National Convenience Stores Incorporated

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National Convenience Stores Incorporated

100 Waugh Drive
Houston, Texas 77007-5829
U.S.A.
(713) 863-2200
Fax: (713) 880-0579

Public Company
Incorporated: 1959
Employees: 5,000
Sales: $1 billion
Stock Exchanges: NASDAQ
SICs: 5411 Grocery Stores; 5541 Gasoline Service Stations

National Convenience Stores Incorporated (NCS) operates retail convenience stores and gasoline service stations in the Sun-Belt states of Texas, California, and Georgia.

NCS’s early growth parallels that of the convenience store industry. Established in 1959 as U-Tote’M of San Antonio, Texas, the business made most of its major acquisitions, beginning in California, in the 1970s and 1980s. By the 1990s the market was glutted, and the three largest convenience store chains filed for bankruptcy, including National Convenience Stores Inc.

In 1959 F. J. Dyke, Jr., an executive with U-Tote’M in San Antonio, formed a partnership to buy five convenience stores in the city from Sommers Drug Stores. The Sommers stores, operating under the name Stop N Go, were changed to U-Tote’M stores. In February 1961 the partnership acquired all U-Tote’M California stores of the same name. The following year the company changed its name temporarily to the National Drive-in Grocery Corporation. By 1965 National Drive-In had moved its corporate offices to Houston and was operating 260 stores in seven states.

In the early 1960s convenience stores offered nearly every product supermarkets sold. New multi-shelved refrigerators gave operators the opportunity to offer a large variety of products in smaller space. The big sellers, sold in all convenience stores at that time, included packaged lunch meats, health and beauty items, tobacco, soft drinks, milk, butter, eggs, cheese, and bread. Ice cream, frozen foods, light bulbs, beer, bulk produce, and toys were sold by most operators as well.

In the mid-1960s the state of Texas alone boasted fourteen multi-unit convenience store headquarters; the new National Drive-In Grocery Corporation certainly faced competition. By 1967 the convenience store industry was selling $1 billion in products, with the total number of stores reaching 8,000 nationwide. The growth of the industry was attributed to the increase in working mothers, as well as shifting living patterns—more people either lived in the suburbs or used their cars to get around. The general economic health of the period also spurred the use of convenience stores that, with higher prices, had previously been considered a luxury by some segments of the population in the early 1960s.

One in three convenience stores was franchised by year-end 1969; fast foods and self-service gasoline pumps were viewed as growth segments for store operators. More than 2,000 new stores were opened in the industry as a whole, with total sales in the market at $2 billion.

The present name of National Convenience Stores, Inc., was adopted in 1968 as the company anticipated large-scale growth. NCS acquired the Austin, Texas-based Town & Country stores the same year. The following year was a banner year for NCS; the company acquired Handee Food Mart’s 35 Houston-area stores, Sanitary Farm Dairies, Inc., and the Baskin-Robbins Ice Cream Stores chain, as well as the franchise to manufacture and distribute Baskin-Robbins ice cream in the eastern half of Texas. Within two years NCS sold the Baskin-Robbins franchise for $2.5 million. NCS then bought 23 PDQ Food Stores in 1973 for undisclosed terms.

V. H. Van Horn, who had joined the company in 1966 as a management trainee and steadily risen through the ranks, was named CEO in 1975. Van Horn faced a big challenge early on. In October 1977 General Host, a diversified company in food services, baking, meat packing, and convenience stores, acquired a 14 percent stake in NCS from former NCS president F. J. Dyke. NCS subsequently sued General Host for alleged securities violations. The NCS suit, filed in federal court, sought to block purchases by General Host, any of its directors, or F. J. Dyke. The following month NCS came to an agreement with the corporation that stated that General Host would not buy more than 21 percent of NCS common shares until after December 2nd of the same year.

In December 1977 National Convenience Stores announced it agreed to be acquired by Circle K Corporation in a stock exchange worth approximately $36 million. Van Horn was to assume the position of president and chief operating officer of the new merger. The merger was soon called off; according to an account in the February 6, 1978, issue of the Wall Street Journal, a spokesman for NCS stated, “It is unlikely that the merger, given the current conditions, could be consummated.”

By 1979 the company acquired nearly all the common stock of Texas Super Duper Markets, Inc., for a total of 68 convenience stores. NCS also bought Super Quick, Inc., including 19 stores equipped with self-serve gasoline facilities, and Jay’s Washateria, Inc., an operator of ten laundromats.

National Convenience Stores posted record earnings for fiscal year 1980. President Van Horn attributed the rise to increased product sales per store and higher gasoline sales in a larger number of operating stores. Quoted in the August 25, 1980, Supermarket News, Van Horn commented that “We have well exceeded our announced goal of doubling 1977 net earnings of $3.4 million in 1980.”

