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November 10, 2020

Part 1: The Case for Investing in Canada - World Leaders in Your Backyard

As Canadians, we appreciate that while our country is large geographically, in the context of the global economy, we are a rather small portion of it. However, it does feel that we are often dismissive of our country’s accomplishments and assume we must look outside our borders to find world-leading investment opportunities.


This is the first of a three-part series that, with the help of members of the Canadian Equity Team, we will provide examples of Canadian-domiciled world-leading businesses in their respective fields.


The purpose of the series is not to do downplay the importance of being adequately diversified or the fact that there are considerable attractive opportunities outside Canada – both of which are true. Rather, the point is to stress that we as “humble Canadians” often overlook the attractive attributes of our economy, population, processes and the many great businesses that call this country home.


Let’s begin by recognizing that while there are many areas where we could improve, Canada is:

  • Among the least corrupt countries in the world (12th globally per Corruption Perception Index)
  • The 10th largest economy in the world
  • Highly competitive (13th globally in the World Economic Competitiveness Ranking)
  • Ranked second highest quality of life in the world (World Economic Forum Ranking)
  • A leader in childhood education rankings (Programme for International Student Assessment scores)
  • Home to considerable natural resources, including the 2nd largest oil reserve in the world
  • Home to a clear rule of law and an independent judiciary
  • A strong and stable democracy
  • Social order and low crime


A winner in the geography lottery (shares the world’s longest land border with the largest “customer” in the world, boarders on both the Atlantic and Pacific oceans and has large amounts of high-quality agricultural land), there is no doubt that we have areas to improve on. The World Economic Forum cites inefficient government bureaucracy, tax rates, insufficient capacity to innovate and inadequate supply of infrastructure as the four most problematic factors in doing business in Canada. Driving innovation and reducing impediments to driving productivity should be areas of focus, but it’s important to put things in context.


Over the coming weeks, you will hear from the three analysts from the Canadian Equity Team as they dive into the companies and why they lead peers in their space, not just in Canada, but globally. Each of the businesses discussed are currently held within Cambridge Canadian Dividend Fund. We hope that these examples illustrate that there are attractive world class companies in our own backyard, and that while going abroad almost certainly makes sense for investors, client portfolios should definitely make room for great Canadian businesses, too.

Fortunately for shareholders, Mr. Bouchard has not grown his convenience store empire merely for the sake of growth, but has done so in a highly thoughtful and value-conscious manner, consequently generating extraordinary returns for shareholders along the way. In fact, had you owned Couche-Tard since the beginning of the millennium (when it was only a 1,600 store chain), you would have earned over 25% per year, making it among the highest returning companies on the TSX over that time frame. How, you might ask, did this local Quebecois convenience store operator manage to build a global leader in a seemingly sleepy industry? From the very beginning, Mr. Bouchard cultivated a very decentralized culture that empowered local managers to operate their stores or business units in a highly effective manner, which continues to permeate the organization today. This strategy has enabled the company to take over other less efficient convenience store and gas station chains and bring both scale and best practices to the acquired operations.


A great example of Couche-Tard’s operational capabilities was its 2003 acquisition of the Circle K chain from ConocoPhillips ( which you’re likely more familiar if you live outside Québec). Following the integration of the newly acquired operations, Couche-Tard managed to improve its profitability by more than 50% by benchmarking its performance, streamlining operations and realizing significant sourcing efficiencies. Its playbook on subsequent acquisitions (which have since totaled nearly $16 billion) has remained remarkably consistent, with the exception of expanding its footprint meaningfully across the Atlantic, following its acquisitions of the retail assets of Norway’s Statoil in 2012 and Ireland’s largest fuel retailer, Topaz, in 2016.

Couche-Tard’s acquisitive history has served both the organization and its shareholders well, owing to the attractive industry structure in which it operates. Crucially, the industry is highly economically insensitive, allowing the company to safely take on debt to fund ongoing acquisitions. Over the past 45 years, in store sales have only fallen twice (-0.2% in 1990 and -2.4% in 2002). More importantly, the market remains highly fragmented, with nearly two-thirds of the industry operating independently as “mom-and-pop shops.” What results is a market that is ripe for consolidation, which favours the large, capable operators, such as Couche-Tard. For context, industry data suggests that the gap between an efficient convenience store and a small independent is very large (nearly 10x the level of profitability) and continues to widen—in fact, the bottom quartile of retailers need to sell fuel at a margin of over $0.20/gallon just to break-even, roughly the historical average over the past five years.


Speaking of fuel, the company has continued to optimize the way it both procures and sells gasoline to consumers like you and me. Management has intelligently centralized their fuel procurement activities and very few, if any, competitors can buy gas and diesel as efficiently as Couche-Tard. As a result, the business can then sell that fuel at a cheaper price, while concurrently earning best-in-class margins. Of the handful of publicly traded fuel retailers in North America, Couche-Tard has consistently had among the highest retail fuel margins over the past five years. The company has been thoughtful in sharing these efficiencies with consumers and has gone so far as rolling out dynamic pricing at over 2,400 locations to offer a competitive price without losing a significant margin. This type of initiative is what has allowed the company to consistently grow its market share of fuel sales, outgrowing the broader market by roughly 150 basis points every year, even before including the impact of acquisitions.


Despite a 40-year history and a management succession—Brian Hannasch has led the company since Mr. Bouchard’s retirement in 2014—the future continues to glow brightly for Couche-Tard. For one, there remains significant real estate for the company in both North America and abroad. While it has grown to become the second-largest convenience store retailer in the U.S., its market share is still below 8% and its Asian-Pacific footprint is virtually nonexistent. To that end, it was in the midst of acquiring its first non-European and non-North American business, Ampol of Australia, prior to the pandemic breaking out, which has since been put on hold. It’s important to note that the company has the financial capacity to acquire a business of significant size given its liquidity position of nearly $6 billion and very low leverage. And even in the absence of any meaningful acquisitions, management is not resting on their laurels, and is instead driving organic growth by reinvesting in the business in areas such as fresh food offerings, fuel rebranding and localized pricing, just to name a few.

Few businesses have compounded its shareholders’ capital as effectively as Couche-Tard has done and yet fewer have done it as consistently. Since its humble days as a single-store “dépanneur,” the company has grown to become a leading convenience store operator globally. I would expect this exceptional performance to persist going forward, positioning itself as one of the world’s leading businesses we should be proud identify as Canadian.




We thank you for your continued support and will continue to work hard to protect and compound client capital.


Stephen Groff


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Published October 30, 2020.

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