Thursday, December 11, 2008

Fuel prices - the secondary market for most consumers second-most valuable property

A condensed version of this analysis was originally done for Gerson Lehrman News and posted 12/11/08
Original Article: Advertising Age

1) After a home, the auto is the second most expensive item most people own.
2) The up and down volatility in fuel prices is lowering demand, regardless of price
3) Fuel prices do impact mid and lower-mid income earners most dramatically

On October 20th the EIA (Energy Information Agency) listed the average retail price for regular unleaded at $2.914/gallon, and it had been on a downward trend for 6 weeks or so at the time.

In it's report released on December 8th, the average price was $1.699/gal. In 49 reporting days, (7 weeks) the price went down $1.215/Gal, or 41.6%, and it wasn't even a primary economic headline.

The CSP Daily News is reporting as of December 9th that the savings at the pump aren't translating to dramatically increased inside sales at the convenience store portions of the fuel outlets. What is going on with the consumer?

Wal-Mart (NYS:WMT) may very well be getting those savings as increased holiday sales. In late summer, when $4.00/gal fuel was being sold, the discussion being had about people needing to trade down from SUV's and minivans to hybrids and smaller vehicles was a laughable argument. Most families purchase their vehicles with consumer credit, and if you were 2 years into a 5 year loan on a SUV or pickup truck, you couldn't just adjust what vehicle you chose to drive on a daily basis.

The secondary market of vehicle costs, fuel prices, is much more volatile than the vehicle market itself. That’s why demand didn’t decrease more than it did; people were forced to drive what they owned, regardless of the cost to operate it. And having seen the automaker bailout play out over the last two weeks, there wasn’t enough alternative and hybrid production to accommodate that vehicle demand, in any case.

Fuel demand is going to adjust lower, as people have been shocked into realizing how vulnerable to energy costs their personal finances and their lifestyle actually are.

Credit was already tightening up, and the average mid-level consumer felt we were in a serious economic slowdown, even if they weren't saying it. You just bit the bullet, filled the tank to keep your transportation means on the road, and hoped prices would eventually come down. Well, now they have.

Fuel prices do impact the mid-level and lower earner most dramatically, and they are using the “savings” to 1) try and recoup some of the budget damage done to them this summer, and 2) get through the holidays without accruing too much additional debt.

The average consumer is worried about the direction of the economy as a whole. "Flash for Cash" is so last year! Wal-Mart shopping was never a stigma for the average consumer, and people "trading down" are learning what lots and lots of people have known for years. Value never goes out of style.

Friday, December 5, 2008

November retail sales drop shouldn't be a surprise to most retailers.

This analysis was written for Gerson Lehrman News and published December 5

1) Credit restrictions are going to inevitably lead to lower retail sales.
2) Economic news and what they experience has consumers nervous
3) Sales made at discount prices reduce top-line revenues, and"Super-Specials" on Black Friday create expectations of better sales.

The news is brutal everyday...Country in recession since beginning of 2008. (That wasn't news to the average person). General Motors(NYS:GM) looking at bankruptcy protection. Circuit City(NYS:CC) and Linens N Things in bankruptcy. Auto dealers closing all over the country. Foreclosure crisis. Global Economic slowdown.

Even the breathtaking decline in energy prices and commodities in general are a sideshow to the unrelenting economic gloom.

The US government seems to making up the "Bailout" or "Recovery Package" as they go along, as each measure they enact seems to have negligible effect on the overall problem of a severe economic slowdown.

While we're all sure that everyone at Treasury, Commerce, the Fed and all the worldwide authorities are doing their best, the overall impression to most people I know is the world governments and agencies don't have a clue as to how wide and deep the problems are.

That being said, the fact that overall sales in US retail are down in only single digits should be a positive, not a negative, sign that the US economy is more resilient and the US consumer tougher and less risk-averse than the institutions that are the causing the pain.

If there's no consumer credit, car sales will suffer. Even more importantly, if the credit score criteria for getting an auto loan stay the same going forward, the ready pool of automobile buyers will be smaller, leading to a smaller new car market.

Each and every step of this process shouldn't be reported as a fresh "disaster". It's a systemic problem.

If the average consumer can't get credit readily, home furnishing and large-ticket electronics purchases are going to fall. It's not a problem with the retailers or offerings, it's a matter of the mechanism most people use to purchase larger-ticket household items is broken. As much as US homeowners love flat-screen TV's, they love eating and caring for their families more.

