The c-store landscape is expected to transform over the next several years, with an increased emphasis on foodservice, high-profit items and service, which will help differentiate the channel.

By Lisa White

Key Takeaways:
 

• A number of changes that will most likely impact the convenience segment in the years ahead include the expansion of foodservice, fuel alternatives, increased tobacco regulation and a greater focus on high-profit items.
• By not losing site of what c-stores do best, these retailers can rise above competitive challenges.
• Retailers need to better leverage consumers’ primary trip missions to drive traffic and increase total sales.
• To succeed in the foodservice arena, c-stores must develop a store within a store that includes proprietary, licensed or franchised brands.

When Southland Ice Co. opened the first convenience store back in 1927, its goal was to sell staples, such as ice, milk and bread.

After World War II, Southland became 7-11, and the chain’s growth exploded. The stores, which were open from 7 a.m. to 11 p.m., began blanketing the suburbs, propelled by the burgeoning automobile industry.

“Our industry grew up around automobiles, and that will continue to be the focus,” says Jeff Lenard, vice president of communications for the Alexandria, VA-based National Association of Convenience Stores (NACS).

Yet, many are anticipating changes that will impact the convenience segment, such as the expansion of foodservice, fuel alternatives, increased tobacco regulation and a greater focus on high-profit items.

Although the number of U.S. convenience stores dropped 0.2 percent over the past year to 144,541 as of December 31, 2009, according to the NACS/Nielsen TDLinx 2010 Convenience Industry Store Count, figures released at the annual NACS State of the Industry Summit recently revealed that in-store sales grew 4.9 percent last year to $511.1 billion.  

“We are seeing a boost in consumer confidence,” says John Dalton, convenient solutions director for Minneapolis, MN-based General Mills. “The c-store is a safe haven to take care of what’s important. Compared with other retail channels, it’s the only one that offers instantaneous satisfaction.”

This may be why U.S. convenience stores still outnumber the cumulative total stores count from competing channels. According to Nielsen TDLinx, there were 35,612 supermarkets, 37,654 drug stores and 27,247 mass merchandiser/dollar stores at the end of 2009.

Maintaining a Competitive Edge

There is no question that today’s c-stores are experiencing increased competition from other retail channels, particularly drug stores like Walgreens, which recently announced its stores are moving into fresh foods and refrigerated items.

This changing landscape will make it harder to differentiate between the two channels in the future, with only fuel and drug sales as the distinguishing factors.
By not losing site of what c-stores do best, these retailers can rise above competitive challenges.

Consumers visit c-stores primarily for drinks, snacks, gas, cigarettes and coffee. The top three criteria for selecting a site are friendly/helpful employees, convenient location and the ability to get in and out quickly, according to C-store Close-up, a report by New York, NY-based Myers Research Center.

“For a variety of reasons, including the number and location of c-stores and the cost of adding fueling infastructures, these retailers are strongly positioned to continue as the channel of choice for gas, drinks, snacks, cigarettes and coffee,” says Scott Dunkley, customer marketing, c-store, at The Hershey Co., based in Hershey, PA.

To best accomplish this, many experts agree that these retailers will need to better leverage consumers’ primary trip missions to drive traffic and increase total sales.

“C-stores should use these categories to cross promote with other, more impulsive categories that can help drive basket size,” Dunkley says. “Bundling is a very effective way to drive incremental sales. Also, loyalty programs should tie in with primary c-store trip missions and give consumers incentives to purchase other items within the store.”

As drug stores respond to the increased competition by big box stores like Target and Wal-Mart that are impacting their health and beauty sales, c-stores need to capitalize on what sets them apart.

“A big differentiator between c-stores and drug stores is service,” Lenard says. “Drug store experiences aren’t very speedy.”

Because drug stores are perceived as c-stores for women, the convenience channel needs to spruce up its image to reach beyond the blue collar demographic to maintain a competitive edge in the future.

“These stores need to offer a reliable, consistent customer service experience,” Dalton says. “It’s important to take care of the ‘loyals’, people the staff develops a relationship with.”

Stores like Wawa and Sheetz are becoming destinations by offering consistency within the chain, which customers appreciate.

“The c-stores that are winning are the ones that consistently deliver on what they promise,” Dalton says. “Consumers need to know what to expect.”

Thinking outside the box in terms of location and selling opportunities also could change the c-store channel dramatically in the next decade.

“For example, c-stores can look at the mobile food cart craze as a competitive threat or as an opportunity,” Lenard says. “How can carts be used in this channel to further convenience offerings? With a low cost of entry, this can be an option, and not just for food, to take this channel beyond what it can currently accomplish.”

As the industry becomes more technologically savvy with digital and social media, such as iPhones and Facebook, c-stores of the future will have increased abilities to reach consumers on the go.

