Pay Dirt

Explosion of new builds ushers in era of the big format.

By  Abbey Lewis, Executive Editor

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“Pardon our dust may be what the sign says at a conveniencestore undergoing a remodel, but retailers moreinterested in building new are putting up a differentsign: “Eat our dust.”

By all accounts, the industry’s best-in-class chains arein hyper-expansion mode, leading a drive into so-calledunderserved markets that is bringing the latest and literallybiggest convenience-retailing concepts to market.

With more pumps, more in-store square footageand advanced foodservice offerings, these new-generationsites absorb market share like giant sponges,soaking it up from established retailers that are tooslow or simply unable to react.Last year was a tipping point for such new builds.Wawa jumped over several states from its regional Pennsylvaniabase to launch a five-year, 100-store thrustinto Florida. QuikTrip built 45 stores in 2012 to breakinternal records. Kum & Go was not far behind with itsown record of 43. Kwik Trip, RaceTrac, Sheetz, Tri Star,Thorntons; smaller chains such as Savannah, Ga.-basedThe Parker Cos.; and former single-store operators suchas Oak Brook, Ill.-based Power Mart are seeing profi tsin expanding with newly crafted convenience models.

Prior to its 2012 record year, West Des Moines,Iowa-based Kum & Go’s previous year-end tally of new builds was less than half—21—in2009. “Competitors are contracting, [andconsidering] the economy in the c-storespace and the markets we wanted to enter,timing was right to do it in 2012,” saysDavid Miller, chief marketing offi cer forthe chain of now 430 stores in 11 states.“While it’s hard to say we’ll do 43 againthis year, we plan to be just as aggressive.”

And the trend is not limited to burgeoningsuburbs or unexplored ruralterritory. A sluggish economy and thenew absence of major-oil turf wars hasopened up midsized cities and even large,inner-city neighborhoods, where pent-updemand for new development presentopen frontiers for those able to lay claim.

For retailers in this mode—as opposedto M&A specialists—the reasons behinda new build, or what some would call anorganic strategy, center around the seductivequalities of new construction:

Getting what they want: Newconstruction means building a site toa retailer’s exact specifi cations. In manycases, revamping an existing site orbuilding in an area where land is notoptimal means compromise. New buildshold the potential for concept perfectionand greater portfolio consistency.

A better ROI: Whether an acquisitionor new build, any new investment isa commitment. Many retailers believe therisks are better and the assets more easilyassimilated with ground-up. As one Texasretailer said, it’s “more interesting.”

The lure of new: Communitiesinevitably gravitate to new retail offers,representing greater immediate potential.

Large formats trump the competition.In many areas, the standards forconvenience retail are low, which meansa bigger forecourt, bigger store and betterinside offer can grab a disproportionateshare of the market.

The recession and its aftermath—often the source of blame for strugglingoperators—in fact laid the groundworkfor this emerging 5,000- to 6,000-squarefootformat, almost double the size of the3,000-square-foot layout that was standardjust a few years ago. Vacancies left by majoroil and prolonged periods of other propertyvacancies are creating entry opportunities,especially for c-stores, which asa channel has proven itself a stable bet intough economic times.

“Aggressive companies are seeingopportunities in trade areas that havebeen abandoned—not in terms of[number of stores] but new development,”says Jim Fisher, CEO of retail siteanalysis fi rm IMST Corp., Houston.

Citing how companies such as Wawa,Wawa, Pa., and QuikTrip, Tulsa, Okla.,won’t jump into a well-developed, highlycompetitive market, he says, “If I’m servingthe market and constantly supplyingthose needs, the competition is notgoing to come in. But when I start livingthe life and forget what’s been given tome, then: Oh my—there’s a Wawa.”

Why Now?

Labeling the current boom in new buildsas an overnight phenomenon wouldbe oversimplifying the trend, as wouldpinning it on depressed land values andconstruction costs.

For Miller of Kum & Go, the processesand the development of each individualsite had their own unique path. “The storeswe built in 2012 took many months ofpreplanning, sometimes years to the daybefore they were built and opened,” Millersays. The chain has moved in recent yearsinto northwest Arkansas and ColoradoSprings, Colo. “For us, 2012 was the culminationof a market-by-market approach,[considering] the best location, the bestprice and then negotiating and buildingstores in favorable locations.”

Still, for many well-positioned retailers,the recession and its byproducts didpropel today’s push to build new. Oddlyenough, the main drivers speak more towhat doesn’t exist that what does.

Big Oil withdrawal: Prior to theirretail pullout two or three years ago,the majors practiced a fuel-pricing andcontractual structure that kept manycompetitors out of metro markets. Sincethe turnover of thousands of sites to areajobbers, those roadblocks no longer exist.

No new development: The effectsof the economy—including handcuffs onlending and consumer-price consciousness—put the brakes on new investmentin general, leaving many city, county andtownship coffers thirsting for revenue.Properties once off limits are now freeingup, and many local communities arewooing reputable c-store chains to winfresh tax revenues and employment.

No new ideas: In many communities,especially older, well-establishedones, new retail concepts are few and farbetween. Entrants with new ideas andnew formats may immediately attract aswell of traffic in older neighborhoods,percolating pent-up demand.

That’s why many companies are consideringa backfill strategy, Fisher says,describing how some retailers are revisitinginner-city areas and older residentialcorners to get at those lost opportunities.

So what becomes important is notthe age of the neighborhood, but theage of the asset. “We find the older assetshave difficulty competing against anewer build,” says Scott Hartman, presidentof Rutter’s Farm Stores, York, Pa.

That key truth puts a fresh spin onnew-build growth, Fisher says. Whilean acquisition that makes the newswill announce a 30-, 75- or 150-storetransaction, the number for a chain’sannual new-build plan may be six, 12,23 or, of late, 45.“The point is that it’snot 45 1,800-square-foot stores withfour MPDs,” Fisher says. “It’s 45, 23 or12 4,000-square-foot stores with eightMPDs.”

One new site could take on the volumesand sales of three older ones. Fromthat perspective, Fisher says the industry is both saturated and not. “Florida andTexas have the highest numbers of locationsin the industry, but it doesn’t meanthat Florida and Texas are saturated,” hesays. “Yes, these markets are saturated—saturated with old [assets].”

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