9B20M076

LITTLE SHORT STOP: CREATING STRATEGY FOR A SHIFTING INDUSTRY

Meredith Woodwark, Karin Schnarr, and Gerry Bes wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to [email protected]. i1v2e5y5pubs Copyright © 2020, Ivey Business School Foundation Version: 2020-04-22

In late 2018, Gerry Bes, the general manager of the Little Short Stop Stores (LSS) convenience store chain, was considering the significant challenges that lay ahead for his company. LSS was a privately held chain of 30 convenience stores located in southwestern Ontario, Canada, focused mainly in the cities of Kitchener and Waterloo. Owned by the Arnold family, LSS celebrated its 50th anniversary in 2018. Bes had graduated in 1991 from Wilfrid Laurier University with an International Institute for Management Development Master of Business Administration degree and was an adjunct professor at the university’s Lazaridis School of Business and Economics, where he taught global marketing. Bes was also a business partner at the local organic farm Beswood Farms. Bes had gained 20 years of global marketing experience working at Nestlé S.A. (Nestlé). His current role running LSS was a very different experience from his consulting experience and having served as managing director of Nestlé Bangladesh and chief marketing officer of Nestlé Caribbean. The convenience store industry in Canada was extremely competitive, dominated by multi-national chains including 7-Eleven Inc. (7-Eleven) and Circle K Stores Inc. (Circle K). Consumer tastes were shifting due to changes in lifestyle and generational preferences. Salary costs had risen significantly after the province’s minimum wage was increased to CA$141 per hour on January 1, 2018, up from $11.60 per hour. Another planned increase to $15 per hour on January 1, 2019, was cancelled by the newly elected provincial government.2 Same-store sales growth had become more challenging for LSS, with two-thirds of revenues restricted by government-regulated pricing (e.g., lottery tickets and tobacco products). Bes had found ways to reduce costs, but he was more interested in innovative ideas to grow LSS same-store sales. Year-end results for 2018 showed that some short-term solutions had offset the higher minimum wage rate to avoid posting a loss, but Bes had to find sustainable strategies to increase revenues and compensate for ongoing higher expenses from 2019. Bes was proud of LSS’s strong local reputation among customers within the communities the stores served. Despite a highly competitive industry, LSS was not only surviving but was outperforming its rivals. However, Bes knew that for LSS stores to survive another 50 years, the company could not be complacent. It had to identify and evaluate new strategic paths. LSS had set an annual target to grow at 500 basis points (or 5 per cent) above the industry average, which had seen little to no growth over the previous four years. In 2019, Bes had to present to the LSS board of advisors a creative but implementable way to achieve the projected growth rate. Although he was confident about many viable options to explore, he was aware of a strong preference from the board to contain geographic growth within the current region of southwestern Ontario.

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Page 2 9B20M076 THE CONVENIENCE STORE INDUSTRY IN CANADA According to the Canadian Convenience Store Association, a store had to fit several specific characteristics to be defined as a convenience store: the building size had to be less than 5,000 square feet (460 square metres); the store had to provide off-street parking or convenient pedestrian access, or both; the store had to feature extended hours of operation, with many remaining open 24 hours a day, 7 days a week, even on statutory holidays; and the store had to offer at least 500 stock keeping units and a varied product mix that included a significant selection of beverages, snacks, candy, tobacco products, grocery items, gasoline, and lottery tickets (see Exhibit 1).3 In 2017, convenience stores in Canada comprised a $56 billion industry,4 with 27,239 convenience sites employing more than 234,000 people, just over half of which were full-time employees. These locations included both independent owners (65 per cent) and corporate (35 per cent) owners such as LSS, that operated multiple stores.5 In 2016, of all the convenience stores in Canada, 9,089 locations were in Ontario, slightly increased from 8,992 stores in 2015. Ontario locations generated approximately $18 billion in revenue in 2016, with $13.5 billion coming from convenience stores that offered gasoline and $4.5 billion from standalone convenience stores.6 In Ontario, 5,560 of the locations were independently owned, compared to 3,432 that were owned by corporations.7 Convenience stores served metropolitan, urban, and rural communities,8 although most Ontario locations (5,412 stores) were in metropolitan centres.9 In Ontario, the convenience store industry consisted of two main categories: (1) companies that owned and operated convenience stores nationally and internationally (e.g., 7-Eleven, Circle K), and (2) small, independently owned (commonly referred to as mom-and-pop) convenience stores. Few regional chains like LSS that were privately held and family owned existed. In the Niagara region, the Stewart family owned more than 90 stores, operating under the banners of Avondale Food Stores, Avonmart, and Dollar Mart.10 In the Ottawa area, another Canadian family owned 52 Quickie Convenience Stores.11 The impact from the January 1, 2018, increase in the provincial minimum wage (to $14.00 per hour) was estimated to cost approximately $50,000 per store, which was particularly hard to absorb for small and family-run stores, many of which were owned and operated by entrepreneurial new Canadians. At the time, 83 per cent of Ontario convenience store retailers predicted that the total proposed minimum wage increases (up to $15.00 per hour) would lead to employee reductions over the following 12 months. Some convenience store retailers expected to see more than 250 reductions in paid positions in 2018, while 80 per cent of retailers expected to hire fewer part-time employees.12 In June 2018, the newly elected Ontario government cancelled the next year’s proposed minimum wage increase (to $15 per hour), which provided some relief to convenience store owners. However, the industry continued to struggle to absorb the previously implemented increases. Before the 2018 minimum wage increase, LSS had reviewed the operations of each store to make sure that revenues could cover the anticipated increase in labour costs and to consider internal adjustments such as price increases. However, increasing prices could make the stores non-competitive and was limited in scope, with only one-third of LSS revenue coming from non-regulated products that allowed price increases. Store owners worried that customers were familiar with the price of basic food products such as bread and eggs, and that they would shop elsewhere if those products increased in price.13 Per capita disposable income was projected to rise slowly in Canada from 2018 to 2022, which was expected to boost the convenience store industry.14 However, high rates of consumer debt and low consumer confidence had hampered overall consumer spending.15 In addition, strict government regulations on the advertising and promotion of lottery tickets and tobacco products, which comprised the bulk of LSS’s