“With this technology, the industry is getting better at corralling and understanding data,” Dalton says. “This makes it possible for retailers, manufacturers and distributors to collaborate and build better plans.”

This data also will help c-stores optimize their SKUs to ensure maximum profitability and sales.

“The importance of SKUs in the store and leveraging the high-profit, high-impulsivity of candy and snacks impacts store layouts in terms of how consumers shop stores,” says Kit Dietz, president of Dietz Consulting in Huron, OH. “Many categories have too many poor performing SKUs.”

Dietz is currently building data to examine how c-store categories are handled to help retailers better determine the appropriate variety necessary to serve consumers’ needs.

“In this channel, variety becomes less important. It’s a matter of looking at efficiencies in the supply chain by focusing on core categories versus emergency categories and how that impacts SKU rationalization and efficient assortment,” Dietz says. “For example, items like toilet paper and laundry detergent are fill-in emergency purchases that people don’t typically buy at c-stores.” Because category management is consumer-driven, successful c-stores of the future will focus on items consumers want to buy and merchandise high-impulse, high-margin items in prime locations.

“C-stores, especially independents, must become more adept at category management,” Dunkley says. “Identifying core items, developing exit strategies, offering the right products and merchandising categories properly is vital to staying competitive in this environment.”

Cincinnati, OH-based Procter & Gamble is on a mission to get c-store retailers and distributors to stock the items consumers are looking for.

“Currently, this channel has most of the best-selling items in only 50 to 75 percent of their stores,” says Marty Monserez, convenience channel leader for Procter & Gamble. “If consumers can’t get our best-selling items at c-stores, they’ll change their shopping habits and go to drug stores and big box stores.”

Traffic Drivers

One category the convenience channel will no doubt continue to dominate is tobacco. Cigarettes continue to lead in-store sales, and the category increased its share to 35.8 percent of in-store sales last year, according to NACS. The rise in sales dollars was driven by the increase in the federal tax on cigarettes to $1 per pack that took effect in April 2009, as well as additional state tax increases.

“Tobacco-only outlets were a huge threat to c-stores at one time, but as state taxes went up and other tobacco regulations took effect, their competitive advantage, which was price, dissipated,” Lenard says.

Like tobacco, motor fuels are still considered an important aspect of c-stores, despite volatile price and profits.

A total of 115,340 convenience stores sell motor fuels, a 0.6 percent increase over 2009, according to the NACS/Nielsen TDLinx 2010 Convenience Industry Store Count. Overall, 78.8 percent of all convenience stores sell motor fuels.

The sharp decline in gas prices from a record $4.11 per gallon in July 2008 to under $2 per gallon by the beginning of 2009 led to a dramatic drop in motor fuel revenues, according to the NACS/Nielsen report. Only 27.3 percent of the industry’s profit dollars came from motor fuel sales, compared to 72.7 percent of profits from in-store transactions.

Many predict the advent of electric vehicles will dramatically alter the motor fuel industry.

“In talking with electric vehicle manufacturers, those offering charging stations are not looking at c-stores as a fueling option,” Lenard says.

This is because speed of service, the hallmark of the c-store channel, does not fit with the 30 minutes required to recharge electric vehicles.

“C-stores will need to look at fueling in the next decade or two and decide what they can do now to handle alternative fueling,” Lenard says. “For example, Israel provides car battery swaps much like propane tank swaps in the U.S.”

Retailers will need to look at different options, since all alternative fueling is handled differently.

“C-stores sell 80 percent of this country’s gas,” Lenard says. “If that drops significantly, we have to look at how to replace this and get people into stores. Progressive retailers are asking questions now. Many experts are predicting, within the next decade, fuel consumption will decrease due to cost.”

Tobacco and motor fuel are strong sales and traffic contributors that won’t disappear tomorrow, but the reality is that these categories may not grow.

“Tobacco and fuel may get people into the lot, but in-store sales pays the bills,” Lenard says.

A New Incarnation

With the instability in the tobacco and fuel segments, a growing number of people are predicting that the future of c-stores may lie in prepared foods.

Foodservice showed strong growth in this channel for 2009, according to NACS, rising to first in terms of in-store margin dollars and second in in-store revenue dollars.

“Many operators are using foodservice as a means to make up lost sales and margins,” Dunkley says. “This can be an effective strategy, especially if operators combine it with bundling and loyalty programs to further drive basket size.”

The importance of foodservice, which includes food prepared on site, commissary items and hot, cold and frozen dispensed beverages, continues to grow, with the category now contributing 20.2 percent of overall industry profits, according to figures released at the annual NACS State of the Industry Summit.

“Any quick-service restaurant (QSR) operator will tell you that their greatest fear is not another QSR, but c-stores that get prepared foods right,” says Ira Blumenthal, president of Co-Opportunities, an Acworth, GA-based consulting company.

