Fuel Services Midyear Update: Time for C-Stores to Plan for the Future
- midyear update
The fuel industry continues to be in a good position as we cross the halfway point in 2021, and certainly in a much better position than when the pandemic started. Fuel margins have stayed strong and c-stores continue to experience an uptick in sales and at the pump.
The pandemic opened consumers’ eyes to the c-store being a great location to buy many products, something they may have never considered in the past. Maintaining this traffic will be crucial to success moving forward because the trick for operators will be to maintain the traffic they picked up during the pandemic. Now that the vaccine is readily available and proven effective, consumers are regaining comfort being in larger, and more crowded, retail stores.
Keep Up the Momentum
As the U.S. continues to fully reopen, we anticipate fuel volumes will continue to increase. We have seen an increase in miles driven and expect those to increase even further as people go back to work, many driving in lieu of public transportation, and families take summer vacations. This industry is almost back to pre-pandemic levels, and it should continue to thrive into 2022, but that doesn’t mean it’s time to be complacent.
For many operators, the second half of 2021 will be about retaining the increased inside sales they benefitted from during the pandemic, partially because bars, restaurants and casinos were closed. C-stores were able to fulfill that demand with food and alcohol sales, as well as offer a variety of lottery options. Though self-service foods were halted in many locations, freshly prepared foods (packaged by staff) were still available, strengthening the “convenience” factor of c-stores for many customers. The challenge will be in maintaining that traffic and getting those customers to keep coming back, even as they return to their pre-pandemic habits and other options are readily available.
As with many industries, the biggest challenge for c-store operators this year has been finding and retaining employees. Many employers are offering higher starting salaries to entice workers. Of course, once you increase wages, it’s not easy to pare them back later. We have even seen operators offer sign-on bonuses for new employees, and we’re likely to see other creative incentives as ways to draw new employees without having to increase wages.
M&A activity has been extremely active too. Though operational uncertainties during the pandemic paused some acquisitions, it was only temporary. Toward the end of the summer and fall in 2020, activity began to ramp back up. Sales multiples have remained on par or even exceeded those seen prior to the pandemic, often reaching double digits. As operators have acquired in an effort to rapidly expand geographies and store count through these opportunities, they can justify these heightened multiples because of the synergies between their existing and new operations. In many cases, these synergized multiples are often significantly less than the headline multiples.
One issue the industry will have to tackle is how to address electric vehicle, or EV, adoption. How will the industry evolve to meet alternative fuel demand?
Legislation will be a key factor. Right now, there are a lot of different state rules to navigate. Some states prohibit charging for electricity unless you’re a registered utility that charges by the kilowatt hour. But we know of a station in Denver that’s experimenting with the market by putting their price per kilowatt hour on the same street sign as their gasoline prices. Because the industry is relatively young, there is a broad range of legislation that is continually changing. You may not be able to do the same things as other operators currently, but that could change in the future and it’s important to stay aware of varying strategies.
Today, most people charge their EVs at home. In the long run, however, there will need to be retail charging stations. Will it be the c-stores in urban settings? Or will truck stops on the major highways that already have larger stores attached make more sense, since customers can stay at these locations for longer periods when charging? Congress is also in discussions about installing chargers at highway rest areas. The legislation includes provisions that would carve out an exception for EV charging to the longstanding federal prohibition on the sale of food, fuel and other commercial services at rest areas and on the interstate right of way.
Plenty of challenges need to be solved to make EV viable, but there’s a good argument that gas station c-stores are best positioned to do it given their existing locations and their importance in people’s daily lives.
Standing Out from the Crowd
This industry is always evolving, and it’s going to have to continue to do so. Fuel volumes are not going to continue to grow indefinitely as more EVs and fuel-efficient vehicles come to market. C-stores need to offer other reasons for consumers to visit, including quality food service, a good product mix and, of course, convenience.
Some c-stores have started to offer delivery. We’ve spoken to various operators about it, and while delivery does drive incremental sales, it can be a challenge to deliver prepared foods to the customer at the same quality it would be at the store. And if an operator chooses delivery, there is still a decision on whether to invest in technology and use a proprietary app that you control or a third-party provider—because that determines who benefits from the data analytics.
Beyond delivery apps, technology can help operators stand out in other ways. Refuel, for example, has self-checkout to quicken the checkout process for customers, which also frees employees to strengthen the customer experience through cleaning, restocking, or assisting customers in other ways. Technology can also support food services and other parts of your operations. We don’t expect technology to eliminate retail employees, though. The friendly greetings and warm conversations are a positive aspect that keep people coming back to their favored locations.
Buc-ee's, a chain of c-stores based in Texas but continuing to grow its territory, is a great example of differentiation. The company operates massive stations, and just announced a new 74,000-square-foot store with 120 MPDs. Their c-stores feel more like a Target, where you can load up on prepared foods, groceries, sports memorabilia, apparel and barbeque smokers! This isn’t a place to just pick up the typical snacks you’d get while filling up; this is a destination.
Operators like Buc-ee’s have figured out how to get people to think of the c-store/gas station differently. When they move into a new market, they are able to shift the consumer’s buying patterns. They can offer a one-stop shop for fuel, food and other retail goods.
Over the last couple of years, c-store counts have plateaued and are starting to trickle down slowly. The stores that are not able to adapt will continue to face competitive pressures, which could force their hands to ultimately either sell or close. Stores require continuous investment to keep up with the trends. Operators unwilling to invest, particularly those running older stores with significant deferred maintenance, run the risk of spiraling downward through lost sales and volumes. This ultimately lowers the price a buyer is willing to pay. As the c-store industry has shown for the past few decade, change is continuous.
The key is to make sure you don’t get stuck in your ways. That means maintaining a good line of sight into your business, knowing what you're selling, understanding the layout of your store, and taking advantage of data analytics to increase sales, drive traffic and make better business decisions overall. The best way to succeed in the coming years is to continue to invest—in your people, in your technology and in your stores.
As head of BMO Harris Bank’s Fuel Services & Convenience group, Bill Thomson leads a team of banking professionals working across the U.S. serving the n...(..)View Full Profile >
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