More than a Dose of Leadership
Full coverage of Outlook Leadership 2012.
Herd on the Street
Economist says group-think mentality is setting up economy for another fall
Like wildebeests moving in packs to protect themselves from predators, a mindless “herd mentality” permeates the stock market, potentially setting up another financial crisis in the United States, economist Walter Zimmermann said during the conference’s opening session.
Accompanied by two retailer panelists who developed strategic directions based in part on his forecasts, Zimmermann, chief technical analyst for United I-CAP, New York, warned attendees that signs of a bullish enthusiasm among investors has historically signaled a dramatic fall.
Pushed by low interest rates, highly computerized trading and aggressive investors such as pension funds desperate to meet goals, a herd mentality creates unwarranted buy-in, leaving markets vulnerable to influences ranging from Iran’s pursuit of nuclear muscle to the European debt crisis.
“Looking at the New York Stock Exchange, it seems they’re all bullish, they’re all-in again,” Zimmermann said, citing that historically the Olympic Games ignite a euphoria that affects the markets.
The herding phenomenon shows itself most vividly in how prices for gold, gasoline, copper and other commodities have all begun to merge into similar patterns, as if in lockstep.
“If you see stock prices go up, 15 minutes later the price of gasoline goes up,” Zimmermann said. Roller-coaster highs and lows work against the kind of confidence that fosters new investment and consumer spending, he said.
In times like these, Zimmermann said, the industry needs to support “visionary leaders.” He suggested that leadership can come in three forms: passive, toxic and visionary. Passive leaders are reluctant to make decisions and often delay them. “For passive leaders, success depends on being lucky,” he said.
On the other hand, “toxic leaders think ethics are for losers,” he said, adding jokingly, “That’s 10% of Wall Street.”
Visionary leaders, according to Zimmermann, “make the right decisions and avoid a herding mentality.”
Discussing other factors that could influence global markets, he focused on Iraq’s pursuit of nuclear energy and the European debt crisis. Regarding Iraq, Zimmerman said the country has no reason related to energy to pursue nuclear power. In that region, he said, 1% of the world’s population lives on 25% of the world’s natural gas. He suggested Iraq’s motives are more political, further fueling instability in the resource-rich region.
For Europe, debt issues with Greece, Portugal and Spain are bound to pull the entire region into a “vicious cycle swirling in one country after another … with repercussions for the U.S. and China.”
While Zimmermann’s forecasts were gloomy, some retailers have found ways to turn bad news into sound strategy. For Scott Hartman, president of Rutter’s Farm Stores, York, Pa., Zimmermann’s forecasts from before the recession of 2008-2009 encouraged him to not only seek the economist’s ongoing advice, but also to slow down his company’s new-build plans and stockpile cash instead, preparing for scenarios of flat growth and a 10% to 15% drop in sales.
“Preparing your balance sheet is key,” Hartman told the group. “Cash is king and too much debt is a problem.”
Deflation forces retailers to review their assets, Hartman said, which led his chain to slow land acquisitions and renegotiate loan durations.
On the other hand, retailer Greg Parker, president of The Parker Cos., Savannah, Ga., opted to take advantage of lower real-estate prices, cheaper building costs and favorable interest rates to secure new funding. “Bet the dollar long and build, build, build,” he said. Parker has built six new locations in the past 15 months, has two more coming on line soon, and he’s planning for 17 more in the near future.
“Let’s not let the tail wag the dog,” Parker said. “The strong companies are out there building.”
Hand-in-hand with chain expansion is the need to build rapport with customers, Parker said, describing the kinds of community initiatives and charity work his company does.
Zimmermann agreed with the strategy. “Consumers are hurting,” he said. “Income is not up. There’s no job security. Any program where you’re giving back will win people over and gain that stickiness you want in a customer.”
C-stores stay above recession, but health care, economy loom
While c-stores continue on a healthy track despite the past four years of global economic struggle, ominous factors such as impending health-care reform, continuing swipe-fee challenges and European debt cast grave concerns.
Tom Robinson, NACS chairman and president of 34-store, Santa Clara, Calif.- based Robinson Oil, pointed out the highs and lows of a relatively successful year for convenience retailers.
Some of the highs include:
- A record year of $681.9 billion in sales, according to NACS State of the Industry Report of 2011 Data and its CSX LLC industry survey tool.
