The Pantry Stocks Up On C-Stores

February 8, 1999 - CONVENIENCE STORE NEWS

BY MITCH MORRISON

HIS COMPANY A MYSTERY FOR SEVERL YEARS, CEO PETER SODINI SPEAKS OUT FOR THE FIRST TIME ABOUT THE SUDDEN RISE OF THE PANTRY.

For 62 years they streamed through the Ellis Island depot – immigrants, some impoverished, others robust, leaving a home of uncertainty for a better tomorrow.

Though it perhaps borders on exaggeration, Peter Sodini, who has threaded an unlikely patchwork of convenience stores into one of the strongest retail operations in the country, likewise sees his company as an oasis for retailers looking to escape uncertain times.

"Right now we’re like the Statue of Liberty," he said "Send me your weak and suffering and we’ll buy you."

Sodini, 58, is CEO, president and director of The Pantry Inc., currently the industry’s fastest-growing retail chain. In the three years since investment company Freeman Spogli & Co. acquired the Sanford, N.C., chain, The Pantry has burgeoned through an uneven collection of large and small acquisitions.

Since the fall of 1997, The Pantry has soared like a phoenix, climbing from the 33rd-largest chain in the Convenience Store News Top 50 Companies into the Top 10. It’s mushroomed from 400 stores to more than 1,200 through 16 transactions over that time. Its total revenues have rocketed from $427 million to $985 million in the past fiscal year (September 1997 through September 1998) and are expected to eclipse $1.6 billion this fiscal year.

Contributing most notably to the fattening coffers is the October 1997 acquisition of Lil’ Champ Food Stores Inc., the largest c-store chain in northern Florida, for $125.7 million in cash (see "Taking On Lil’ Champ,"). The Pantry also retired $10.7 million in outstanding debt accrued by the Florida chain.

More recently, The Pantry cemented deals to acquire Crescent City, Fla.-based Miller Enterprises’ 126 Handy Way Stores and Winston- Salem, N.C.-based Taylor Oil’s 60 Etna units.

Charging ahead, the company continues to rattle an industry not accustomed to such swiftness and aggressiveness. It seems that whatever The Pantry wants these days, it gets. A look at a map shows it becoming the premier player in a splintered southeast.

"We’re unique and differentiate ourselves in the market based on our mode of growth and desire," Sodini said during an exclusive interview with CSNews at his company’s headquarters. "Most operations look at growth through construction. We look at that as the last option."

Like the company he represents, Sodini is confident and perhaps a bit brash. He disdains most retail associations and has little interest in conventions dominated by golf. Anyway, he said, he prefers tennis.

He’s not interested in turning c-stores into service centers with extravagant foodservice offerings and comprehensive prepaid programs, nor is he keen on undercutting competition to better margins in the long run. His philosophy is simple and precise.

"We like to focus on what we think we do well, which is to run a basic convenience store – selling gasoline and the usual amenities you find in the store," Sodini said. "Don’t get too fancy unless you’re prepared to make a substantial commitment toward the systems to handle that."

Underscoring that principle, Sodini saw an opportunity in the southeastern portion of the country. He saw openings in all markets but Atlanta, controlled by QuikTrip and Racetrac Petroleum.

"With the level of fragmentation that existed out here, we thought we could buy high-quality operations with less risk a lot faster than we could build a suit," he said, referring to new stores as "suits."

"You have a lot of competition for sites. Drug chains are looking at the same sites we are, and they can pay a lot more for that piece of dirt than we can because they have a higher sales volume. We made a decision that if we’re going to grow in any reasonable fashion, then we would go the acquisition route "

Favorite Target

Founded in 1967, The Pantry was a relatively quiet operation, comfortably niched in the Carolinas, Kentucky, Tennessee and Indiana. A steady and stable operation, it breezed through the 1970s and early 1980s with little fanfare. Then came the tumultuous late 1980s, an era defined by savings-and-loan bailouts and leveraged buyouts.

The Pantry would succumb to the times. By August 1987, an entity calling itself Montrose Pantry Acquisition Corp. (MPAC) assumed all of The Pantry’s common stock in a leveraged buyout. As The Pantry rolled into the mid-1990s, it had lost focus. The stores had deteriorated and fractious infighting between founder Truby Proctor Jr. and Montrose general partner Clay Hamner had surfaced.

When Freeman Spogli & Co. Inc., a private investment firm based in Los Angeles, acquired majority control in November 1995, it arrived with tremendous financial resources, prompting The Pantry’s then- CEO/President Gene Horne to predict, "We have the infrastructure to go to 1,000 to 2,000 stores."

