AI and Possible Impacts on C-Store Industry

While a significant Middle East conflict continues to impact petroleum markets, perhaps a more important long-term story is the rapid transformation of the global economy driven by massive investment in AI machine learning and execution techniques. These changes are unfolding simultaneously across industries with lasting implications. The following reflects a number of observations on where this may lead – we are still early, likely in the fifth inning of a nine-inning game.

Artificial Intelligence represents the next phase of computing, driven by rapid advances in chip technology. Advances that teach robots to replicate not just physical robotic tasks but also to replicate key memory elements to convert data knowledge into physical activities. An example might be mapping the knowledge of an automated truck driver to load and unload various items, transporting them into a manufacturing plant, figuring out how to place them in the assembly line as it passes in real time, and even giving recommendations of how to improve that entire process to save time and money. The term Agentic AI refers to computer ‘agents’, which are simply computers dressed as human-like robots, and performing tasks as a human assistant while solving real life problems based on continuously learned data.

In our c-store industry, AI is already providing some industry benefits from labor and back room overhead savings. One of the biggest benefits at this point is from cross product and cross channel of trade price optimization. For example, especially for those in foodservice, the number of possibilities for revenue and profit optimization is sizable and can be evaluated by store after considerable data collection that AI will eventually compute and solve. You can use your imagination at this point about store robotics for stocking, ordering, food assembly, pricing, cooking, etc. Yes, it will be strange, but remember our main business is convenience that competition will force at an affordable price.

Our industry has a large array of financial services. The U.S. is close to announcing a highly sophisticated AI-generated change that revises our banking system, using a Space-X Starlink communication system through blockchain techniques to process transactions quickly and free up funds for everyone in the system anywhere on the planet. Banks themselves will have to adjust in many ways, as fewer physical banks will be needed over time, freeing up valuable commercial real estate. The common theme is reducing cost and still improving consumer efficiency.

There are many important economic changes in this transformation. AI related capital spending is currently adding about 2% real growth to an already growing economy, The result currently is adding to inflation pressures, which in turn could adversely affect our serious debt size and interest rates before we see more of the deflationary aspects of AI. If all goes well based on history of other past game changing technologies such as electricity or locomotive engines, etc., jobs were lost but unexpected new jobs were created in time. Employing robots could also offset the reduction of the workforce from changing population-demographics that by itself reduces growth.

Company strategy and competitive position in the marketplace, plus the ability to execute will always be keys to profitability. Some things never change.

In summary, this transitional game will progress with winners and losers. As a result, the c-store industry impact on M&A and multiples is a little more uncertain than the exuberance shown recently in highly successful Wall Street IPOs. Any anticipation of less long-term unit growth from fuel and often unhealthy c-store items will impact multiples, as has been the case in other retail industries even with tech savvy large retailers such as Walmart. Covid helped fuel margins considerably, but we cannot always rely on flexible margins.

Regardless, industry M&A will remain active due to considerable overhead savings and improved bargaining power with suppliers. Petroleum based joint ventures are increasing once again, but they do form complex partnerships with suppliers, often providing profit protection, but with complicated operational strategies and complex exit strategies since partners’ long-term goals may differ. Convenience will still command a premium multiple to most other retail venues because of good real estate and flexibility for changing consumer needs, but it may be more challenging to exceed ‘four wall’ store EBITDA multiples exceeding 10X. Hopefully, AI profit improvements will more than offset.

Jeff Kramer

jeff.kramer@nrc.com

(303) 619-0611