- An 8.8% increase in overall sales, with an increase inside the store of 5.4% for January to April 2012 over the same period the year before.
- An overall increase in profits of 5.3%, with in-store profits going up 6.0% and fuel profits up 2.9%.
- An increase in foodservice sales of 11.6%, a healthy sign for an industry trying to wean itself from declining demand for tobacco and fuel.
- Double-digit increases in sales and gross-profit dollars in categories such as salty snacks, packaged beverages, candy and other dairy.
Unfortunately, the same research numbers reveal the industry’s weaknesses:
- Flat to negative numbers for core categories of fuel and tobacco, with fuel volumes up only 1.7% and cigarette sales down by 4.7% for January to April 2012 over the same period in 2011.
- An increasing disparity between the top-quartile chains and the bottom, with many key financials double for top firms.
- Ongoing credit-card swipe-fee issues, with the challenge hardly diminishing after legislators passed reforms in 2010.
- The European debt crisis and its potentially chilling effect on the global economy, which could slow U.S. recovery.
- Health-care reform and its deadlines edging closer, causing uncertainty and potential volatility as implementation in 2014 approaches.
- Middle East unrest and the potential of another “Arab Spring” of 2011, possibly bringing more swings in the price of crude, thereby affecting U.S. supply and demand.
Still, Robinson was very optimistic about the industry and its ability to bring in profits despite the larger economic picture. “We are a resilient industry,” he said. “We’ve had a solid year considering how poorly the rest of the economy did. Every year, we’ve had a positive increase in sales.”
Robinson showed a comparative graph involving annual sales for six different channels, with c-stores never dipping below zero and maintaining a stable growth rate. That picture is diminished by credit-card companies and the dynamic increase in credit-card fees that continues today. The record-breaking c-store profit edged into the $7 billion range, but credit-card fees by 2011 hit $11.1 billion.
Switching to issues that will affect retailers going forward, Robinson touched on many challenges. He said health-care costs leading up to President Obama’s initiatives will be a topic of concern for retailers, as will issues under the Food and Drug Administration (FDA). Such FDA issues include menu-labeling and tobacco regulation.
“It’s going to take work with the FDA to get requirements that work in this space and that are fair,” Robinson said.
Taco Bell CEO Extols Power of Social Media
When Taco Bell CEO Greg Creed, a self-professed “Australian selling Mexican food to Americans,” walked onto the stage at Outlook Leadership, he urged the crowd of c-store execs to accept that the world is an evolving place.
Taco Bell’s policy of adaptation allowed the company to recognize that the customer’s requirements are changing. Food is no longer being used for fuel; it is being used as experience. The company changed its tagline from “Think Outside the Bun” to “Live Más” to, as Creed said, “become a lifestyle experience, not a food experience.” It unleashed its incredibly popular new Doritos Locos Tacos. It also created a new, more upscale product—the Cantina Bell menu—for its changing demographic.
“You are no longer in control of your messages. Your customers are in control,” Creed said.
Taco Bell is harnessing the customer through the power of social media. It hosted a hometown “tweet-off” in which the company awarded a Doritos Locos Taco party to the writer of the most re-tweeted Taco Bell-related tweet. The winner became an overnight sensation in his city, and Taco Bell turned him into an unofficial spokesperson through TV ads and additional social media efforts.
“Our fans inspire our advertising,” he said. “You have to create conversations in the language they use.”
To fully harness the power of social media as it relates to the Taco Bell brand, the company put together a social media command center, staffed with a small group of twentysomethings. Their main focus is to troll Facebook, Twitter, Instagram—anywhere people are chatting about Taco Bell on the Web—and respond in clever, meaningful ways.
“It’s a massive commitment in people and money. And it’s the best investment I’ve made as CEO of Taco Bell,” Creed said.
Through this effort, many posts have gone viral, and some of the company’s most effective marketing campaigns have sprung from it, including a recent spot it did on a small town in Alaska. In the ad, Taco Bell responds to a hoax that had residents believing they were going to get their very own Taco Bell. When the town and its residents were crushed to realize it wasn’t true, the company airlifted a Taco Bell food truck and hand-delivered thousands of tacos to the residents. It made for some great TV—and an excellent marketing opportunity.
