In the current economy, c-stores are finding that focusing on merchandising, value and profitable product categories are vital to success.

by Lisa White

Key Takeaways
•    Retailers are targeting profitability and the right store mix in tough economic times.
•    Value for consumers remains a top priority.
•    Some are expanding their offerings and store sizes to compete with grocery/mass merchandisers.
 
It appears that tough times call for traditional methods.

To survive in one of the harshest economic environments the U.S. has ever seen, convenience stores are taking stock of, and concentrating on, what sells best.

“C-store retailers today are more cautious about bringing in risky products that aren’t sure sellers,” says John Scardina, vice president, merchandising for Naperville, IL-based distributor Eby-Brown Company. “Due to the tough environment, this channel is taking a back-to-basics approach with a solid mix of products that generates sales.”

Only when the core of the store is solid and driving sales will these retailers look outside the box and take a chance on new or unique items.

“The bottom line is that retailers are focused on profitability and trying to make sure the store mix is the right one to drive sales, consumption and profits,” Scardina says.

To help accomplish this goal, more stores are incorporating value pricing and innovative merchandising strategies, while looking at profit replacement opportunities to help compensate for interchange fees, the tobacco situation and burgeoning fuel costs.

A value focus
Today, the focus is more on value strategies, as opposed to value pricing.

“It’s important to get the value out in front of customers to drive takeaway at retail,” Scardina says.

Consumption for many categories is down these days, but due to inflation, dollars are up.

In an effort to better compete with grocery, drug and mass merchandisers, an increasing number of c-store chains are looking into second-tier brands, distributor control brands and private label programs as part of a value strategy.

“McLane is one example of a distributor that has its own control brand that offers more penny profits, while delivering value to shoppers,” says David Bishop, managing partner of Balvor, a Chicago, IL-based sales and marketing firm that provides consulting, sales support and analytic services to retailers and product suppliers.

Distributor J.T. Davenport & Sons, Inc., based in Sanford, NC, is emphasizing non-branded products, including its own health and beauty care brand.

“We have a program for independent stores where we focus our promotions on four items every 60 days,” says Ken Denney, Davenport’s vice president of sales. “Value brands are definitely strong sellers in this economy.”

It is difficult to ignore the fact that private label products have become more popular than ever in today’s economy. According to Rogers, 97 percent of U.S. households currently have at least one private label product in their pantry, and nine out of 10 people perceive private label products to be on par with national brands.

“Stores know that the dominant brands are important to consumers and these won’t be eliminated. Private label products are not competing against these brands,” says Dave Rogers, executive vice president of Stamford, CT-based Daymon Worldwide, a leading private label brand broker and marketer that assisted 7-Eleven in developing its 7-Select private label program. “At the same time, it pays to look at a category and incorporate store brands where it makes sense.”

Private label programs are increasing in all retail channels, but none as dramatically as convenience stores, Rogers says.

“Consumers are trying to find ways to conserve and get more for their buck, and retailers have done a good job responding to that,” says Bishop. “Private label is a value strategy that provides between a 20 and 30 percent discount when compared with national brands.”

Dallas, TX-based 7-Eleven, which now has more than 36,000 stores in 14 countries, launched its 7-Select brand program in November of 2004, starting with non-food items. In May 2008, the chain did a big push with chips, snacks and cookies. This past March, the program was significantly expanded.

“We now offer 240 products across all convenience store sales categories, with the exception of beer, tobacco and publications,” says Tom Gerrity, 7-Eleven’s processed foods product director.

7-Eleven’s proprietary branded products are priced between 10 and 20 percent less than the national brands in its stores.

The private label program is currently meeting its goals in terms of the number of items introduced, forecasted sales and gross profit dollars.

Gerrity attributes the program’s success to the increasing number of c-store consumers who are seeking value. “Industry data indicates that 91 percent of customers surveyed will continue to buy private label brands even after the economy improves. Our 7-Select brand provides us with a point of differentiation, and we can offer our franchisees higher gross profit margins with these products,” he says.

Though consumers expect to pay more for convenience at c-stores, getting in and out quickly is not the draw it was in the past.

“In this economy, all retailers need to be more price competitive,” Rogers says.

Whether incorporating second-tier lines, distributor control products or store brands, these days it pays to be price competitive.

The retail division of Valero, a San Antonio, TX-based chain with more than 1,000 convenience stores concentrated in southwest Texas, New Mexico, California and Arizona, unveiled its Fresh Choices store brand about three years ago. Stores reported record sales for 2007/2008.

“We recently began increasing our offerings and now provide snacks, soft drinks, foodservice products and beverages,” says Bill Day, Valero’s executive director of media relations.

The program has been successful, despite the challenge of competing with well-known brands.

“We decided to go with non-cola beverages, due to the tough competition. Our store brand fruit-flavored drinks and bottled water are sold at a much lower price point,” Day says.

Valero’s 132,000-sq.-ft. distribution center in San Antonio is managed and supplied by South San Francisco, CA-based Core-Mark.

Because consumers are still brand oriented, many caution that retailers must be selective when choosing which items to private label, especially stores with limited space.

This channel can learn a lesson from drug stores, which have emphasized private label in some segments and not in others.

Whitehouse Station, NJ-based Quick Chek, a family-operated convenience store chain with more than 100 locations in New Jersey and southern New York, emphasizes value with its ‘Q’ store brand.

“We have incorporated private label products in the grocery segment and foodservice,” says John Schaninger, Quick Chek’s vice president of sales and merchandising. “We’re looking to expand the program as our focus on value continues.”

Unique merchandising
Retailers and wholesalers are becoming more adept at category management, which has created unique merchandising opportunities.

