To follow along please click here for the reference slides.
Here is Part 2 of the 3 part presentation recently given to a distinguished group of Shell marketers through their NASM group on September 12. Shell distributors interested in joining NASM should contact Natasha Pitcock, NASM’s Executive Director by email or at 859-554-3175.
Today’s section is titled Gas/C-Store/Foodservice (?) Industry. Page 14 mentions several key points, perhaps the main one being that convenience remains a key consumer priority in any economic environment as we rarely have enough time to accomplish everything in today’s busy world. So many c-store sales are for immediate consumption, and we often purchase with our eyes and/or smell. Being deemed an essential industry during Covid introduced new customers to our stores, and increased average sales per transaction. Post Covid is seeing more competition often at the pump depending on location, plus the geographic spread of more c-store ‘disruptor’ brands whose main focus is Foodservice as a draw. And now rapid delivery and competitive prices from giants like Amazon and Wal Mart are formidable for stretched consumers, especially on the lower end of the income scale, often our main customer base.
FUEL
Fuel remains a key profit center, and often an important draw for inside store sales. And the nature of petroleum fuel keeps evolving, as reflected from increasing ethanol blending, biodiesel, renewable diesel fuel, electric chargers, etc. Most of these new fuels use less petroleum to manufacture, so combined with better fuel economy standards and changing work styles like work from home, crude oil demand is down considerably. At the same time, crude oil supply keeps decreasing due to technology improvements like fracking and the extension of crude oil reservoir lives. The crude oil chart on page 16 reflects the overall decline in crude prices, the main component of gasoline costs. The U.S. has been the clear leader in adding to supply, as we now produce 13.3 million barrels per day, far exceeding former leaders Russia and Saudi Arabia, likely both producing less than 10 million barrels per day.
Credit to NACS’ State of the Industry (SOI) data starting on page 17. First, gasoline usage in the U.S. shown on page 18 remains well below 2019 pre Covid levels. So far in 2024, gasoline actual fuel usage tracker OPIS indicates that demand is down another 4-5% below 2023 levels. Fortunately, page 19 shows retail motor fuel pool margins continue at record breaking levels, and holding fairly well this year. The net result on page 20 is total fuel gross profit remains at or near record levels despite less volume.
An interesting comparison of retail regular gasoline margin in random cities on page 22, courtesy of OPIS, reflects some incredible differences. There are many variables, but it is interesting that many of the areas with low margins have M&A activity often as strong as high margin areas, and just as frequently have selling price cash flow multiples just as strong as well. Real estate values are critical too, but the comparisons show that M&A markets work for both buyers and sellers.
INSIDE STORE
Page 23 clearly shows the growing importance of inside store sales this past decade, even without including foodservice. Granted, unit growth has slowed recently, but the relative stability of the category and the ability to add new products and profit centers is a huge advantage compared to many other box store retailers. Will the trend towards healthier eating affect sales? It will certainly to some extent, but if healthier products can continue to improve with public preferences, convenience may pick up the slack.
Foodservice is clearly the most recent game changer, much as was the transition from fuels sales to c-stores. Old mainstays such as fountain and coffee have evolved into sandwiches, fresh salads, etc., often rivaling QSR quick serve restaurants and even other fast serve sit down restaurants. The other complimentary items a c-store offers, frequently with brand freedom of choice or even less expensive private label, gives the industry a huge competitive advantage for sales. It is very difficult to achieve scale with foodservice due to waste and labor costs (hence my ?), but fortunately many companies have successfully paired up with national or local QSR or quick serve restaurants to enhance their return on investment. Clearly, the biggest ‘disruptors’ in the business today are those with great sites and great foodservice as a draw. Studies show that companies like Buc-ees are a destination purchase as far as 50 miles away.
Regarding M&A, it is interesting that many of the disruptor companies use build-to-suit financing and often sale-leasebacks to enhance their rates of return and use remaining cash flows to build more sites, very similar to the most common financings for QSR’s and other restaurant chains. This is quite different from value creation in the gasoline/c-store industry, as historically much of the capital appreciation when the business has been sold has come from real estate appreciation, pretty much forgone through leasing.
OVERALL PROFITABILTY
Despite constant headwinds like all businesses today, the chart on page 25 which depicts the total of all profit centers after direct store expenses, clearly shows that our industry has shown tremendous profitability over the last decade. We’re back to the basics of marketing post Covid, and with the opportunities provided through Artificial Intelligence (AI); perhaps most noticeably for product selection and profitability, and also perhaps for labor saving automation on site and in the so called back room.
We all know petroleum fueling will not be ending soon. I have always said ‘ya gotta fuel and ya gotta eat’. Finally, arguably there are important reasons why petroleum has lasted so long. It is arguably one of our most ‘convenient’ products of all, since there remain a number of dinosaurs left as petroleum to find, it is easy to transport, refined at a reasonable cost into chemicals, transportation fuels, etc., and it’s easy to store for retailers and other users to supply on fast notice. And a very inexpensive price compared to houses, cars, travel, entertainment, and more.
This Friday’s Observations From the Executive Suite will conclude the NASM discussion on further M&A topics.
See you at NACS or SIGMA.
Please click here for the presentation reference slides.
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