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Page 3 9B20M076 revenue, limited the company’s revenue-generating options. For example, convenience stores were not allowed to utilize loyalty programs in the sale of lottery tickets and tobacco products. In addition to these operational challenges, legislative changes affecting the sale of beer, wine, and cider had come into effect in the fall of 2016 that effectively strengthened the competition. Up to 450 grocery stores across the province could apply for a licence to sell these three alcoholic products, but convenience stores were not eligible because they did not meet minimum size requirements.16 By early 2018, more than 200 grocery stores, including 15 in southwestern Ontario, were selling select alcoholic products.17 Bes found the minimum store size restriction unfair, given the many existing smaller liquor and beer stores across the province, particularly in northern and rural communities.18 The rule was also inconsistent with those in place other Canadian provinces, such as Québec, where beer was available in convenience stores. One-third of LSS revenues came from tobacco products, which had regulated pricing, and Canada’s percentage of smokers had dropped to 2.4 per cent over the previous five years.19 Canadians were becoming increasingly health conscious and willing to pay more for healthier alternatives.20 However, from a social perspective, a reduction in many Canadians’ leisure time prompted the demand for convenience store goods, as consumers grabbed food on the go, a practice that was catered to by convenience stores.21 HISTORY OF LSS LSS had its genesis as a pool hall that was owned and operated by the Arnold family in downtown Kitchener, Ontario. Founded by Alfred Arnold Sr. in 1929, the company diversified into tobacco distribution in 1947, and both parts of the business were passed on to his two sons, Alfred Arnold Jr. and Paul Arnold. Because they were already distributing products to the stores, the brothers decided to further diversify the company into toy distribution, thereby building up the company. In 1968, a major convenience store customer that was unable to pay its bills offered the Arnold family three of its stores as payment. From that point on, the Arnold family began growing the convenience store part of the business, keeping the stores in the general southwestern Ontario area. In 1988, the business was passed on to the third generation of Arnold children. Three of the five children were actively involved in the business: Michael Arnold as chairman, Jamie Arnold as president and director of human resources, and John Arnold, who worked for the company but remained outside the management stream. The last two Arnold children chose careers with other companies but were passively involved with LSS and served on the company’s board of advisors. The board, which was informal and fully composed of family members, was kept informed of all decisions the company undertook but did not become actively involved in the day- to-day operations. By 2018, for the first time, the Arnold family could not identify a member from the next generation of the family as being interested in taking over leadership in the company. CORPORATE STRATEGY AND OPERATIONS All 30 LSS stores were corporately owned and located in the southwestern Ontario region. Store performance was reviewed on an ongoing basis, and poorly performing stores were closed or sold. The current store locations were concentrated in the cities of Kitchener (9 stores), Waterloo (3 stores), Cambridge (11 stores), Guelph (5 stores), Ayr (1 store), and New Hamburg (1 store). The company’s strategic organization made geographic expansion difficult. For example, most processes were manual rather than computerized, and only recently had mechanical cash registers been replaced with digital ones. In addition, the company’s two district managers would have found geographical expansion beyond a short drive too difficult, and the Arnold family preferred to keep all stores concentrated in one area.

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Page 4 9B20M076 With its headquarters in Cambridge, LSS operated with only a five-person management team that reported to the family’s board of advisors. The management team included Bes as general manager, Jamie Arnold as president and human resources manager, Michael Arnold as chairman of store development, Jim Smulders as finance manager, and Kevin de Spiegelaere as information technology (IT) and project manager (see Exhibit 2). LSS employed approximately 240 non-unionized workers, some of whom had been with the company for more than 10 years. However, as was typical for this industry, approximately 80 per cent of staff members were short-term employees, requiring continual recruitment and customer service training. MISSION The company had a clear organizational vision, grounded in customer service:

Little Short Stop Stores’ objective is to provide our customers with the highest level of customer service while offering fair prices on all our products. Compare our prices to big supermarkets or your local drug store and you will be pleasantly surprised. Our hectic lives make finding time to enjoy the finer things in life increasingly more difficult to find. Avoid long line-ups and giant stores by shopping at Little Short Stop Stores and save yourself time and money.22

