Couche-Tard's Plan B
Couche-Tard after Caseys must find a new road to global conquest.
Hatched 18 months ago, it would have positioned Alimentation Couche-Tard as the most dominant player in the Midwest, and possibly the largest convenience chain in all of North America.
Of course, it didn’t happen, but had Couche-Tard been successful, acquisition of the 1,542-unit Casey’s General Stores (based in Ankeny, Iowa) would have enriched the Circle K empire in many ways:
- Extended its footprint decidedly into rural markets, gaining insight into the logistics and profi tability of small-town America.
- Brought in a formidable retail foodservice offer, supply chain and culture.
- Provided greater leverage and scale to fi nance global expansion. But after its unprecedented hostiletakeover attempt last fall—one that drew in arch rival 7-Eleven and cost $7 million in fees—the 5,904-store Alimentation Couche- Tard formally stepped away.
Not nearly as sexy as its predeceson this plan calls for a more modest approach to acquisition, a renewed focus on developing its foodservice strategy and other organic growth, including its burgeoning franchise business.
But first, Laval, Quebec-based Couche-Tard must regroup. A year of effort and a sizable investment later, the assumption is that the industry’s boldest acquirer needs time to lick its wounds. And a merry-go-round of top management changes that occurred earlier this year may be a sign of such a readjustment.
That said, more than a dozen industry contacts interviewed both on and off the record say the great consolidator appears to have shrugged off and moved on from what many believe to be a watershed moment for both the chain and the industry at large.
Here’s the bare bones of what Couche-Tard now faces after Casey’s:
- A tempered approach to growth, eyeing chains in the 10- to 30-store range over purchases that will make a “big splash.”
- A potential European expansion, which was mentioned during a recent presentation.
- An underdeveloped foodservice program needing to find its optimal formula for everything from supply to assembly and retail offer.
- A cagey industry, now fully aware of Couche-Tard’s envelope-pushing ambition, but also a potential Achilles’ heel in its refusal to “overpay,” considering the determination of big-league competitors to stymie its grand plans.
Insiders say this big deal was probably no big deal, internally. Accustomed to the ups and downs of acquisitions, executives on down through rank-and-file clerks have returned to their daily routines and responsibilities.
But their “business as usual” is set against a backdrop that is not.
“The whole Casey’s deal changed the landscape forever,” says Dennis Ruben, managing director of NRC Realty & Capital Advisors, Chicago. “Some of the bigger players have said we only want to look at a deal that’s bigger than ‘X.’ … Now [it’s] anything that’s a potential acquisition— small or large.”
The core drivers are clear: The publicly traded Casey’s now has something to prove to shareholders; the remaining major-oil parcels have gained new cachet; and as Ruben says, buyers today want to know what’s out there because, “If I don’t want it, who’s going to get it?”
In a single majestic stumble, Couche-Tard has ramped up the channel’s inevitable consolidation, setting the competition on edge and refocusing the spotlight on a chain that embodies both what’s fi xed and what’s broken about running c-stores.
Despite the presence of real-estate and acquisition experts both at corporate and throughout Couche-Tard’s 11 regional business units, Alain Bouchard would have taken the reins on the Casey’s deal, says a source once privy to the chain’s inner workings. Requesting anonymity, the source says that although Bouchard—president and CEO of the Circle K, Couche-Tard and Mac’s banners—has a consensus-building nature, he more than likely was the driving force behind the Casey’s run.
And Bouchard’s commitment to being a disciplined buyer may have been crucial because, all along, price was an issue.
“He’s very disciplined,” the source says. “He was not going to get drawn into a bidding war.” Publicly for Bob Myers, president and CEO of Casey’s, the singular issue was price. Couche-Tard initially bid $36 a share in October 2009. During the back and forth that lasted nearly a year, it eventually floated up to $38.50, which in a letter to Bouchard, dated Sept. 14, 2010, Myers said “substantially undervalues” Casey’s.
Overt pitches to Casey’s shareholders from both sides along with financial plays by Couche-Tard involving Casey’s stock (which it owned and sold to cushion the blow of costs incurred in the takeover attempt) all made for a historic battle. Even Dallas-based 7-Eleven, the industry’s only match to Couche-Tard’s numbers, stepped in, providing Casey’s and its shareholders with an alternative bidder and another shield to deflect Bouchard’s advances. Throughout the process, hints of nationalism drifted in, playing up Casey’s as a heartland staple pitted against the “foreign” ownership of the Circle K brand. (See “Lessons Learned,” below.)
In the end, shareholders, in an October vote, overwhelmingly sided with Casey’s management. Despite the shun, Bouchard in a February presentation at the CIBC Retail and Consumer Conference suggested that shareholders were, in fact, prepared to vote in Couche-Tard’s favor as late as eight days prior to the vote.
It’s unknown whether Bouchard’s unwillingness to move further on price or the 11th-hour entry of 7-Eleven as a “friendly” bidder sealed Couche-Tard’s fate in this 12-month ordeal.
