Under a new federal proposal, each newly-eligible employee will cost a store operator at least $5,000 more in overtime yearly, adding hundreds of millions of dollars of additional expense within the c-store industry.

By Mark Radosevich

A review of legislative issues underscored by the Petroleum Marketers Association of America attests to the wide array of challenges the convenience store industry has faced since 2008.

From gasoline to cigarettes to sugary snacks, marketers have had to contend with a steady assault of regulatory policy over the last six or seven years.

DOUBLING UP
Come 2016, chain operators will face another challenge in the form of new overtime mandates. This past June, the U.S. Department of Labor issued a proposed rule to raise the overtime threshold from $455 per week, or $23,660 per year, to a “standard salary level equal to the 40th percentile of earnings for full-time salaried workers,” or $933 per week adjusted to 2014 dollars.

Essentially this would double the salary whereby employees become exempt from overtime to $50,440 from $23,660. It’s conservatively estimated that each newly eligible employee will cost a store operator at least $5,000 more in overtime yearly. This will add hundreds of millions of dollars of additional expense to the convenience store industry as the traditional manager’s position reverts to a standard hourly pay formula.

The new overtime mandate will undoubtedly compound the stress on the traditional c-store operational model. Stores that were previously on the fence for continued direct operation will see their profitability and long-term viability seriously impacted. Besides the direct economic damage, the process of employee advancement and job growth will be altered as operators adjust their staffing to this new reality.

NEW RESOLUTION
This situation should prompt store operators to make a New Year’s resolution to conduct comprehensive business assessments including:

• Confirm that the current operational model is still the most appropriate for the new realities of the day. Have a willingness to consider other alternatives in the event that the direct operation of some sites is no longer an appropriate option.
• Consider divesting targeted sites into a lessee dealer arrangement or sell them and hold a long-term fuel supply contract. For leased properties, conduct a lease analysis to determine the possibility and timing of a withdrawal from the store entirely.
• Understand the various contributing factors of business profitability and resultant current value. Be willing to put the retail chain and other areas of the business under a full and pragmatic stress test with a consideration made to competitive factors that could negatively influence the local market, including but not limited to recent acquisitions by national chains and MLPs (master limited partnerships), or the introduction of modern new-to-market stores by sophisticated national store operators.
• Consider alternate use scenarios whereby the value of the real estate is significantly higher than the current use going forward.
• For example, we are currently marketing two c-store properties where the current-use cash flow value is around $350,000, but a national quick-service restaurant chain has offered over $800,000 for each location. This doesn’t apply in all instances, but an alternate use evaluation of all impacted sites could prove enlightening and represent a profitable divestiture option.
• Once a comprehensive understanding of the “current state” of the business is achieved, develop and implement a strategic plan to guide the company into the future in order to preserve business relevance and long-term value.

The New Year is going to be challenging with the continued onslaught of government interference and regulation, but at least there is some light at the end of tunnel and the hope that the upcoming election brings. That is of course if the American electorate will finally come to its senses after eight long years and vote to put the country back on track.

With 35 years of downstream petroleum experience, Mark Radosevich is president of PetroActive Real Estate Services LLC, which offers confidential mergers & acquisition representation and financing services exclusively to petroleum wholesalers. He can be reached at [email protected] and by phone at (423) 442-1327.