Look out, Mom and Pop

“We’re going to be the Wal-Mart of the c-store industry,” he says. That prediction looks like it has a good chance of coming true.

Canadian Business Magazine
October 29, 2001

Look out, Mom and Pop
Kevin Libin

They used to be a place for the desperate. In the black of night, when your stomach was growling or the baby was crying or you were missing an ingredient for a recipe and had nowhere else to turn, you ran, naturally, to the convenience store. Sure, it would cost you—30%, maybe even 40%, more than you’d pay at the supermarket—but what choice did you have?

That was then. These days, with supermarkets keeping extended hours and drugstores open ’til midnight, the convenience store (or c-store) has been suffering a bit of an identity crisis. Even so, you might find that now, more than ever, c-stores can alleviate another kind of desperation. With retail stocks heavily damaged after last year’s slowdown and this year’s economic devastation—and with the markets generally hostile—investors have managed to find shelter in convenience store retailer Alimentation Couche-Tard Inc. (TSE: ATD.B). Though the past six months have been dreadful for most stocks, Couche-Tard has defied the trend, climbing almost 50% from about $12 in April to more than $18
in October. And with growing fears of even more economic bad news on the horizon and uncertainty in the US and Canada, industry watchers are betting that the Laval, Que.-based operator of brands such as Mac’s, Becker’s and Provi-Soir will keep up its winning streak. For its part, Couche-Tard is playing for higher stakes. As it prepares to open hundreds of stores in the US Midwest, Couche-Tard, now the ninth-largest c-store operator in North America, expects to creep up on market leader 7-Eleven a few years down the road.

Not all convenience store operators can afford to be so optimistic. For many, the industry has changed too dramatically in the past 20 years to keep up. In 1977, when Alain Bouchard, Chairman and CEO of
Alimentation Couche-Tard (which literally translates as “food for those who go to bed late”), opened his first convenience store, c-stores enjoyed a particularly well-insulated place in the retail world. Historically, their dispersion could be correlated almost directly to Canada’s puritan Sunday-shopping laws. In Quebec and Ontario, where laws were strict, convenience retailers flourished. In Western Canada, however, where retailers were free to open whenever they wanted, the stores were far less numerous. Within five years, the Couche-Tard chain had grown to more than 30 stores and, within 10 years, it owned almost 200. But in the late ’80s, Ontario and Quebec lifted the Sunday-shopping laws, and the c-store business was in jeopardy. “The convenience store industry hasn’t modernized much over the past 25 years,” says William Chisholm, a retail analyst with Dundee Securities in Toronto. “They had a really tough time. They weren’t really geared for anything besides having a monopoly on Sunday.” In 1991, industry leader 7-Eleven filed for bankruptcy protection, and many others teetered on the brink.

The weakness that crippled others only fueled Couche-Tard’s growth. After reinventing itself by moving away from highpriced necessity items and becoming more of a high-efficiency grocery store, the company turned into an industry consolidator. It snapped up c-store chains Sept-Jours from Métro-Richelieu Inc., Perrette, Provigo’s C-Corp Inc. (owner of Provi-Soir and Wink’s) and Silcorp Ltd. (owner of Mac’s,
Mike’s Mart and Beckers). Today, Couche-Tard owns close to 2,000 retail shops across Canada and the US with annual sales of $2.4 billion.

But 2001 could go down as one of the biggest years since the company made its first foray into the US with the purchase of Johnson Oil’s Bigfoot chain, which includes 225 stores across Kentucky, Illinois and Indiana and added US$500 million to Couche-Tard’s revenue. And it’s just the beginning, says Stephane Gonthier, the company’s vice-president of operations for Eastern Canada. “It’s going to be very easy for us down there because their c-store business is a very fragmented market, a lot more than in Canada,” he explains. “There are more than 120,000 stores in the US, and the eight biggest players combined control only 20% of them. There’s lots of room for consolidation, and we are very good at that.”

That’s not to say there isn’t still plenty of room to grow here at home, says Cynthia Rose-Martel, an analyst with Harris Partners in Toronto. “They haven’t reached saturation in Canada by any means,” she says. “It’s still a phenomenally fragmented industry.” Even after consolidating pretty well all the major chains (except Japan-based 7-Eleven, which operates 5,700 stores in the US and Canada), Couche-Tard can still bulk up quickly—one store at a time. “That’s the way they’ve grown most of their business,” says Rose-Martel.

