Economic data continues very mixed worldwide, as inflation softens even in critical commodities like oil, natural gas, copper, grains, lumber and even ‘exotics’ like lithium. Geopolitical uncertainties persist, but many elections this year have been completed with little destabilization in most countries, so far. Perhaps even an important war or two will get settled. In the still strong U.S. economy, the recent sharp decline in both U.S. Treasury Ten-Year Treasury Bonds, and now even Six-Month Treasury Bills, usually indicates less demand for funds for economic reasons, and is occurring in spite of ongoing auctions to fund our fiscal deficits. The Federal Reserve may again be late in reacting but can move quickly if the economy slips too fast. Unfortunately, monetary policy changes take time to have an effect on the economy.
Regardless, clearly consumer spending in particular is slowing in the U.S. as consumers are depleting their savings and increasing credit card debts. Lower- and middle-income consumers in particular are not able to keep up with past inflation and are reducing their spending and being more selective. All the while, online spending is increasing–recently reported at an 8% pace–taking market share from brick-and-mortar stores including consumer staples.
Many c-store companies are holding sales, not so much in units as in dollars, depending on the competitive strength of the brand and pricing power in any given area for both fuel and store items. As indicated by recent NACS State of the Industry data, the larger c-store chains with established foodservice programs continue with healthy profitability. Many restaurants and QSR’s are clearly losing market share to our industry, as we offer convenience, one-stop shopping with diverse product selection, and sometimes better-quality food these days. Fast product turnover helps maintain quality and keeps waste as a small percentage of sales.
The main effect on recent c-store M&A activity is most easily seen in a slowdown of M&A, in large part because buyers realize the importance of being more selective, as the number of quality chains available for purchase has decreased in the last few years. A number of acquisitions remain in the market, reflecting factors affecting buyers who have funds readily available, which is very important today, similar to advantages for cash buyers of houses because no sale is ever complete until it closes.
Recent M&A transactions continue to point to certain trends worthy of note, and largely explain the wide range of multiples, as sellers want more, hoping for better interest rates and sales and profits, while buyers are cautious and more selective. In particular:
Size matters. Because of foodservice and even fuel uncertainties, store size and lot size are more important than ever. It really depends on the specialty items that buyers need to sell.
Location, location, location. We sometimes forget that we are in the real estate business. It is critical to prove our convenience experience is worth the price versus big boxes and online.
Regulatory environment. The differences by state and even townships are incredible and can promote growth or kill growth. Slow regulatory movement costs money, especially since it is no longer free money. Look at the growth in Southeastern states versus most others.
Taxes. Also very important for both consumers and business owners. Changes in overall national tax structure post-November elections will definitely impact multiples. Some business tax savings are already being reduced and will be reduced further in existing tax regulations.
Size matters, again. Some larger companies are very committed to growth, so some chains can often pay more for instant growth through acquisitions than through NTI’s, perhaps even more important with fuel uncertainties, etc.
Size matters, again. Scale brings brand recognition, plus purchasing efficiencies, overhead savings, etc. The key for smaller chains is profiting from an emphasis on the differentiators of your store or chain from larger competitors. The post-Covid era is different.
Brand matters.
Contractual obligations matter.
People matter, on the front lines, in the back room, and certainly in the Executive Suite.
Overall, convenience lives and thrives in many cases. But if the post-Covid period brings back more competitive features, it is important to get back to basics and assess your position in the marketplace.
JEFF KRAMER
Managing Director
(303) 619-0611
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