Last month, I predicted that potential tax increases by the Biden administration could alter the structure of mergers and acquisitions by increasing store leasing at the expense of real estate ownership transfers. In this follow-up article, I’ll look into my crystal ball and offer some thoughts on what the future might hold for new-to-industry (NTI) store development next year.
Chain store operators with no foreseeable plans to exit the industry generally take a balanced approach to growth, with a mix of acquisitions and new-builds. Depending on the size and sophistication of the operation, NTI expansion could be strategic, guided by preferred market analysis and planning, or opportunistic, in which individual NTI projects are unsystematically decided based upon availability of appropriate real estate.
NTI real estate may include vacant land, alternate-use conversions, and raze-and-rebuilds of owned or competitive sites that fit predetermined criteria, including property size, traffic counts and demographic profiles.
With headwinds on the horizon, pragmatic c-store operators should have some level of NTI development in their plans. Modern, high-quality NTI sites not only deliver incremental sales and profits, but add some flagships to the store portfolio. This improves overall motorist perception and brand image across the rest of the chain, which also helps enhance business value.
Headwinds On the Horizon
At the time of this writing, the proposed $3.5 trillion spending package accompanied by massive tax increases is being debated, and various pundits believe that there is a 50/50 chance this economic disaster will pass. If so, one result could be a higher degree of NTI development, for these reasons:
- Marketer reluctance to convey real estate title to avoid onerous tax consequences will result in a higher degree of store leasing. Buyers who wish to own their real estate must factor in a higher level of NTI development to achieve that goal.
- The Federal Trade Commission’s (FTC) increased scrutiny of c-store deals involving the largest retail consolidators will likely dampen mid- to large-scale acquisition activity, prompting these big, well-funded companies to look more toward NTI development. Growth may slow, but their funds can be redirected toward NTI stores without the worry of FTC interference.
On the downside, heightened competition from greater numbers of NTI stores will further erode the economic relevance of older, conventional c-stores within the trade-area of these new-builds. This resulting domino effect will require savvy petroleum marketers that own and operate or own and lease older sites to conduct network studies to identify vulnerable locations and to develop divestiture plans to be implemented once they learn an NTI is planned.
Tactical divestiture could include the sale of the property to a dealer, while maintaining the fuel supply, or a sale to an alternate-use buyer.
However, care must be taken with any outright sale due to the above-mentioned tax consequences from real estate title transfer. The optimal approach may be to lease the property to an alternate-use tenant.
Short of a meteorite strike, I hope that some semblance of rationality will rule the day in Washington D.C., and that the proposed cataclysmic tax-and-spend plan will not come to fruition, rendering my 2022 prognostications moot.
Finally, as I’ve recommended in the past, if you’re in the retail petroleum business, I highly encourage you to become a member of your state’s petroleum marketer and convenience store association, to proactively support our industry and help preserve an important part of the fabric of America.
Mark Radosevich is a strong industry advocate, recognized petroleum veteran and president of PetroActive Services (www.petroactive.net). He can be reached by email at [email protected] and by phone at (423) 442-1327.