Couche-Tard to give 7-Eleven more competition
Alimentation Couche-Tard Inc. on Thursday said it agreed to acquire The Pantry. The merger will give the Canadian c-store operator a stronger presence in the Southeastern and Gulf Coast regions of the U.S. and bring its store count in the region close to that of 7-Eleven, the world’s largest c-store operator.
Couche-Tard has 6,303 outlets in North America, operating primarily under the Couche-Tard and Mac’s banners in Canada as well as Circle K throughout the U.S. The Pantry, which primarily operates under the Kangaroo Express banner, has 1,512 locations. Through owned and franchised operations, 7-Eleven operates about 8,700 stores in North America.
Couche-Tard will pay $36.75 per share, a 27 percent premium to Monday’s close. The transaction is expected to close in the first half of 2015.
The Pantry appears to be doing well, doubling its net profit more than in the past two quarters. Like Couche-Tard, it has been focusing on selling more high margin fresh food. It sells its own private label bottled water and is the fifth largest location for Subway restaurants. But the retailer particularly benefited lately from rising gas prices. Most of its locations include gas stations and fuel sales making up the vast majority of company revenue. The majority of Couche-Tard’s locations in the North America likewise have fuel services.
The deal adds to a number of mergers in the fuel station space. Last year, Valero Energy Corp spun off CST Brands. In May, Hess Corp agreed to sell off its more than 1,200 gas stations to Marathon Petroleum Corp.
"We expect industry consolidation to continue to be a key theme in the [convenience store] space," Wells Fargo analyst Bonnie Herzog told Reuters.
- Alimentation Couche-Tard Inc. and The Pantry, Inc. Announce Definitive Merger Agreement – Couche-Tard/ The Pantry
- Couche-Tard aims for top convenience store spot with Pantry buy – Reuters
- Couche-Tard to Buy Pantry for $860 Million – The Wall Street Journal
- Couche-Tard buying The Pantry in US$1.7-billion deal to expand in southern U.S. – Canadian Business
- Canada’s Couche-Tard in $860 Million Deal for Pantry Chain – Bloomberg
Discussion Questions
What will a more formidable competitor to 7-Eleven mean for the c-store landscape as well as for competition with other retail channels? How does Couche-Tard’s acquisition of The Pantry alter the c-store landscape? What other retail channel should be most concerned about more-formidable operators in the c-store channel?
The fact that The Pantry generates most of it revenue from fuel sales is not unusual but rather the norm for the c-store industry. While the ratio of fuel to merchandise sales does vary for a site offering both merchandise and gas, depending on the price of fuel it typically has been that two-thirds of the revenue comes from gas. However the opposite is true when measuring gross margin. Typically two-thirds of the gross margin comes from merchandise.
There are several differences between the two companies. The first is in brand strength. Circle K has the stronger brand awareness and customer following. It has also developed several successful proprietary merchandise brands. The second is their approach to foodservice. While The Pantry has been installing Subways and other branded foodservice offers, Circle K has relied on its proprietary brands.
Couch-Tard has a history of successfully integrating its acquisitions. I would expect that will also be the case with The Pantry.
The c-store industry has seen a lot of consolidation this year primarily through the use of the MLP (Master Limited Partnership) structure. I would expect that to continue. It is likely the industry will have three to five mega-players at the top. With size comes the benefits of affording staff with the skill sets that the smaller operators might not be able to afford. This will help them be more effectively competitive against dollar stores and others. That being said, it is a location-by-location business.
Here in the Southeast we have three dominate structures, banks, churches and c-stores. The c-stores may have the lead but I am not sure. Since most of these stores are franchised I do not see any major changes in the operation of the stores nor the closure of any stores. Even when stores are directly across the street from one another, they at least have a different brand of gasoline. We may see a few pricing wars between the two but again, we do not shop at c-stores for their prices. Store size, cafes and branded QSRs will give the advantage to the Couche-Tard stores over the 7-Eleven stores and that may be the major difference we will see from this transaction.
Fuel sales, cold drinks and lottery tickets are sales driver categories for c-stores. When any of the three become vulnerable to price and margin impact there is going to be problems. While it is true that fresh foods and meal solutions are becoming a bigger part of the mix, that places Couche-Tard and 7-11 in the mix with the QSR channel, which has enough challenges and formidable competition already.
Consequently, while falling gas prices are great for the consumer, oil cartels, oil companies, fracking operators and c-stores are all hoping for $100-plus per barrel crude—and soon.
Retail channels are most successful at self destructing by way of saturation, obsolete locations and irrelevant or dated market plans. Having a permanent detrimental effect on cross-channel operations is more telling of how the affected company or market is out of touch with public needs and wants than the deadly effects of a new channel or plan.
Innovation and creation in response to the market is and will remain among the strongest ingredients for ensuring success in retail. Convenience stores don’t seem to be paying attention to the market as much as they should, as we see in the apparent indifference towards two significant market feedbacks. The most obvious is price. The differences between c-store pricing and the big boxes is now considerably distant and in favor of waiting for a whole order purchases when and wherever possible. The second market concern, or maybe even a complaint by now, is time and space.
As the c-stores get larger in size and scope, the time needed to maneuver in the parking lot and the box is increasing exponentially. These two factors are not good for the “convenience” businesses and will push the consumer with severe time constraints, like those on the way to work, away. It is always amazing to me how the fall of a market plan can almost always be found to be a result of separation from the initial successes largely by way of exploitation through irrational expansion(s).
7-Eleven is a terrible operator. All they do well is location, which is #1 for a convenience store. Circle K does a far better job on mix, price, fresh, and store conditions.
The Pantry is a patchwork chain made from many others with some nice stores and some not so nice stores. I expect Circle K will increase in store sales as that’s something they are good at doing by way of better mix and promotion.
All of these The Pantry stores are corporate owned and it will be interesting to see if that continues under Circle K in all markets, especially the smaller ones such as Kansas.