As the company was proud to say, “It is the little store with a whole lot more!” STORE OPERATIONS The average size of an LSS store was 1,500 square feet (140 square metres). Each store was led by a store manager and, in some stores, an assistant manager, leading a team of 5–20 members, depending on the location and on the number of full-time versus part-time workers.23 Each store manager reported to one of the two district managers: Vicky Rivers and Robbie Mulder. Each district manager was responsible for 15 stores and reported to Bes. The peak hours for LSS stores generally were from 4 to 7 p.m., although the peak time was somewhat later in the summer, when it was warmer and lighter for longer. Seasonality played a significant role in store sales; generally, there was a 30 percent drop in overall revenues in January and February as compared to July. To accommodate the needs of the local area, the length of time the stores were open varied between the locations, with 13 stores being open 24 hours a day, 7 days a week. For instance, the busiest hours for the University Avenue location in Waterloo (across the street from a university) were between 9 p.m. and 3 a.m., so this store was always open, while many stores in residential areas were closed by 11 p.m. LSS had set the hours of operation at each location according to what customer sales revenues justified. LSS had locations in strip malls and stand-alone stores. They did not own the land upon which the stores were located. The minimum lease contract was for three years, with the most being five years. Gas station locations involved 10-year contacts. Bes explained how they chose locations for new stores:

We are really pragmatic about it. We look for high traffic, bedrooms in the neighbourhood, and industrial mix nearby. Residential and traffic alone do not work for long-term viability. Because our locations are leased, sometimes the increases asked for by the landlord could be too much and we would decide to close.

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Page 5 9B20M076 While the typical customer for each store depended on the neighbourhood in which it was located, the clientele of LSS was skewed towards the lower-middle-class income level. There was no apparent gender bias in the typical customer base, and customers tended to visit once a week on average, although a small number of regulars visited daily. These statistics were estimates; LSS had little consumer information and no indication of how long a customer remained in the store. Both Bes and de Spiegelaere, the IT manager, were interested in gathering more information on LSS customers and making better use of the information they already had, as de Spiegelaere explained:

We actually have a lot of data right now, but we do not do much with it because we don’t have any systems that allow us to link the data to individual consumers. We’d like to learn a lot more about our consumer. It is very much on our radar.

LSS stores enjoyed higher than average convenience store sales. LSS felt that their competitive advantage stemmed from three main factors: excellent customer service, great locations that were clean and well organized, and strong brand recognition in the Kitchener and Waterloo area. Consistent with the company’s mission, LSS store managers differentiated its stores from the competition by becoming part of the local community and running them like a small family business, where repeat customers were addressed by their names and clerks knew customers’ preferences. Bes commented on the loyalty customers showed to specific LSS employees:

There is an LSS store right across from our corporate offices, which is run by Sue [Susie] Verlaan. Susie is just fantastic—customers love her! In fact, when Susie moved to the Preston Parkway location, there were customers that followed her from her old location because she had built such a strong relationship!

The strong customer service approach seemed to appeal to LSS customers. LSS was often voted among the best convenience stores by Kitchener, Waterloo, and Guelph customers, as published in local newspapers the Waterloo Region Record and the Guelph Mercury Tribune. All LSS locations offered an ATM (automated teller machine) on site and accepted payment by cash or debit; however, only five stores accepted credit cards. This was a deliberate choice by LSS; credit card fees were a considerable cost for the company. Average credit card transaction fees ranged from 1.5 to 3.0 per cent per transaction. Because LSS sold many low-margin products, including gift cards, phone cards, and bus tickets (which all had a margin of less than 1 per cent), the credit card fees meant that LSS would lose money on these sales. Bes was interested in continuing to modernize LSS operations, particularly in terms of its financial and accounting systems. The stores processed approximately 1,500 invoices of different types and sizes each week, which made it a challenge to find the best option to mechanize the process. In 2012, LSS installed a new point of sale (POS) system that allowed exporting sales directly into an accounting system. Tobacco product and lottery ticket sales were fairly automatic for inventory management, but getting information from the last third of product sales data was quite a challenge, so most elements had to be checked manually. PRODUCTS The convenience store industry relied heavily on three highly regulated products: gasoline and diesel fuel, lottery tickets, and tobacco products. LSS had a partnership to sell gasoline—supplied by Royal Dutch Shell PLC (Shell)—at only 3 of its 30 locations, in Kitchener and Waterloo, so the company relied heavily

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Page 6 9B20M076 on the sale of lottery tickets and tobacco products, each generating approximately one-third of all revenues. Average margins were 6 per cent for lottery tickets and 15 per cent for tobacco products. However, tobacco product sales were increasingly at risk from contraband tobacco sold in some areas of the province. In 2017, contraband tobacco use increased to 37 per cent, from 13 per cent the previous year.24 Lottery ticket sales for draw games, such as the Lotto Max lottery (styled after the Powerball lottery of the United States [US]), provided 5 per cent margins. The various instant scratch lottery games had slightly higher margins, and LSS received up to a 3 per cent commission on winning ticket redemptions. The remaining one-third of revenue came from other convenience products, such as food, drinks, and magazines, with lighters and bottled water as some of the most profitable items (see Exhibit 3). Aiming to provide the “hottest new products and everyday essentials,”25 LSS regularly added and removed products from stores, based on a corporate master list of approximately 4,000 items. Corporately, LSS was continually reviewing new products for potential addition to the master list of products available to stores. Store managers would order products from that list and have them shipped directly to each store. Without a formal warehouse, LSS made use of some spare additional storage space that was available in one location, as Bes explained:

Sometimes we can get a really good deal on non-perishable goods, things like toilet paper, so we will buy it in bulk quantities and store it in the one store where we have a bit of extra space. Then we have a team member that will drive it around to the other store locations as needed. It is great when we can do that because we can pass on the additional savings to our customers, but we can’t do that too often because we just don’t have the space.

The main distributor to LSS stores was Sobeys Inc. (Sobeys), Canada’s second-largest grocery store chain, which also provided distribution services to various convenience stores.26 LSS also dealt directly with individual companies for various food and beverage products. The layouts of LSS stores were designed based on customer traffic patterns, but managers could organize products on shelves and throughout the stores as they saw fit. Various displays on wheels allowed some products to be moved around according to customer needs, given that “People buy different things on their way to work than they do on their way home from work,” as Bes explained. There were no listing fees provided to suppliers. The only cost related to restocking products was for freezer items, which was a labour-intensive exercise. Over 90 per cent of the products sold by LSS were consumed immediately. However, unlike in the US convenience store industry, where prepared food service accounted for approximately 40 per cent of sales, the Canadian convenience store industry had a low proportion of prepared food service sales27, accounting for only 2 per cent of overall revenues at LSS. Most prepared foods, such as sandwiches, were procured weekly from Sobeys, which supplied them to one specific LSS location. The foods were then distributed to the various LSS stores that sold these products. LSS stores were equipped with only a microwave for preparing hot foods. Hot dog rollers had been tested in the past, and a popcorn maker was being tried in one location. Submarine sandwich shops were added to three LSS locations at one time, but they had since been stopped. Bes was not convinced of the benefit of providing food services in LSS stores, although he was willing to continue testing various options. The provision of prepared foods increased the operational complexity and required strict adherence to additional health regulations. Ethnic/international foods and products were also generally not available in most LSS stores, although some managers provided limited options to accommodate local tastes. Evaluating which products to stock was an ongoing process. LSS tracked product sales to determine how much revenue each product was driving. Bes was contractually obligated to sell some specific products that

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Page 7 9B20M076 had financial incentives. As a family business, LSS had previously turned down some product opportunities for personal reasons. However, with the recent decriminalization of cannabis in Canada, LSS was considering selling products that supported cannabis use. GASOLINE LOCATIONS The gasoline part of the business was complicated. The three LSS stores that sold gasoline were the largest in terms of volume but not necessarily in terms of profit. As Shell gasoline dealers, the stores owned the fuel components and earned revenue on each litre sold, the price of which had increased with a $0.05 tax hike imposed by the provincial government on January 1, 2017; a new carbon tax was also to be applied on January 1, 2019. In 2016, Ontario convenience stores had collected $1.7 billion in fuel tax.28 In addition, LSS stores that sold gasoline generally had higher tobacco product sales and reflected a different customer profile and product mix than those of traditional LSS stores. LSS evaluated the option of adding gasoline sales to each store, but this would depend on each store’s location and its zoning laws and traffic patterns. Building a new store with gasoline sales could require an investment of up to $1 million, depending on the location, the number of gasoline pumps, and the specific building requirements. In comparison, a new store without gasoline could be built for $100,000 to $150,000. MARKETING LSS concentrated its marketing efforts regionally, relying heavily on word of mouth to promote its brand image, exceptional service, fair pricing, and product selection. LSS offered loyalty rewards for repeat coffee purchases but was not affiliated with national loyalty programs for general sales, such as Air Miles, which would not be applicable to the sale of tobacco products or lottery tickets. LSS was an active member of the communities in which its stores were located, supporting local baseball teams and food banks. LSS tended to sponsor activities that mattered to individuals in each store’s community, including providing support for the Multiple Sclerosis (MS) Society of Canada through activities such as the Walk for MS and Round Up Your Change for MS. Bes saw these activities as demonstrating LSS’s commitment to the community, which also helped raise local brand awareness and were often promoted through radio advertising in conjunction with the community partners. LSS had used the same logo and brand image since its inception. Its mascot was named Seemore Savings and was styled as a young child, depicted in an old-fashioned graphic. Seemore Savings had appeared on LSS’s first store sign and had remained in place despite several font changes over the years (see Exhibit 4). The corporate website, Facebook page, and Twitter handles helped provide information about the company and promoted weekly specials offered at all LSS locations. In-store POS signs were also used for product promotions, although approximately two-thirds of customers mainly purchased lottery tickets or tobacco products and rarely went beyond the front counter to peruse the store’s other items. FINANCIAL PERFORMANCE LSS had outpaced industry growth by 500 basis points in each of the previous five years, and Bes wanted to ensure this trend continued. Although LSS was a private company, it had the resources to support growth through the opening of new stores, even while maintaining its a strongly held tradition of avoiding debt