“The industry is looking more closely at share of store and analyzing product mixes,” Scardina says. “If there is an item on the shelf that’s not turning and generating profits, retailers are more attuned to replacing it quickly with a more profitable product to generate more revenue.”

Newer and more effective display vehicles, like multi-vendor end caps (MVEs) and free-standing theater racks, are helping c-stores to better capitalize on limited floor space.

“Stores are more effectively grabbing consumers as they walk in and getting them to shop the environment. A lot is being done around point of interruption in order to grab shoppers within the store and increase the market basket at retail,” Scardina says. “There is a small window of opportunity, so those stores that can accomplish this are reaping the rewards.”

7-Eleven’s 7-Select brands are located on the front end caps during the initial introduction as well as within the shelves, next to similar branded products.

“Periodically, we will have off-shelf displays, like temporary corrugated floor displays,” Gerrity says.

At Quick Chek, point of sale displays help get the message across.

In terms of positioning, store brands receive premium shelf space alongside branded products in Valero’s stores.

Cross promotions that pair value items and name brands also is an effective marketing method.

“7-Eleven recently had a meal deal that included a sandwich, soft drink and its 7-Select chips. This promotion was instrumental in growing these chip sales,” Rogers says.

The takeaway from these promotions is a better price point for customers and increased sales of a profitable item for retailers.

“Limited shelf space helps weed out weaker items and allows retailers to focus on what consumers want to buy,” Rogers says.

The decision-making process isn’t always easy, but focusing on consumer preference gives stores a leg up on the competition.

“Profitability won’t decrease if other brands are pulled from the shelves, because consumers won’t leave a c-store if they don’t find the secondary brands they’re searching for,” Rogers says.

Co-branding with notable companies, like Disney, also has become more common in the c-store channel.

To make sure the product mix is suited to a store’s demographic, retailers are instituting planograms.

“We’re finding that good planograms are now at the top of the list. Stores are staying on top of this, because it’s important to get every dollar out of each section,” Denney says. “The execution isn’t easy, but we’re working hard to do this for retailers.”

Merchandising success can be measured by stores that are the most aggressive in delivering value.

“A value price strategy may mean the everyday price is the same, but a store is offering candy bars two for $2, rather than $1.39 each,” Bishop says.

C-stores have also seen continual growth in less visible and simple merchandising tactics like club, fountain and coffee cards. These encourage repeat business, awarding customers a free or discounted product after a certain number of products are purchased.

“These programs are a low investment and easy to execute,” Bishop says.

Loyalty programs are being paired with electronic and direct mail campaigns to more effectively reach customers.

Patrons fill out a postcard with their name, mailing address, phone numbers and e-mail information. Retailers maintain a database with this information, which allows promotions, coupons and other offers to be sent via text message, e-mail or direct mail.

Profit replacement
Offering value and unique merchandising only work if more emphasis is placed on the money-making areas of the store. With increasingly stringent tobacco regulations, escalating fuel costs and costly interchange fees, the burden is on distributors and retailers to determine each store’s profit centers.

“The industry is at a major crossroads,” Bishop says. “C-stores need to reinvent themselves and look for alternative forms of revenue.”

With the lines blurring between retail channels, Valero’s new concept stores feature wider aisles, higher ceilings and 5,500 sq. ft., which is 1,000 to 2,000 sq. ft. larger than its typical stores.

“Our newer sites look more like grocery stores, because these are the stores we are competing with,” Day says. “We’re expanding in terms of the size of our stores, the number of store sites and the products we’re offering.”
Lately, much of the focus has been put on Valero’s foodservice program, which is a growing category for the chain.

“To address this, we’ve stepped up our foodservice program, conducting more food prep on site and expanding our prepared food menus at the store level,” Day says.

Valero’s proprietary foodservice program includes an on-site bakery program and sandwiches that are prepared at a central commissary. Stores also offer traditional c-store foodservice items, including hot dogs and nachos.

“In addition, we now offer more fresh foods, like fruit and salads, rather than just packaged foods,” Day says.

When looking at profit replacement alternatives, coffee is where many stores start from a foodservice perspective because it’s less complicated to execute than fresh food.

“McDonald’s upscale coffee concept has been helpful for c-stores, because this channel is not at the price disadvantage that it was two years ago,” Bishop says. “There is more awareness among consumers who were less inclined to purchase convenience store coffee in the past.”

Addressing value across the entire store, 7-Eleven has targeted its dairy category as well as foodservice, providing a fresh-food bundle with a 99-cent chips or drink.

Thinking out of the box has become inherent to survival. For example, instead of being designated for logs or mulch as in the past, outside space is being leased out to vendors to help increase store revenue.

“Convenience stores are involved in more novelty-type items that generate extra dollars to help compensate for the fuel, beer and cigarette categories,” Denney says. “As a result, there is a lot more interest in general merchandise and non-food items.”

Quick Chek is currently reviewing its product mix and looking at profit percentages per item. “The focus is on what customers want and what we are best at providing,” Schaninger says.

Distributors also are responding to the need for c-stores’ profit replacement strategies.

“Everyone is evaluating their inside gross margin opportunities and really fighting in today’s environment to replace lost profits associated with volatile fuel margins and tobacco,” Scardina says. “We’re seeing more emphasis on the foodservice category to gain gross profits, in addition to confection items, which offer one of the highest gross profit opportunities.”

With c-stores trending toward value offerings, stepped-up merchandising and profit replacement options, this channel will better weather the economic storm and come out stronger on the other side.

Lisa White, a regular contributor to Distribution Channels, is based in Cary, IL.