One thing is clear: This chapter is over. Now turn the page.
Inrernal Ripple Effects
Many in the industry support Bouchard’s disciplined approach. Shareholder commitment to Casey’s management proved formidable and, as long as the chain’s stock price stays in the $40 range, that’s unlikely to change. (At press time, Casey’s stock was selling for $40.18.)
“I’m sure it was a letdown,” the anonymous source says. “[Couche- Tard] wanted it enough to get into a hostile environment, but it’s the difference between an emotional decision and a business decision with an emotional ending.”
That emotional ending could yet be a consideration. As those who have followed Couche-Tard know, it enjoys a rich history of successful and sweeping acquisitions, including a 980-store Canadian purchase in 1999 and, the coup de gras, the 2,290-store Circle K deal in 2003. Both purchases doubled the chain’s size. Again, sweeping and successful.
Granted, Casey’s was Couche- Tard’s first major unwilling seller. (Casey’s declined comment for this article.) However, $7 million represents only the cash value of this unprecedented effort. There’s also the emotional toll, says Bob VandePol, president of Grandville, Mich.-based Crisis Care Network, a consultancy that helps organizations facing stress.
Regarding Couche-Tard and the potential deal, he says, “It’s not a crisis in that nobody’s life was at risk, but crises are defined differently by different people. Shattered hopes and dreams can be impactful as well. It’s about the impact, not the incident.”
VandePol goes on to say that these moments can be pivotal and may negatively affect the productivity of working teams. That said, it would be folly to overplay any emotional fallout or expect to find a more humbled, retrenched Couche-Tard.
“These are not companies that say, ‘I’m going to pick up my toys and go home,’ ” says Dick Meyer of Meyer & Associates, Mesa, Ariz. “They’ll just go to the next challenge. They’re too smart to be demoralized. If anything, it strengthened them.”
Couche-Tard proved it would continue acquiring, with several incremental acquisitions right around the Casey’s situation, including last fall’s pickup of 10 company-operated stores from Dalton, Ga.-based Compac Food Stores and 12 from Indianapolis-based Crystal Flash Petroleum LLC. During the 24-week period ending Oct. 10, 2010, the company also acquired nine other stores through eight transactions.
The company’s decentralized structure allows regional acquisitions to be rapid decisions that don’t need a long approval process, according to one of the analysts interviewed.
Bouchard also said during the CIBC presentation that the company will maintain a pace of acquiring 200 stores a year.
Coincidence or not?
On the heels of the Casey’s fallout, Couche-Tard announced an executive shakeup: in all, 10 management changes since January.
On one hand, the shifts may be the result of planned changes in anticipation of the Casey’s acquisition, but when the purchase fell through, top execs may have carried out some altered form of it as a way to reward leaders for their efforts despite the loss.
On the other hand, the changes may have been in motion prior to Casey’s and would have occurred whether the deal went through or not.
Either way, what’s in place seems to reflect a new Plan B, with internal shifts happening between regions, and between regions and corporate, as well as hires coming from outside to lead at least two specific endeavors.
Three newly filled positions stand out, in foodservice, franchising and benchmarking. The most prominent is the hiring of 7-Eleven foodservice executive Joe Chiovera. Coming from a retail-foodservice background with c-store leaders such as Sheetz and ExxonMobil’s On the Run network (and 7-Eleven), Chiovera seems a logical choice for a chain pieced together from major oil acquisitions and having the entrepreneurial spirit to make foodservice a winning profit center.
The shifting of Kathy Cunnington to what seems to be a newly created position of vice president of benchmarking and administration shows a focus on analytics and developing comparative metrics. Cunnington was formerly the director of finance for Couche- Tard’s Midwest “shared services” department. Dennis Tewell is a new hire, who also moved into a spot vacated by a retiree, Rick Hamlin. Vice president of worldwide franchise, Tewell comes from work with London-based BP and the drugretail chain CVS.
A review of the remaining changes indicates that many seem to stem from a vacant spot up top. Last year Réal Plourde left his position as COO. Brian Hannasch, formerly the senior vice president of U.S. operations, took that role.
After Hannasch became COO, a period of several months lapsed before the company filled his former role as one of two senior North American vice presidents—suggesting either a lengthy search or a question as to whether the role needed filling.
The leadership changes may ultimately be a matter of course. Couche- Tard, according to the inside source, is a company “more focused on succession than any I’ve ever worked with.”
Its decentralized structure by all accounts breeds friendly competition among its 11 business units, as well as a steady pool of trained, experienced executives. “If you look at the people who are coming and those who are replacing them, they all have extensive experience, and that’s the beauty of their decentralized structure,” says an analyst who spoke on condition of anonymity. “It allows them to develop talent in-house, and it allows them to move talent from one division to another.”
When initially contacted for this story, Couche-Tard declined to participate; however, after a review of it prior to going to press, officials clarified the motives behind recent management changes, saying four retiring executives and a split of the Quebec region prompted the shuffle.
