Casey’s – Convenience Store Outlook & Q3 2021 Update
– 21 July 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Jason Murray (JM)
Former VP at 7-Eleven Inc
Agenda:
1. Casey’s (NASDAQ: CASY) North America convenience store footprint
2. Retail product mix and same-store sales
3. Fuel margin compression
4. Sales outlook amid increased mobility
Contents
Q: Could you provide an overview of the convenience store industry’s structure and how that and the
competitive landscape have evolved over the last few years?
Q: Could you highlight 2-3 consumer trends you noticed pre-coronavirus within convenience stores? This
also includes tobacco, as you said.
3
4
Q: How has the operating environment changed due to coronavirus? Has the pandemic just accelerated
trends much more quickly? Were some trends harder to implement because of peoples’ reduced mobility? 4
Q: How did convenience store operators adjust to the pandemic environment? Which players have been
agile and quickly understood that their business model needed to be adjusted to stay afloat, rather than
waiting out the storm?
4
Q: Why do you think this industry is so fragmented? Why wasn’t there consolidation earlier, given some of
the advantages that may come with scale? Could you elaborate on the advantages or disadvantages that scale
5
might give to industry players?
Q: What are the strengths or weaknesses in Casey’s product mix, even though cigarette sales still represent
around 20% of revenues? What do you think is the right product mix, perhaps reflecting the shift to food
service?
6
Q: Why do you think Casey’s private label business has been so strong? Is it due to brand names’ high
pricing vs what Casey’s can provide? Could you outline that balance of quality and price and how that
compares to well-known brands?
6
Q: Could you elaborate on the product mix and the balance players have to strike when pushing out a private
label product so you don’t alienate brands that consumers are deeply loyal to? At what point is it too much
private label and companies need to scale back and have more brand-name products in stores?
7
Q: How can a company such as Casey’s leverage pricing to drive traffic, at a time when there’s significant
demand within retail grocery? What comparisons have you noticed when assessing pricing and promotional
activity?
7
Q: How have freight costs impacted convenience stores? How have retailers worked to mitigate these higher
costs?
9
Q: You mentioned the EV [electric vehicle] landscape will evolve in the next 3-5 years. Do you think there’s
an opportunity to provide charging stations, or is there just not enough revenue to entice a convenience store
9
to implement that on a much larger scale, given the low cost of recharging a vehicle?
Q: Why do you think Casey’s might target a particular region or area to build a strong presence in,
considering its footprint and the mix between urban and rural? Why do you think Casey’s is more centred in
the Midwest?
10
Q: Could you elaborate on the opportunity within smaller and less sophisticated chains and how aggressive
Casey’s is with this growth strategy vs just presenting the opportunity for investors?
11
Q: You mentioned the sales
Q: What opportunities have you noticed within the category assortment from convenience stores such as
Casey’s? You mentioned 7-Eleven jumping into pet food. Prepared food also seems to be one of the fastest-
growing categories.
Q: The retail grocers struggle on the health and wellness front. To what extent is private label from chains
such as Casey’s or 7-Eleven placed to tackle clean ingredients and make offerings much more health
conscious?
11
12
12
Casey’s – Convenience Store Outlook & Q3 2021
Update
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Casey’s – Convenience Store Outlook & Q3 2021
Update. I’m Nyree Hinton and I’ll be facilitating today’s Interview with Mr Jason Murray, former VP at 7-
Eleven Inc.
Jason, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
JM: I agree.
NH: Could you provide an introduction to your background?
JM: I’m a 27-year veteran of retail and big-box retailers like Walmart and Best Buy. I did spend just under 11
years at 7-Eleven, where I served as a merchandiser, operations training and international. Probably most
relevant to this call, a little over five years of experience as Vice President of Operations of a 900-store zone
across four different states. I’m happy to help any way I can today.
[00:01:23]
Q: Could you provide an overview of the convenience store industry’s structure and how that and the
competitive landscape have evolved over the last few years?
JM: The convenience store industry makes up about 155,000 convenience stores. It’s a very fragmented
market, where if you look at other areas such as Japan, over 95% of the convenience stores fall under one of
three banners, where in the US, our largest convenience store retailer represents less than 10% of the total
convenience store base. It’s a very fragmented market, but there’s rapid acquisition and merger activity
occurring and that really is happening for multiple reasons. One is the digital revolution, where the larger
retailers are able to adapt and get into that game, whereas the mom-and-pops, single-store operators, or
operators that have maybe 10-15 stores, they just don’t have the capital or the flexibility to be able to compete
in that digital world. The other thing that you’re seeing in the convenience industry is the decline of cigarettes
and tobacco.
