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Overview Equity Market Overview 1Valuations 2
Publicly Traded Companies 4
C-Store Trends Margins 6Government and Regulatory 8
Mercer Capital’s Value Focus: Convenience Stores Second Quarter 2016
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5
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10
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Q1 2011
Q2 Q3 Q4 Q1 2012
Q2 Q3 Q4 Q1 2013
Q2 Q3 Q4 Q1 2014
Q2 Q3 Q4 Q1 2015
Q2 Q3 Q4 Q1
Mid-Point
C-Store EBITDA Valuations // Quarterly Range of Mean Highs & Lows
Data Source: S&P Global Market Intelligence
EBITDA multiples were down slightly for convenience stores during the quarter. The multiples for grocery stores fell by
a larger percentage (3.5%), while multiples for fast food operators were up 2.5%. Multiples for public C-store operators
fell from 9.8x EBITDA at the end of the third quarter of 2015 to 8.9x at the end of the fourth quarter of 2015. Multiples
dropped further during the first quarter of 2016 to 8.8x EBITDA.1 C-store multiples remained slightly above their five-
year average (8.5x).
1 As measured by the average of : (1) the median of the highest EBITDA measure of all the companies in the Mercer Capital index over the entire quarter and (2) the median of the lowest EBITDA measures of all the companies in the Mercer Capital index over the entire quarter. Current and historical multiple data was obtained from Capital IQ. In some prior newsletters, data was sourced from Bloomberg.
OverviewValuations Down, Ranges Widen for C-Stores
Mercer Capital’s Value Focus: Convenience Stores Second Quarter 2016
The industry is mature and continues to consolidate. Merger and acquisition activity among the larger players has been
high in the past few years. The Kroger Company merged with Harris Teeter in 2014 to expand within the Southeast and
Mid-Atlantic market areas and create a network of over 2,600 stores. Kroger also acquired Roundy’s in 2015 adding
151 stores to its network. Safeway and Albertsons merged in early 2015 to create a nationwide network of over 2,200
stores. This is an industry in which economies of scale are crucial; larger size helps enterprises better compete with
mass merchandisers by lowering per-unit costs. The grocery store industry has been facing increasing competition
from superstores and discount warehouse clubs, such as Wal-Mart. According to Wal-Mart’s 10-K for the fiscal year
ended January 31, 2016, grocery store segment revenues were 56% of total company revenues. Supermarkets are also
increasingly facing competition from convenience stores, food service providers, and dollar stores.
Grocery Stores (continued)
WWW.IBISWORLD.COM Supermarkets & Grocery Stores in the US May 2016 22
Competitive Landscape
Basis of Competition Internal competitionSupermarket and grocery store operators fiercely compete for the consumer’s dollar in an increasingly competitive food retailing sector. Due to the homogeneous nature of the goods sold at supermarkets, industry participants compete on price by offering discounts and promotions in addition to customer loyalty awards. Supermarkets rely on a large volume of sales with low markups and offer generic- or store-branded food items that are less expensive than branded products to drive sales. Most stores offer weekly savings on popular products to entice new consumers.
Other than lower prices, grocery stores must attract customers with the range and quality of products they offer. Industry players who offer an extended range of goods cater to a larger consumer
base from both low- and high-income households. However, if grocery stores price their high-quality products too high, they risk losing sales, even from high-income households. In the years following the recession, private label products have maintained their popularity among consumers. In particular, higher-end generic goods, such as Whole Foods’ 365 organic line of products, have enjoyed increasing sales as consumers seek affordability and value. Consequently, retailers that offer a range of private label products have benefited from improved sales and margins.
Supermarkets offer a variety of products and services, aside from traditional grocery and nonedible products. For instance, through its partnership with Starbucks, Safeway
Sector vs. Industry Costs
n Profi tn Wagesn Purchasesn Depreciationn Marketingn Rent & Utilitiesn Other
Average Costs of all Industries in sector (2016)
Industry Costs (2016)
0
20
40
60
Perc
enta
ge o
f rev
enue
80
100
SOURCE: WWW.IBISWORLD.COM
3.2 1.5
9.63.8 1.00.9
73.3
9.9
10.04.3 1.51.1
70.7
9.1
Level & Trend Competition in this industry is High and the trend is Increasing
Cost Structure Benchmarks continued
WWW.IBISWORLD.COM Supermarkets & Grocery Stores in the US May 2016 25
Player Performance The Kroger Company was founded in 1883 and is the largest grocery store chain in the United States. Headquartered in Cincinnati, the retailer employs 431,000 people throughout the United States. The company operates one retail segment, which includes its retail food and drug stores, multidepartment stores, jewelry stores and convenience stores. Along with its retail business, Kroger operates 38 manufacturing facilities where it produces a variety of private label goods, primarily baked goods and dairy products, which are sold at its retail outlets.
Kroger participates in the Supermarkets and Grocery Stores industry through its food and drug stores segment and multidepartment stores. The company operates more than 2,770 supermarkets and grocery stores across the United States. Kroger trades under 24
brand names across 35 states. Also, the company uses private labels as a way to differentiate its products and compete against other industry players. The company sells about 13,000 private-label items in three tiers: Private Selection is the premium-quality private label, offering food and beverages that cater to consumers’ specific gourmet tastes; the midrange Banner brand makes up the majority of private-label sales; and Kroger Value maintains an emphasis on price.
Over the past five years, Kroger has focused on driving sales productivity in markets that it already operates in, as well as expanding through strategic acquisitions. Since Kroger is the largest grocery retailer, it aims to acquire companies in locations where it can expand its market share. For instance, in 2011, the company acquired eight stores
Major CompaniesThe Kroger Co. | Albertsons LLC Publix Super Markets Inc. | Other Companies
68.6%Other
The Kroger Co. 16.1%
Albertsons LLC 9.7%
Publix Super Markets Inc. 5.6%
SOURCE: WWW.IBISWORLD.COM
Major players(Market share)
The Kroger Co. (industry-specifi c, excluding fuel centers) - fi nancial performance
Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an
information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list
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Mercer Capital serves the following industry segments:
• Motor Fuels
• Grocery Stores
• Alternative Fuels & Consumer Transportation
• Foodservices
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