In December 1981 NCS acquired 116 stores operating under the name Mr. M Food Stores in San Antonio and Houston from McCombs International, Inc., for $14.5 million in cash. The company became the largest convenience store operator in Houston with the purchase. While the company’s acquisitions increased the total number of stores to 834, the push for new stores really began in 1982. NCS made plans to open 75 that year, 70 the following year, and 100 in fiscal 1984, up to a total of perhaps 400 by 1986 (not including stores gained through acquisition). Yet NCS management was closing nearly as many stores as it was opening. In 1981 57 stores opened, while 42 low performers were shut down. The results were positive; sales per store doubled over a five-year period. To generate cash for overall debt reduction, the company sold 850,000 shares for a total of $10.3 million in February 1982.

NCS planned layout changes in its stores to reflect changes in product demand, profitability, and its changing customer profile. Grocery items were pushed back into the store while higher margin general merchandise—health and beauty aids, cigarettes, automotive supplies, magazines—were brought up front. NCS concentrated on fast foods as well, where profits margins were as high as 40 percent. The company noticed that its average customer was not the typical convenience store customer—a 35-year-old male, making a purchase of less than two dollars. Instead, at National Convenience Stores the average customer was a single 18-year-old male, with less responsibility and more discretionary income. In response to this new data, and in an overall effort to re-energize marginal stores, NCS created the Quik Store, which would feature “Top 40” records and tapes, magazines and newspapers, and coin-operated video games.

Beginning in May 1983, National Convenience Stores, Inc., began a series of acquisitions: for $18 million NCS bought 125 stores in western Texas under the name Colonial Food Stores; in December the company completed the purchase, for cash and stock, of 15 Stop ‘N Serve stores in the Houston area, and six Super Stop stores. The acquisitions were separate buys.

To complement the number of acquisitions, President Van Horn initiated a major plan for growth, emphasizing marketing and merchandising strategies. The Stop N Go logo was updated and a plan to rename all National units Stop N Go was devised. A new store layout was designed that utilized a hexagonal shape to make the most of both indoor and outdoor space. Planners reasoned that with six sides, the interior of the stores would have no dead space; front door parking would be increased as well. Of the 3,100 square feet of total area, 600 were designated for fast-food sales. A sitting area was included in the new design as well, to emphasize the fast-food service. Large canopies outside over the gas pumps both drew attention and sheltered customers from bad weather; the pumps were also situated close to the front door for quick payment.

Van Horn’s general strategy was to take the lead in retailing and merchandising tactics to stay ahead of the imposing crowd of convenience store competition. By December 1984 there were approximately 50,000 convenience stores across the United States, with more being built. Drug stores and supermarkets joined in the rush to provide convenient shopping for customers. Jerry Welch, senior vice-president of stores, was behind the change in store design and also advised a change in product mix. Since the single male shopper (aged 18 to 35) was already a mainstay, Welch planned to woo the female shopper, who preferred products in the nonfood category, such as health and beauty aids, housewares, and hardware. In a move similar to his methodology in upgrading NCS’s fast food category, Van Horn recruited executives from the drugstore industry (whose primary customer is female) to gain expertise in that market.

National Convenience Stores increased its advertising budget significantly to sell its new image. As Welch, quoted in the December 3, 1984, Advertising Age, put it: “We want to have a warm, friendly image. We want to make our stores more attractive for women and senior citizens.”

As the convenience store industry moved toward fast foods, it tried to veer away from its dependence on gasoline sales. By year-end 1986 a typical store gained 50 percent of revenues and 25 percent of profits from gasoline. While profit margins were historically high, the trend would not last. Another factor affecting the convenience store industry as a whole was the “open 24-hours” policy, which began to attract robbers as well as customers. Many convenience store operators installed brighter lighting both inside and outside stores to fight the problem.

More specific to NCS fortunes, however, was the stumbling southwestern economy. The combination of Houston’s hard times and the cost of financing its new image sent NCS sliding. NCS’s net profits for fiscal 1986 were $3.6 million; the previous year, profits were $15.5 million, and in 1984, $18.4 million. As reported in the February, 1987, National Petroleum News, “This [was] the first time in the company’s 26-year history to experience such a dramatic downturn in its fortunes.”