Over the last 10 years, there’s been a significant decrease in the velocity of cigarettes and tobacco, which has
put a lot of pressure on these smaller retailers that are not able to pivot into other areas of the business that
larger retailers such as 7-Eleven, Circle K, Casey’s, in the things like private brand, into food, into the digital
world. They’re able to pivot into different areas of the business, whereas the smaller mom-and-pops are having
difficultly replacing those sales dollars and, more importantly, the gross profit dollars, associated with
cigarettes and tobacco, so that has also helped fuel some of the M&A activities, because the smaller mom-and-
pops just aren’t able to compete in the world that we’re in today. The larger retailers, and I would include
Casey’s, having 2,300 stores, as one of the larger retailers that is able to pivot into private brands, pivot into
food, pivot into digital, that is going to help them be successful in the years to come.
Private and confidential 3
[00:04:02]
Q: Could you highlight 2-3 consumer trends you noticed pre-coronavirus within convenience stores? This also
includes tobacco, as you said.
JM: It really hits along those same lines. What you’ve seen is fresh food has become a great way of replacing
the gross profit dollars that have been lost via cigarettes and tobacco. As more and more local and state, and
even federal, restrictions on cigarettes and tobacco, that has been the mainstay in convenience for decades and
now that that platform is starting to become a much smaller part of the business, there is a transition into
food, which Casey’s already had a strong food business with their pizza programme, their doughnuts, they’ve
done a nice job on that front, so they’re able to pivot their business towards being more of a food destination
than maybe what they’ve been in the past. The other trend is the digital trend. With the onset of Amazon,
coming in really and having a huge impact on retail overall, it’s also having an impact on convenience. Being
able to be relevant to customers in the digital world by having a website, having apps, having a loyalty
programme, being able to buy it online, pick up in store, or have home delivery, these are huge trends that
were happening pre-COVID.
Then the third and final one that I would add to that would be the private label presence. Casey’s is a little late
to the game on the private label, but the important thing is that they understand the importance of private
label and they’re getting into that business. It already, given the strong name, brand recognition with Casey’s,
they’ve done a great job over the last 50 years of establishing a very strong and consistent brand. Being able to
add private label to that is going to help increase the margins that are associated with the private label
programme. It will also drive foot traffic, because you can only buy Casey’s private label product at Casey’s,
and so that’s been a big change and something that you’re seeing happen prior to COVID happening was the
food, the digital and the private label.
[00:06:46]
Q: How has the operating environment changed due to coronavirus? Has the pandemic just accelerated trends
much more quickly? Were some trends harder to implement because of peoples’ reduced mobility?
JM: COVID has had a significant impact on consumer behaviour. Obviously, when we’re locked down, kids
are not able to go to schools. There are people working from home. It has really disrupted the rhythms of
shoppers into convenience stores, including Casey’s. What it’s done is it’s accelerated the need for digital.
You’ve seen Casey’s come through with their loyalty programme in 2020. That obviously is a big step in the
right direction, because consumers now have to engage with you digitally, where in the past they may have
physically come in the store three, four or five times a week, they’re reducing their number of trips, but they
want to feel connected to you via the digital. The digital has actually been accelerated in the COVID
environment. Food has been negatively impacted by this, because trips are down and so that person that was
coming in the morning and getting their coffee, getting their doughnut, maybe a sandwich for their lunch,
they’re not coming in, because potentially they’re working from home, so they’re eating at home rather than
going out. Food has actually been hindered by the COVID. Private label, I don’t think it’s really been
accelerated or been distracted from. It’s been on pace. They’re growing that piece of the business. It’s growing
very successfully, so in some cases COVID has accelerated pieces of the business, like digital and private label,
but it’s also hindered some of the progress that has been made on food, because it’s had such a disruption with
foot traffic and kids not going to school and people working from home.
[00:09:04]
Q: How did convenience store operators adjust to the pandemic environment? Which players have been agile
and quickly understood that their business model needed to be adjusted to stay afloat, rather than waiting out
the storm?
Private and confidential 4
JM: I’m most familiar with 7-Eleven and I think they’ve done a very nice job of accelerating their digital
presence. When I see Casey’s taking a page out of their book, out of 7-Eleven’s book, and not only having a
digital presence, but being able to buy online, pick up in store, having home delivery, so they’re using
DoorDash, they’re using Uber Eats, to help them deliver to consumers’ home. That has been accelerated with
COVID and I think that they’ve adapted well. Again, your smaller mom-and-pops, they don’t have the
capability, the capital, the infrastructure to be able to be relevant in that digital world. It makes it very difficult
for them to be meaningful to their consumer base from a digital presence. People want to be able to go onto a
website or an app and see what your promotional offerings are, see if you have the items that you’re looking
for, but if you don’t have that website, you don’t have that app, you don’t have that digital presence that is
becoming more and more important with consumers in today’s environment.