So while the machine that is Couche-Tard may have simply moved on from the Casey’s effort, VandePol of Crisis Care Network points out that behind the mechanisms of any great organization are its people.
“In retrospect, business leaders will … identify how the incident actually launched a new sense of commitment to the organizational mission, loyalty, team cohesion and engagement,” he says. “Others bemoan the event as triggering a collective negative image, increased conflict and distrust of leadership.”
Another reason to believe the Casey’s loss had less of an effect culturally on Couche-Tard is its almost Zen-like balance of growth by acquisition and profitability in the stores.
“There’s pressure and incentives to do both,” says Arnold Kimmel, CEO of the Ottawa, Ontario-based Quickie Convenience Stores chain, citing that the different regions are empowered to make acquisitions as much as they are pressured to meet their in-store numbers. “They attain [their goals] through an entrepreneurial spirit.”
So as aggressive as Couche-Tard is with M&A, it is also mindful of driving same-store growth.
One area in need of a win, though, is foodservice. The Casey’s acquisition may have brought some expertise, but even then, Couche-Tard is still looking for an across-the-board, soup-to-nuts solution, as it were.
Last July, Bouchard spoke of two efforts at finding the best way to bring foodservice products to the chain’s more than 3,500 U.S. stores. At the time, Bouchard said both were showing promise. He spoke of the Great Lakes division having their own trucks and a commissary that produced and delivered pastries, muffins, sandwiches and fresh fruits to 125 stores. Also, its Arizona division has its own distribution center. “We have hired multiple third-party producers to make similar SKUs to those I mentioned in the Great Lakes test,” he said. The ultimate goal is to improve core foodservice offers in all of its divisions.
It may be significant that Paul Rodriguez, the former head of the Great Lakes division, is now going to lead Arizona (filling the role vacated by the promotion of Geoffrey Haxel to senior vice president of operations).
Then, in a second-quarter earnings call, Bouchard said the company is “very, very happy” with its fresh initiatives, although when prodded he cited the competitive nature of the business as reason to be secretive about those efforts. He did say, however, that the company has “good pricing strategies, with the right products and right size and some exclusivity.”
A trip to a Circle K in the western suburbs of Chicago found a cooler filled with sandwiches, cut fresh fruit, vegetable dippers and yogurt parfaits, all products mentioned in past Couche-Tard earnings reports.
What’s Plan C?
Still, for as much as in-store progress makes for solid profitability, public companies such as Couche-Tard are in a heightened time of M&A. Some even speculate a second attempt at Casey’s if its stock price fails to meet shareholder expectations over time.
“Don’t think Casey’s is over,” says Kimmel of Quickie Convenience Stores. “They’ve got a desire to buy, and I can see a Round Two.” Many interviewed for this article believe a number of factors, including the Casey’s bid, have stoked a larger fire within the industry’s consolidators.
Case in point: Florida. In December, after the Casey’s tug-of-war, 7-Eleven reportedly beat out Couche- Tard for an ExxonMobil portfolio of 183 properties in Florida. “I think a lot of big players are really looking over their shoulder now, thinking, ‘Should I bid on this to make sure XYZ company doesn’t get it?’ ” says Ruben of NRC.
Ruben says he believes a couple of remaining major-oil parcels are potential targets: An ExxonMobil deal in Texas is one, with another portfolio in Southern California.
Bouchard may choose to get in on those bids, but as recently as February he directed the mergers and acquisitions discussion to Europe. In the CIBC presentation, he said a European platform would be an opportunity, but it would need a strong footing of about 200 stores.
Though remaining adamant that his first priority is expansion in North America, Bouchard said major oil companies in Europe have begun to divest their convenience stores, as occurred in the United States. The company has been scoping out opportunities there over the past few years, but, much like Couche-Tard’s foray into the United States a decade ago, it would require “a market where there’s room to grow.”
“So we have traveled a lot in the last year or so in Europe, [and] I think that there are opportunities that we’ll bid on eventually,” he said.
Others say acquisitions there would have to be big enough to justify a strong local management team—as is the case with the company’s decentralized U.S. structure. “With a standalone division in North America, usually they want at least 500 stores,” says another analyst who preferred anonymity. “It’s usually 500 to 700 stores, so they would need something along those lines.”
While such a large block wouldn’t be necessary in the first transaction, the company would have to see the potential to reach that level in a reasonable time frame, the analyst says.
Though Casey’s may have provided additional scale needed to pull off an even larger buy in Europe, losing the transaction actually could speed up such a move, according to the analyst: “Because if they had done the Casey’s transaction, they would have been a lot more levered and they would have spent the next 18 months probably integrating Casey’s.”
Speculation aside, Bouchard will always return to that balanced place. During recent earnings calls, Bouchard has said, “Many observers thought that the only way for Couche-Tard to grow was to make numerous acquisitions. This is partially true.
“But,” he continued, “our focus on sales, margins and efficiency are also part of the equation. This is why we will continue to seek acquisitions, but our focus will also remain on improving our existing network.”