Food and fountain drink gross margins can run as high as 63% at Casey's, topping the 58% gross margins Starbucks has posted over the past 12 months by selling mostly hot drinks. Unfortunately, about 70% of Casey's sales stem from low-margin gasoline. Customers primarily head to the convenience stores to refuel, but end up purchasing prepackaged and prepared fodder as an afterthought or impulse buy.
The symbiotic relationship between fuel and food implies that one can't exist without the other: Casey's wouldn't be able to stay in business without high-margin food sales, and without gasoline, consumers could easily go elsewhere for basic necessities, and just about anywhere for better-tasting fare.
Casey's realizes this, and the company does its best to maximize consumer dependency on its stores. Management focuses on small towns "not served by national-chain convenience stores" such as 7-Eleven or regional competitors such as The Pantry
Even with the razor-thin gasoline margins, Casey's has been able to consistently expand same-store sales across its three primary platforms of gas, grocery and merchandise, and prepared food and fountain drinks. Recently reported third-quarter results confirm this trend, and overall the company has been able to post steady and growing operating cash flow.
Casey's also looks to grow by acquiring numerous mom-and-pop stores in the highly fragmented gas station industry. It only operates in nine Midwestern states, with a focus on Missouri, Iowa, and Illinois, giving the company plenty of open road to expand into. And as far as I can tell, management takes a measured pace to its acquisitions: The debt-to-capital ratio is relatively modest at less than 30%, and capital spending is easily covered by internally generated funds.
So overall, Starbucks may have written the book in terms of motivating consumers to pay $4 or more for a cup of coffee, but Casey's takes the cake in its ability to charge an arm and a leg for pizza bites, toothbrushes, and chicken tenders. Maybe the two can trade notes on how to sell food and drink without gasoline, or how to successfully expand into non-urban markets. In any case, both have found a recipe for success in a crowded retail sector.
For related Foolishness:
- Casey's Filling Quarter: Fool by Numbers
- An Empty Pantry
- Kroger: Does X Mark the Spot?
- Casey's Quarter Isn't Filling
Fool contributor Ryan Fuhrmann is long shares of Starbucks and Walgreen but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.