So, when earnings for furniture retailers and manufacturers come out, it's not a new story of another category falling apart; it's just a continuation of the consumer credit crisis, same as the auto sales drop.

Jewelry companies are reporting lower sales, again, no surprise, just another manifestation of shrinking consumer credit. So when strip centers and malls start losing retail tenants and commercial mortgages become the next crisis, it's still the same story.

The US consumer should be congratulated for what they've been able to accomplish, even in this very tough economic time. They are trading Macy's( :M) for Wal-Mart(NYS:WMT), auto parts chains should be picking up business while the dealers starve, the "Rent-to-Own" businesses (Aarons, Rent-a-Center) will be busier than the Rooms-To-Go or the Ethan Allen(NYS:ETH) store.

The consumer will adapt and survive, but it's time for a real, comprehensive program that people can have confidence in.

Monday, December 1, 2008

Sell More Gasoline !!!

Well, here it is…Unleaded Regular under 2.00/gal in most of the country, diesel back under 3.00/gal, the rapid drop in prices as unexpected as the rapid run up to the 4.00/gal.+ range over the spring and summer. As I write this on the afternoon of December 1, 2008, I see Crude oil under $50.00/bbl, and NYMEX RBOB under $1.12/gal. What year is it, anyway? The last time the benchmark WTI crude was priced at this level was in the third quarter of 2004. Ahhh, the good old days!

Most of the operational and management employees at firms we’ve either operated directly or consulted for know the three words we’ve driven to success in the past…”Sell More Gasoline!” (Fuel).

It’s hard to be pumping good gallonage and not do well on inside sales, you have to do a notably bad job of convenience retailing in order to not have the corollary of “Increased Gallons pumped = increased inside sales” not ring true.

As we have designed and operated units and chains over the years, this has been our guiding principle:”To use the strength of the constant traffic flow that a petroleum outlet provides to drive the enhanced revenue flow and operating margins that a Convenience store (and/or fast food outlet) outlet achieves.”

This simple philosophy is the reason that gasoline retailers have sold additional items since before Standard Oil was broken up. While we’re not advocating any “price wars” breaking out on hotly competitive corners, we certainly believe that fuel pricing can again become a major driver behind store merchandise and foodservice volumes and subsequently, increased location profitability.

Condevco has an affordable solution that services your individual sites, and that allows for fuel pricing that drives traffic to your site, while still maintaining competitive and better margins on fuel. Contact us for details.

Monday, November 10, 2008

Circuit City Retrenchment delaying the inevitable

NOTE: This was written and turned into Gerson Lehrman News last Friday Nov 7, and published Yesterday, before the Bankruptcy filing of this morning.

1) Pulling out of Major markets a bad idea for long run outlook.
2) Last store remodel/refit wasn't successful
3)Tried to become like Best Buy(NYS:BBY), but didn't try to better them

The news the Circuit City was closing 155 stores and pulling out of major metropolitan areas came as no surprise to industry watchers.

The seeds for this were sown during the last major store remodel/refit, when the Circuit City stores were converted to essentially an imitation of Best Buy, eliminating any chance for Circuit City to differentiate itself in any way but price and advertising spend. Commission plans were eliminated from the sales floor, so the face-to-face knowledge and expertise of the customer service staff disappeared.

They never compensated for that loss of product knowledge to the consumer with the better POP informational regime that Best Buy has always employed.

Unfortunately for Circuit City, Best Buy is better at being themselves than Circuit City was at imitating them.

Saturday, November 8, 2008

Vote "Yes" for Good Customer Service!

In the Convenience Store field, our first name is “Convenience”. Convenience means being in a convenient location, having a selection of merchandise that allows people to fill their needs without additional trips somewhere else (making it convenient to stop there), and having multiple options to allow them to pay. What seems to be missing from many convenience settings is making it convenient to deal with your first-line associates. In other words, how many times has a friend or client with a store or stores had a half-hour discussion with you about how to arrange the cold vault, but shrugs their shoulders and dismisses staffing with “It’s hard to find good people”?

