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The Great Recession lead to price declines
across all classes of commercial real estate. The convenience industry followed this trend.
Costar reports that the median price of a convenience store in the U.S. declined 42% from 2006 to Q1 2011.
The graph shows a 2006 median price of $1,373,190 falling to $793,958 in the first months of 2011. These
prices reflect convenience stores with fuel service. This decline is similar to the drop in the Moody’s
National Commercial Properties Index, which fell 39% over the same period.
The magnitude of the annual
price declines parallels the rise in capitalization rates. In 2006, the average capitalization rate for
convenience stores was 7.36%. Rising steady in the following years, by 2011 the average capitalization
rate increased 100-basis points to 8.35%. Capitalization rates are a reflection of perceived investment
risk. The higher the rate, the higher the perceived risk.
Transaction volume has remained
about the same. In 2010, Costar recorded 1,296 c-store sale transactions across the nation.
In 2006, that number was 1,339. Hypermarkets have significantly slowed their
penetration into the U.S. retail fuel market. According to EAI, Inc. only 180 fuel sites were added by
hypermarkets in 2009. This is down sharply from 528 new sites in 2005. Mirroring the
disillusionment in the industry, Home Depot and Publix never went ahead with plans to roll out fuel sites at their existing
locations. In a handful of cities, hypermarkets have captured 20% of the retail fuel market. Nationally,
their market share is thought to be about 9%. It appears their market-share momentum is coming to an end. The next emerging trend in retail fuel marketing is loyalty programs between mass merchandisers
and branded fuel retailers. This “Stealth Marketing” arrangement offers the customer discounts
on the price of fuel at major oil branded locations through loyalty card credits at mass merchandisers. The
amount of the discount varies by the customer’s shopping volume at the participating mass merchandiser.
These discounts will reportedly range from 3 to 10 cents per gallon. In turn, the fuel retailer
is projected to achieve volume gains of 20% to 30%. This arrangement is called “Stealth Marketing”
because the price discounts are not publically advertized. The
success of “Stealth Marketing” remains to be seen. Will customers drive the distance to the
participating convenience stores to save a few cents? Currently, Shell is partnering with Kroger and Sunoco
is partnering with Shop N save and Price Chopper. If this latest marketing venture is successful, fuel
sales will be returned from the mass merchandiser to the convenience channel.
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