Electrification of Everything? Part 2 – Good and Bad for Our Industry M&A

My first blog on the electrification of everything from May 2025 is accessible on NRC’s website here. The Iran War is creating a further interruption, but let’s hope it ends quickly. Yet another war over oil will bring back cries of reducing the world’s dependence on oil. In the meantime, AI activity adds to creating potential major supply disruptions on many things, so geopolitics will continue to bring uncertainties hindering capital decision making.  

First, it appears that the U.S. race for AI superiority with China is close, because the U.S. seems to have the lead on technology, but China is ahead on cost savings, making them more competitive at times than the U.S.  In fact, China’s car company, Xiaomi, just introduced a $30,000 to $42,000 fully equipped four-door premium EV sedan called the SU7 with a charging range of over 500 miles. About 60% of current Chinese new automobile sales are EVs. Furthermore, most of them can be converted to fully autonomous vehicles (AVs) as they become approved. In the meantime, Elon Musk has converted most of his U.S. car making capacity to put more emphasis on robotics where he believes he is ahead of the competition. His would like to tie in with his $1.75 trillion IPO of Space-X, as he plans to produce data centers in space and on the moon to take advantage of solar for energy and natural cooling at night. The center of these efficiencies also ties with plans for so-called Supercomputers that absorb data and provide solutions at rapid speeds. Fortunately for our industry, geopolitics has helped slow the growth EV car sales in the U.S., so even if EVs become popular again, petroleum usage will be extended, likely depending on reliability and economics.

Labor is one of our industry’s main expense categories, accounting for approximately 30% of in-store labor costs that vary considerably based on the very important foodservice profit center. Robotics will be extremely important in our industry since AI can be developed for ordering, recipes, product choices, assembly, clean up, and delivery optimization. True, Amazon tried city c-stores for a while, but in retrospect, this might have been to gather data on public buying habits of perhaps its biggest competitor. Regarding M&A, some purchasers will be carefully determining your AI planning and personnel to assess the costs required to integrate it into their systems. 

M&A activity has been slower than anticipated this past year, perhaps caused in part by a lack of quality chains available due to ongoing industry consolidation. Company selling price is determined by store cash flows (i.e., before interest, depreciation and overhead) times the current market multiple less net debt and needed capital expenditures. The market multiple is determined by long-term interest rates, money availability, and economic confidence in industry health and growth. Even if some stores or locations are not large enough to compete effectively with today’s NTIs, technology improvements may not require as much space in the future for good locations, other than for parking. In addition, we anticipate M&A picking up because the Trump Big Beautiful Bill definitely improved buyers’ ROIs through asset step-ups and depreciation write offs, while protecting sellers’ generally favorable capital gains taxes.  

Perhaps most important about today’s M&A is the flexibility of having a sellers’ market at a time when record cash flow times record multiples create great selling prices and allow creative thinking to meet sellers’ and buyers’ long-term needs. For example, company-owned units carry good multiple values today, but perhaps some of the stores could be leased for twenty years or more as part of the purchase price, which might be attractive to some family owners or outside business partners wanting income from a quality buyer. Those stores will have a lower purchase price, but that income stream could be sold at a later time to another buyer creating add-on value to the seller. NRC has extensive experience in facilitating such a structure and can provide valuable assistance in negotiations.

Call if you have any comments or questions.

Jeff Kramer

jeff.kramer@nrc.com

(303) 619-0611