Every day we face the challenge of setting priorities. But setting priorities for your business — especially in the convenience store industry with its countless moving parts — is even more demanding. This is doubly true when it comes to real estate.
Imagine you are a multiunit c-store operator with nine stores. I say this to make the math easy to figure. After working with over 1,000 stores, I have discovered the 1/3, 1/3, 1/3 rule, which says most of the time, if you have nine stores, 1/3 of them are “A” stores, 1/3 of them are ”B” stores and 1/3 of them are “C” rated stores. This rating is based on the profitability of the stores.
The “A “ stores are generally the newer stores and are cash cows and you wished all of your stores were like these stores. The “B” rated stores probably used to be “A” stores, but over time these stores and the areas where they are located became dated. There may also have been some competition move in, which affected the performance of these stores.
Then there are the “C” stores, which probably break even financially and don’t really contribute anything to the profitability of your company. The “C” stores are the issue.
The Upside Test
When I am in doubt as to whether I should keep a financial asset in my portfolio, I give the asset the “Upside Test,” which means I consider what, if any, upside there is in keeping the asset. If there is no upside in the convenience store that has a “C “ rating, then why I am keeping it? Once I answer the “Upside” question, and find there is no upside to keeping the property, then it’s time to get rid of the asset.
Then, I would take the money from the sale and invest it in what I do best and build or buy a store that would be an “A” rated store for me.
The simplicity of this concept is obvious and should be practiced by anyone who is in the convenience store business. Who would not want to take assets that are not making money and convert them into an asset that will make them money? Well, more people than you can imagine.
Bob’s Problem
Take Bob, who has 27 stores. He follows the 1/3, 1/3, 1/3 rule to a T. He has nine stores that are highly profitable, nine stores that are profitable stores and nine stores that need to be converted to dealers or sold off to the local State Farm guy for an insurance office.
But Bob can’t get out of his own way and let go of some of his stores because he thinks he will be a failure for not making the “C” rated stores profitable. Therefore, he continues to operate a declining asset, which is nothing more than an accident waiting to happen. Because where do most of the employee issues and customer issues come from? The nine stores that are not making money, not from the “A” rated stores.
Retailers with similar thinking to Bob are rampant in the convenience industry except with the operators who are well financed and growing. The operators who understand this 1/3, 1/3, 1/3 rule of thumb are constantly culling their stores and eliminating the ones that are not contributing to the profitability of the company, which is good common sense.
The moral of the story is don’t be a Bob and let your ego regarding the number of stores you operate get in the way of why you went into business, which was to make a profit and capitalize on the assets you have.
Terry Monroe (www.terrymonroe.com) is the president and founder of American Business Brokers & Advisors and has been involved in the sale of more than 800 businesses. He serves as a consultant for business buyers and sellers throughout the nation.
