Wars, AI and Their Economic Impact on the C-Store Industry and M&A

Wars are extremely harmful for any kind of economic progress, especially at a time of huge transformation into an Electronic Age as we have never lived through called AI, or as I like to call it, ‘Google Squared’, or ‘Google on Steroids’. Even wars for a good cause cost huge sums of money on wasteful items like bombs - they can’t be reused like cars or machinery- that raise inflation and sometimes cause recessions. We are in a mixed consumer recession of sorts now led by oil and related energy issues, but more than offset by the start of a beneficial Industrial Revolution led by AI.

Even the ‘winner’ in some wars loses due to what is called ‘Unintended Consequences’. For example, prior to the current Iran war, the world was severely oversupplied with oil inventories and supply. The Unintended Consequence here is that a planned short war has taken much longer to finish, costing more but further decreasing demand probably permanently, even though prices never got as high as in prior wars fought years ago. The Strategic Reserves in China and the U.S. were helpful, but the potential for serious surpluses is reemerging as countries need money to pay their debts and for planning their own AI-related capital expenditures, almost every country it seems.

Our petroleum/c-store industry is in a perfect position to benefit in many economic environments, because our business is determined by how we can create Convenience since time is something we never have enough of at any age. Our industry led the way with gas stations, then leading into c-stores, and more recently to convenient foodservice items that QSRs and most restaurants (with tips!) cannot offer given the large variety of items, as we can. If space is available, we can often offer ‘tuck-in’ profitable items and traffic builders, such as gaming, ATMs, car washes, vapes when cigarettes are declining, etc. As a result of these format transitions, Winners and Losers are created along the way. Economists call it Creative Destruction. Besides creative minds, it does usually require more overhead and capital to succeed, so scale does matter.

AI has huge promise for retooling the whole world’s economies through robotics, less costly health improvements, starting new businesses in space, etc. The U.S. leads the world and will continue to for many years to come, especially if we can lead for coordinated policies and growth. This rebalancing by definition will create Winners and Losers from effective competition going forward.

Cheap and relatively easy to transport oil has served us well for many years. Green energy such as wind and solar no longer need subsidies to compete. Potentially inexpensive geothermal energy is being drilled using horizontal drilling techniques 15,000 feet under the earth’s crust. It needs a recently granted U.S. Federal subsidy to help reach economic scale, but it can be an important energy source anywhere in the world for data centers. Rumors persist than Elon Musk has developed an extremely small nuclear reactor with large potential for local usage and space as well, although commercial timing is unknown.

Also likely is a new push towards electronic and autonomous vehicles, which will only include Tesla as one of many competitors, as opposed to a monopoly. Yes, EVs and AVs could use 20% of electric grid usage some day, but the cars with new technology will be cheaper and cleaner, and should save lives, insurance costs, healthcare costs and time, as the technology advances.

How will the above changes impact our petroleum/c-store industry and ultimately M&A selling prices? Will higher fuel margins with fewer gallons sold save our gross profit for the sites? I don’t know. Depending on oil and refining profits, will the oil companies continue to pay for so-called ‘branding up’ for long term contracts as generously as recently? Good question. If you can transcend into robotics, cost saving ideas for labor, new businesses like profitable foodservice, etc., you should be fine. This transition is even more important when you consider that more vehicle recharging need not be from a fuel outlet, because it will be more convenient and perhaps more economical when done at home or work or even while grocery shopping.

Do today’s wars affect M&A and selling multiples? It seems our industry M&A has slowed while tech mergers are in focus, and frankly many of the good retail chains have been sold. The key numbers for determining selling prices are store-level cash flows times selling multiples. With financial and economic conditions fairly stable right now, we see no reason to change our recent multiple range of 8-10x times. Also, we are seeing wider ranges of earnings these days, often impacted by recent trend changes in demographics, competition, etc. Scale is always helpful, but does not necessarily impact multiples by itself.

We’ll see you at industry events or at your convenience at your location. Please call with your thoughts or questions to get the latest updates on M&A and single store selling trends. There are still more buyers than sellers. No deal is too small or too large for NRC to help you with.

Jeff Kramer

jeff.kramer@nrc.com

(303) 619-0611