Tuesday, July 6, 2021
Market Update - As Good As It Gets?
Source: Observations from the Executive SuiteBy Jeff Kramer, Managing Director, NRC Realty & Capital Advisors
First, the good news is that the Federal Reserve plus the U.S. Treasury are continuing the huge stimulus program in what is hoped to be the long-lasting post-Covid pandemic period. Overall, the largest stimulus since the end of World War II is expected to provide 7% real GDP growth this year, plus perhaps a 'temporary transitory' spurt of inflation that might be as high as 5% (or more?). Many economists forget that for various reasons, oil prices lead to longer periods of inflation, and this worldwide economic recovery still requires a lot of oil.
So far, the markets are supporting these free-spending policies with the stock market at new highs and both short- and long-term interest rates not even covering inflation. Selling multiples, including the convenience store and fueling industry, are holding at near-record highs. Overall, so far, the main beneficiaries of these policies are a large variety of asset classes, namely stocks; home prices (particularly single-family homes); most commodities; prime real estate in general (often including our profitable industry); and even bond prices, as reflected in continuing institutional and foreign purchases, keeping interest rates at historic lows. Our government is hoping that more of this cheap money goes into the economy for more jobs rather than only assets anticipating ever higher prices.
As always, there are some headwinds. The U.S. economy remains very consumer spending oriented, and clearly the consumer has already been on a huge spending binge. But with an aging population, plus a fast-turning labor force, consumers are likely to save more than they did coming out of past recessions. Both consumers and businesses alike know they cannot rely on government support lifelines forever. Meanwhile, government debt continues to balloon, increasing rapidly to levels which now exceed our annual GDP. This can work as long as we can either grow or inflate our way through, and yet retain worldwide confidence in our country and its ability to continue the deficit financing. Long term headwinds continue from Chinese tensions, internet security, and political uncertainties.
The labor situation is increasingly important to our industry, as our employees represent our offerings on the front line. Statistics show over nine million job openings compared to about seven to eight million supposedly still unemployed during the Covid period. So, what we really have is a workforce without needed job skills, such as truck drivers, or people who have dropped out of the workforce, many perhaps permanently, for whatever reason. Not good for the convenience industry in particular, for these five reasons:
- Women predominate in hospitality industries, especially on the front lines, in restaurants, retails, convenience stores, etc.… More women are dropping out of the labor force than men.
- Wage and benefit pressures will increase regardless of whether it will draw or retain employees. It has never been an easy job, and there is perceived risk of health exposure and the wrath of an uneasy populace in understaffed and stressed areas of the country. This now includes rural as well as urban areas. Retail surveys are showing that many employees are wanting out of retail. A sign of the times?
- Competition from alternate lower-cost and price providers, such as larger venues like supermarkets, Costco, Amazon, etc.…
- Foodservice will be a great growth area, but it is very labor-intensive.
- Automation will help, but will quality and the lack of personal store experience hurt sales?
A very important industry statistic may regain importance – store traffic. During Covid, declining store counts were more than offset by increasing rings per transaction. Will the higher rings continue? Store counts were decreasing even before Covid.
The other important issue remains the perceived impact on fuel volumes from electric vehicles. The electric vehicle push is on worldwide, and will continue especially as batteries improve and volumes increase to reduce car prices and ongoing maintenance. In the meantime, oil companies are being discouraged from looking for new oil fields to replace naturally declining production, helping push crude prices higher, a trend favored by many environmentalists. Not good for driving traffic to the forecourt, unless through competitive retail prices hurting margins.
Conclusions for merger and acquisitions (M&A) activity is mixed in our industry. Clearly, being deemed an 'essential industry' during Covid provided a huge exposure at a time when convenience was extremely valuable. Now, will demand and pricing power at the pump and in the store offset rising costs as the economy returns to a more normal pace of growth? For this summer as people emerge from their homes, probably yes. Industry profits are terrific. Longer term is much more difficult to guess right now, especially since we do not as yet know consumer reactions to the inflation that is already in the marketplace. Is it as good as it gets for a hold or sell decision? Probably yes.
Summing it up, recent monetary and fiscal policies in our country have greatly helped asset prices like stocks and real estate in favored industries, and certainly including fuel and convenience. Thus, buyers in this space have exceeded sellers for some time now. Labor issues, including the importance of having a strong staff support for the front-line employees, will be more important than ever until automation can be developed and accepted. Management issues are growing more complex, but companies that can stay ahead of changing trends should do well, as convenience will always be important to the consumer.
To see a list of convenience stores and gas stations for sale, click here.