All the care and science that goes into everything from merchandise selection and mix, to how a store is designed and looks, to what fuel brand, if any, to select, can be of little effect if the customer/associate interaction isn’t a positive experience. The level of service in the US, in general, has gotten to the point that good friendly service is the exception rather than the norm. One of the big C-Store publications actually has a column where they talk about the good service they received when THEY are on the road.

That doesn’t mean we shouldn’t strive for a better level of customer assistance.

We don’t believe anecdotal evidence proves a norm or spots a trend, but we all know that, even with the rapid drop in fuel prices, our customers are hurting financially. Inside store merchandise and foodservice (if you have it) sales are the lifeblood of the business. The easiest way to increase inside sales is to concentrate on staffing and training. Raise your expectations of performance for your customer service associates, and reward them when they perform.

Your customers want to be served, promptly and with a smile. My blog is named “The Service Station” for a reason. Think of the category you’re in as “The Service Store” instead of “The Convenience Store” category, and both you and your customers will be much better off. Sales will go up, your associates will be happier and busier, and you’ll be providing a positive “service” to your bottom line in the end.

Condevco offers comprehensive customer service and operations consulting and manuals for your store/chain. The operations we have operated and consulted on have a long history of “famous” customer service. Let us help you.

Monday, November 3, 2008

Buffalo Wild Wings and dineEquity are both being built for the long run

Title: Buffalo Wild Wings and dineEquity are both being built for the long run, but with different operating models.


1) dineEquity is 6 times larger in location count than Buffalo Wild Wings

2) The two companies aspire to grow earnings in different ways.

3) dineEquity can market across the whole daypart with the brands they own.

dineEquity (DIN) and Buffalo Wild Wings (BWLD) both released third quarter results on October 27th. dineEquity posted a .47/share profit verses a .09/share expected loss, and Buffalo Wild Wings posted .25/share profit, missing the projected earnings by .06/share. We used the two firms Quarterly reports as the basis for our comments

The two companies are not similar in size or makeup, and while they are competitors where Applebee’s and Buffalo Wild Wings restaurants compete in the same market for casual dining dollars, they really market to two separate demographics. The differences are more marked than the similarities.

dineEquity is still consolidating Applebee’s into their operating system, having purchased an entity in Applebee’s that was larger than IHOP. While the wisdom of a massive expansion could be questioned in light of current market conditions, even the most conservative of forecasts missed the magnitude and speed of the slowdown in consumer spending and the dive in consumer confidence that has occurred.

Applebee’s experienced a decrease in same-store revenues, and the company acknowledged that their new value offerings didn’t perform. That’s a marketing/advertising, not an operational or management issue, and can be easily corrected.

IHOP, with several years of brand revitalization under its belt, is a much more capable competitor than they were when the exercise in refranchising and repositioning started. There is no reason to think Applebee’s won’t eventually get down the same track and move dineEquity towards its goal of being 100% franchisee locations. I believe that dineEquity’s management is building a firm for the long run, and will benefit favorably from lower interest rates as their debt instruments mature and are replaced with lower-cost debt. If dineEquity conservatively manages their financial side and continues to retire debt with free cash flows, the outlook continues to get better and better. dineEquity is out to be a marketing and franchisee management firm, creating their earnings through franchise and licensing fees.

Buffalo Wild Wings, on the other hand, experienced excellent same store sales growth, and is buying back franchisee properties as part of a program to expand company revenues and earnings. They obviously feel that their way to increased profits is to become a full line owner and operator, while still actively franchising where the deals make sense.

This is why comparing these stocks requires understanding that while it looks like they share a common operating model within the same consumer space; they are heading in opposite directions in operating structure and philosophy.

dineEquity has a very large unit count, and as it becomes more focused as franchisor/marketer on driving top-line revenues, with the advantage of having the two brands identified with different dayparts for less cannibalism of consumer marketing focus, they are building a system that will allow for ever more efficient use of capital as the Applebee’s company restaurants get moved out to franchisees.

Buffalo Wild Wings is taking the tried and true approach of picking a specific consumer segment and being the best competitor within it. Their management believing they can run restaurants as company ops more profitably than they can as being the franchisor has lead to the “Buy–back” of franchisee units.

Buffalo Wild Wings and dineEquity are two dissimilarly sized firms with completely opposite philosophies of how best to grow their specific companies. In economics, the example of bad analysis is comparing apples to oranges; in this case it would be comparing Applebee’s to Wings.

