Road Noise

In this edition, I reflect on the relationship between the leveraged buyout and big-box retail.

Did Someone Say a Road Trip?

Traveling across the country by car is like a right of passage. Unlike flying, you can take your time and take in the sights, allowing the land to unfold before you in a way that you can’t from forty thousand feet in the air. I love road trips because I learn more by being up close and personal about different people and places and that is why this week's edition highlights a certain LBO retailer that I had the opportunity to experience while on the road.

Columbus 2 San Francisco

I did not publish an edition last week as I just finished an eleven-day three thousand-mile road trip with my son, traveling from Columbus, Ohio to San Francisco. We made stops in three national parks, three national monuments, and the requisite pilgrimage to South Dakota’s Wall Drug. We drove, ate, hiked and each evening was punctuated with multi-colored prairie sunsets melting into purple mountain horizons.

A Fleet of Farms

We took the “northerly route” which included Minnesota, South Dakota, and Wyoming. It was in these states that I started seeing massive behemoths of big box stores located a stone's throw from Interstate ’90s four lanes called “Fleet Farm”. Coincidentally there was one next door to our hotel in Rapid City, South Dakota, and feeling that it was a predetermined fate, I had my first close encounter with Fleet Farm.

Low Key Big Box

The Rapid City Fleet Farm is a big store at over 190,000 square feet. From the outside, it does not even look like a store. From a distance, it looks like yet another Amazon warehouse and while each store is emblazoned with its name and branded logo, it still has a subdued feeling as a warehouse because it lacks any sub-branding or description of its purpose anywhere outside the store other than a low key smaller font list of categories on one end of the building. I suspect maybe that is the intent as it captured my curiosity enough to investigate by actually entering the store. I fully expected someone to turn me away at the door from what could have been a top-secret government project masquerading as a warehouse.

Trails to Tractors

I liken Fleet Farm to what would happen if a Walmart Supercenter, Tractor Supply Company, Costco, and Bass Pro Shops had a massive collab or maybe even a baby given that was possible! Under one Fleet Farm roof, they sell everything from trail mix to farm supplies to groceries and apparel. And it does not end there as in the parking lot there is a fuel center with a trackless car wash and they give you a bag of free popcorn with each fuel fill up, given you go in the store to retrieve said bag of popcorn. I walked out with a bag of trail mix and a set of three screwdrivers for less than $5 and even though I thought the $3.99 regular unleaded was a tad higher than what I had seen elsewhere in Rapid City, I filled up my son’s Jeep out of convenience and added on the $11 “Premium” trackless car wash. And yes, I did go inside to get my free bag of popcorn.

The Quiet Giant

The Rapid City store was relatively quiet on the Wednesday morning I visited. Despite its massive size, there are only eight registers and I could have heard a pin drop given I was only one of a handful of people in the store. I could not imagine how they kept the lights on as I had just visited a Target store nearby and it was bustling with wall-to-wall people with all of its sixteen registers running with lines of at least three to four people each.

Enter KKR

What makes Fleet Farm so intriguing beyond its size is it is owned by leveraged buyout firm Kohlberg Kravis Roberts & Co LP. KKR acquired family-owned Mills Fleet Farm for a reported $1.2 billion in 2016. The KKR data point made sense of it all.

52% Success Rate

While KKR has had a decent track record in the retail sector with 9 of their 17 retail-related acquisitions being successful, I could not help thinking about the graveyard of bankruptcies left in their LBO wake from Beatrice Foods and Bruno's Supermarkets (1998), Safeway (2002), and more recently Party City and Bed, Bath and Beyond (2020). I have always questioned the significance and qualifications of financial-based businesses like KKR taking on retail acquisitions. Even the Fleet Farm 2016 acquisition news clippings read like the big bad guys from New York’s Wall Street came to take away the local family-owned retail chain.

It's the Nuisance, Stupid!

Nothing against finance people, but there is a great deal more to running a retail chain than cutting costs and knowing the financials. There is a nuisance to contend with. Fleet Farm has to contend with competing versus online and the decline in the independently owned family farm being displaced thanks to technology and ironically Wall Street money by larger scale agri-industrial farms. A study by the Harvard Business School found that KKR's average return on investment for its LBOs was 18%. This is higher than the average return for all LBOs, which is 14%. However, the study also found that KKR's returns were more volatile than the average LBO, meaning that they were more likely to be either very high or very low. (Source: “Kohlberg Kravis Roberts & Co.: The Performance of a Private Equity Firm." 1997).

Why the "Fleet" Matters

Only time will tell if KKR’s acquisition of Fleet Farm is successful. I know I am not Fleet Farm’s target and I was in the store early on a weekday during the growing season around 9 am, so traffic could have been understandably light, but I thought farmers were early risers anyway. I am guessing the target is rural Americans or farmers who shop less online and drive great distances to the nearest Fleet Farm and will spend more on a one-stop shopping trip versus going to multiple locations. Farmers can buy a pair of men's Dickie’s pants for $23.99, a bottle of Hidden Valley Ranch dressing 16 oz for $3.49.and fill up their pickup truck in Rapid City with Regular Unleaded gas at $3.99 a gallon.

To the Victor Goes the Spoils

In the event, Fleet Farm does go the way of other retail LBOs like Safeway, and A&P/Pathmark, then there will be some major Upper Midwest retail-to-warehouse conversion opportunities for a growing eCom retailer like Amazon or Chewy. If not Amazon and Chewy, then of course it does get cold in the Upper Midwest and perhaps someone will have the foresight to buy these big boxes and convert them into a massive Indoor Hockey x Pickleball collab chain. Perhaps they will call it Pucks N’ Pickles!