Recent Consumer Changes and Impacts on the Economy, AI and M&A

First, AI is moving at breakneck speed. The push for data centers and related energy and infrastructure is huge. The Iran war is no help, raising energy costs and potential bottlenecks at peak data center build out time. Recent U.S. data shows that 2% of Q1 2026’s 2.5% GDP growth was due to AI/data center-related capital spending, plus capital spending (overspending?) related to unprecedented depreciation allowances. Q2 data will reflect the huge increase in fuel-related spending, but unfortunately sizable unit decreases in gasoline near 4%, and soft unit c-store and foodservice sales as well. Foodservice spending may be soft for many in our industry but think about stand-alone restaurants and QSRs’ loss of market share compared to our industry. The best current example is Casey’s outstanding overall sales and profit results led by proprietary pizza, relative to their standalone pizza QSR competition including Domino’s, Pizza Hut, etc. This trend is likely to continue in our industry because of our much greater array of product choices and services offered - true convenience. Robotics should help many industries at some point.

Inflation in our economy is showing up in other categories as well. The Fed’s favorite inflation gauge, core CPI, that excludes food and energy, increased to an annual rate of 3.2% in March. Labor is more available, but the cost of labor is increasing usually from job hopping advantages. So overall, the preferred trend for the Federal Reserve to lower interest rates is almost impossible for now. Long-term interest rates could/should rise, hopefully to not more than 5% for U.S. Ten Year Treasuries. All these trends now are adding to our painful overall sovereign and often corporate debt, in most countries of the world. Regardless, the average U.S. corporate gross profit margin rate for the S&P 500 companies is still remarkably close to the 14% record achieved during Covid, reflecting great consumer product choices, price optimization during this inflationary period, and expense control. Most of these improvements are AI-related, whatever the term AI exactly means.

The promise of better noninflationary growth from AI stays, although other obstacles remain. We have huge energy requirements, even including green energy, but apparently not enough for the buildouts announced. Higher electricity demand brings serious issues. In the US, natural gas is a huge inexpensive source, but much of it is associated with crude oil production. The Iran conflict has raised the back side of the dated crude oil price to help with drilling incentives, but much of the cheapest oil will be developed overseas, plus it will take time to build the natural gas pipelines to get the fuel to the data center markets. Then there will often be limits on expensive storage capacity for fuel and electric power. And finally, we need a national policy to expand our electricity grid to get the power to market, often encountering conflicting interstate regulations. Net, net, expect unpredictable power outages and stoppages - expensive and economically disruptive.

Elon Musk has been working on several solutions to the above issues, often enough to compete even with China. Miniaturization with more speed and power is the key, and critical items like the latest semiconductor chips are his design and perhaps manufactured in-house. He has also been working on an advanced version of China’s We Chat run by Ten Cent, that incorporates blockchain technology to enable faster, integrated, international financial bank-like transaction processing through the internet. Outer space will be an important source of that rapid communication through Starlink and space buildouts of data centers - how soon is impossible to guess.

A few other AI notes. I have previously discussed the importance of making rapid price changes from central headquarters for both fuel and c-store items with shelf tags. Important because this will certainly improve profits but also will test price sensitivity and test time of day changes ahead of competition. Another AI recommendation is having a centralized AI specialist to watch AI adoption policies and programs to help assure all parties in your company are on the same page about overall long-term corporate goals to avoid conflicts and costs from unplanned obsolescence.

In summary, we live in exciting, rapidly changing times, with all the above impacting M & A and valuations. The recent extraordinarily successful split off of ARKO’s wholesale operations into ARKO Petroleum Corp (APC), and the excellent multiple and dollar raise from the Yesway (YSWY) IPO are solid support of the industry’s recognition by Wall Street. Stock markets in general, but especially in the U.S., are considered richly valued for perfection, so we will see how profits and the economy hold up. Right now, it appears that Q2 2026 and perhaps Q3 after inflation GDP, will be negative contributors from the consumer side of things, which still comprise 70% of our economy. Hopefully, as in COVID-related 2022, any slowdown will be temporary, although this time monetary and fiscal conditions are much more limited if needed.

Jeff Kramer

jeff.kramer@nrc.com

(303) 619-0611