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Circle K Norway's EV Experiment Lab

In June 2022, ~90% of all new passenger car sales in Norway were electric. The Norwegian government has also banned all ICE sales from 2025, the first country in the world with such a policy.

As most Western governments follow a similar energy transition, where does this leave a gas station business like Alimentation Couche-Tard?

We interviewed a Former Director of Circle K Norway to explore how the EV charging market works in Norway and how ATD’s business can adapt to an electric world. We share a few learnings below.

Norway has been the most aggressive country to move to an electric world.

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But although new passenger car sales are ~100% EV in Norway, total miles driven by electric vehicles is still <20%.

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Gas will still be in demand to fuel passenger cars for decades to come. McKinsey predicts it will take until 2040 for EV’s to be ~100% of the total Norwegian fleet.

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In the US, 6% of new passenger car sales are electric. But this share isn't evenly distributed because half of all EV sales are in California. The EV adoption curve in the US is likely to be even slower than Norway or Germany. Excluding a major ‘Cash for Clunkers’ scheme, it could be another 30-40 years until the US sees near-100% EV fleet mix.

This is a key part of ATD’s long-thesis; the decline in gas volumes will be slower than expected and continued market consolidation will drive higher CPG.

After refurbishing its store base and buying ~100 new stores per year, ATD is increasingly returning cash to shareholders via buybacks and dividends.

Although there is potentially a longer runway for fuel demand, it doesn’t mean ATD’s terminal value isn’t impaired. It just pushes out any potential impairment. But the market certainly won't wait until 100% EV penetration to cut the multiple in half. So what is the terminal value of 10,000 gas stations when governments have an agenda to eliminate fossil fuels?

To answer such a question, Circle K uses Norway as its test lab and opened its first fully-EV charging station last year. There are a few challenges for gas stations. Firstly, most charging is done at home:

Home charging is the most important element in car charging; it is not the public charging stations or work or destination charging. Roughly 70% to 80% of the electricity charged into EVs is at home. - Former Director, Circle K Norway

And the efficiency of EV charging is much higher than ICE engines:

For the energy of a car, a kilowatt hour driven, compared to a kilowatt hour for fuel, it is 40% to 50% more efficient for EVs. Due to the cheaper price and the more efficient use of energy, it still gives you a clear price advantage, which is about 40%, even today. If you are commuting a lot and you have to pay for fuel or electricity, it makes a huge difference if you have an electric car. - Former Director, Circle K Norway

The combination of 80% charging at home / work and more efficient energy suggests there are way too many c-stores looking ~20 years out. The location, footprint, and overall quality of the site required for EV charging is very different to a typical gas station. Some existing plots are not close enough to the grid and will need to be repurposed into retail-only locations or residential or commercial property. Who knows how much of the store base could be repurposed and at what cap rate?

Secondly, TSLA and Ionity (JV with legacy OEM’s) have large market share in EV charging. All charging stations are built close to the grid and use the same electricity suppliers. Given the huge peaks in charging demand, it requires significant capex to get access to prime locations and infrastructure to ensure adequate charging speeds.

In principle, everybody buys electricity from the same kind of suppliers. You can still choose and make contracts with electricity suppliers who you feel are right for yourself or your company. It used to be – just before the prices exploded so much – that the actual cost of goods sold was relatively small, compared to the actual sales price. Electricity used to be very cheap. Now, it’s a bit different and the prices have increased. Of course, you have more than just the price of electricity when you are operating a charging network. You have investment, maybe even into the grid, and rent, service and a lot of other things you have to pay for. Companies can come up with the margins they need or want to have and try to use that in the market.- Former Director, Circle K Norway

It’s unclear what margins are possible in the long run from EV charging, especially as electricity companies will be dominating home charging. Circle K is exploring new subscription models for home charging in Norway, but reselling electricity for home charges doesn’t seem too attractive?

If you want to host your customers in the right way, you should look at the customer and the charging experience holistically, and that applies to every charge point operator. What companies, including Circle K, are doing is that they have a good offer for home charging, with installation…The market in Norway, today, is very competitive in terms of electricity. People buy from the same sources and most of the people, in Norway, have an electricity contract based on the spot price trading in the market and then you have something like an add-on price for managing that retail for you and that is very, very low. You may have a monthly fee and that is where the companies are competing; the little add-on and the monthly fee. That is quite competitive and there is not a lot of money to earn when everyone buys from the same sources and tries to sell it in the same way. - Former Director, Circle K Norway

In the full interview, we explore how ATD is approaching the Norwegian EV market, challenges for fuel margins, and outlook on the store base.

One key takeaway is that the EV transition in the US will take longer than expected. Last month, we estimated ATD could return 50% of its current market cap by 2030. If US EV penetration is as slow as we now expect, and ATD's reinvestment slows with higher EV penetration, it could return 3x+ its current market cap over the next 20 years. Even if the terminal multiple is 50% of the current multiple, it seems an interesting opportunity.

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