Monday, October 27, 2008

Adjusting Menu Selection a Good Short Term Fix

This was done for Gerson Lehrman News and Published October 27

Original Article: Restaurants may change menus, hike prices


1) Customers are resisting higher prices
2) Food prices will come down, but not rapidly
3) Market the selections as new variety


The restaurant industry has a real dilemma on it's hands. Customers, given the current economic climate, are resisting price increases with fewer trips to dine out and lower per-ticket purchases.

At the same time, the core ingredient "proteins" have experienced a much greater than CPI increase in cost. Given the recent steep decline in energy costs, we can expect there to be a stop in the cost inflation, but any decrease in supply prices will come due to weak global demand, a bad sign for consumer spending in general and discretionary spending in particular. No one wants the downturn to be so great that actual "deflation" sets in. The farmers and food production industry are operating on very tight margins as it is.

So, what to do? Dress up new menu items with coatings, breading, sauces and lots of marketing. A hot ham and cheese sandwich can be made into an alternative to a cheeseburger, if presented correctly.

Certainly people are used to "Nontraditional" menu items at all the fast feeders and casual restaurants. If marketed right, both sales volumes and margins should be able to be maintained. Remember when fast-food breakfasts were a novelty? Now, they are a staple item in the product mix.

Layoff news at marquee firms across the board, the seeming end of the US automobile business as we all know it, and the unrelentingly bad economic news are going to cause people to review their personal expenditures much more carefully, but America loves to "Eat out".

The right mixture of cost containment and good menu planning, along with a great invitation to the consumer to check out the new items, will be able to allow restauranteurs to weather the storm

Wednesday, October 15, 2008

The Stratification of Gas Station Values in Florida

UST Compliance Status, Station Pricing and how it affects the Florida Market.

This is being posted to “The Service Station” blog on October 15th, and will be included in “The Meter” newsletter published on October 20th.

As we watch the clock wind and the calendar pages fly off the pad, it is increasingly clear that whats been predicted for the last 10 years has come home to roost. There would be a high percentage (currently figured at 40%+) of stations that would be in a jam when it comes to the Florida Double-wall tank deadline at the end of 2009. When tank insurance is coming up for renewal this time, if you haven’t converted to a DW distribution plant, it’s essentially going to be impossible to get insurance for a non-compliant tank set at any price.

The Jan 1, 2010 deadline for conversion to all systems needing secondary containment was mandated by Florida in 1984; so 24+ years to date is a long time to claim you are now surprised. But, at this point it’s water under the bridge. The FDEP continues to say there won’t be any extensions for compliance granted.

So, as an operator who owns their site, you have a few choices; operate without insurance, getting fined by the FDEP on a daily basis, and risking a complete financial wipe-out if there’s an incident. (We are not suggesting this as a course of action, just using it as a scenario!) Or, you can shut down until your tank set can be changed. Or, you can put your station up for sale, discounting the price of a tank swap in the asking price, and hoping someone will purchase the site knowing it needs to be closed down for 3-4 months and there’s no assurance that there won’t need to be remediation during the tank swap, lengthening the time out of operation and increasing the costs.

In order to accept that level of risk, it’s clear the savvy purchaser will expect a large discount to get you out of your jam. Then there’s whole issue of getting credit to pay for the job. It’s a rare purchaser who can pay cash for the $300-$400,000 needed to swap a tank set and account for the lost gross profits for the time they are closed down, right after completing a purchase for the site. The credit crunch is affecting purchaser’s decisions on looking at non-compliant sites.

Conversely, the sites that are compliant stand to gain in two categories. 1) Value of the actual asset, and 2) improved competitive position from the immediate wash-out of (let’s figure) 30% of the station count at the end of 2009. Increased volumes, increased scarcity of sites to fuel from, and increased profits should all be in the offing if there is no extension for compliance granted. You have to think FDEP is serious about holding everyone to the deadline, taking them at face value.

Should owners be lobbying for some kind of state program for sites that need tank swaps that are not in the LUST fund? A loan guarantee or low-cost assistance for tank swaps? The population of the State of Florida will be profoundly unhappy and inconvenienced if 25-30% of the current retail sites have to close down in January 2010.

