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Circle K. Case Study
The Circle K Corporation
The Circle K Corporation is considered to be the 30th largest retailers in the United States and is the nation's second largest operator and franchiser of convenience store. This position had guaranteed it a leading role in the mid-80s and a period of growth during that time. However, 1989 marked a downturn in the business and the company was forced to file for protection under the U.S. Bankruptcy Code. The company's leading figures were forced to take serious measures to restore the company's revenues and came up with a 3- point plan of reestablishment.
The Convenience Store Industry
Who do we buy from?
The main characteristic of the industry with regard to the competitors and main actors on the market is that the industry is highly fragmented. As of 1989, no less than 1,353 were listed as belonging to the convenience store category. The high degree of fragmentation was given not only by the large number of convenience stores, but also by the high percentages of sales accounted for by small companies: 31% of total industry sales were realized by companies with less than 50 stores.
Serious competitors were the so called g-stores, that is gas stations that also sold food, as these were generally operated by commercial giants such as Texaco or Chevron, well-capitalized companies that could afford to compete. Additionally, they posed a serious threat as were mainly axed on the products generally making most sales for convenience stores: tobacco, beer and soft drinks.
Who is buying?
Studies have shown that the typical customer for a convenience store is a white male, between 18 and 34 with high-school education and employed as a blue worker. However, the great number of companies in the business has determined executives to take measures in order to expand this target customer into a potential and future customer. Thus, women, office and white-collar workers were regarded as being appropriate, possible future customers. The executives were bound on finding new niches and possible clients.
What are they buying?
In general, the main products that customers bought were gasoline, tobacco products, prepared foods and alcoholic or non-alcoholic beverages. These accounted for a total of 80% of total sales, but, as I have pointed out in the lines above, there was an increased competition in all five- product categories form g-stores.
The industry had suffered from slowing sales growth rates in the late 80s, mainly due to increase in the number of competitors and industry saturation. Additionally, the increase in gasoline sales, that generated lower gross profit margins due to high cost of technology mainly, had affected industry profitability.
Another threat came from the differentiation issue: as a 7-Eleven had put it, "the thing to overcome is the battle of sameness." Indeed, in the context of a high number of competitors and of increasing competition, a company had to find efficient means to be in some way different from the others. This could be done in the products being offered (although the range of products is mainly the same), in location (generally, throughout America) or in any other way of increasing public awareness (advertising campaigns for example).
The Circle K Corporation
Circle K Corporation was begun as Circle K. Convenience Stores in 1951 and became a subsidiary of Circle K Corporation in 1980. The Corporation runs approximately 1400 licensed or joint-venture stores in 13 foreign countries. Most of the company's stores, however are located within the Sun Belt states, from California to Florida, mainly in Florida.
The number of stores run within the company greatly expanded during the 80s, mainly due to an aggressive acquisition program, began in 1983 and following throughout the following years.
Circle K. sells over 3,800 different products and services, including fast-food items, non-food items and gasoline. Gasoline accounted for around 48.6% of the company's revenues in 1990 and is sold at 77.5% of all stores. However, as we shall see below, the product mix and an interest in high-profit margin products led to a destabilization of the company, as sales of popular merchandise decreased.
Identifying the problems
The company seemed to have led a much too aggressive plan of acquisition in the 80s, which it later could not sustain and could not face the costs involved. If we look at the period from 1983 to 1985, the company bought 1,000 stores from the UtoteM chain, 453 units from Little General Stores and 449 units from Stop & Go. These new facilities could of course bring an increase in sales, but a decrease in effective profits due to higher costs.
This is what actually happened in 1990. If we look at the figures from Exhibit 2, we will see that the total assets grew by almost 50% in 1989 as regarding 1988 and 1990, this probably due to new acquisitions. However, we are in the situation where, even if the company bough more facilities and stores, its sales increased by a mere 7% in 1990.
Another serious issue was the fact that one of the most important competitors in the industry were huge oil companies, like Texaco and Amoco, that had pushed through in the industry due to the g-stores each operated. These companies proved most serious rivals: they had the financial strength to afford and sustain anything ranging from huge promotional and advertising campaigns to losses in subsequent years. An increase in costs from 1989 to 1990 led Circle K. To the brink of bankruptcy.
Looking again at the characteristics of the industry, we find that this is a very difficult market to compete on. How to be different? How to sell something differently from all the rest of the numerous competitors in the industry? We have an industry with a very large numbers of competitors, each operating a specific niche and all selling the same products. The only differentiation could come from how you sell it, and here Circle K. seemed to be way behind the others, as it spent less and less on advertising. As the figures show us, the company's advertising expenditures had dropped by 41.2% in 1989 and it spent almost 3 times less than the National Convenience Stores.
Another issue to be addressed concerns the pricing policy used. Several competitive advantages such as location, longer hours accessibility and faster service had previously allowed Circle K. To charge higher prices and provided the highest gross-profit-margin in the industry. However, an increase in gasoline sales, corroborated with a decrease in regular merchandise sales provided for lower gross-profit-margin, as gasoline sales implied higher costs, due to the use of expensive technology.
Profit margin on sales = Net earnings after tax/Sales
Basic Earning Power = EBIT/Total Assets
Return on Total Assets = Net Profit/Total Assets
Return on Equity = Net Profit/Total Equity
These are the four main profitability indicators that will be used in our analysis of the company's profitability, using data from Exhibits 1 and 2. We will discuss each in part.
Profit margin on sales
Basic Earning Power
Return on Total Assets
Return on Equity
The Profit margin on sales shows what profit each dollar of sales brought. As we can see from the table, in 1988, this ranked a total of 2.1%. It decreased to 0.4% in 1989, to reach an alarming -20.96% in 1990. This basically tells us that for every dollar of sales, the company lost almost $5. This financial indicator is useful in order to have a clear view of the situation. If we had only looked at the Consolidated Statement of Earnings, we would have seen that sales had indeed increased in 1990 with respect to 1989 with almost 7%, however, at the same time, the cost and expenses related to these sales had increased with 30%! This has led to the fact that, even if the company had indeed expanded its business and increased its sales, the operational costs had made it unprofitable.
The Basic Earning Power has also dramatically decreased from 1988 to 1990 by almost 70%. This is mainly generated by the negative profit before taxation that the company has recorded in 1990. It is however interesting to note that the total value of the assets of the company was almost reduced by 50% from 1989 to 1990, which, in the case of a positive profit, would have certainly raised the BEP indicator.
The Return on Total Assets indicator basically shows us how profitable are the company's assets. In the case of Circle K, the indicator has decreased to almost -61% in 1990, which, given its negative value needn't be discussed any further.
As for the Return on Equity indicator, this calculates how high is the return that the stakeholders are receiving. Quite high in 1988, almost 20%, probably much above the industry average (there were no industry data to compare these indicators with), this could not be calculated in 1990, as there is no profit, so, obviously, there is no return for the stakeholders.
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