Horne was right. But he would not be part of the team to transform his prognostication into reality. Sodini joined The Pantry in February 1996 and, in the ensuing months, would complete a management overhaul, purging the old guard with allies from his tenure at the Purity Supreme grocery chain.

"Although they didn’t have gasoline experience," Sodini said of his current team, "what they brought in terms of being able to further enhance the merchandise side of this business was significant. Up to that point, [The Pantry] was a company in flux. The Montrose Group had been making staff changes... they were evolving the strategic plan. If you look at their profile of how they presented themselves to customers, they were the highest-price marketer of cigarettes and the highest-price marketer of gasoline – both of which we felt didn’t bode well for the future."

Sodini makes little effort to mask his displeasure with The Pantry’s former leadership. "The only philosophy we were able to glean from them was that the quality of location was paramount and pricing was secondary."

To turn things around, The Pantry refocused on a c-store’s two top staples: gas and tobacco. To achieve better results, the new leadership designated Greenville, N.C., a community about 45 miles from Raleigh, as a test market. In the spring of 1997, management slashed gasoline and cigarette prices at the 10 Pantry stores there, putting them in line with their competition. It also remodeled the stores, giving them a fresher look with better lighting and broader selection.

The changes worked. Sales soared and, suddenly, a group of grocers with no c-store experience had found for themselves a formula that remains the bedrock of the company. Instead of depending on unrealistic margins to fatten revenues, the new Pantry aimed at increasing sales through better pricing.

"Too many retailers worry about the top line instead of looking at what’s there at the end of the day," Sodini said.

With 389 stores – down from the 403 purchased – The Pantry was ready to grow.

When word came in 1997 that Lil’ Champ was for sale, industry analysts pegged Tosco Corp., which had acquired Circle K just two-and-a-half years earlier for $750 million, as the clear frontrunner.

But to much surprise, The Pantry, with cash in hand, acquired the larger Lil’ Champ, suddenly leapfrogging from 33 to 16 in the CSNews Top 50.

It was hardly the perfect buy. Many of the Lil’ Champ stores were outdated, sorely in need of extensive overhaul. Many stations featured only single-hose product dispensers instead of the more popular multi-product dispensers. Additionally, approximately 125 facilities did not meet federal underground storage tank standards.

Still, it was a good investment. "It had a significant critical mass that you can’t replicate," Sodini said. "You could say it was the ugliest mass of stores, but it was still a critical mass."

Suddenly, The Pantry was a chain to be taken seriously. Bankrolled with handsome cash reserves, the company went on a buying spree, acquiring small and mid-size outfits it describes as "tuck-ins," while opening a handful of stores in select markets.

But contrary to the era of leveraged buyouts and hostile takeovers, Freeman Spogli has initiated few deals, with The Pantry and Lil’ Champ as notable exceptions.

"What do you think this is, a boiler house operation where you have a guy on the phone saying, ’Hey, You want to sell? You want to sell?’" Sodini said. "The overwhelming majority of what we’ve bought have been referred to us. Put yourself in the position of a fellow who’s got 25 stores and you’re on the fence of whether or not you want to sell it. You’re concerned about what’s happening in the industry, you’re concerned about consolidation, you’re concerned about cigarettes. And you think, ’Well, maybe I can get a fair price.’

"One option is to get an investment banker, usually a broker, and let them put a package together. The negative of that is word gets out; it becomes widely publicized. The most common situation is that someone would like to do a quiet sale, assuming they get what they believe is fair value. Since we’ve done a number of them, we get calls, oftentimes from a third party."

Enhancing its lure to smaller retailers looking to get out, The Pantry is an eager buyer with few hard-edged rules. "We’re very simplistic," Sodini said.

"We’re only interested in three things initially. We want to know what the merchandise sales are and related margins. We want to know what the gas (sales) are. And, if they own the locations, whether they plan to sell or lease."

Few Rules

Of course, a hodgepodge strategy has its associated risks and costs. Chains, whether small or mid-size, gas operate with different salary structures, different store layouts, different accounting procedures and different philosophies. Indeed, no two chains to are the same.

"We have everything from soups to nuts with one commonality," Sodini said. "Every one of these acquisitions would be characterized by higher volume of gasoline. The overriding negative with [acquisitions] is we have to contend with a lot of variation in marketing styles.

"A lot of these folks are generally gas-oriented, conventionally anywhere from 700-square-foot to 1,500-square- foot boxes. Merchandise ends up being more complementary, but not critical to the overall operation.