“We really think [social media] is transforming who we are as a brand,” Creed said.
A-B InBev CEO Reveals Platinum Upsizing
As part of his presentation on best-in-class leadership insights, Carlos Brito, CEO of Anheuser-Busch InBev, announced the rollout of a 22-ounce version of Bud Light Platinum.
Introduced earlier this year, Bud Light Platinum has been the most successful new beer launch of 2012, according to the company. More than a million barrels of the product sold in five months. The new 22-ounce package, created specifically for the c-store industry, was introduced in mid-August.
Brito also spoke about the company’s pending acquisition of the remaining 50% of Grupo Modelo. He said he’s “very excited” about what having the Corona brand in the AB InBev stable, along with a stronger footprint in Mexico, will mean for the company on a global scale.
When asked about beer’s role in the future of the c-store industry, Brito said the first thing is having a “quick in and out and having what consumers want. Understand their trips and have the assortment and layout designed around those needs,” he said. Second, the advantage this channel has to offer cold beer and the right beer in the right assortment is crucial.
The next goal for AB InBev, Brito said, is to make Budweiser (his favorite beer) a global beer brand. “Budweiser essentially represents the American dream in a bottle,” he said.
And the company’s ultimate goal: “Our dream is to be the best beer company in a better world.”
Panelists use hypothetical company to talk valuation, business assessment
Buying a fictitious Florida convenience chain may sound naïve if not downright ignorant. But the exercise was a way for six panelists to discuss the nuances of company valuation.
Talk of the fake 50-store Florida chain—40 fee sites and 10 leased sites— along with 15 dealer operations proved enlightening for session attendees, many of whom were potential buyers and sellers.
The exercise set up a list of statistics and historical data set to mimic the financials of “ABC Convenience Stores Inc.,” complete with total fuel gallons in the $70-million range annually, merchandise sales at about $50 million and store-level EBITDA at about $13.5 million.
Naming some of the pros of purchasing such a chain, the retailer on the panel, Jeff Kramer of Prima Marketing, Fairmont, W.Va., cited strong cash flow, good ratio of income to expenses and a solid number of high-performing stores (vs. just one high performer). In addition, the stores are located in Florida, where the demographics and economy (despite housing struggles) are promising.
(As a side note, Kramer was in the process of selling his locations to Dallas-based 7-Eleven at the time of this panel.)
Some of the cons Kramer named were the competition rushing into Florida, including Wawa, Thorntons and Sheetz. He also said the asking price for the fictitious chain was high at about $1.8 million per store and that the lot sizes at 2,800 square feet on average were not ideal for stores of the future. “But beauty is in the eye of the beholder,” Kramer said. “We’ve gotten used to an urban location, whereas a chain like Casey’s has done outstanding in rural areas.”
In many cases, chains eager to grow find acquisition a logical route, bypassing barriers to entry as well as the upfront costs of building from the ground up.
Kramer had other pieces of advice, including focusing on capital expenditures. Retailers need to know additional costs required to properly bring the new store back online. He also said to consider fuel brand and the option of going unbranded. “It’s huge regarding the flexibility it gives you,” he said. “But if you’re unbranded, you ought to bring a strong [c-store] brand to the area; if you choose an oil-company brand, they’re looking for longer and longer terms.”
The topic of sale-leaseback deals emerged. Stephen Horn Jr., senior vice president of acquisitions for National Retail Properties Inc., Orlando, Fla., said one of its main criteria when reviewing a possible buy is whether the tenant is bankable or not. “We’re in love with rent vs. land,” Horn said, citing how the value of the asset itself and historic cash flow are also strong indicators.
Panel moderator Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, Chicago, provided attendees with a list of valuation assumptions and methodologies, including:
- Valuation multiple ranges are calculated on store-level EBITDA in the case of retail operations and total dealer fuel income for wholesale operations.
- Valuation multiple ranges are calculated on the most recent 12-month income statement period.
- Typically, each store is analyzed separately. In the absence of individual store-income statements, the multiples are calculated on total store-level EBITDA.
Bankers and the market in general are more interested in the value of the wholesale business, said Brock Rule, COO of Hopkins Appraisal Services, Independence, Mo. “In the past it was all about the real estate and the retail business,” he said. “But as the jobber class has matured and grown, people now see value there and are looking to perhaps lend against it.”