NCS enjoyed 38 consecutive quarters of record earnings until December 1984. The fall in oil prices hit NCS particularly hard, since one-third of its stores were in the Houston market. At first, the company misinterpreted the problem and offered price-cutting promotions, which were successful for only a month. But the recession hitting Houston was a problem far larger than any promotion NCS could devise. As the real-estate market collapsed, strip malls and other shopping centers began to offer store space rent-free for the first two years. New convenience stores sprouted all over the city at locations that, fortunately for NCS, Van Horn considered marginal. The new store operators wouldn’t get the traffic of prime NCS stores, which were often at high-visibility corner locations.

Quick to react, NCS underwent a major restructuring effort in 1986. The company sold 186 operating stores in nine markets to the Circle K Corporation for $51.2 million. The total number of NCS stores went from 1,130 in mid-1985 to 960 in early 1987; the states in which NCS operated, concentrated in the southern and southwestern region, dropped from eleven to six.

As important as the sell-offs was the company’s reorganization at both the field and district levels. Instead of four geographic divisions, with a different vice-president handling store operations and marketing, Van Horn consolidated into two regions of coverage. The result was a more centralized marketing campaign, with all stores focused on the same advertising and merchandising schemes. Field personnel were reduced by 20 percent.

At the district level, NCS’s rapid growth had created an excess of management positions. The company had one district office for each 30 stores; in Houston, there were ten offices. Each office employed a personnel manager, five store supervisors, and two to three of both maintenance and administrative staff. NCS tightened up Houston operations by eliminating the personnel positions and cutting administration from thirty to four positions. District managers were set up in store offices, and training was offered in three locations, rather than in ten. The reorganization in Houston saved the company $5 million a year.

NCS also concentrated on the Hex store, which offered more fast foods, general merchandise, and gasoline, to appeal to a broader customer base. Hex stores were larger and had more gasoline pumps than traditional stores, upping the volume of sales and allowing the company to hire higher quality staff and pay them well. The company also remodeled more than 200 of its existing stores in 1986, with plans to redo 150 in 1987 and all older units by mid-1989.

In August 1987 National Convenience Stores sold 40 operating and 3 closed stores in Midland-Odessa, Texas, to Southland Corporation (the operators of the 7-Eleven store chain) for $12.5 million. The company then followed that up with a purchase of 400 properties from Southland in the greater Houston market, including 269 operating stores, for approximately $75-80 million. The acquisition doubled the NCS presence in Houston, an area where the company had been losing money for three years. As reported in the April 17, 1988, Houston Chronicle, it appeared “as if NCS capitalized on an opportunity to lose twice as much.” But viewed within a larger framework, the acquisition enabled NCS to rid the Houston market of its competition—therefore eliminating lower profit margins due to price wars with competing stores. In the same Houston Chronicle article Montgomery Securities analyst Bo Cheadle, commenting on the NCS purchase price of $92,000 per store, stated: “They didn’t buy them, they stole them.” NCS, for example, had sold marginal units to Circle K a year earlier—many without gasoline pump facilities—for $125,000 a store.

CEO Van Horn believed the Houston economy hit its lowest point in the spring of 1987. With more than 500 stores in the country’s fourth-largest market, Van Horn banked his company’s fortunes on an economic turnaround. Armed with that philosophy, the company initiated a veritable property swap with Southland Corporation. In August 1988 NCS sold 52 properties in the Las Vegas market, including 43 operating convenience stores, for $25.6 million. By April of the following year NCS bought 102 properties in San Antonio from Southland, including 79 convenience stores, for $28 million.

The purchase brought the company’s San Antonio store base to 208, nearly 37 percent of the market. San Antonio became NCS’s second-largest stronghold; trailing it were Dallas/Fort Worth, with 142 stores, and Los Angeles, with 105. The National Convenience Stores’ plan was to concentrate in fewer markets with a stronger presence. For example, in 1986 NCS had approximately 1,100 stores in 21 markets; by mid-1989 the store number remained constant, but was focused in only 10 markets.

During this period, NCS was burned by two costly promotional pushes that went awry. A successful NCS promotion involving coupons redeemable for Black & Decker appliances got out of hand. The company posted a $2.1 million loss for the fiscal quarter ending December 31, 1988, due to $7 million in costs related to the ill-conceived promotion. Another promotion the company engaged in—selling beer and soft drinks below supermarket prices—lost money as well. Van Horn fired the executive in charge of the campaigns, and the company brought prices back to where they were previously. Quoted in the August 18, 1989, Forbes, the NCS chief said, “We’ve returned to our basic premise that convenience has value.” NCS hoped the larger number of customers it garnered from the ill-fated promotions would continue frequenting its stores.