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Page 8 9B20M076 (see Exhibit 5). After a profitable year in 2018, LSS was anticipating a loss in 2019 due to declining gasoline and convenience store revenues amid increasing costs. COMPETITIVE LANDSCAPE The convenience store industry in Canada, as in the US, was fiercely competitive. However, the two countries differed considerably in terms of the general landscapes of the convenience store market. In the US, the convenience industry had grown by 2.2 per cent since 201429 to generate US$654.3 billion in revenue in 2018.30 Same-store growth was slightly up from 1.5 per cent in 201731 to 2.2 per cent in 2018.32 The growth was largely driven by a 13 per cent increase in fuel sales, which accounted for almost 70 per cent of total sales.33 At the same time, US stores were experiencing a reduction in tobacco sales and increasing labour costs, for an increase of 8–10 per cent annually,34 although the average wage remained about US$11.00 an hour.35 There was also an overall reduction in the number of convenience stores, driven by the closure of 2,198 single-store operators.36 The industry saw strong merger and acquisition activity from existing convenience store chains, as well as new global foreign market entrants from companies based in England and Chile.37 In Canada, however, LSS faced stiff competition from the two giant multi-national convenience store chains 7-Eleven and Circle K, in addition to many smaller, independently owned convenience stores. The multi- national convenience store chain 7-Eleven had more than 60,000 locations in more than 180 countries.38 As a subsidiary of Seven-Eleven Japan Co., Ltd., which was part of the Seven & i Holdings Co.,39 7-Eleven stores offered private-brand products and a large number of prepared foods. The stores were also known for their Slurpee drinks, which were available at approximately 650 locations across Canada.40 Circle K was founded in El Paso, Texas,41 and became a convenience store chain with outlets throughout the US, Canada, and much of Europe. In 2003, it was acquired by the Canada-based Alimentation Couche- Tard Inc.42 In Asia, Central America, and Africa, Circle-K stores operated under licensing agreements. Globally, the chain operated in more than 20 countries.43 LSS was also facing growing indirect competition from pharmacies and drug store chains such as the Shoppers Drug Mart Corporation, which was increasing its product mix, as well as dollar stores, such as Dollarama. Bes believed that dollar stores only provided competition for LSS locations when specifically located in the same shopping complex. Indirect competition also came from major grocery store chains, particularly when they were open for 24 hours a day and if they were selling beer, wine, and cider; their sophisticated POS tracking systems could monitor consumer spending patterns beyond the abilities of smaller convenience store chains such as LSS.44 Bes knew that there was a potential for the grocery and convenience industries to shift, given the growing consumer appetite for online shopping and delivery. The recent acquisition of the US grocery store chain Whole Foods Market Inc. (Whole Foods) by e-commerce giant Amazon Inc. (Amazon) sent a warning to all grocery retailers. In 2018, Amazon had begun offering free two-hour delivery in almost 100 US cities through its Prime Now service for Whole Foods purchases made online by Amazon Prime members. This was in addition to Amazon Fresh, which was a grocery delivery and pick-up service available to Amazon Prime customers in select US states and in London, Tokyo, Berlin, Hamburg, and Munich. Although these services were not yet available in Canada45, Bes was aware of how quickly industry trends and offerings could shift.

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Page 9 9B20M076 NEXT STEPS FOR LSS Although LSS had outpaced the growth of the convenience market by 500 basis points, Bes wanted LSS to do even better. The LSS target customer was difficult to define, but millennials did not seem to be regular LSS consumers, despite the fact that 74 percent of millennials shopped at convenience stores for some groceries.46 Bes wondered if there were new target customers that could LSS could attract to its customer- centric brand. However, the biggest challenge was growing revenues in declining categories (such as tobacco products) where LSS had no control over pricing and little to no control over promotion. Bes could not increase the price of lottery tickets, but he could try to reduce some of the costs related to store operations through increased automation. He was unsure of the costs and benefits of such a move, particularly because of the challenge of using an automated system to check legal age for sales of lottery tickets and tobacco products. Various LSS competitors had set up Canada Post outlets in their stores, but Bes saw these as loss leaders that would not add to the LSS bottom line. He was also not sure that the federal government would award LSS a Canada Post franchise. He knew that LSS would have to remain a southwestern Ontario company, as no desire had been shown by the Arnold family to expand beyond that area. The outright sale of the company was always an option, but it would be extremely difficult to find a buyer in the highly competitive field of North America’s convenience store industry. Far more attractive opportunities were available to investors in emerging markets. LSS was one of the few convenience store companies that remained completely company owned. Franchising had been considered in the past, but Bes felt that franchising would not work well for a regional business, as he explained: “Historically, the industry goes back and forth all of the time between franchised and corporate owned. We looked at it in the past and did not feel it would work. You need 100–150 locations for franchising to work.” Bes felt he had considered most conventional options to grow the LSS business. He had to find creative solutions to reach his goal of above-normal revenue growth. The solutions had to be both implementable and affordable, particularly given the strong management preference against long-term debt. Any solution would also have to be consistent with the LSS mission and not easily copied by the competition.

