In 2015, a new word for “convenience store” was added to the Oxford English Dictionary: “depanneur”. Originated in the 1970’s by a corner store owner in Quebec, “dépanneur” means “to render a service”. For years, laws in Quebec prohibited grocers from opening Sunday’s or evenings so the convenience stores stepped in with a retail option. In the early 1990’s, the law was repealed and many believed that was the end for c-stores. However, Alain Bouchard, the founder and Chairman of Alimentation Couche-Tard (ATD), the second largest c-store operator globally, continued to scale ATD to over 14,000 stores globally and the stock has compounded 20%+ per year for 20 years.
In the US, there are over 150,000 convenience stores of which 70% are run by owners with only 1-10 stores. It’s a fragmented industry where stricter regulation is pushing mom and pop owners to sell to larger corporations. Also, sales inside the c-stores have grown for 16 consecutive years at 3.6% CAGR. This resilience plus the continued consolidation is what originally attracted us to the industry.
The c-store business sells gas and merchandise such as food, beverages, and tobacco. We interviewed an executive at ARKO, one of ATD’s competitors, to understand how the store is run and to explore the implications of EV’s on the traditional c-store business.
Two statistics immediately stood out when researching ATD:
- ATD report 65% of transactions are convenience only
- Nielsen reports c-stores account for 86% of US cigarette sales
During ATD’s FY21, 25% of transactions were fuel only and 10% are a mix of both gas and merchandise. Tobacco is a major driver of traffic:
"All competitors in the C-store space have over 70% of their volume based on tobacco products. Customers are forced to shop at our sites because other vendors have been eliminated. 18,000 CVS stores and 5,000 Walmart sites no longer carry tobacco. You will never stop people from smoking, vaping or utilizing tobacco, so that bodes well for C-stores." - VP, ARKO
Just as c-stores stepped up to fill the opening time gaps of grocers 40 years ago, they are stepping in today to supply tobacco as grocers cut back their offering. Over 40% of ATD’s merchandise revenue is tobacco; effectively, the c-store is a specialised tobacco store with a food and beverage offering.
An average US ATD store generates ~$5.2m revenue per year: $3.6m in fuel and $1.6m in merchandise. Pre-covid, ATD sold 1.45m gallons of fuel per store per year and the gross profit per gallon has been increasing steadily from 22c to over 35c in 2020. In 2021, ATD earned $430k and $520k in fuel and merchandise gross profit per store respectively. Although 65% of transactions are merchandise only, over 45% of ATD’s gross profit per store is from fuel. The big question we’re exploring is how the gross profit per store changes as EV penetration increases?
Let’s assume EV’s are 100% of US vehicle sales in 2030. In the US, there are around 300m cars and, excluding the semiconductor and supply chain problems, ~17m new cars are sold per year. The US is currently selling ~1m EV’s per year which means sales have to grow 38% per year to fully replace new gas vehicles sold each year by 2030. If we assume all cars sold are EV’s and the average vehicle life is 12 years, our numbers suggest US EV penetration will be ~15% in 2030. However, regulation could accelerate EV penetration and some believe it could 25% by 2030.
So if EV’s are 25% of the car parc in 2030, how many gallons of gas will ATD sell?
Maybe it decreases from 1.45m gallons per store to 1m?
ATD’s fuel margins would need to increase to 43.5c per gallon to produce the FY 2021 equivalent fuel gross profit on the same store base. This doesn’t seem that crazy. Fuel margins have been rising over the last 15 years; from 2008 - 2013, the average margin per gallon was 17.2 cents and over 24c from 2014 - 2020. The large consolidators will also continue to vertically integrate to own more of the supply chain and reduce the cost per gallon of fuel which drives higher margins.
If ATD doesn’t grow the US store base and can hit 44c per gallon in gross profit, even if gallons sold declines ~33%, the 2030 fuel gross profit is stable. However, it’s very unlikely US store count doesn’t grow. There are over 100k mom and pop operations that are struggling under the operating cost pressures. If we assume ATD grows the store count by 6.5% per year to over 12k US stores, at 44c per litre and 1m gallons per store, ATD US fuel gross profit grows to over $5.5bn in 2030.
As merchandising gross profit margin also increases with new fresh food offerings, there is a long runway for ATD to grow EBITDA even as gallons sold per store declines. The 3-5 year outlook is good, however the problem is estimating the terminal value of the assets beyond 10 years when EV’s are closer to 100% of the car parc.
Norway, where over 75% of new car sales are EV’s, is a mini-case study for this scenario. ATD has more charging stations and home / office charging solutions than any other fuel retailer in Norway and the company recently launched its first all-electric station. This comment from the recent investor day stood out:
“Between 55% and 75% of EV charging will happen at home...25% to 35% of charging will typically happen at your destination...10-20% will happen in transit” - EVP, Europe, Alimentation Couche-Tard
The refuelling business completely changes in an electric world; the relatively longer refuelling time for EV’s leads electric car owners to refuel in transit only 10-20% of the time. The refuelling game completely changes in an electric world; ATD is now competing with OEM’s like Tesla in home and office charging solutions, not with fuel retailers on location and price.
Although the station may see less significantly less refuelling revenue, those who do charge in transit are spending more time and money in the store: