Recession, Wars, Tariffs, AI, Budget Deficits, Oil – Summary of Current C-Store Industry Variables

All the above are at least partially geopolitical and impact our industry significantly, thereby creating uncertainties that directly impact M&A, some favorably, most not.

Yes, we may already be in a recession, but assuming it doesn’t get severe, it is long overdue. And yes, tariffs are potentially inflationary, but important non direct tariff related items such as labor, services and oil prices are not rising quickly at this time so perhaps they will offset each other. Recall as well that in the U.S., during Covid and post Covid until recently, the average US economic gross profit margins have been in the 13-14% of sales range compared to an average of 8% since World War II. Some of the recent stock market shakeout may be reflecting that companies can cut costs, but lower margins may be also be an acceptable tariff alternative for many of the affected parties in the supply chain to maintain sales volumes.

Three important matters are making some progress. First, independent even of the costs in money and human casualties, there is a lot of pressure to solve our two very prolonged wars in Ukraine and the Middle East. Second, at least the unusually large tariffs are finally being discussed, the most important ones being with China which currently has its own economic problems. Electronics tariffs are supposedly off the bargaining table for all countries for now, which is critical for any international AI cooperation in the future in a world of growing electrification. The tariff discussions are obviously important, but will take a very long time to negotiate, in theory with 90 different countries. Insane.

Progress on wars and tariffs might help resolve our seriously needed Federal budget ceiling resolution so the bond market volatility doesn’t go crazy again as it did in early April, reflecting a rare show of huge bond market illiquidity. For both future capital spending including M&A, it’s important that 10 Year U.S. Treasury rates remain below 5%, which they are. In addition, AI programs for robotics and maybe retooling factories might ‘home shore’ or ‘near shore’ some US industries not as dependent on our expensive labor and hopefully facilitated by simplifying and cutting legal red tape. This too is a long process.

AI has helped improve oil drilling technology, which when combined with significant surpluses of refining capacity from reductions in fuel demand, are helping US consumers enjoy gasoline prices 50c per gallon lower than last Easter. Unfortunately, demand remains soft making price increases difficult to pass through to offset lost gallons, store sales, and ever-increasing store expenses. Brand identification is important, especially as more marginal refineries close to balance supply, which can impact supplier competitive pricing. Finally, Elon Musk and continuing improvements in EV’s and charging systems assure a still slow-moving future place for EV’s, as we try to catch up with China in particular at this time. CATL, a Chinese owned lithium battery company supplying most of Tesla’s batteries, announced today a second generation EV battery capable of adding 300 miles of charging in 5 minutes.

Recent c-store industry profitability is clearly more variable by region and by company. The bigger companies plus a number of mid-sized firms benefitting from scale, foodservice, and financial strength generally continue to outperform. Buyers remain acquisitive, but more cautious. Would be sellers of family-owned businesses are sometimes more complicated by multi-generational management issues. Considering the serious variables mentioned above, it is not surprising. Money availability is plentiful, yet all U.S. M&A and the often related stock IPO markets have all lagged expectations thus far in 2025. As a result, M&A selling multiple ranges may be wider than normal, but scale plus quality assets are still holding near their historic levels.

One thing is clear at this point, the c-store industry performance in the stock market has outperformed other brick and mortar retail industries. It is not fun to be a stand alone QSR store or restaurant right now. Our industry continues to produce solid rate of return NTI’s, especially those with profitable foodservice supporting the store, plus those with cost competitive fuel ‘brand’ leaders of the industry.

Next year we have an extremely important mid term election to determine the control of Congress, the branch of government that has historically initiated and often controlled many issues such as taxation, which have frequently been backed by the Supreme Court. The election likely explains the fast action taken by the Trump Administration to show results, and even promising ‘pain’ to achieve objectives. Geopolitics will not go away. Notwithstanding all the factors at the moment, the best way to settle the economy down is to have stable, steady, non inflationary growth - easier said than done in a high tech fast changing competitive world.