C-Stores and Gas Stations: An Industry Evolution & Analysis
Consumers desiring convenience and stores carrying this title have changed the landscape of this $650 billion industry. While customers are looking for that "one-stop-shop," owners are chasing a limited number of dollars, and looking for opportunities to persuade costumers.
Definition of Consumer Store and Background
When discussing the evolution of this industry it is important to note that convenience doesn't come in just one shape and size. According to National Association of Convenience Stores (NACS) a convenience store is “...a retail business with primary emphasis placed on providing the public a convenient location to quickly purchase from a wide array of consumable products (predominantly food or food and gasoline) and services,” . This has been further defined by the Appraisal Institute as: “A retail outlet, typically located in proximity to a residential neighborhood, where convenience goods can be purchased; provides a convenient location and longer hours for the quick purchase of a wide array of consumable goods and services," .
Convenience stores have six identifiable formats:
Kiosk: Less than 800-square feet
Mini Convenience Store: 800- to 1,200-square feet
Limited Selection Convenience Store: 1,500- to 2,200-square feet
Traditional Convenience Store: 2,400- to 2,800-square feet
Expanded Convenience Store: 2,800- to 3,600-square feet
Hyper Convenience Store: 4,000-to 5,000-square feet
NACS published that the average size of a US Convenience Store is 2,812-square feet. This is up from 2,777-square feet in 2010. The traditional, expanded, and hyper stores now will offer (besides the standard packages items) fresh fruit and vegetables, fresh baked goods and other soft merchandise sales. On average, convenience stores typical carry around 2,900 SKUs (stock keeping units). SKUs are the total number of individual product lines that are in a store for sales and any given time.
How is the industry doing?
It depends on who you are. This is an industry that was under significant pressure in the early and mid 2000's. Some entities have evolved to lead the industry, while some become more obsolete as each year passes. According to IBISWorld, the industry "has experienced volatility over the five years to 2018 . . .Drastic declines in the world price of crude oil throughout most of the period led industry revenue to fall until 2016. In particular, the world price of crude oil tumbled an estimated 47.2% in 2015. Although the world price of crude oil has since returned to growth, boosting industry revenue, gains have not been substantial enough to completely counteract the declines experienced prior to 2017. As a result, industry revenue is projected to decline at an annualized rate of 1.9% to $419.2 billion over the five years to 2018," .
The U.S. convenience store industry has 153,000+ stores that account for more than $650 billion in total sales, according to NCAS. In the United States, the convenience store count dipped for the first time since 2010. In 2018, convenience stores sold the majority of gasoline (80%) purchased in the country.
U.S. Convenience Store Count, according to the NACS:
(as of 12/31/18)
2019 — 153,237 (-1.1%)
2018 — 154,958 (+0.3%)
2017 — 154,535 (+0.2%)
2016 — 154,195 (+0.9%)
2015 — 152,794 (+0.9%)
2014 — 151,282 (+1.4%)
2013 — 149,220 (+0.7%)
2012 — 148,126 (+1.2%)
2011 — 146,341 (+1.2%)
2010 — 144,541 (-0.2%)
As this industry becomes more sophisticated in the future, there may be an overall decline in the number of locations. In fact, we believe that this is now a given. From an industrial (investor) standpoint, gas stations with convenience stores are in the mature stage of their life cycle. The structural risks within the industry are fairly high, though some are significantly higher than others. As stores such as Thornton’s – located in the Midwest – expand, their pump prices and the number of SKUs carried in addition to their food and grocery offerings will make it harder and harder for the older, more poorly designed and located stores to compete. This can be seen the following way given the following seven structural components:
In looking at the first component, Barriers to Entry, there is a substantial cost in developing a new station. Site costs vary with size, location, and various other factors. Even finding a suitable location can be a major issue. What is the real Trade Area? In looking for a new site, should one conduct Ring Studies and Drive Time Studies? In employing Location Quotient Analysis, how many results will be below One? If the answer is continually less than One, the market population is insufficient to support a new location. Co-branding will off-set some of the significant development costs, but for privately held companies such as Sheetz, each new location is a sunk capital cost that needs to be 100% offset by same site total revenues from all sources.
Ultimately, the main structural risk factor is the high level of competition. “Businesses competing fiercely for market share are forced to incur expenses to differentiate their offerings, keep prices low to entice demand, or both. The result is a greater likelihood of declining revenue and lower profits,” . There is a downside for existing convenience stores with the introduction of new competition. Market share for the older, poorly laid out units can be so affected that traditional market values are altered to the point that the older store is eventually forced to either recapitalize or close.
Many older c-stores, which are located in urban areas, are on smaller sites with simply no room to expand or reconfigure. Newer c-stores erecting signs for "lower prices" may be all it takes to get new, "loyal" customers.
The need for continual reinvention to stay relevant and competitive will never go away.
Those thriving and surviving in the industry know this isn't anything new; take into consideration trends from 2010.
According to the NACS, the average convenience store posted $3.98 million in motor fuel sales and sold 123,449 gallons per month in 2010. At 10 cents per gallon net profit, the NOI on the average monthly sales was $12,400, or approximately $150,000 per annum. With site development costs running as high as four million dollars, this income needed to be supplemented by different revenue sources within the c-store.
Historical Appraisal Perspective and C-Store Trends
Twenty years ago, the primary appraisal technique for developing a valuation estimate for gas stations was as a Going-Concern valuation, and it was felt that market value was a fairly direct function of gas sales volume. All of the other income streams were a function of this sales volume. Volume was the core of the valuation with all income streams being a function of this variable. Back in the 1990s, there were certain fundamentals that we also recognize today, such as branding, traffic count, competition, exposure, and convenience. Our understanding of the working of the site has greatly advanced since then.
In 2000, the optimal site size was 30,000-square feet. It has since grown to 53,000-square feet, and rising. This growth is to make room for more profitable streams of revenue. Our understanding of how revenue components interact has greatly increased. For example, the average gross margin dollars per store for beer was $34,716 in 2011 (based on $15.4 billion in gross beer sales. NACS reported that 75% of all stores sold beer). This is a single profit center within the store with few allocated SKUs. The profit margins for motor oil sales are under strain and struggling to maintain motor oil profit margins. However, this is being balanced by other sources of funds. More recently, NACS published that “U.S. convenience stores experienced record in-store sales of $242.2 billion in 2018, led by consumer desires to satisfy an immediate need for food and refreshment,” .
 What is a Convenience Store? (n.d.). Retrieved from https://www.convenience.org/Research/What-is-a-Convenience-Store
 Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010)
 IBISWorld, Industry Rick Rating Report, #44711, November 2012, Page 2
 Fact Sheets. (n.d.). Retrieved from https://www.convenience.org/Research/FactSheets