And Couche-Tard says it often finds receptive sellers. “A lot of these companies are at a stage of maturity where the owner is ready to retire and has to decide to invest more or sell,” says Gonthier. That decision is much easier now that competition in the gas-pumping business is heating up—which means fewer drivers are heading for c-stores. “The big-box stores have really gotten into the gasoline business,” he says. In fact, industry watchers expect retailers like Wal-Mart and Costco to control as much as 10% of the gasoline market within five years. And that’s convincing a lot of c-store owners that it’s just not worth it. “And if you’re Joe Blow with a little chain of half a dozen stores, they’re the ones you call,” says Rose-Martel. “They come to Couche-Tard.”

Some of the folks calling on Couche-Tard these days are more than just little Joe Blows, according to Gonthier—more like billion-dollar oil companies, the biggest operators of convenience stores in North
America. In March, Couche-Tard announced a joint venture with Irving Oil that will have the two corporations co-own 56 gas bars in Eastern Quebec. The deal is worth $200 million in combined annual revenue. It’s the kind of arrangement industry watchers expect to see more of. “I believe many of these oil companies are good at selling gas, but they’re not good at specializing in food,” says Christiane Dubeau, an analyst with Desjardins Securities in Montreal. “Retail is something very, very different from selling gas.”

Oil companies are drawing the same conclusion, and Couche-Tard is helping them get there. “We’ve proven in Western Canada, Ontario and Quebec that we’re able to be very profitable—more than any oil company can be,” says Gonthier. “Oil companies have to invest a lot more than we do to develop a new location. They’re starting to realize—and Canadian companies are starting to realize—that it’s not worthwhile for them to keep investing given the return on assets and the return on investment.”

And those who aren’t yet convinced soon will be. In addition to its explosive growth, Couche-Tard has recently unveiled another secret weapon: the ominous-sounding Store 2000, which Dubeau calls a significant “raising of the bar” in the convenience game. The idea is to exploit the convenience and ubiquity of c-stores by turning them into “meal replacement solutions,” says Gonthier. You may have noticed a change already in your local mini-mart—gourmet coffee, fresh sandwiches and extensive cobranding with popular food retailers. Couche-Tard stores trying to lure the morning crowd might have a
Second Cup or a Dunkin’ Donuts; the one across from a high school might have a McDonald’s or a Subway sandwich shop; on the way home, there are outlets with M & M Meat Shops inside, so folks can pick up some Veal Swiss for supper. “[Full meal solutions] is a business that’s growing very fast—faster than any other business,” says Gonthier. “So we want to provide them with a solution for breakfast, for lunch and for dinner.”

Though the new format—and the idea of noshing on gourmet sandwiches and fine coffee at a gas station—might just represent a sea change in the way we think about convenience stores, some say it’s a perfect fit with the advantages inherent in the c-store format. “The relevance of convenience stores is actually starting to ramp up,” says John Torella, a senior partner with J.C. Williams Group in Toronto.

“Time is such a high priority today for a certain segment. People will pay for convenience. They will pay for you saving them time.”

Some of the changes might seem absurd—some stores even have easy chairs and cozy bistro tables—but as strange as it may seem to those of us still stuck on the old perception of what a c-store should look like, Couche-Tard does its homework. “These things seem to work,” says Chisholm. “They micro-market them to every market they go into. It’s not a cookie-cutter plan that they develop in Montreal and roll out across the country.” And there’s nothing funny about the fact that the Store 2000 concept has consistently improved sales per square foot—which retail analysts estimate to be between $800 and $1,000 on average—by at least 15%, and often considerably more. “Food products have a much higher margin than classic products like potato chips or tobacco products,” says Gonthier.

It’s little wonder, then, that investors continue to rally behind Couche-Tard. Even now, while other retailers sweat out the current economic drought, the c-store continues to sail along. “Our business is anti-cyclical,” says Gonthier. “This is the last sort of expense you cut.” And with 1,900 stores now, dozens more being added each year, and only 450 equipped so far with the Store 2000 concept, there are plenty of hidden profits waiting to be gobbled up. As the US expansion gathers steam (the company anticipates owning 800 stores south of the border by 2006), some analysts expect Couche-Tard’s stock to gain another 50% in the coming year—if only by virtue of the expansion itself.

“Couche-Tard trades at seven times EBITDA [earnings before interest, taxes, depreciation and amortization], and they buy for three-and-a-half times EBITDA,” says Rose-Martel. “So all this expansion is immediately accreted to earnings.”

And, says Gonthier, the company minimizes risk by buying only financially healthy stores with strong management already in place. “We’re going to be the Wal-Mart of the c-store industry,” he says. That prediction looks like it has a good chance of coming true. After all, the convenience store business, just like every other every retail segment, has to catch up to the times—and fast. But with Couche-Tard on a roll these days, investors won’t have to stay up nights worrying whether it is up to the job.

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