If you think about what people do in their day-to-day lives, the first thing you do when you wake up in the
morning, is people typically grab their phone, and it’s the last thing they do before they put their head on their
pillow at night is they look at their phone and they make sure everything, people waking up in the middle of
the night and looking at their phone. It’s just a part of life now. All throughout the day, people are checking the
stock market, checking news, checking social media and if you don’t have a presence digitally, you’re going to
be left behind. If you look at the big retailers like 7-Eleven and Couche-Tard, Circle K and even Casey’s, they
understand the importance of being digitally relevant and they’re making the appropriate investments to be
able to have that digital presence. That’s the big value proposition that will go against Amazon. Everybody is
concerned about Amazon, Amazon, Amazon, but what Amazon doesn’t have is it doesn’t have the 13,000
stores that 7-Eleven has, or even 2,300 stores that Casey’s has. That’s the strategic advantage that these
convenience retailers have, is they have the physical locations and it’s how do they use those physical locations
with their digital presence, to be able to effectively compete against the Amazons of the world and be relevant
to their respective customer base?
[00:12:17]
Q: Why do you think this industry is so fragmented? Why wasn’t there consolidation earlier, given some of the
advantages that may come with scale? Could you elaborate on the advantages or disadvantages that scale
might give to industry players?
JM: It is very fragmented and really if you look at how this industry came to be, being in a small town, corner
market, and seeing that that was successful, “I’m going to go ahead and grow a little more here.” It was very
regional. When you see in discount store retailing, Walmart was gobbling up a lot of market share over the
years. In convenience, small entrepreneurs were the ones who primarily made up the convenience store
industry. Convenience is a 90-year-old industry and it’s been popping up a little bit here, a little bit there. I
referenced Japan. Japan convenience didn’t start until the 1970s, so it is relatively a young industry. Since no
one really understood convenience, 7-Eleven really took charge and was able to expand very quickly.
FamilyMart and Lawson took note of that and did the same thing, and that’s why, when you look to Japan, you
really only see three brands that make up the vast majority of the market. When you look at the US, it’s been a
lot of mom-and-pops that have been the backbone of the convenience store industry. 7-Eleven has grown to
the point where now they’re at 13,000 stores, but still that’s less than 10% of the total stores.
What you are going to see in the years to come is a very vast consolidation of those 155,000 store into a few
key brands. 7-Eleven, Circle K, Casey’s could be one of those, but the smaller mom-and-pops are just having a
very difficult time adapting to this new digital world that we are in. Customers expecting home delivery, being
rewarded for their transactions with loyalty. The larger players are able to adapt that environment. The
smaller mom-and-pops are going to struggle, especially in light of cigarettes and tobacco declining in volume
as much as they are, and not having the capability to pivot into fresh food platforms, a digital presence, private
label, things that you see the larger, the Circle Ks and the 7-Elevens and the Casey’s. Those strategies have
been very on purpose, because that’s where the customer has gravitated to. They have the capital to be able to
get into these new areas of business, where the smaller mom-and-pops, they just don’t have that capacity and
so they’re looking at, “What are we going to do?” In a lot of cases, they’re selling and they’re selling to the big
boxes, the Circle Ks and the 7-Elevens and the Casey’s of the world. I see that continuing to happen. In fact, I
see it accelerating over the next 3-5 years, given the pressures that are happing on the cigarette and tobacco
Private and confidential 5
front.
[00:15:59]
Q: What are the strengths or weaknesses in Casey’s product mix, even though cigarette sales still represent
around 20% of revenues? What do you think is the right product mix, perhaps reflecting the shift to food
service?
JM: Casey’s has benefited as they have typically a little bit of a larger footprint than what you would find in
your typical convenience store. They just did a big reset across all of their stores. They have raised their
gondolas, giving them the capability of adding another 250 items, which is about 10% of their total mix within
the stores. Here you see Casey’s broadening their assortment, trying to be more relevant to their consumers.
That’s going to be a real strength. Pizza has been a mainstay for them since the ’80s and they continue to grow
that piece of the business, while venturing out into new areas of food. As I look at the product mix of Casey’s,
I’m very optimistic in their ability to grow in-store sales, because they do have the capability of expanding
their food programme. I do want to underscore the private label as well. Private label is already doing very
well. It’s, what, about 2.5% of their total in-store sales and some of their categories, the leading products
within those categories are private label. If you look at meats, snacks, nuts and seeds, they’re already the top-
selling items, eclipsing the main brands, so that is another thing that is helping their assortment. That’s going
to give them a strategic advantage against local competitors that maybe don’t have the capability of having a
private label programme, or have the room to be able to expand into a meaningful food programme.
As I look at the product assortment, I think that basic convenience needs, the store is large enough to be able
to have the assortment, especially with this new remodel, raising the gondolas, adding more items that are
going to identify the poor sellers and getting those items out of the store, and freeing up the capability for new,
innovative items that are going to resonate with the customer. As I look at their merchandising mix and the
merchandising value proposition of Casey’s overall, I’m very optimistic with them. They’ve got a strong
merchandising team, they understand the importance of food and private label and they’re taking appropriate
actions to give the consumer the breadth of assortment, so they have the convenience, whether it’s, “I have a
stomach ache,” or, “I’ve got a headache,” or, “I need a little snack,” or, “I need a gas can.” They’ve got the room
to be able to have a product assortment that’s going to cover the convenience needs, while they’re driving their
food business forward, their private label business forward. I think that merchandising, the product mix is a
strength for Casey’s, especially because of their growing food business, their private label. Since they’ve
launched that, it’s resonated quite well with the consumers, and giving themselves capacity with this new
remodel, raising their gondolas to be able to have the items that the customers are going to be looking for.
