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Kings of Convenience

By Peter Staas on Dec. 18, 2014

The gradual decline in driving miles and fuel consumption represents a long-standing headwind for the convenience-store industry, a business that evolved from dairy and ice stores to selling motor fuel, tobacco, beverages, candy and salty snacks.

Although these operations don’t profit directly when gasoline prices tumble, lower fuel costs tend to simulate store traffic and boost merchandise sales—the main source of industry profitability, as price competition at the pump remains cutthroat.

At the same time, cheaper gasoline also helps to reduce the number of fueling transactions completed with credit cards—another cost center.

The wealth effect created by lower prices at the pump disproportionately benefits households that rank in the bottom quintile by income because gasoline costs represent a higher proportion of their overall expenditures and their after-tax earnings. (See Will Retailers Rally Because of Lower Oil Prices?)

Investors looking to profit from this trend and hedge their exposure to the energy sector should focus on names that boast well-designed stores and food-service options that are a draw in their own right and can compete effectively against traditional fast-food restaurants.

With cigarette and gasoline sales gradually declining because of structural trends, US convenience stores have grown their food-service sales to almost 15 percent of industry revenue and 25 percent of overall gross margins. Breakfast and lunch are the two most important times for prepared-food sales.

(Click graph to enlarge.)C-Store Product Categories -- Top 10

A robust food-service platform and in-store merchandising that’s responsive to local tastes and trends distinguishes the best-in-class convenience store operators, the names that stand to benefit the most from lower gasoline prices and to build wealth for shareholders.

We also like companies that have sought to diversify their food-service offerings by introducing innovative menu items and adding healthier options to their traditional lineups of sandwiches, soups and pizza.

According to trade publication Convenience Store News, salads were the industry’s fastest-growing category last year, though they still account for only 4.1 percent of overall food-service sales.

Acquisitions represent another important growth opportunity for convenience stores; chains account for only 37.2 percent of the more than 151,000 locations in the US. About 123,000 of these stores sell gasoline.

Companies with strong food-service programs often can get the most out of underperforming locations and have solid track records of successfully integrating acquisitions. Rising costs, ownership fatigue and the competitive advantages that come with scale will continue to drive consolidation in the industry.

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