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    Casey's Keeps Eye on ROI

    By exercising diligence and discipline over every aspect of the business, Midwest chain rises above difficult economic times.

    By Linda Lisanti

    The business news these days is bleak. The national economy is in a recession that seems to be deepening by the day. Consumer confidence is the worst it's been in more than 40 years. The U.S. housing market is frozen and real estate values have plummeted. More Americans are doing without a steady paycheck, while those still employed have sharply cut back spending for fear of being laid off. You would never know all this, however, looking at the financial results of Casey's General Stores Inc., the Ankeny, Iowa-based chain of 1,470 convenience stores that built its business upon fulfilling the needs of small-town, rural Midwestern communities.

    Casey's is experiencing positive same-store sales growth across all categories, and its customer traffic remains steady. The retailer is even investing in the rollout of a new store design, which debuted in September, and is poised for unit expansion through new builds and acquisitions both in and outside its current nine-state operating area.

    Convenience Store News recently sat down for an exclusive interview with company President and CEO Robert Myers and Chief Financial Officer Bill Walljasper to ask the obvious question: How is Casey's winning when so many other retailers are losing?

    The chief executive attributed Casey's success to the diligence it exercises over every aspect of its operations. "We're a well-disciplined organization. We have, over the years, been able to refine all of our operations to make them more efficient and effective. I'm not saying others don't also do that, but it's one of our core characteristics," explained Myers, a 20-year veteran of Casey's who took over the company's helm three years ago.

    Like most of its c-store industry peers, Casey's faces a continuous balancing act between adhering to its long-term strategic plan and being flexible enough to adapt to the ever-changing business environment.

    "You can perceive a customer demand for certain products or services, but when you look at a plan or program to put into place, and really start to focus on your return on investment (ROI), you find that although it may be a customer demand, it's not really a very profitable thing to do," the CEO said. "So, you're constantly faced with the question: Do you implement a plan like that or do you invest in something that has a better return on investment? We've gotten very good at making those decisions."

    Data-Driven Decisions
    Casey's attention to ROI doesn't only apply to large-scale projects, but permeates down to each and every product on its stores' shelves. Three years since investing in the rollout of a comprehensive scanning and inventory automation system -- including upgraded point-of-sale devices, handheld bar-code scanners to track inventory and data mining software -- the retailer continues to reap gains from delving even deeper into the information being collected.

    "That's one of the significant reasons our in-store sales have done so well. We're doing a much better job of understanding what products sell, where they sell and what time of day they sell," said Walljasper, noting Casey's is now using the data to optimize its sales of fresh food. "We bake many of our products fresh from scratch, and they have a very short shelf life, so you have to make sure you hit the window of opportunity to meet that customer demand."

    Data mining reinforced what Casey's marketing department already intuitively knew -- certain areas of the store and products within those areas didn't sell very well. Shelf space allocation is now based on movement, an especially valuable approach when dealing with heavy-handed vendors. The most obvious examples, according to Walljasper, are in the cigarette and beverage categories.

    "Vendors are always trying to move their brand through your stores. Now, we have data to refute [what] they're trying to tell us. We know what will and won't sell in our areas," he explained.

    To boost the beer category, Casey's has been making a conscious effort over the last few months to focus on smaller packages that carry higher margins. In the second quarter of fiscal 2009, beer sales were up double digits and margins increased more than 100 basis points.

    Likewise for packaged beverages, the retailer is using its POS data to optimize shelf space allocation of new products and alternative beverages, such as energy drinks and vitamin-enhanced bottled waters, which carry higher margins in the grocery category.

    Because of these merchandising initiatives and others, the Midwest powerhouse continues to see positive same-store growth in all product categories, and as Myers is quick to point out, most of the gain is coming from volume growth, not price increases.

    The latest results released by the publicly traded company show same-store sales in grocery and other merchandise categories up 4.9 percent in the second quarter of fiscal 2009, and up 4.8 percent for the first half of fiscal 2009, ending April 30. In prepared foods and fountain, same-store sales were up 9.3 percent for the quarter, with an average gross margin of 60.6 percent.

    Addressing Shortcomings
    While pleased with results like these, Casey's leadership has known for some time that its stores had three major shortfalls preventing the chain from reaching new heights:

    -- Too little cooler space to handle the explosion of alternative drinks and bottled water;

    -- Space constraints in its kitchens that impeded the introduction of new food offerings; and

    -- Limited selections in both hot and cold dispensed beverages.

    A new store design was necessary, and in true Casey's fashion, the company spent several years carefully crafting a concept to fulfill its goals. In September 2008, the retailer unveiled a new prototype addressing these three critical concerns and is designed to increase gross-profit dollars by driving traffic to higher-margin, faster-moving products in the stores, such as packaged beverages and prepared foods.

    The new design spans 3,700 square feet -- roughly 1,000 square feet larger than the chain's traditional stores. Half of the additional square footage is used to move the checkout to the store's center, and expand the cooler set from an average of nine doors to 14 doors, providing space for greater variety in energy drinks, vitamin-enhanced waters, craft beers and different packaging sizes to better meet customer needs.

