Fueling Growth: Expansion
- Keywords:
- expansion
- growth
- acquisitions
“Growth is never by mere chance; it is the result of forces working together.”—James Cash Penney, founder of JCPenney
In 2018, the number of convenience stores in the U.S. declined for the fourth time since 2000—but that doesn’t mean the industry itself is in decline. Not a week goes by without reading about the acquisition of a large chain or a regional player growing into a national player in the news. There are also regular updates about midsize chains discussing plans for greenfield expansions as they build new sites to suit their needs.
The contraction within the industry has mainly been happening at the lower end of the scale—operators with one or two sites that typically don’t have the diverse product offerings or capital to be competitive—while larger players have been consolidating and growing. If you have competitive operations, now may still be a good time for growth.
Acquisitions
The mergers and acquisitions market is hot. In May, my colleagues and I attended the Southwest Fuel & Convenience Expo in Fort Worth, Texas, where one of the sessions focused on current sale prices within the industry. Due to the influx of international investors and private equity groups in the U.S. markets, EBITDA multiples have increased to historical highs. Combined with the recovery of retail margins over the past two years, some operators are seeing offers they cannot refuse. These sales prices are pushing the bounds on what some operators are willing to pay, leaving some to feel as if they’re being left on the sidelines.
Nonetheless, we don’t think the high multiples for acquisitions necessarily exclude midsize chains from growing. That’s because with the multiples so high, there are many more players who are open to a sale, including numerous smaller operators who may be interested in cashing out. If their pumps are older or their space is smaller, for example, the smaller operators are less likely to command the same high multiples as the premier operators, but they could still be valuable because of their location. With more targets out there, you may want to consider having a conversation to see if you can strike a deal.
New Builds
Having previously worked with the construction industry, I still get excited to hear about new builds. And if you’re not looking to acquire existing sites, it’s the alternative path for growing your business. With a new build, you have more control over the end result—you can choose the location, the entrances to your site and the size of your build (local code permitting). You can even make a site that could be a new flagship store for your growing brand.
Build-to-suit can also be potentially cheaper than making an acquisition because you’re paying only for the tangible assets, but it can still create high leverage due to the fact you would be taking on debt with no accretive EBITDA initially. Even after the store is up and running, it will typically take time to build operations to achieve a sustainable customer base that can support the cost of financing and operating the new store. But it also creates the opportunity to build a larger site that includes a broader array of food and ancillary products, or even an attached quick-service or dine-in restaurant, all of which could provide potential additional revenue to pay down construction debts and further grow your business.
How to Grow
Any growth strategy will require funds to support the expansion, whether it’s using cash on hand or outside sources, such as bank financing. It’s also possible to take advantage of the two trends discussed above to finance your planned growth.
With buyers paying relatively high multiples, it could be a good time to sell an older site that may be smaller or no longer fits within your target geographies. You could then use that cash to fund an acquisition or a new build. Or, if you have experience building out new sites, a construction loan from a known financing partner could include covenant modifications until the site is up and operating, mitigating the impact of increased debts until the site is operational. Other options to grow could include leveraging your existing assets or bringing in a partner to generate additional capital.
So don’t let the prices in the news scare you from growing. With proper planning, your time could be now.
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Doug Chinery
Fuel Services Relationship Manager
“Growth is never by mere chance; it is the result of forces working together.”—James Cash Penney, founder of JCPenney
In 2018, the number of convenience stores in the U.S. declined for the fourth time since 2000—but that doesn’t mean the industry itself is in decline. Not a week goes by without reading about the acquisition of a large chain or a regional player growing into a national player in the news. There are also regular updates about midsize chains discussing plans for greenfield expansions as they build new sites to suit their needs.
The contraction within the industry has mainly been happening at the lower end of the scale—operators with one or two sites that typically don’t have the diverse product offerings or capital to be competitive—while larger players have been consolidating and growing. If you have competitive operations, now may still be a good time for growth.
Acquisitions
The mergers and acquisitions market is hot. In May, my colleagues and I attended the Southwest Fuel & Convenience Expo in Fort Worth, Texas, where one of the sessions focused on current sale prices within the industry. Due to the influx of international investors and private equity groups in the U.S. markets, EBITDA multiples have increased to historical highs. Combined with the recovery of retail margins over the past two years, some operators are seeing offers they cannot refuse. These sales prices are pushing the bounds on what some operators are willing to pay, leaving some to feel as if they’re being left on the sidelines.
Nonetheless, we don’t think the high multiples for acquisitions necessarily exclude midsize chains from growing. That’s because with the multiples so high, there are many more players who are open to a sale, including numerous smaller operators who may be interested in cashing out. If their pumps are older or their space is smaller, for example, the smaller operators are less likely to command the same high multiples as the premier operators, but they could still be valuable because of their location. With more targets out there, you may want to consider having a conversation to see if you can strike a deal.
New Builds
Having previously worked with the construction industry, I still get excited to hear about new builds. And if you’re not looking to acquire existing sites, it’s the alternative path for growing your business. With a new build, you have more control over the end result—you can choose the location, the entrances to your site and the size of your build (local code permitting). You can even make a site that could be a new flagship store for your growing brand.
Build-to-suit can also be potentially cheaper than making an acquisition because you’re paying only for the tangible assets, but it can still create high leverage due to the fact you would be taking on debt with no accretive EBITDA initially. Even after the store is up and running, it will typically take time to build operations to achieve a sustainable customer base that can support the cost of financing and operating the new store. But it also creates the opportunity to build a larger site that includes a broader array of food and ancillary products, or even an attached quick-service or dine-in restaurant, all of which could provide potential additional revenue to pay down construction debts and further grow your business.
How to Grow
Any growth strategy will require funds to support the expansion, whether it’s using cash on hand or outside sources, such as bank financing. It’s also possible to take advantage of the two trends discussed above to finance your planned growth.
With buyers paying relatively high multiples, it could be a good time to sell an older site that may be smaller or no longer fits within your target geographies. You could then use that cash to fund an acquisition or a new build. Or, if you have experience building out new sites, a construction loan from a known financing partner could include covenant modifications until the site is up and operating, mitigating the impact of increased debts until the site is operational. Other options to grow could include leveraging your existing assets or bringing in a partner to generate additional capital.
So don’t let the prices in the news scare you from growing. With proper planning, your time could be now.
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