Trends Changing the C-Store Industry

August 11, 2021

Today, approximately 150,000 convenience stores are operating in the nation, according to the Convenience Store News 2021 Industry Report. Of them, about 122,000 sell motor fuel. Fuel directly accounts for roughly 60 percent of the industry’s sales and 40 percent of its gross profits. Indirectly, about 48 percent of fuel customers come inside the store to make a purchase. So, the fuel customer is important to today’s convenience store.

Change is on the horizon. By 2030, the convenience industry may look very different. A convergence of two industry trends is on a collision course with future sustainability. The first trend is the movement to alternative fuels; the second is sale-leaseback financing.

The Movement to Alternative Fuels

With today’s inevitable push toward “green energy,” the current Administration has established a $15 billion investment fund with the goal of installing a nationwide network of 500,000 electric vehicle (EV) charging stations. The Department of Transportation ultimately seeks to designate 166,000 miles of highway in 49 states, inclusive of 134 interstates and 125 U.S. highways, as Alternative Fuel Corridors for all fuel types, including electric, hydrogen, propane, and natural gas.

An April 2021 press release stated: “Most electric vehicle drivers will charge at home and work. One of the perks of driving an electric vehicle is never needing to go to the gas station.”

Source: Federal Highway Administration, Department of Transportation

Moreover, California plans to ban the sale of new gasoline and diesel engines for passenger vehicles by 2035. Deloitte Insights forecasts that electric vehicles will account for about 25 percent of all new car sales in the nation by 2030.

The business model of big-box, grocery and drug stores may be better suited to embrace EV charging because of the compatibility of the typical customer transaction time with the 20 to 30 minutes required to charge an electric vehicle. Today, Walgreens has more EV charging locations than 7-Eleven Inc.

The Impact of Sale-Leaseback Financing

The second industry trend we want to look at is sale-leaseback financing. By 2008, 72 percent of all new stores were leased, often through sale-leasebacks (SLBs).

The impact of sale-leaseback financing on the convenience industry has been significant. Sale-leaseback financing is contributing to an expansion of the industry that was not possible before. For example, one national chain based in the Midwest is building about 20 new stores every year. Without sale-leaseback financing, its director of real estate stated that new store construction would fall to about three stores per year.

These SLB instruments most often equate to a capital lease with 100 percent financing and relatively high fixed lease payments guaranteed by the corporate tenant. Professor C.F. Sirmans of Florida State University conducted perhaps one of the only peer-reviewed studies comparing sale-leaseback transaction prices of commercial real estate to non-SLB sales. This study found, on average, SLB transactions were priced at about a 14 percent premium over non-SLB sales.

So, SLB convenience stores carry a comparatively high cost of operation created by these leases.

We have completed a shutdown analysis of a typical convenience store using the earnings and operating cost data from the 2021 Convenience Store News Industry Report. The economic situation for these sale-leaseback stores will be especially dire as these trends converge. Based on what we have seen in our analysis, at a 10 percent customer loss, the shutdown zone is entered. At a 16 percent to 17 percent drop in customers, no profit will remain, and no economic incentive will exist to continue operations.

Within a decade, 25 percent of all new cars will be electric vehicles. The convenience industry will face an emerging trend of fewer customers as EVs gain market share. Those stores with high fixed costs for real estate, such as those under SLB obligations, will not be able to absorb the lost fuel customers. So, what will the convenience industry look like in 2030?

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