A pending recession is on dealmakers’ minds as they look to the second half of the year. When digging for investment ideas, one investment banker suggests considering a recession-proof sector with growing margins: convenience stores.

“Specifically focusing on retail sectors that are recession resistant, there are a number of those,” says Noam Cohen, managing director and head of retail at KeyBanc Capital Markets. “One that I do a lot of work with are convenience stores or fuel stations.”

“The c-store sector is relatively recession resistant in large part because of fuel margins,” he adds. “They’re very favorable right now. The main reason they are favorable is because the sector is extremely fragmented with over 60 percent single-store mom and pop operators that play a major role in setting margins.”

There are over 64 thousand gas stations with convenience stores in the U.S., according to IBISWord, with over 13 thousand of them being in Texas alone. The industry as a whole is worth more than $641 billion.

Fuel margin is what the consumer pays at the pump on top of what the operator pays to bring in the fuel. The average fuel margin price used to be 23 or 24 cents a gallon, versus today, where it’s more like 35 cents a gallon depending on the location, and that makes a big difference in profitability, according to Cohen.

“These stores need to set fuel margins at higher breakeven levels today to make up for higher labor costs, credit card fees, and reduced profitability due to lower traffic flow that results in fewer fuel gallons being sold and fewer in-store sales. While the higher fuel margins are keeping the mom and pops in business, larger operators with economies of scale and more sophisticated operations benefit significantly from the higher fuel margins”

The sector is no stranger to M&A, mostly attracting strategic buyers, and Cohen does not expect that to change. The largest operators in the space are acquisitive including 7-Eleven, Couche Tard, Casey’s, Murphy USA, EG Group, Arko, BP, and most recently, Maverik, with its acquisition of Kum & Go.

“There’s more M&A activity in that sector now than I can remember at any other time,” Cohen says. “It’s a unique sector.”

Reach Cohen at [email protected]

– Demitri Diakantonis