[00:19:47]
Q: Why do you think Casey’s private label business has been so strong? Is it due to brand names’ high pricing
vs what Casey’s can provide? Could you outline that balance of quality and price and how that compares to
well-known brands?
JM: It’s a great question. I’ll first point out the change in the consumer. As you look at the millennials and the
Gen Zs, the younger generation, the studies have shown that they’re more willing to use convenience as a
solution for food vs the Gen Xers and the baby boomers, who have gravitated away from that. The consumer
has fundamentally changed to be more open to consider convenience as a solution for breakfast needs, lunch
needs, dinner needs. You look at private label, what we’ve also seen in the change in the consumer is that,
while the baby boomers and Gen Xers may be very brand loyal, if I look at, “I want a tortilla chip,” my
generation, Gen X, we look at it and say, “We’ve got to get a Doritos. Doritos is the way to go,” while the
younger generations, the millennials and the Gen Zs, they’re not as brand loyal. They want a good-quality
tortilla chip. They don’t necessarily have to have a Doritos tortilla chip, so they’re not as brand loyal. The
consumer has kind of shifted to, “We’re okay with private label, as long as it meets good quality.”
Private and confidential 6
Darren Rebelez has already committed that, “Our private label programme is going to be as good, if not better
than the national brands.” Something very similar to what 7-Eleven did, benchmarking the national brand and
making the private label as good, if not better than the national brand. From a consumer perspective, you’re
getting the value, because you’re not paying for all those commercials that Doritos are spending to advertise
their product. That is built into the price of their Doritos chip. If you look at private label, they don’t have all
that advertising. They don’t have to go through all that, so you’re able to have a lower cost of goods, a higher
margin, so the company is making more money for every sale of a private label item, and from the consumer
they’re getting a good-quality item at less than what you would be paying for the main brand. There’s value for
the customer, there’s margin for the retailer and it also creates a loyalty. If you happen to get affiliated to a
private label tortilla chip that I used in this example, I will drive past a 7-Eleven, I will go drive past a Circle K
to get to Casey’s and get that tortilla chip that really I like. It creates some loyalty, it creates value for the
customer and it also creates shareholder value by driving higher margins than what you would find on the
main brand items.
[00:23:20]
Q: Could you elaborate on the product mix and the balance players have to strike when pushing out a private
label product so you don’t alienate brands that consumers are deeply loyal to? At what point is it too much
private label and companies need to scale back and have more brand-name products in stores?
JM: The consumer is the one that’s really making the call. They’re the ones that are letting retailers know
when there’s too much private label. Quite honestly, I haven’t seen it. I haven’t seen it at Walmart, I haven’t
seen it at Costco, I haven’t seen it at convenience store retailers. The consumers seem to be more value
conscious than they are brand. You’re going to have things like Coca-Cola. If you’re a Coke drinker, you can
put out all the private label in the world and it’s not going to change that Coke customer from wanting the
Coca-Cola, so you’re right, there does need to be a balance between what consumers have grown to know and
expect when they come into a convenience store, like Doritos. It’s not okay to not carry Doritos. You’ve got to
carry Doritos, but it’s okay to have a private label offering. I look at Walmart and see what they’ve done, and
I’ve seen a lot of retailers take a page out of Walmart’s book, where they have the name brand item and then,
right next to it, is the private label. They’ll typically have some POP or some kind of messaging that says, “Save
and compare,” or, “Compare and save.” That’s when you pick up the box and you turn it around, and you look
and look at the ingredients of the name brand, look at the ingredients of the private label, and they’re,
essentially, exactly the same. The consumer says, “While I like Doritos, it’s, essentially, the same chip. It’s a
good-quality chip, but it’s USD 1 cheaper, so I’m going to go ahead and give this one a try.”
As we’re looking at merchandising assortment, you have to have a good balance of name brand that draws
people to the section, while having some private label presence. I know at 7-Eleven, the goal is to have a
private label presence in every category throughout the store, regardless if it’s pet food, automotive, snacks,
sodas, beer, cigarettes and tobacco. They have Teton cigarettes with 7-Eleven and I see Casey’s going down
that same road. They’re not as far as long in their development as 7-Eleven, but you’re seeing that they’re
introducing new private label items, putting them as close to the name brand as possible, so people can
compare, because you’re right, there is going to come a tipping point where it’s too much, you’ve taken out too
many of the name brands. The consumer is the one that’s making the decisions, because their purchasing
behaviour is what’s driving the decisions of the merchandising team whether to add more private label or,
“Maybe we’ve saturated this a little bit too much and need to go back to having a little bit more name brands in
that particular sub-category.” I’m happy to elaborate on that if I didn’t quite hit your question on the head.
[00:26:57]
Q: How can a company such as Casey’s leverage pricing to drive traffic, at a time when there’s significant
demand within retail grocery? What comparisons have you noticed when assessing pricing and promotional
activity?
