| The
Pantry (PTRY) Has Some Juice |
Published: October 3, 2006
There are few industries as
fragmented as the convenience store market. The National Association of
Convenience Stores estimates that there are 140,655 such stores in the
U.S., delivering total annual sales of just under $500 billion. Many of
these are one-off locations and there are very few large multi-state
chains. Of course, you have probably heard of 7-Eleven. However, unless
you live in the Southeast, you are likely unaware of The Pantry (Nasdaq:
PTRY, $56.37).
The Pantry operates a chain of
1,400 convenience stores across 11 states in the southeastern U.S. With
$4.4 billion in revenues for 2005, the company controls about 0.9% of
the national convenience store market.
The Pantry's strategy is to act
as a consolidator in the business. One-off convenience stores and small
local chains have several major disadvantages when competing with The
Pantry. For one thing, fuel accounts for about three-quarters or your
average store's sales, and profit margins are razor-thin in that
business. Small operators don't have enough market power to fight for
and win volume discounts from the big oil companies.
The food business is extremely
profitable for convenience stores. Consumers are willing to pay high,
premium prices for snacks and drinks they grab after pumping gas -- the
convenience warrants the higher cost. But smaller chains are also at a
disadvantage in this business. Sourcing costs for food are higher for
smaller stores, and modern scanning and inventory management equipment
are often out of the budget range for such stores.
The Pantry's strategy is to buy
up these smaller chains and one-off convenience stores. The company then
integrates these stores into its existing centralized inventory
management and distribution system and adds modern scanning equipment.
Thanks to relationships with the likes of Subway, The Pantry can vastly
expand a convenience store's offerings to include freshly made
sandwiches, specialty coffees and chilled fountain drinks. These food
items earn even higher margins, and consumers tend to enjoy the expanded
selection of merchandise.
Moreover, The Pantry has
existing relationships with several major oil companies. As a result,
it's able to get good prices on gasoline and volume discounts. That
serves to boost margins on the gas business.
The Pantry has plans to
continue opening new locations and buying up small chains in the
southeast U.S. to expand its market share. In the first six months of
2006, the firm bought 107 stores. And looking ahead, management plans to
build 20 to 25 stores per year from the ground up. Thus, it's not hard
to imagine The Pantry adding 250 to 300 stores per year to its current
base, grabbing considerable additional market share in the process.
Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
