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Hypermarkets
continue to expand their share in the U.S. retail gasoline market, moving from 6% in 2001 to 12% of all the gasoline sold
in 2003. With average annual volumes of 3 to 10 million gallons, each new hypermarket can satisfy the retail demand for a
market of 23,000 people.
Hypermarkets are large discount retailers that offer department store merchandise, groceries,
and gasoline. Examples include Walmart, Costco, Fred Meyer and Albertsons. Retail channels are now blurred with overlapping
competition between hypermarkets, convenience stores and fast-food restaurants.
Gasoline sales competition from
hypermarkets continues to be the number one problem facing the convenience industry. In response to this new competition,
some industry insiders expect the number of convenience stores in the U.S. to decline to 50,000 by the year 2015. In the early
part of this decade, about 125,000 convenience stores were operating in the U.S. This would be a loss of over 50% of the convenience
industry's capital asset value.
For example, in response to competition from Walmart's supercenter format,
the Winn-Dixie grocery chain filed for Chapter 11. Share prices declined from a high of $59.38 in the pre-supercenter days
to $1.47 this year. The convenience industry is facing the same competition.
Operating performance benchmarks necessary
for c-stores to survive in this new competitive environment are:
Minimum Fuel Gallonage: 2.5 million gallons/year
Minimum Fuel Margins: 3 to 5 cpg
Minimum Inside Sales: $1.2 million/year
As a spokesman for the troubled
Krispy Kreme retailer noted, "If the economics at the store level does not make sense, then the chain can not make
money." XXX U.S.
Historical Price Movement 2000 to 2009 According to Co-Star, the average price of a convenience store with fuel service was $2,055,965.00 in 2004
and $2,229,525 in 2009. XXX The average price per foot was $738.06 in 2004.
Yearly increases in the median price per foot appeared to begin to level off in 2006. XXX Cap rates for c-stores reached 7.5% in 2008. The lowest
average annual cap rate recorded in the last five years was in 2005, at 6.6%. This coincides with the height
of the speculative real estate market. With a nearly 100-basis point rise to today’s level, the greater
perceived risk is apparent in the markets. XXX Convenience
Industry Conclusion The convenience industry has come through the most difficult
period it has ever experienced. Hypermarkets today are approaching a 15 percent share of the U.S. gasoline
market. xxx The convenience industry is changing, becoming less dependent
on fuel profits. This was achieved by growing in-store sales. But, because the fuel
customer drives in-store sales, the fuel customer is still important. Hypermarkets are expanding their
market share and will continue to do so in the coming years. This has the potential to divert fuel customers
away from traditional convenience stores. xxx Currently, the largest issues affecting property values are
at the local level. When a hypermarket enters a local trade area, the supply and demand fundamentals are
significantly changed. That is why it is more important than ever for convenience stores analysts to carefully
examine the local trade area for a traditional convenience store. xxx NACS: Strategic and Competitive Issues The
National Association of Convenience Stores (NACS), the largest convenience industry trade group, has identified what they
see as the major issues affecting the this industry as stated in the 2007 State of the Industry Report on page 17:
XXX 1. Reducing Credit and Debit Card Costs When credit and debit cards costs exceed overall industry pretax
profits and inexorably grind away at motor fuel margins as prices rise, the time for action is now. Unfairly
draining billions of dollars from our industry makes it hard for retailers to compete. Cards are universal
and rules need to be transparent with respect to payment issues. XXX 2. Increasing Motor Fuel
Margins An
industry that endures eight consecutive years of declining motor fuel margins as a percent of sales is flirting with a future
financial crisis. If the profitability model is not working, eventually there will be a traumatic change
in the investment equation. In the search for better motor fuel margins/profitability, firms will be forced
to cut costs, reduce service, reduce cost via consolidation, rationalize their investment portfolio of stores or exist the
business. It is hard to subsidize losses over the long term or make it up on in-store sales. XXX 3.
Fighting Alternative Format Competition for Customers For a long time convenience
stores were the only game in town when it came to convenience. Adding motor fuel accelerated growth by
bringing in repeat customers. Now all retail formats are looking at the convenience model and not only
providing it but in many cases also exceeding the expectations of customer segments. XXX 4. Managing Labor Costs
for Both Costs and Productivity It makes no sense to pay above minimum wages and not have benchmarks
for efficiency, productivity and employee satisfaction. Attracting, training, retaining and motivating
employees is key to long-term success. Facing the healthcare issue as part of this equation is critical. XXX 5.
Working to reduce Governmental Regulation The convenience store industry depends on
two key categories: cigarettes and motor fuel and both are under fire from governmental authorities.
What should be the industry response to higher excise taxes on cigarettes and possible FDA regulation of the category?
Rising motor fuel prices tempts the government to get involved, usually for the worst. Alternative
fuel subsidies send inefficient price signals to the marketplace. XXX Fitch Ratings Current Outlook Fitch Ratings is one of the nation’s
premier risk assessment consulting firms, advising equity market investors and lenders. xxx Regarding franchise loan performance, Fitch Ratings’ 2007 Structured Finance report states, xxx “Fitch Ratings’ 2007 outlook for the franchise loan sector
remains negative, indicating that downgrades are expected to exceed upgrades.” With regard to convenience
stores and gas stations, “Fitch remains concerned about operator profitability in an environment of higher gas prices,
increasing sales of gasoline through hypermarkets and intensifying competition from nontraditional retail outlets for the
sale of convenience items.” XXX This succinct statement accurately summarizes our own industry analysis and conclusions.
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