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Page 10 9B20M076

EXHIBIT 1: TOP 10 CATEGORIES BY SALES IN CANADA IN 2016 (EXCLUDES LOTTERY TICKETS AND GASOLINE)

Rank Category Sales, Including Tax

(in CA$ Million) Increase (or Decrease)

from 2015 1 Cigarettes 3,500 +4% 2 Energy Drinks 229 –3% 3 Beer Products (Québec only) 219 +2% 4 Snack Foods 189 No change 5 Soft Drinks 183 –3% 6 Chocolate 147 +2% 7 Milk 133 –6% 8 Juices and Drinks (Shelf-Stable) 124 –4% 9 Flat Water 107 –3%

10 Candy Confections 80 +4% Source: Canadian Convenience Stores Association, 2017 Canada’s Convenience and Fuel Retail Channel: Annual Facts & Figures Report, accessed February 23, 2020, https://depquebec.net/wp-content/uploads/2017/09/CCSA-2017-Annual-Facts- Figures-Report.pdf, 15.

EXHIBIT 2: LITTLE SHORT STOP STORES ORGANIZATIONAL CHART

Source: Company documents.

Chairman of Store Development

Michael Arnold

Store Maintenance Wayne Radtke

Information Techoinlogy and Project Manager

Kevin de Spiegelaere

General Manager Gerry Bes

District Manager Robbie Mulder

Store Managers (15)

Team Members (Approximately 100)

District Manager Vicki Rivers

Store Managers (15)

Team Members (Approximately 100)

Inventory Manager John Arnold

President and Human Resources Manager

Jamie Arnold

Finance Manager Jim Smulders

Accounting Team Cindy Rama, Kim O'Neill

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Page 11 9B20M076

EXHIBIT 3: LITTLE SHORT STOP STORES PRODUCT SALES IN 2017 (EXCLUDING LOTTERY TICKETS, TOBACCO PRODUCTS, AND GASOLINE)

Product Category Percentage

of Sales Average Gross

Margin Beverages 24.0% 25% Snacks 12.8% 35% Confection 12.0% 40% Sundry 11.8% 30% Phone Cards 11.6% 3% Dairy 8.3% 30% Frozen 5.1% 45% Grocery 4.7% 40% Services 4.6% 2% Non-Food 3.4% 50% Food Services 1.7% 45%

Source: Company documents.

EXHIBIT 4: LITTLE SHORT STOP STORES “SEEMORE SAVINGS” LOGO

Source: Company documents.

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Page 12 9B20M076

EXHIBIT 5: LITTLE SHORT STOP STORES FINANCIAL INFORMATION (IN CA$) Balance Sheet

Year ended September 30 Unaudited

Proforma

2019 2018 2017 2016 2015

Assets

Current

Cash and cash equivalents 37,565 382,123 597,222 66,243 49,839

Rebates receivable 795,000 565,000 288,887 275,469 450,692

Inventory 2,497,138 2,478,032 2,386,573 2,695,786 2,604,672

Deposits and prepaid expenses 295,000 285,000 279,451 224,454 155,694

Total current assets 3,624,703 3,710155 3,552,133 3,261,952 3,260,897

Property, plant, and equipment, net 835,972 826,910 924,627 1,312,865 1,431,763

Intangible assets, net — — — 14,241 37,887

4,460,675 4,537,065 4,476,760 4,589,058 4,730,547

Liabilities and shareholder's equity

Current

Accounts payable and accrued liabilities 2,113,590 1,852,929 2,341,624 2,340,841 2,440,616

Income tax payable (47,584) 120,807 — 1,481 39,856

Total current liabilities 2,066,006 1,973,736 2,341,624 2,342,322 2,480,472

Note payable — — — 250,000 495,000

Total liabilities 2,066,006 1,973,736 2,341,624 2,592,322 2,975,472

Commitments

Shareholder's equity 4,000 4,000 4,000 4,000 4,000

Share capital 2,390,669 2,559,329 2,131,136 1,992,736 1,751,075

Retained earnings 2,394,669 2,563,329 2,131,136 1,992,736 1,751,075

Total shareholder's equity and liabilities

4,460,675 4,537,065 4,476,760 4,589,058 4,730,547

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Page 13 9B20M076

EXHIBIT 5: (CONTINUED) Statement of Income

Year ended September 30 Unaudited Proforma 2019 2018 2017 2016 2015 Sales Convenience sales 33,567,656 34,137,445 35,900,274 34,255,987 32,353,702 Gas revenue 15,482,222 17,219,716 16,320,905 16,456,993 16,650,934 49,049,878 51,357,161 52,221,179 50,712,980 49,004,636 Cost of sales Inventory, beginning of year 2,478,032 2,386,573 2,695,786 2,604,672 2,468,845 Purchases 38,655,744 40,584,161 40,732,520 40,316,819 38,468,639 41,133,776 42,970,734 43,428,306 42,921,491 40,937,484 Inventory, end of year 2,497,138 2,478,032 2,386,573 2,695,786 2,604,672 38,636,638 40,492,702 41,041,733 40,225,705 38,332,812 Less rebates, discounts, and promotional expenses