"The profile of our typical seller is 50 to 65 years old, been in business for upward of 30-plus years and came into the business when the c-store was essentially a non-entity," he said. "But all of these folks have one thing in common: They are superb real-estate people and, thus, they tended to pick prime locations. We thought we would be the beneficiary of that."

Trying to streamline a motley crew requires considerable time and cash. But that’s if you want to streamline them. "We have a different attitude because we’re different in how we’re growing," Sodini said. "Virtually everything acquired in 1998 operates under the same logo they operated under before.

"Most people would have gone in and changed the logo, which I think is stupid. Our filter is we want to acquire high-volume, quality operations. There is a reason why they are high-quality, high-volume operations. They had a good perceived customer image. If I took The Pantry [name] and put it on Express Stop, what the hell is it? As an Express Stop customer, what has Pantry done for me’?

"Express Stop has a reputation for superior facilities, superb pricing of gasoline, extremely aggressive price image on cigarettes. Why, in the name of God, would I want to change that?"

The notion that variety is a good thing plays out in the gasoline offering. The Pantry has made no attempt to unify the program under one brand. Indeed, depending on location, customers may find Texaco, Shell, BP, Amoco, Chevron, Citgo or unbranded gasoline at the pumps.

In a few instances, The Pantry has changed the logo, particularly in the case of Jacksonville, Fla.-based Lil’ Champ. Once again, Sodini is blunt in his characterization of the Florida chain. "Other than that they’ve been there since 1967 or ’68, I wouldn’t say that they have a good image in that market," he said. "Intuitively, it tells me if you run facilities you don’t put capital in, that are tired, rundown and look like hell, I can’t believe they can’t convert into anything."

A handful of Lil’ Champ stores have been remodeled and renamed Sprint, a name taken from another Florida acquisition. "I like the name ’Sprint,’" Sodini said. "It suggests speed, fast, quick service."

As for tinkering with the command chain, Sodini believes in a laissez-faire approach that says leave well enough alone. With the exception of Lil’ Champ, whose staff has been replaced, The Pantry has kept on management of the chains it’s acquired. In most cases, that means the owner, operations manager and district manager, as well as the stores’ employees. In a larger purchase, Sodini said he works to keep the field structure in place.

"We don’t change the operational structure of the chain," he said. There are some exceptions. There is one supplier. All of The Pantry’s additions must buy from wholesaler McLane Co. Inc. of Temple, Texas. "We see McLane as a survivor when wholesale consolidation takes place."

The Pantry also has tapped Professional Datasolutions Inc. (PDI), which is owned by McLane, to install a uniform store automation system in all of the stores by 2001. "We’ve got to standardize them," Sodini said. "Right now, we go from the most antiquated to the most state-of-the-art."

Future Profile

When asked what sports team, he’d compare The Pantry to, Sodini chuckled, then replied, "The New York Jets, only because they’ve had an influx of experienced people combined with the existing employee base."

The analogy seems appropriate.

This past season, the Jets made it all the way to the conference championship. Two years ago, the Jets finished 1-15 and were a team in disarray. With new leadership and some new personnel, they have moved into the NFL elite.

Similarly, in just three years, The Pantry has reversed its fortunes to join the industry’s elite. Former CEO Horne predicted The Pantry would reach 1,000 to 2,000 stores. With 1,000 already surpassed, is 2,000 in striking distance?

Based on the company’s past performance, the answer would seem a certainty. It isn’t. "We aren’t chasing new stores, per se," Sodini said.

"We are reacting to a situation where there’s a lot of instability in the jobber base, because huge mergers of oil companies have a lot of these people concerned."

As for a precise store count, Sodini said, "We don’t have a number in mind. If there was nothing in the market that met our criteria, we’d do nothing. We’ve passed over a lot more opportunities than we acted on. We’ve turned away on a lot because they’re junk. But anything that we’ve wanted, we’ve been successful in acquiring."

Sodini credits The Pantry’s quick turnaround ability to the ownership’s modus operandi of pursuing promising businesses. With a total financing package of $335 million, including $50 million for new acquisitions, Sodini boasts, "We can give them a quicker transaction. We tend to look at things more simplistically. There are things that are critical and there are things that are ancillary. We have a very straightforward approach and are environmental."

Don’t mistake that last word, "environmental," as suggesting that Sodini is a member of the Green Party. Rather, The Pantry assumes liability over all environmental concerns – new and old – relieving sellers of potential headaches long after they retire.

While the bankroll is deep, Sodini is quick to point out that that doesn’t mean The Pantry will buy just anything. "There are constrictions to this. If we don’t get returns, the water would be cut off real quick.

"We’re not into collecting trophies and we’re not in this as a philanthropic venture."

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