Private and confidential 7
JM: The promotional activity is really what’s driving the value message. You’re going to see it in the app,
you’re going to see it online, you’re going to see it on the external messaging at the stores. It’s a, “Buy two, get
one free,” “Buy one, get one free,” “If you use our app, you’re able to get 50% off a pizza.” That’s how they’re
going to drive the value statement with consumers, is through promotional pricing. Convenience typically falls
into what’s called channel pricing. We’ll take Coca-Cola. We used them as an example earlier. Coca-Cola will
charge retailers differently, based on the channel that you operate in. A 12-pack of Coca-Cola for a Costco or a
Walmart would be charged to that retailer differently than what they would at convenience. This really rubs
the convenience store industry wrong and there have been a lot of battles over this, because convenience
stores hate channel pricing, but it is a reality. If you look at your basic side counter items, your candy bars and
your snacks, they’re going to try to be competitive and utilise private brands to drive that value message, but
the real value that you’re going to be shouting from the rooftops and to the street is going to be through
promotions. Again, it’s the two-fors, the three-fors promotional pricing, utilising digital to drive promotional
awareness. “If you use our app, we’re able to give you two pizzas for buy two and get one free.” They’re going to
use the digital platform to also drive that value message. Private label and promotional pricing are going to be
the big ways that unit velocity is going to be driven. Once you get inside the store and look around, you’re
going to see that a lot of the side-counter items are going to be maybe not priced as well as what you’d see in a
Walmart or a Costco, and part of that is the result of channel pricing.
NH: Does that produce a risk to manufacturers, given this rise in private label? Do you think some of these
suppliers or manufacturers are using this channel pricing metric because private label is not as developed in
the convenience store channel? Why do they feel so confident having a much higher price point, given that
same dynamic or battle is very fiercely happening in retail grocery, when even the manufacturers are trying to
figure out ways to stay competitive? Why are they not bringing that same approach to the convenience store
channel?
JM: It’s kind of the culture that it has. This has gone on for decades, where your big national brands will
charge differently, based on the industry that you’re in. If you’re in the discount store industry, if you’re the
Targets and Walmarts and Costcos and Sam’s Clubs of the world, they justify that, “When I deliver to one of
those stores, I’m delivering pallets of goods. When I deliver to a convenience store, I’m delivering 40 cases.”
That’s their justification, it costs more to service a convenience store, because the deliveries are smaller and
they have to be more frequent, because they don’t have the holding capacity, so there’s been some justification.
On the retailer’s side, again I’m looking at this from 7-Eleven’s perspective, because that’s where I’m most
familiar, we had a real problem with that, because in a lot of cases, we outsold, as an aggregate. If you look at
how many cases our flow-through at 7-Eleven exceeded Walmart, exceeded Costco, but yet we were being
charged more simply because we’re in the convenience industry. There is some real justification for some
pushback on that, but, “That’s how it’s always been done,” and that was kind of their justification. It made the
manufacturer more money as well.
If I’m able to squeeze a few more cents out of the convenience store industry, I get a lot of volume. Yes, it’s a
little bit more difficult, because the delivery sizes aren’t as big and they have to be more frequent, but I see that
changing as convenience, you’re seeing the likes of a 7-Eleven and a Circle K becoming so large, they have
bargaining leverage to be able to say, “No, we’re not going to be charged differently than what you’re charging
Walmart and Costco. We want that same price as what you’re offering them.” When the manufacturer says no,
you’ve seen retailer, 7-Eleven, I remember Pepsi, we said, “We’re not going to carry a certain amount of your
SKUs then, because you’re treating us differently than how you would treat a Walmart or a Costco.” The
convenience industry is starting to gain leverage to be able to push back on channel pricing. Casey’s, as they
grow bigger and bigger, will get more leverage with the national brands. When you’re 7-Eleven and you’re
operating 13,000 stores, you’ve got some leverage. You can press these national players to give you a better
cost of goods. Casey’s, 2,300 stores is becoming more of a player, but they don’t really have that leverage just
yet to go in and really start twisting arms and saying, “This isn’t fair. You need to start charging us what you do
those in the discount and warehouse industries.”
Private and confidential 8
[00:33:41]
Q: How have freight costs impacted convenience stores? How have retailers worked to mitigate these higher
costs?
JM: With Casey’s, they’re about to open up another distribution centre. Their 2,300 stores have been serviced
by two distribution centres. They’re able to add a third in Joplin, Missouri, which is going to really increase
efficiencies for their business. The number of miles that truckers have to drive in order to get the products
from the warehouse to the stores. Having that infrastructure of a logistics supply chain, to be able to get the
products to the stores in a cost-efficient manner, you’re seeing Casey’s take a nice step in the right direction
because of that. As you look at the national brands, if I can deliver to a warehouse vs 2,300 individual stores, it
creates some leverage for the merchandising team to be able to negotiate a lower cost of goods, because the
burden of delivering to these 2,300 stores is now on the retailer, not the manufacturer. I’m very pleased to see
that Casey’s is opening up that third distribution centre, creating some efficiencies for their business, which,
ultimately, is going to fall into their cost of goods. You’re going to see their margins are going to be impacted,
not only through the efficiencies, but also the leverage of the negotiating with the national brands that is
created when you have a larger store base and you have efficiencies with distribution centres and a supply
chain that is able to get the product to the stores in a more efficient manner.