622,400 556,782 666,778 788,619 642,518

38,014,238 39,935,920 40,374,955 39,437,086 37,690,294 Gross margin 11,035,640 11,421,241 11,846,224 11,275,894 11,314,342 Gross margin (percentage) 22.5 22.2 22.7 22.2 23.1 Expenses General and administrative 11,025,169 10,654,320 10,777,843 10,595,723 10,903,906 Interest on debts — — — 14,100 27,918 Amortization of property, plant, and equipment

226,715 217,921 241,340 268,500 272,245

Amortization of intangible assets — — 14,241 23,646 23,646 11,251,884 10,872,241 11,033,424 10,901,969 11,227,715 Income before the undernoted items (216,244) 549,000 812,801 373,925 86,627 Other income (expenses) Gain on sale of property, plant, and equipment

— — 5,660 — —

— — 5,660 — — (216,244) 549,000 818,461 373,925 86,627 Provision for income taxes (47,584) (120,807) (180,061) (82,264) (19,058) Net income (loss) for the year (168,660) 428,193 638,400 291,661 67,569

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EXHIBIT 5: (CONTINUED) Statement of Retained Earnings Unaudited

Year ended September 30 Proforma 2019 2018 2017 2016 2015

Retained earnings, beginning of year 2,800,943 2,131,136 1,992,736 1,751,075 1,683,506

Net income (loss) for the year (263,828) 669,807 638,399 291,662 67,569

Dividends — — (500,000) (50,000) —

Retained earnings, end of year 2,537,115 2,800,943 2,131,135 1,992,737 1,751,075 Schedule of General and Administrative Expenses

Unaudited

Year ended September 30 Proforma

2019 2018 2017 2016 2015 Advertising 32,561 24,321 27,886 30,509 26,331 Automobile 8,675 8,400 8,200 12,343 16,444

Employee benefits

Workers’ compensation 142,503 135,214 137,465 142,611 126,281

Pension plan 53,500 53,500 53,500 46,000 46,000 EI, CPP, EHT, and group insurance 622,382 590,111 585,369 574,924 604,153 Fees and licenses 7,721 7,541 8,765 7,952 7,451 Insurance 80,214 78,512 80,062 65,999 63,065 Municipal taxes 482,584 475,325 464,780 429,558 417,969

Office 122,549 125,851 135,480 137,520 140,529 Professional fees 52,000 55,000 75,000 80,000 90,000

Rent 1,825,994 1,737,315 1,761,058 1,819,854 1,801,735 Repairs and maintenance 505,321 542,632 589,018 574,800 534,602 Debit and credit card fees 401,545 374,521 370,766 371,090 366,663 Supplies 70,524 75,321 95,015 97,580 89,425 Telephone 24,321 25,142 30,019 35,199 33,314 Utilities 857,412 832,400 856,870 887,889 851,603

Wages 5,735,363 5,513,214 5,498,590 5,281,895 5,688,341

Total 11,025,169 10,654,320 10,777,843 10,595,723 10,903,906 Note: EI = Employment Insurance; CPP = Canada Pension Plan; EHT = Employer Health Tax Source: Company documents.