    The remainder of the extra space is dedicated to foodservice, a category Casey's has cultivated for nearly three decades. The chain's existing offering includes homemade cake doughnuts, introduced in 1981; its flagship made-from-scratch pizza program, started in 1983; and a wide variety of other items from fresh-baked cookies to bacon cheeseburgers.

    "Foodservice is not a fad for us. We've gone to great efforts to ensure our people are well-trained, and all of our processes and procedures have been developed over years of doing this," Myers said. "But we also know we have to add items, take out items, and rotate products in and out, so we're constantly doing that. This is how we generate excitement in our stores. [Foodservice] is truly a destination item that sets us apart."

    As part of its modernized store design, Casey's is unveiling several new offerings in the foodservice category, beginning with a proprietary made-to-order sandwich program to complement its existing grab-and-go concept. The program's creation was driven by Casey's experience becoming a Blimpie franchisee as part of an acquisition. "We learned a lot through that process, specifically that we could have the [sub program] co-exist with our pizza program without one cannibalizing the other," Walljasper said.

    The sandwich program will be incorporated into every newly designed location. Similar to Subway and Blimpie, Casey's customers have their choice of various breads, meats, cheeses, condiments, etc. Six- and 12-inch subs are available in nine cold varieties, two hot selections and five wrap options -- all prepared in front of the customer.

    "We are producing one of the finest sub sandwiches I've ever tasted," said Myers.

    Also built into the retailer's new stores is an expansion of Casey's proprietary coffee program. While its traditional stores offer regular and decaf coffee, and three to four heads of cappuccino, the coffee bar in newly designed stores features stronger blends, bolder flavor profiles, an array of creamers and syrups, multiple heads of cappuccino and iced coffee, now a year-round offering after a successful test run in select stores.

    Other elements of the new store design include:

    -- An expanded fountain selection.

    -- A seating area where customers can dine -- a first for the chain.

    -- Aesthetic upgrades including use of warm colors, dark wood accents, Corian countertops and slate floors, which create a more upscale appearance.

    -- Larger fuel presence: six-quad setup vs. four-quad setup at traditional stores.

    -- Fuel upgrades, such as the installation of larger in-ground tanks and the use of blender pumps, which will allow Casey's to adapt to the fuel environment of the future.

    By the end of this fiscal year, the company plans to open 20 new store constructions, replace 20 existing stores and remodel 10 existing stores according to the new design. By May, Walljasper said roughly 50 locations should be sporting the new layout.

    As is Casey's trademark way, chain executives are closely studying the data coming out of the newly designed stores to determine the return in dollars and cents. It's too early to have any concrete data, though Myers said historically a remodel results in same-store sales increasing by a third, and he expects this latest round of remodels to keep with history. He recognizes, however, this model may not work everywhere.

    "We started [the remodels] at existing stores with many years of sales history so we could truly measure the impact and look at whether it makes sense financially. It will take us a year to get through that and make some conclusions," he said. "For some locations, it may not be practical to add cooler doors, but it may be practical to expand the kitchen space and improve the fountain and coffee."

    Positioned for Growth
    Given the company's financial strength and solid infrastructure, Casey's is in prime position to continue expanding, both through new store construction and acquisitions. The publicly stated goal for this fiscal year is to increase store count by 4 percent.

    "As we look forward in our strategic approach, we don't have an obstacle with infrastructure. We have a distribution center that can handle store growth for many years to come," Walljasper said. "We don't have a financial obstacle either. We have more than $100 million in cash and cash equivalents, and our average long-term debt-to-capital ratio is probably one of the lowest in the industry at roughly 26 percent. We have the cash, we have the debt capacity, and we have the flexibility to leverage our balance sheet to take advantage of opportunities as long as they meet our criteria."

    Such opportunities are becoming more plentiful in recent months as other c-store operators find themselves under a great deal of pressure. In 2008, margins were pretty healthy, making retailers less inclined to sell their businesses. But now, with the tightening margin environment and credit crisis -- whereby some vendors are demanding payment upon fuel delivery -- more operators are facing cash flow issues.

    "Conditions are beginning to turn favorable for acquisitions," Myers said, noting they're seeing more people willing to have conversations. "Operators we've spoken with before are not only more open to the idea now, they're the ones initiating the calls and traveling to us. Whether that results in an acquisition, we don't know."

    A "fair amount" of deals are in the pipeline, according to the executives. Casey's is looking in and out of its nine-state area, which includes Iowa, Illinois, Indiana, Kansas, Minnesota, Missouri, Nebraska, South Dakota and Wisconsin. "We want to go into other states and we will. We just haven't had the opportunity yet," Myers added.

    Of course, the same due diligence exercised throughout the operation is applied when sizing up potential acquisitions. Anyone can go out and buy 100 stores, but Walljasper said they're not going to grow the company just for the sake of growing. "We do not expand without a solid thought process behind it. We're going to continue to do our rigid due diligence and make sure we make sound investment decisions."

    After all, this disciplined approach has proven a means to success so far for Casey's.

    "Our basic, fundamental philosophy has not changed and will not change in the near term," Myers concluded. "It's kept us from making mistakes that have gotten others into [financial] trouble. That's not to say we're mistake free. We do make mistakes, but we are willing to acknowledge them, back up, correct them and move forward."

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