAS -- It was a year of transformational deals, a continuing decline in gas prices, merchandising evolution as some categories rose (foodservice, packaged beverages and vapor products) and others lost momentum (electronic cigarettes). It was also a year of increased competition from outside the convenience store industry and a further blurring of the lines between the traditional retail channels of convenience, grocery, drug and dollar stores.
Those are just a few of the prevailing tradewinds discussed by senior industry leaders at Wells Fargo Securities LLC’s second annual Convenience Store Forum, held at the Mandarin Oriental Hotel Tuesday afternoon.
The sessions were presented in an informal format with Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities, chatting with each of the featured guests before an audience of investors and industry suppliers.
Stacy Loretz-Congdon, chief financial officer of Core-Mark International Inc., one of the largest distributors of fresh supply solutions to c-store retailers, spoke about how channel blurring is being driven by consumer preferences.
“Consumers crave convenience everywhere –- not just from convenience stores. And they want fresh and healthier grab-and-go options in all store formats, especially drugstores, which are focusing on this to coincide with their wellness categories,” said Loretz-Congdon.
She spoke about the success of several initiatives including Core-Mark’s partnership to supply fresh, refrigerated and frozen food categories to 3,000 Rite Aid drugstores and the wholesaler’s farm to market fresh program with Del Monte. The program, which includes all types of fresh whole fruits, is “resonating with customers,” said Loretz-Congdon.
Core-Mark has 28 fresh foodservice programs to suit a variety of retailer needs, with a range that includes express pizza, fried chicken and deli. The wholesaler is also working to consolidate vendors and put more direct-store-delievery (DSD) vendors’ products onto its trucks to reduce the number of deliveries each store receives per week.
Andrew Clyde, president and CEO of Murphy USA, spoke about the retailer’s spinoff from Murphy Oil Corp., a process the energy company first began contemplating in 2008 and completed in January 2013. Murphy USA, Clyde noted, remains a high-volume, low-cost retailer focused on selling fuels and tobacco out of 4,000- to 1,200-square-foot kiosks in the parking lots of Walmart Supercenters.
Growth, he said, would be organic –- adding a couple hundred sites a year. Responding to a question about Walmart’s own efforts to open convenience stores, Clyde dismissed the mega retailer’s efforts as being more focused on Neighborhood Market stores that are more akin to traditional grocery stores, than to a real c-store concept.
“Walmart needs to create a Fortune 500-size company every year just to maintain its growth rate,” he said.
However, Walmart is committed to fuel and that’s “good for us,” the chief executive reported. For future expansion, Murphy USA will continue to grow with Walmart but expects to remain focused on areas where it can be a low-cost operator, ruling out high-cost states such as New York, California, Wisconsin, etc.
The biggest drawback to Murphy USA’s future, according to the CEO, is the continuing malaise of the national economy. “Low GDP [gross domestic product] growth is the biggest factor holding us back,” said Clyde. “Just a 1 percentage point increase from 2 percent to 3 percent GDP growth would be huge for us, especially with our lower income customer base.”
With Americans driving fewer miles and vehicle fuel efficiency improving every year, Clyde expects that gasoline sales (including ethanol) will remain flat in the long run, “with some improvement for diesel.” The declining oil prices of the past few weeks have really helped to improve retail margins, he added.
Summing up the retailer’s first year as an independent company, Clyde said: “It’s been a great first year. We were a great business model stuck inside a different kind of company. It’s been a year of meeting commitments and giving back to shareholders.”
Dennis Hatchell, president and CEO of The Pantry Inc., which operates more than 1,200 Kangaroo Express stores, said the retailer has made a lot of progress in the past year but much of those improvements have been overshadowed by declining gross profit on fuel.
“Fuel is masking a lot of the progress we’ve made with store sales,” said Hatchell. Inside sales, excluding fuel, have increased on a comparable store basis in 10 out of the last 11 quarters, he noted. “And we are closing the gap between us and the industry in foodservice,” an important focus for the chain going forward.
“We’re big fans of QSRs [quick-service restaurants],” said Hatchell. “We’re the second largest non-traditional Subway franchisee in the country.” The retailer also operates Church’s, Little Caesar and other fast-food franchises at its largest stores that can support the foodservice business.
Hatchell said the company thinks 700 of its stores could support a QSR. “The entire box gets better results because of the increased traffic from the QSR,” he noted. “These are generally our best growth and strongest stores.”
The retailer will grow its QSRs carefully, however, according to Hatchell, pointing out that much of the growth is dependent on the amount of land available to do a remodel, as well as the QSRs' own franchisee restrictions on geographic competition. “I think 35 to 50 per year is attainable,” he said.
Outside of foodservice, the company has seen strong growth in packaged beverage sales, driven by a new Buy More, Get More promotion.
The Pantry plans to remodel about 40 stores per year while continuing to rationalize its store base, meaning it will take underperforming stores out of the network as their leases expire. Hatchell said he finds the acquisition activity going on in the industry, driven by master limited partnerships (MLPs) “interesting,” but he doesn't expect The Pantry to make any blockbuster deals.
“We approach strategic acquisitions with a market mindset.” The retailer views markets as either a Leader Market, an Expand and Protect Market, or a Core Market. “We would focus on Leader Markets for acquisitions. We’re looking at everything,” he said when asked about The Pantry going the MLP route.
Asked about competition from outside the c-store industry, Hatchell replied, “I’m more focused on some of our terrific competitors in the industry than I am on Walmart Express. A lot of people are worried about the dollar stores, too.”
Hatchell promised to continue to use social media to communicate with customers. He tweets regularly on Twitter under the handle, Chief Roo.