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Page 15 9B20M076 ENDNOTES

1 CA$ = Canadian dollar; All currency amounts are in CA$ unless otherwise specified. 2 Thomas Agnew, “A Summary of Ontario’s Changing Employment and Labour Legislation,” Benefits Canada, February 19, 2019, accessed March 20, 2020, www.benefitscanada.com/human-resources/other/update-on-bill-47-and-changes-to- employment-standards-act-2000-125290. 3 Canadian Convenience Stores Association, The Canadian Convenience Store Industry Facts & Figures Report 2016, 3, 2016. 4 Canadian Convenience Stores Association, 2017 Canada’s Convenience and Fuel Retail Channel: Annual Facts & Figures Report, 3, 2017, accessed February 23, 2018, https://depquebec.net/wp-content/uploads/2017/09/CCSA-2017-Annual-Facts- Figures-Report.pdf. 5 Ibid., 4. 6 Ibid., 7. 7 Ibid., 4. 8 Ibid.; The Canadian Convenience Store Association defined metropolitan as a population in a city of at least 100,000 inhabitants, urban as a population in a settlement of at least 1,000 inhabitants with a population density of at least 400 residents per square kilometer, and rural as a population living outside of a metropolitan or urban area. 9 Ibid., 6. 10 “About Us,” Avondale Food Stores, accessed February 23, 2020, www.avondalestores.com/site/about-us. 11 “About Quickie Stores,” Quickie Convenience Stores, accessed February 10, 2018, www.quickiestores.com/pg_CompanyAboutUs.php. 12 “Convenience Retailers Concerned with Effect of Ontario Labour Changes on Community Stores and Part-Time Jobs,” Ontario Convenience Stores Association, September 12, 2017, accessed January 2, 2018, http://ontariocstores.ca/convenience-etailers-concerned-effect-ontario-labour-changes-community-stores-part- time-jobs/. 13 Flora Pan, “Waterloo Region Residents Give Input on Rising Minimum Wage,” CBC News, July 19, 2017, accessed February 24, 2018, www.cbc.ca/news/canada/kitchener-waterloo/ontario-minimum-wage-15-an-hour-public-consultation-1.4212445. 14 “Convenience Stores in Canada—Market Research Report,” IBISWorld, July 2017, accessed June 2018. 15 Ibid. 16 Marina Strauss and Adrian Morrow, “Alcohol Sales on Tap for Ontario Grocers, but Not Convenience Stores,” The Globe and Mail, April 16, 2015, accessed February 24, 2018, www.theglobeandmail.com/report-on-business/alcohol-sales-on-tap-for-ontario-grocers- but-not-convenience-stores/article24000415; “Alcohol Sales in Retail Stores,” Government of Ontario, accessed February 24, 2018, www.ontario.ca/page/beer-wine-cider-sales-grocery-stores?_ga=2.130056783.1187674203.1519498294-1853514510.1519498294/. 17 “Alcohol Sales in Retail Stores: Social Responsibility,” Government of Ontario, accessed February 24, 2018, www.ontario.ca/page/beer-wine-cider-sales-grocery-stores#section-4. 18 In Ontario, alcohol was largely available through government-controlled Liquor Control Board of Ontario stores. 19 “Convenience Stores in Canada—Market Research Report,” op. cit. 20 Elwood Watson, “Younger Consumers Are Trending Toward More Health-Conscious Eating,” The Huffington Post, February 9, 2015, accessed March 17, 2018, www.huffingtonpost.com/elwood-d-watson/younger-consumers-are tre_b_6632166.html. 21 “Convenience Stores in Canada—Market Research Report,” op. cit. 22 Little Short Stop Stores, Facebook profile, accessed February 10, 2018, www.facebook.com/LittleShortStopStores. 23 Locations near universities tended to employ more students and therefore had more part-time workers. 24 “Contraband Tobacco Level in Ontario Reaching Alarming Rates According to New Study,” Ontario Convenience Stores Association, November 14, 2017, accessed October 30, 2019, http://ontariocstores.ca/2017contrabandstudy. 25 “Home Page,” Little Short Stop Stores, accessed February 24, 2018, www.littleshortstop.com. 26 “Our Company and Purpose,” Sobeys Inc., accessed February 23, 2020, https://corporate.sobeys.com/our-purpose. 27 Canadian Convenience Stores Association, 2017 Canada’s Convenience and Fuel Retail Channel: Annual Facts & Figures Report, op. cit. 28 Ibid., 8. 29 “Convenience Store Industry in the United States—Market Research Report,” IBISWorld, October 2019, accessed December 2, 2019. 30 National Association of Convenience Stores, “Record U.S. Convenience Store Food, Merchandise Sales in 2018,” Cision PR Newswire, April 3, 2019, accessed December 7, 2019, www.prnewswire.com/news-releases/record-us-convenience- store-food-merchandise-sales-in-2018-300824097.html. 31 Patrick Gleeson, “What Is the Average Gross Revenue of a Convenience Store,” Houston Chronicle, April 2, 2019, accessed December 8, 2019, https://smallbusiness.chron.com/average-gross-revenue-convenience-store-35712.html. 32 National Association of Convenience Stores, op. cit. 33 Ibid. 34 Ibid. 35 Ibid. 36 Gleeson, op. cit. 37 “Robust M&A Drives Consolidation of US Convenience Stores,” ABLAdvisor, accessed December 7, 2019, www.abladvisor.com/PressRelease.aspx?id=15746&title=robust-ma-drives-consolidation-of-u-s-convenience-stores.

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Page 16 9B20M076 38 “History,” Seven-Eleven Japan Co. Ltd., accessed August 16, 2018, www.sej.co.jp/company/en/history.html. 39 Jack W. Plunkett, Plunkett’s Retail Industry Almanac 2009: The Only Comprehensive Guide to the Retail Industry (Houston, TX: Plunkett Research, Ltd., 2009). 40 “7-Eleven Is NOT Closing All Ontario Stores,” Canadian Convenience Store News, accessed December 3, 2019, http://ccentral.ca/7-eleven-is-not-closing-all-ontario-stores. 41 “History and Timeline,” Circle K Stores, accessed December 3, 2019, www.circlek.com/history-and-timeline#fndtn-timeline-tab. 42 Ibid. 43 “A Presence We’re Proud Of!,” Circle K Stores, accessed December 3, 2019, www.circlek.com/ca/western/about-us-0#. 44 “Convenience Stores in Canada—Market Research Report,” op. cit. 45 “Frequently Asked Questions,” Whole Foods Market, accessed September 20, 2019 https://primenow.amazon.com/onboard?sourceUrl=percent2Fhome. 46 “Consumers Continue to Choose Physical Over Digital for Groceries,” Business Wire, September 11, 2017, accessed March 17, 2018, www.businesswire.com/news/home/20170911005797/en/Consumers-Continue-Choose-Physical-Digital-Groceries.

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