NH: What are your thoughts on offering fuel and the added benefits that it may provide vs a 7-Eleven, where
there isn’t that integration?
JM: Like I mentioned earlier, convenience, it’s an older industry. It’s been around for 90-plus years and
customers have grown to become accustomed to getting fuel and swinging into the convenience store and
grabbing some snacks, or whatever they might want to have, and then, boom, go back, get in their car and go.
We’re trying to train consumers, over the years, to complement fuel with convenience. You see 7-Eleven, most
of their acquisition in store growth is with fuel. The days of just a standalone convenience store, while there is
going to be a certain percentage of stores that are going to be just convenience stores, the more profitable
model is to have convenience with gas. You have seen Casey’s explore, “We typically are a convenience store
with gas, but we’re exploring convenience stores without gas,” and that gives them more flexibility to get into
more urban areas. They’re traditionally in these smaller towns, but, as you start to encroach into towns with
more than 100,000 people, 200,000, 300,000, 400,000, 500,000, getting a big lot, the requirements of the
lot size, when you have fuel, is significantly higher than if it’s simply going to be a convenience store by itself.
Fuel, we’ve trained consumers over the decades. It is a key value proposition for convenience. Now, with
electronic fuel or, excuse me, electronic cars, and electronic fuel stations, that dynamic is changing to a certain
degree, and maybe three, five, seven years down the road it’s going to look much different than what we see
today, but, yes, fuel is a something that customers have grown to expect that, “When I go to my convenience
store, I can also get my fuel. I can get some air in my tyres, get some water, whatever it happens to be.” Fuel
continues to be a big driver into the parking lot of convenience, because we’ve trained customers to think of us
that way for the last 90 years.
[00:39:03]
Q: You mentioned the EV [electric vehicle] landscape will evolve in the next 3-5 years. Do you think there’s an
opportunity to provide charging stations, or is there just not enough revenue to entice a convenience store to
implement that on a much larger scale, given the low cost of recharging a vehicle?
JM: This is a really interesting area. If you’re looking at major manufacturers, Toyota, Nissan, GM, Ford,
Volvo, making commitments that, “We’re going to be fully electric by 2030,” or, “80% of our fleet is going to
be either hybrid or fully electric by 2027,” you’re seeing all these commitments from the auto manufacturers. I
mentioned earlier how convenience stores have trained the consumer that you come to a convenience store for
your fuel needs. People, over time, even though you’ve seen the Walmarts and some grocery stores add fuel as
a value proposition, the vast majority of Americans still get their fuel from convenience stores. As you see the
industry starting to shape up into more electric vehicles, quite honestly I’m seeing the convenience industry
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lag in being proactive in getting and helping customers make that transition from combustible gasoline fuel to
electric. You’re not seeing the investment. Just recently, 7-Eleven announced they were going to test 500
stores with electronic fuelling stations. I’ve been calling for that for five years. I had an area that operated with
Tesla in my backyard and I was like, “I need electronic fuelling stations. I don’t want my consumer to stop
coming to me in the morning to get their fuel, or after they finish work and come to my store to get their fuel. I
want to continue that rhythm of people coming to my parking lot to get their fuel needs, whether it’s gasoline
or electric.” What I’m seeing on the electric front is you’re seeing electronic fuelling stations in parking
garages, at movie theatres, at strip malls, at Targets, and non-traditional places. Places of work, even at home,
people can get their electronic cars fuelled.
The risk is, for the convenience industry, if that person pulls into your parking lot to get their gas, they’re not
just purchasing fuel. They go inside the store and they get their coffee and their sodas and their snacks and
whatever, and then they take off. If the convenience industry doesn’t become more proactive in getting
electronic fuelling stations in their parking lots, it’s going to train the customer to go somewhere else to get
their fuel needs, and it’s not just missing out on the fuel. It’s not even so much, “What money do you get for
the charging of the car?” It’s that customer going inside the store. That’s going to be the big opportunity lost by
not having electronic fuelling stations at the convenience store. You’re seeing other opportunities, like I said,
strip malls and movie theatres and places of work and home, apartment buildings, those types of things that
are having electronic fuelling stations. People don’t have to go to a convenience store and when they’re not
going to get their fuel needs, they’re not going inside and buying a doughnut or buying a pizza or buying a soda
or buying a coffee. That’s the part that they’re really going to be missing out on. I’m glad to see that 7-Eleven at
least is understanding, “We probably need to get more into this market,” but they’re chasing it. Of all my
research and everything that I’ve learnt about Casey’s, I haven’t heard about electronic fuelling stations at your
local Casey’s store. While I see 7-Eleven is behind the times, I look at retailers like Casey’s and say, “Boy, you
really need to get on this, because that’s what the consumer is going.” It may take 5-7 years, but no doubt that
is where the industry is going, the major auto manufacturers have already made commitments, and consumers
are starting to make their migration over to hybrids and fully electric cars.