Another change in emphasis for NCS became evident in 1989, as the company began tailoring merchandise to more closely match the neighborhoods in which the stores were situated. Stores in higher income areas began to stock high-priced wines, gourmet pasta sauces, and magazines such as Vanity Fair and the New Yorker; in black neighborhoods, black health and beauty displays were added; in core middle-class markets more bottled waters and frozen and quick-to-prepare foods were stocked. In Hispanic areas, stores stressed Mexican cooking items and Spanish-language magazines; NCS also translated signs into Spanish and hired bilingual employees. A related move was the installation of in-store scanning equipment, which provided NCS with marketing data to assess its new product mix. The company budgeted $12 million to advertise its new strategy.

In August 1989 NCS decided to move out of the Nashville market, selling 37 operating and 14 closed convenience stores to Mapco Petroleum, Inc., for $21.8 million. The funds would be used to repay $100 million in debt that NCS borrowed to fund its significant Houston and San Antonio acquisitions. It was an irony of the business that NCS sold to Mapco, since the oil companies entering the convenience store industry posed a threat to all convenience store operators.

The total number of convenience stores peaked at 83,000 in the late 1980s. Industry profits, however, dropped by an alarming 75 percent. The fallout in the convenience store industry was inevitable. The market was overcrowded; from a high of 83,000 units in the late 1980s, the number of convenience stores fell to 71,200 in several years. In May 1990 Southland Corporation, the largest convenience store chain, posted an annual loss of $1.3 billion (notwithstanding the fact that it gained $52 million in tax credits following the sale of a 50 percent stake in Citgo Petroleum). Circle K, the number-two chain, filed for Chapter 11 bankruptcy status. NCS claimed a slim profit of $383,000 for the quarter ending March 31, 1990. The company’s extraordinary $7.1 million profit, for the nine-month period ending on the same date, was due to $6.6 million gained from a stock swap with shareholders.

Van Horn’s revised plans to reinvent the convenience store business—with targeted product mixes, point-of-sale scanners, and redesigned stores—was one method to try and overcome the industry downturn. The first NCS unit that opened with the changes listed boasted an increase in sales of 20 percent. In the first redesigned Hispanic store, sales rose more than 20 percent as well.

But by early 1991, fewer than 150 stores out of 1,071 were restyled; the cost, in the tens of thousands of dollars, was far too high for NCS to afford at a time when the company’s long-term debt was near $190 million. NCS experimented with several new ventures, including selling Pizza Hut and Taco Bell products at five Houston-area stores in June 1991. The company also sold 24 operating stores in the El Paso area to Diamond Shamrock, Inc., for cash.

On December 9, 1991, National Convenience Stores was forced into a voluntary reorganization under Chapter 11 of the United States Bankruptcy Code as the company struggled with the combined effects of the sagging U.S. economy, low gasoline prices, and increased competition in the convenience store industry. The company had little cash and its creditors had grown increasingly concerned about NCS’s posted losses four out of the previous five years. For the quarter ending December 31,

1991, NCS reported a net loss of $177.7 million; the Persian Gulf crisis negatively affected prices and volume of gasoline for the company.

In contrast to Dallas-based Southland and Phoenix-based Circle K, which owed billions when they entered bankruptcy, NCS’s long-term debt as of the bankruptcy filing date was $162 million. The company had managed to pare the debt an average of $10 million a year since 1987. Though the picture was positive, J. Christopher Brewster, chief financial officer for NCS, resigned in April 1992; the company did not fill the vacant position.

By mid-year 1992 NCS had closed nearly 200 stores; well over 800 were still in operation in Texas, California, and Georgia. The company’s new venture—offering Taco Bell and Pizza Hut products—was limited to fifteen stores; the original plan was to involve nearly 100 NCS Stop N Go stores.

NCS filed its first reorganization plan in Houston in late July 1992, with plans to pay creditors in full in periods ranging from 30 days to 15 years. When one creditor (not on the creditors committee) objected to the plan, NCS Vice President F. R. Daily, Jr., quoted in The Wall Street Journal, July 27, 1992, responded: “The court expects you to prepare the plan and file it when it’s ready. It’s stretching the point to say it’s premature and unexpected. “An alternative plan was presented one month later for confirmation by the bankruptcy court pending creditor approval. NCS had reason to be optimistic about repaying its debts; net income for the quarter ending June 30, 1992 was $4.4 million, as compared to a net loss of $5.6 million a year earlier. The Fourth Amended and Restated Joint Plan of Reorganization was confirmed February 25, 1993, and became effective March 9, 1993.

Principal Subsidiaries

Kempco Petroleum Co.; National Money Orders, Incorporated; NCS Realty Co.; Stop N Go Markets of Georgia, Inc.; Stop N Go Markets of Texas, Inc.; Texas Super Duper Markets, Inc.; Schepps Food Stores, Inc.