Rev. of Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues

Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues

by Robert Bainbridge, MAI

Published by the Appraisal Institute, 2003

Review by Stephen Traub, ASA

[Bookcover]

Convenience stores, not surprisingly, provide a convenient location to purchase consumable products such as food and gasoline.

Nationwide about 120,000 convenience stores exist. In 2001, NH had 719 convenience stores, Maine had 939, and MA had 2,328. Typically stores have extended hours, contain at least 500 items, and have convenient access. The product mix primarily includes beverages, snacks, and tobacco. In the future they also may include pharmacies and banking.

According to the National Association of Convenience Stores, the convenience store evolved from the 1) neighborhood grocery store, 2) ice-house (from pre-refrigerator days), 3) dairy store, and 4) delicatessen. The first convenience store opened in 1927 in Dallas.

As suburbs grew, residents found too much space between supermarkets. Convenience stores, therefore, sprung up in areas too small to warrant a supermarket. For many years, nearly every convenience store was about 2,400 SF and was loaded with packaged consumer items.

In 1999 and 2000, as a result of overbuilding, closings occurred. During 2001, profits were down by 4.1%. The decline was partly a result of new competition from Wal-Mart and warehouse clubs selling gasoline at steep discounts.

Stores built today average about 3,400 SF. Formats also include the Kiosk below 800 SF; the Mini about 1,000 SF; the Limited Selection (often converted two-bay service stations) at 1,500 to 2,000 SF; the Expanded at 2,800 to 3,600 SF (typically with significant fast food seating); and the Hyper (more than 4,000 SF with discrete product and food service departments).

Fluctuating Fuel Revenues

The author points out that just because gross revenues increase, it doesn't mean that increased profits result. For example, in 1999 the price of cigarettes went up as result of a sharp tax increase. In 2000, the price of gas jumped 28.5% from crude oil spikes. Resulting gross revenue increases did not translate into increased profits.

Sales groups typically are divided into motor fuel, in-store sales, merchandise sales, services, and food services. Now fuel sales typically make up 61% of sales. This has increased from 50% during the mid-90s as a result of higher fuel prices and less in-store traffic from increased pay-at-the-pump.

Since the price of fuel varies, the best indicator of the quality of store performance is gallons sold each year compared to industry averages. Another important measure is gross fuel margin. The margin is the difference between the wholesale and retail price. Industry-wide, the gross fuel margin consistently has been about 13% since 1996. Margins on fuel are lower than on other products.

Fuel Service refers to the real estate (including canopies) and equipment involved in the dispensing and sale of retail motor fuel. Canopies are now a must item. Besides providing shelter, they also provide lighting and brand advertising via signs. A store without a canopy today is functionally obsolete.

The fuel dispensing system includes tanks, pipelines, and dispensers. Fuel pumps are now called fuel dispensers since some no longer have pumps in the dispensers. The pumps are located in the tanks and push the fuel to the dispenser, rather than pull the fuel up to the pump in the dispenser as in older systems.

Older dispensers were mechanical with analog revolving wheel indicators. New dispensers are electronic with digital indicators that one attendant can control from a remote location. Moreover, most new dispensers have only one hose per side that can dispense multiple grades of gasoline. Other developments include pay-at-the-pump systems. On one hand, the convenience of pay-at-the-pump increases fuel sales by 30%, on the other hand, fewer patrons set foot inside the store to buy other items. A coming attraction includes a robotic dispensing system in which customers do not even have to get out of the vehicle.

Gas, Cigarettes, & Beer

The top four non-fuel categories include cigarettes at 36% of in-store sales, followed by food service items, packaged non-alcoholic beverages, and beer. Other potential services include copying, ATM service, money orders, and dry cleaning.

A nationally branded quick service restaurant (QSR) can double total revenue.

Food service refers to fresh food prepared onsite. It can consist merely of prepared coffee and hot dogs to a full-service, nationally branded quick service restaurant (QSR), which can double total revenue. This is known as a 2 in 1. Annual food service sales can be measured in sales per SF. With national chains, a one-time franchise fee is charged by the franchisor, as well as annual royalties and advertising fees of 7% to 12%.

A Convenient Site

Site evaluation should consider access, visibility, and traffic count. Ideally, a site that will support a full-service QSR should be in a prime location, on a corner lot with 60,000 SF and 250 feet of frontage. It also should have one-third of a mile visibility and excellent accessibility. In addition, the site should have few restrictions. The operation should be allowed to be open 24 hours, sell beer and wine, and have a car wash. The average trade area of a store is about two miles, but varies. In some cases, drive time is a more accurate measure of the trade area.

During 2000, the average cost of a site in a rural area was about $260,000 and in an urban area about $700,000. By sharing a site and a building, a 2 in 1 can reduce land costs and building development costs. Ultimately, however, the value of the site will be based on potential retail earnings. The total investment will include more than the real estate costs, however. It also will include costs for franchise associations, equipment, and start-up inventory. During 2000, the total investment for a new urban store was nearly $1.90 million.

Keeping It Clean

The book also has a section on carwash elements. It discusses the various types: Self Service, Exterior-Rollover, Exterior-Only, and Full Service. Exterior-rollover systems are the most common at convenience stores and can accommodate 12 to 15 cars per hour. If the subject location has the capacity and potential to do a higher volume, a larger mini-tunnel system might be more appropriate as it can accommodate 33 to 65 cars per hour.

Within the book is a sample appraisal report highlighting pertinent sections applicable to a convenience store. The comparable sales method is considered moderately useful and the book has outlines for gathering information on comparable sales. One economic unit of comparison is gross sales per SF, but the preferred units of comparison are the gross profit per SF and the gross profit multiplier. The gross profit is the amount of revenue after paying the item's wholesale cost but before paying operating expenses.

EBIDTA

The author states that the income capitalization approach is the most useful approach. Getting rents on the real estate portion alone, however, will be difficult and often misleading since lease arrangements are rarely arms-length. Therefore, the overall operation's net revenue is the income to capitalize. This is often termed earnings before interest, depreciation, income taxes, and amortization, or EBIDTA. The author shows how to get from gross sales to net revenue or EBIDTA.

He states that intangible assets such as business value or goodwill only exist if excess earnings exist over the required investment return on the tangible assets. The appraiser should not assume goodwill exists in every case. On the other hand, if the economic return is less than reasonable on the tangible assets, this is termed negative goodwill. This may show that external obsolescence exists on the tangible assets. This also should be reflected in the cost approach.

Capitalizing EBIDTA will provide a value for the total assets of the business or total operation. Typically, this overall cap rate will be higher than the cap rate of the real estate only. The reasons are that the personal property portion has a shorter life, therefore, has a higher recapture rate and if some value is intangible, its income is less durable than the income attributable to the tangible property. Therefore, income attributable to an intangible item is of higher risk.

The book also contains many useful references to other publications and websites as well as a glossary of useful terms. If you have an interest in convenience stores or might appraise them, having this information in one book will surely be -- convenient.

The book above, Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues, is available on-line at Amazon Books.

Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME, and MA.

To contact the author of this review, e-mail to: straub@shore.net or contact him at the address above, or call 978-462-4347.