[00:43:40]
Q: Why do you think Casey’s might target a particular region or area to build a strong presence in, considering
its footprint and the mix between urban and rural? Why do you think Casey’s is more centred in the Midwest?
JM: If you look at the average volume of a convenience store, Casey’s average store does about USD 1.6m a
year, a little less than USD 4,500 a day. You have to have stores within close proximity to be able to leverage
the supply chain. These stores just don’t do enough volume, so if I’ve got a store that’s a one-off and I’ve got
one store that’s 50 miles away, it becomes cost prohibitive to be able to get products to them profitably. If I
had seven stores or 10 stores that were 50 miles away, I could still send that singular truck out there and
deliver to 10 stores or seven stores, vs the one store. As you look at the growth strategy, not just of Casey’s, but
you look at any convenience, you’ll see that they try to keep their stores pocketed together. It’s really because
of the logistic challenges and being able to make it pencil out profitably. As I look at when I was running my
zone, I wanted to be able to expand in certain areas, but I couldn’t do it unless I committed to, “I’m going to
have 15 stores in this area,” because if I just have one or two, it didn’t make financial sense to do that.
As you look at Casey’s and their growth strategy, you can see that they’re trying to keep their stores within
close proximity, so they’re primarily in the Midwest. They’re going to continue to try to concentrate stores
within the Midwest, because for every store you add, you just reduced your fixed costs. You’ve just improved
the efficiencies of your supply chain. You’re going to see them continue to try to grow, but you’ll fill in the gaps
where maybe they might have missed some opportunities in the states that they already operate in. You’ve
heard Darren Rebelez speak to that. There are a lot of opportunities for them. Maybe they’ve overlooked some
of these mom-and-pops in the past, are going back and look at those and saying, “We might have an
opportunity to grow our store base, market concentrate to leverage the efficiencies of our logistics. That’s
really the key reason and why you don’t see them just branching out into all these other new states, is because
there are a lot of efficiencies that can be gained by filling in on the states that they already operate in.
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[00:46:50]
Q: Could you elaborate on the opportunity within smaller and less sophisticated chains and how aggressive
Casey’s is with this growth strategy vs just presenting the opportunity for investors?
JM: Casey’s has already publicly announced that they’re going to grow another 350 stores by the end of 2023,
so that’s a healthy growth, 15% using rough math. That’s healthy growth. If you look at where they’re looking
at, they’re looking at existing, not only ground-up. There is going to be a percentage of that 350 stores is, “I
like this piece of dirt. Let’s build a store on this piece of dirt here.” That’s called organic growth, but a lot of the
growth, in order to get to that 350, they’re going to have a real hard time trying to build 350 stores over the
next, what, 36 months, or not even 36 months anymore. It’s 24 months. What they’re going to do is they’re
going to look at existing businesses that are struggling to keep up with the digital influence, the private label
impact, the emphasis on food, retailers that are struggling now because they’ve leaned so heavily on cigarettes
and tobacco that that part of the business is evaporating right in front of them and they don’t have the
capability to pivot into other areas that are going make them remain profitable.
Casey’s is going to look at, “Who’s having a rough time and fits within our growth strategy?” They want to fill
in on the states that they already operate in, where they have the distribution centre, they have the supply
chain capabilities. They’re going to look to those smaller mom-and-pop chains that have leaned so heavily on
cigarettes and tobacco, are not able to make that transition into food and private label and the digital presence.
They’re the ones that are going to get gobbled up by Casey’s. What Casey’s needs to all understand is they
could also get gobbled up. Look at 7-Eleven, just acquired 3,500 stores from Speedway. They’ve publicly
announced they’re going to get to 20,000 stores by 2027, and they’re only at 13,000 stores, so they’ve got
another 7,000 stores to go in the next 5-6 years. They’re going to look to gobble up not only the same things
that Casey’s is looking at, the smaller, maybe five-store retailer or 10-store retailer, but they’re also going to
look at mid-size. “That 2,000-store retailer, we could gobble those up.” While Casey’s is out there, looking to
grow and grow and gobble up the mom-and-pops and grow their store base, streamline efficiencies with their
logistics system, they’ve also got to keep an eye over their shoulder that the likes of a Circle K or a 7-Eleven
could be eyeballing them and saying, “That could really help us get into areas that maybe we’re not in, or help
us concentrate our existing store base.”
[00:50:22]
Q: You mentioned the sales volume of Casey’s average store is USD 1.5m. What are the typical reasons for a
store being a low performer? Are there strategies in place to drive traffic, or is it about exiting that specific
area?
