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    It's a Dirty Business?

    Bad perceptions hamper c-stores in quest for capital

    By Andy Weber, Corner Capital Partners LLC

    I want to report a shocking statement conveyed to me the other day by a potential investor: "Convenience stores are filled with dirty people, products and bathrooms. What a bad business it must be."

    Our industry has battled these perceptions since the oil industry lost its shine with the energy crisis in the 1970s, and we have really never recovered. The majority of our stores offer commoditized products -- tobacco, gasoline, even sodas -- often coupled with substandard service and environmentally damaged properties. As with most stereotypes, these perspectives are overblown from a few bad apples.

    From a financial standpoint, we must overcome these perceptions when introducing potential partners to the industry. Investment groups and banks want to see differentiated store models, outstanding commitment to customers, thoughtfully selected real estate, stable profitability or excellent management. They too often see "asset plays" that won't command the lower interest rate or a value premium.

    Along with these misperceptions, your financial services professionals must educate lenders and equity partners on the fairly sound economics generated by our businesses. We offer generally stable cash flows with desirable real estate, and often with national fuel and store brands. All investors like to say they supported a Chevron operator or a Circle K retailer. When working with a chain with true differentiation, investment groups and banks buy into the value premium, and it will be reflected in their proposals. Asset plays -- those without differentiation -- don't offer a concept for these partners to believe in, and often result in standard proposals.

    The past few years have seen a dearth of capital flowing to our industry, both in the form of debt and equity. The situation was exacerbated by the recent subprime debacle affecting our banks. The lack of capital springs from numerous factors: volatile gas margins, overblown environmental concerns, over-leveraging, operator preference to remain private or family-held, increasing fragmentation to single-site owners, macro-economic issues and -- as mentioned above -- bad stereotypes of our industry. But, the stereotypical perceptions can be addressed and overcome.

    Several private equity groups have invested in our industry in recent years -- from Freeman Spogli (The Pantry) and Sun Capital (Village Pantry) to Apollo & Blackstone (Clark) and Wellspring (Susser) -- with varying degrees of success. These investors conducted their due diligence. They supported strong management, and in most cases, a focused, differentiated business model. There are other examples, but I suggest there are simply not enough. As a $500 billion-plus industry, we should be able to command and attract a greater amount of professional investment. It takes risk and creativity, which the companies above have exemplified on a large scale. And you don't have to be as big as The Pantry or Susser to do it.

    Chip Lavigne of Lavigne Oil in Mandeville, La., built a true destination location on his 3-acre Blue Harbor Pointe facility. His location offers Shell fuel, a full service car wash, Express Lube Experts, the Harbor Market, PJ's Coffee, Magnolia Cleaners, Quiznos and Gamestoppers (new and used video games). As an extremely successful site with outstanding management, Chip's model would attract investors to roll out the concept in other retail centers. And remember that Trader Joe's, the highly successful grocery store chain, started out as a c-store operator that wanted to be drastically unique, with only a handful of stores in Southern California.

    By focusing on differentiated concepts and disciplined management practices, you can head down the road to something entirely new and profitable. It will take some creativity and a lot of risk, but you already knew that when you entered this industry. And when the time comes for expansion or retirement, your options will be much greater, and certainly more profitable.

    P.A. (Andy) Weber III is founder of Corner Capital Partners LLC, an investment bank specializing in recapitalizations, capital raises, and mergers and acquisitions in gasoline and convenience retailing.

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