On the other hand, if you took care of business, have a new dispensing plant in the ground, why not get ready to enjoy less competition and greater volumes, all because you followed the law? Why should the people that didn’t take the deadline seriously get help?

Which leads to our title subject; the Stratification of Gas Station values here in Florida. There are two tiers of pricing setting up in the market; tank-compliant stations and those who aren’t. In addition, within each tier, there are usual considerations of parcel size, Branding/Fuel Supply Agreements, competitive position, amenities (car wash, service bays etc.), foodservice and size of store.

What we’re seeing from multiple owners is that sites that fall into the non-compliant pricing tier, are .75 of an acre or under, and need significant updating are trying to keep some kind of floor value on the pricing of these sites, but the floor is preventing the sites from moving. With today’s lack of ready credit, I think a major look at these small sites asking prices needs to be addressed, or there is going to be a significant drop in station count once the deadline rolls around.

What do you think? Write me back at

Friday, October 10, 2008

Soft Serve Won't Fix Soft Sales at Krispy Kreme

This was done for Gerson Lehrman Group News and Posted on October 10th - Ron

Original Article: Krispy Kreme hopes ice cream heats up sales (article)

Soft Serve Won't Fix Soft Sales at Krispy Kreme

1) The namesake product is out of synch with consumer trends
2) Soft Serve Ice Cream adds a daypart, not a full profit center
3) Quality as criteria in site selecton and Distribution key to success

Krispy Kreme essentially imploded during 2004-05, as the reported sales volumes turned out to be inflated. Consulting for a Convenience Store chain in 2003, I watched first hand as locations who paid a delivery driver cash daily for Krispy Kreme product would receive an invoice for the same goods at the end of the month. It would always be called into the office and pointed out as an error, and the paperwork would disappear.

Krispy Kreme overestimated their sales potential in a given market; the C-Stores carrying the product were saddled with minimum purchases that resulted in a lot of product being wasted, at the retailers expense. We shopped, over a 6 week period, a full Krispy Kreme location w/Factory on a high-value corner for a competing client (location now closed)in 2006, and they added a frozen custard operation to punch up the lack of walk-in traffic in the afternoon/evening period. It did not seem to work at this site, and so I'm not sure if the product has been adjusted to a more saleable concept or not. The product is good, but is running against current consumer QSR trends. In theory, it adds a daypart, but you need to market it apart from the core doughnut business.

Krispy Kreme has shown very little discretion in siting locations and adding distribution partners, and overall, the brand suffered. At least in the area serviced by our master franchisee, they never seemed to get over the image, cleanliness, training and personnel issues that McDonalds(NYS:MCD) and BK solved, for the most part, years ago with a much, much greater restaurant count. To rely on adding a product line as a solution, unless (and I don't have firsthand knowledge) they've addressed the daily operational and quality control (product, service and customer experience) of the operation won't make a long term difference in the firms viability.
Posted: 10/10/2008 12:57 AM

Thursday, October 9, 2008

Sales Restrictions Won't Drop Tobacco Sales Volumes

This was done for Gerson Lehrman Group News and Posted on October 3rd - Ron

Original Article: PM USA v. Pharmacy Smokeout (article)

Sales Restrictions Won't Drop Tobacco Sales Volumes

1) Legislation Restricts Drug Stores Unfairly
2) Legislation Doesn't Make It Harder to find Cigarettes, just more Inconvenient
3) Smokers will easily adapt to Law; no consumption reduction

The law banning tobacco sales in drug stores unfairly singles out stores containing pharmacy operations as unsuitable venues to purchase tobacco. There is no inference that the drug stores haven't been following the current restrictions on underage sales, so this seems a measure aimed a simply making less convenient to purchase cigarettes, and a punitive measure against smokers with the drugstores overall sales volumes as an innocent casualty of the legislation.As a convenience store consultant to numerous operators, I see at an opportunity for more sales volume. Smokers have been adapting to increasingly restrictive rules on purchasing and using tobacco products, and will adapt in San Francisco again. If they can't purchase cigarettes at one location, they WILL stop at another. Ask any retailer who is "Out-of-Stock" on a popular brand!While I think the Phillip Morris(NYS:MO) position in this case is correct, the overall prevailing sentiment against smoking is driving this legislation.I do not believe there will be an overall drop in in the tobacco company's sales, just who is selling them to the end consumer.
Posted: 10/3/2008 1:06 AM

"The Meter" Newsletter Vol 1, Issue 1 Oct 6, 2008

Welcome to “The Meter”
Vol. 1, Issue 1, Oct 6 2008
Dear friends, associates and interested parties,

Welcome to the inaugural issue of “The Meter” which will be an e-mail newsletter put out by Condevco LLC on a semi-regular basis. We named it “The Meter” because that’s what keeps track of the fuel flow in the pumps, and we’re going to try to give you a sense of the “Flow” of the business. Hopefully, you will find this a valuable resource and sounding board for your own thoughts.