JM: I know that Casey’s looks at it similar to what we did at 7-Eleven, and that is, let’s say you opened up a
store 30 years ago. The neighbourhood today looks a lot different than what it did 30 years ago. While the
store that was opened 30 years ago was very meaningful, it made a ton of sense, the neighbourhood as it was
30 years ago, it really made a lot of sense for that store to be there. You fast-forward 30 years, there are new
suburbs, there’s new housing, strip malls and new places of retail and that store maybe isn’t in the most
meaningful place anymore. The community has grown in a different direction and so what Casey’s, as part of
their 350-store growth strategy, it’s not just acquiring. Sometimes it’s relocating. Maybe it’s relocating from a
mid-block to a corner, or moving from a corner that used to be the hotspot. Now, they’ve got to move a quarter
of a mile or three-quarters of a mile away to the new hotspot. When you look at underperforming stores,
sometimes it’s the location itself. Time has passed them by and it’s no longer the relevant location that it once
used to be.
You’re seeing that 7-Elevens and Casey’s are recognising that and saying, “You know what? It’s not that this is
a bad store. We just have it in the wrong spot. If we could finish the lease here and then move it to Main and
Main,” we call it Main and Main, a much more busy corner, that same operator, same staff in a newer location,
where there’s more foot traffic, gives them an opportunity to have usually a bigger, better store. It’s going to
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draw more people to that store and they can take an underperforming store and make it a successful store. The
other reason for an underperforming store, quite honestly, is execution. Being able to execute against a food
strategy, a digital strategy, a private label strategy, having the appropriate mix in the store. That is a difficult
proposition and some operators just aren’t great at it. You’ll see that this is an operational execution issue.
That’s a self-inflicted problem that can be resolved internally, but that is another reason why stores
underperform. The bigger piece, and what you’re going to see a lot of is, “We just picked the wrong corner and
we’ve got to get the store into a more relevant corner for customers.” You’re seeing that Casey’s is doing that,
as a part of their growth strategy, is relocating existing stores to more meaningful corners that are going to
give them the opportunity to have higher traffic and higher sales.
[00:54:16]
Q: What opportunities have you noticed within the category assortment from convenience stores such as
Casey’s? You mentioned 7-Eleven jumping into pet food. Prepared food also seems to be one of the fastest-
growing categories.
JM: I think private label is a phenomenon that continues to surprise everyone in retail about how well the
customer is gravitating, and really it’s the value play. As long as the quality is as good, if not better, than the
national brands, that’s the narrative that you’re hearing from 7-Eleven and from Casey’s, is that, “We
benchmarked the national brands and our private label product will be as good, or even better, than the
national brands.” The customers are recognising that and they’re realising that, “I don’t have to have a Doritos
tortilla chip to have a good-quality tortilla chip. I don’t need to have Bayer aspirin to get a good headache
medicine. I can use some private label.” I think private label is going to continue to be a significant piece. You
just saw 7-Eleven eclipsed USD 1bn in private label sales. We used to not be very good at private label. Our
packaging, our quality. Joe DePinto put a real emphasis on us to increase the quality, increase the packaging,
drive value, and convenience customers are value-driven. If you look at the typical convenience consumer,
they typically are your middle- to lower-end income folks and so value does make a difference. That’s why
these promotional offers, “Buy one, get one free,” “Buy two, get one free,” resonate so well with driving traffic
inside the store, is that the consumer is value-driven.
[00:56:27]
Q: The retail grocers struggle on the health and wellness front. To what extent is private label from chains
such as Casey’s or 7-Eleven placed to tackle clean ingredients and make offerings much more health
conscious?
JM: I think it’s a great opportunity. As you look at what’s happening within private brands, and I’ll go to 7-
Eleven, I can’t think of a sub-category that there isn’t a private label presence. Again, you’ve got to be careful,
as we talked about earlier, that you don’t swing the pendulum too far and get too private label heavy. You still
have to have the name recognition of the main brands within the sub-categories, but 7-Eleven pretty much has
a presence all throughout the store, including health and beauty aids and pets and automotive, some of those
non-food categories, but they do compete well. If you look within aspirin, headache medicines and cold and
flu, stomach medicines, the private label, the quality of these is as good, if not better, than the main brands,
but you’re also able to offer them at a value pricing. Instead of USD 4.49, they’re able to offer it for USD 3.49
and save a whole USD 1. That makes a difference to a customer. I think that there’s a real opportunity. Look at
Casey’s specifically. They’re relatively new into the private label venture, but they recognise the importance of
it, not only for driving the value statement and the velocity of the units, but also the profitability that’s
associated with it, because your penny profit, your gross margin percentage, is noticeably higher in your
private label items than what you’re going to find on name brand.
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[00:58:31]
NH: We’re just about out of time, so we will end Third Bridge Forum’s Interview there. Let me close by saying
thank you, Jason, for your time today. It was a really great Interview. Thank you, clients, for joining Third
Bridge Forum’s Interview. If you would like to arrange a private meeting or consultation, please contact your
relationship manager. Have a good one, everyone.
JM: Thank you.
Transcription ends at 00:58:44 of the recorded material
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