Business Article - Convenience Stores - A Buying Guide
At a time in the economic life of our society when many small businesses are struggling, and superstores and giant chains undermine local or independently owned businesses, it can be difficult for those interested in buying a business to discern which businesses are likely to be profitable. Most buyers are concerned for both themselves as business owners and for the community in which they decide to do business, but do not wish to suffer the same fate as many local storeowners.
There is, however, at least one type of business that seems impervious to the looming shadow of the discount chain. Convenience stores rely more on where they are and the hours they keep than on what they stock, and because of that, they tend to do well even in markets that are not always prosperous. In fact, not only do convenience stores hold their own in terms of profit and market share, they are expected to make even larger strides in the coming years.
This is possible because convenience stores serve a need that no other business is able to meet. The discount giants are seldom easily accessible (not very convenient) to people in rural communities. In order to justify placing a large superstore in a community, the population has to be able to support the enormous structure and infrastructure of the enterprise. Those who live in communities too small to support such a business may, indeed, travel the thirty, forty, or fifty miles to the superstore on occasion. But they cannot do it every day. Most of the time, they require a neighborhood store that carries the things they need on a daily basis, and the convenience store fulfills this need.
The same dynamic holds true of large urban areas, where space is at a premium, and large warehouses of groceries literally do not fit. In those areas, a family may take the bus to the superstore from time to time, but for the most part, they will run down the block to the local convenience store, which stocks everything they need to cook daily meals and to take care of daily needs.
In some areas, both rural and urban, the local convenience store serves as a gathering place in much the same way that general stores once did; it is where people run into teach other and share pleasantries and conversation. Many even operate post offices within the convenience store, further serving the community’s needs. Because people require both food and social interaction, convenience stores are prospering in our economy.
As with many small businesses, the buyer has a choice between running an independently owned convenience store and one that is part of a franchise. The success of each will depend on many factors. If a buyer chooses a franchise, they will have the advantage of familiarity; not only do most people know the brand, but they also know what they will find and where they will find it in the store. That kind of reputation and familiarity provides its own advertisement, but it is difficult to defeat; even when a customer receives bad service, chances are they will return to the franchise.
The independently owned convenience store depends much more upon the strength of its stock and of its customer service. A family’s reputation might be the selling point, rather than broad familiarity with the brand. An independently owned convenience store is also more free to choose its stock, in contrast to the franchise in which stock is largely chosen for it by the corporate offices. A local owner can choose to feature local products, for example, thereby keeping even more money in the local economy.
One thing a buyer should consider before investing in a convenience store is the hours they plan to keep. Convenience stores, in order to remain convenient, must remain open when others are not, which requires very early and very late hours. Many are open twenty four hours a day, which brings in other considerations such as staffing and security.
In addition to being convenient purveyors of food and other goods, convenience stores also often sell gasoline. In fact, more than 80% of the gasoline sold in 2006 was sold through convenience stores. Because of the increase in revenue that came through gas sales, convenience store revenues in 2006 set a record high of $569 billion, which was an increase of over $71 billion from the previous year. Everyone needs food, and everyone needs gas, and convenience stores are ideally positioned to serve both needs and to benefit from that service.
One caution to potential buyers grows from the statistics in the previous paragraphs. Revenue at convenience stores increased by $71 billion dollars, but profits declined by 19%, or $4.8 billion. The difference is largely due to the fees being charged by credit card companies that convenience stores have to pay in order to allow customers to use credit and debit cards. In some cases, credit card fees were actually more than the stores’ profits for the year, and convenience stores pay almost as much in credit card fees as they do in total payroll for their employees. There are negotiations happening between representatives of convenience stores and credit card companies, and this difficulty does not negate the value or general profitability of convenience stores as a business.
Even with the difficulties surrounding credit cards, the convenience store industry continues to grow. In 2006, 351 new convenience stores were opened in the United States. In fact, the growth rate in the convenience store industry is remarkable, and should certainly encourage a potential buyer.
Most convenience stores in the United States are operated by owners who own only one store. In this industry, even franchises are locally owned businesses. For those who are considering buying a convenience store, those advantages must be weighed against several other important questions that must be explored before a final decision is made. If a buyer is seeking to purchase an established independent convenience store, he must ask why the current proprietors are selling the shop. Are they simply trying to get out from beneath an unprofitable investment? Have the demographics of the area changed since the shop’s original establishment; i.e., have customers declined or crime risen? Will the location be successful for a new owner?
A buyer should also look carefully at the area and do his or her own demographical research. What is the projected future for this neighborhood or district? Who can be expected to frequent the convenience store in the next year, five years, or decade? The buyer should consider whether the projected demographics are those which he is capable of serving; for example, if the ethnic makeup of the area is projected to change, will the buyer be able to meet the needs of that new cultural presence?
Next, the buyer should examine the records of the business itself. Does the store have any outstanding bills that could carry over even if there is a new owner? It is advisable to have an accountant or attorney examine the store’s financial records. Does it have a record of profitability? If so, have the profits been sufficient to cover expenses such as rental or leasing, insurance and marketing that all businesses incur? If not, the buyer must discern why not. In the case of an independent store, suppliers can be changed and merchandise replaced, but the store’s reputation in the neighborhood takes more time to overcome if it is negative. If it is a positive reputation, and the store is already known for its good customer service and good quality merchandise, the buyer should find that fact an encouraging part of his discernment. It often takes years to build a positive reputation in business, and if the store’s current owners have already done that work, the buyer should take that into account in his decision.
Other considerations, of course, have to do with the buyer’s financial resources and his ability to acquire adequate funding. It is important for the buyer to learn what amount will be expected as a down payment, and then to discern whether he has those resources available. Next, he must consider what type of funding is most appropriate for a convenience store. A first step in making that choice is to draw up a business plan. This plan will make use of all the research done up to this point: demographics, physical plant, profit margin, potential marketing strategies, and the history of the business. The business plan can then be taken to a bank, many of which have departments specializing in small business loans, or another lending agency.
Convenience stores are among the fastest growing and most profitable business fields in the United States and Europe. Although like any business, buying a convenience store is not without its risks, these neighborhood stores serve a need for food, socialization and many other things important to a community’s life. Convenience stores will be viable business choices for many years to come.