This newsletter will not be taking a point of view as it relates to anything but good customer service, convenience retailing and petroleum marketing, and anything that supports that. We will also delve into real estate related issues as it pertains to retail sites and development.

We seem to be in a time of unprecedented upheaval in our business. As it relates to retail, there is cost inflation in CPG with no inclination on the consumer’s part to absorb higher prices, volatility in fuel pricing that seems to be more about speculation than the actual value of the fuel, and regardless of which way consumer sentiment is flowing, the credit card companies making more money in processing fees than the entire industry profited at retail last year. As in all times of market turbulence, some will profit and grow, and some will whither and die.

On the Distribution and Real estate side, the big Oilcos are “shedding” their retail sites en masse, but that opens up an opportunity that wasn’t available before on the distribution side of the business. Good store operators have continued to grow store count and expand their offerings, but until the credit markets get straightened out, that continued growth is in jeopardy.

Here in Florida, the combination of no or tough credit and the Double-Walled tank deadline have a lot of site owners who haven’t “re-tanked” sweating it out. There is going to be a period of opportunity for picking up assets that are “Fixer Uppers” at excellent prices, and some of that is starting to hit the markets now. Tank Insurance on Single-wall installations is going to disappear by the end of the year in the state, it seems pretty clear.

“Consolidation” is a word being bandied about the industry right now, and while it looks like there is a consolidation of ownership occurring, remember that there is a large supply of Oilco sites coming into the market, and so far, being absorbed by distributors with decent store count already. There are still lots of properties and groups of properties that fit the “Smaller” range that will need to be moved and re-branded and freshened up.

Whenever there is disruption to the market equilibrium, which is occurring in 1) the consumer market, both with credit tightening and increased fuel prices, 2) the fuel retailing and distribution market, and 3) the credit markets, both for operating and real estate acquisition, opportunities present themselves to those who know where to look.

As we move forward through this time, in mostly uncharted waters, we need to remember that an automobile is still either the first or second most valuable asset most people own, and the lifestyle most consumers lead and the infrastructure they use were predicated on relatively inexpensive and plentiful motor fuels.

This is why the fuel volumes didn’t drop as much during the price spike as most people would think. But the consumer feels hostile and wary of the oil business right now, and no matter how much people rationally know the guy who owns the Exxon or Chevron at the corner didn’t make the $40-50 Billion last year, you’re the one they can be upset at.

So give them service, give them clean, give them a smile and remember you’re still the “Corner market”. We can help provide solutions to your most pressing needs, and everyone can use a set of “Fresh Eyes” to look at the issues we’re all concerned about.

Looking forward to a long and productive dialogue between all of us.

About Condevco LLC and Ron & Darcee Santicola

Ron SANTICOLA HAS been in the Convenience Store Business for 14+ years here in Florida and Internationally, as a “C” Level executive and Consultant. Award-winning and respected industry leader. Darcee Santicola is an award-winning store designer and space planner. We merchandise locations and lay out selection, mix and promotional calendars.

Ron is also a FL Licensed Real Estate Broker, Specializing in Petroleum Retailing properties and Petroleum Distribution.

We specialize in:

¨ Site and Chain Acquisition
¨ Branding and Fuel Supply
¨ Store Design—New & Refurbishment / Rebranding
¨ Merchandising & Promotions
¨ Financial Modeling—Acquisition and operating
¨ Customer Service training
¨ Mystery Shopping
¨ Management Consulting
¨ Company Benchmarking
¨ Fuel Pricing using the:©
Fuel Pricing System
Convenience Development Corp.
Condevco LLC

2909 S. Ocean Blvd, Suite 3-D
Highland Beach, FL 33487-1819
Tel.: (561) 274-4261
Fax: (561) 276-9996