Multi-tasking consumers are looking for a place to get gas, milk, candy and a decent meal.

“With QSRs, 65 percent of traffic is at the drive thru and 15 percent is takeout. Considering 80 percent of QSR food being eaten in the car, and the quintessential retailer that caters to cars is the c-store, [the potential is obvious],” Blumenthal says.

Many are convinced that c-stores are poised and ready to win the battle of share of stomach, mind and market if the channel takes the right foodservice approach.

“I believe the future is bright for c-stores that not only embrace foodservice, but also develop a culture that includes hospitality and systems to properly provide these items,” Blumenthal says.

To succeed, many agree it’s necessary to develop a store within a store that includes proprietary, licensed or franchised brands.

C-stores that simulate QSRs in terms of menu boards, menu board graphics, counter personnel and promotional strategies, including bounce back coupons, meal deals, kid’s meals, bundling and combo meals, can compete in foodservice.

“C-stores need to, and are, diversifying,” Lenard says. “More are going towards a model where they are restaurants selling gas, rather than gas stations selling food. The concept of fueling is evolving from outside the store to inside the store, from the driver to the person.”

Although c-stores can never discount the threat of competition in the years ahead, whether it be from a big box or drug store, this channel has many aspects that differentiate it.

With the largest number of selling units across all channels, c-stores should never lose sight of how this tremendous penetration can be successfully leveraged.

“Fortunately, the industry has been very resilient and opportunistic in finding solutions,” Dalton says. “We’ve been agile and nimble, and move quickly compared with other retail channels. The responsiveness and high level of collaboration by retailers, manufacturers and distributors will continue to be very advantageous to the industry.”
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Lisa White, a regular contributor to Convenience Distribution, is a freelance writer based in Cary, IL.

Breaking Down Sales & Dollars
More than 75 percent of in-store convenience channel sales in 2009 were from the top five categories:

1. Cigarettes (35.8 percent of in-store sales)

2. Foodservice (17.3 percent)

3. Packaged beverages (14.0 percent)

4. Beer (7.7 percent)

5. Salty snacks (3.9 percent)

Nearly 75 percent of in-store gross margin dollars in 2009 were from the top five categories:

1. Foodservice (29.7 percent of in-store gross margin dollars)

2. Packaged beverages (17.7 percent)

3. Cigarettes (17.5 percent)

4. Beer (4.9 percent)

5. Salty snacks (4.5 percent)

Source:  2009 NACS State of the Industry survey, powered by its wholly owned subsidiary CSX and based on data from 197 firms representing more than 23,000 stores.

Sidebar

E-Z Mart’s Sonja Hubbard to Kick Off AWMA Show

The American Wholesale Marketers Association (AWMA) announces that Sonja Hubbard, CEO of E-Z Mart, will serve as the Opening Session Speaker during the AWMA Show, Feb. 8-10, 2011, in Las Vegas. During her presentation, Insights & Perspectives on the Future of Convenience Retailing, Hubbard will provide her views on the challenges, changes and opportunities that convenience retailers are facing and how she sees the industry evolving over the next few years. With her background and experiences as NACS Chairman, combined with her role leading a large chain of stores, Hubbards’s remarks will set the stage for distributors and manufacturers to better tackle today’s issues and prepare their businesses for the future.

“We are very excited to have a retailer of Sonja’s caliber as the speaker at our AWMA Show Opening Super Session,” commented AWMA President & CEO, Scott Ramminger. “AWMA is committed to bringing in top retailers from around the country to discuss the forces and trends that are shaping the convenience industry. We are extremely gratified that Sonja has agreed to share her considerable insights. This is a session that no one will want to miss."

Hubbard, who in 2008 became the first woman chairman of NACS will be the first woman inducted into the Convenience Store News Hall of Fame later this year.

Hubbard's list of accomplishments and her service to the c-store industry is lengthy. As chairman of NACS, she was a tireless fighter for important c-store issues, especially unfair transaction fees charged by credit card companies. As CEO of E-Z Mart Stores, she has overseen a complete modernization of the 300-plus store chain. She is also a leader of numerous philanthropy efforts throughout E-Z's five-state market territory of Arkansas, Texas, Louisiana, Missouri and Oklahoma.

The theme for AWMA’s 2011 Show– Tackle Today’s Issues and Build Your Business for Tomorrow – features more than 18 hours of educational sessions including three Super Sessions, concurrent sessions on foodservice, strategic leadership issues and key categories as well as a new track of sessions geared specifically for smaller distributors. More than 200 companies will be showcasing their latest products and services in the expo, where a new Foodservice Pavilion will be introduced. This new area features food products, programs, beverages and equipment and will provide distributors and retailers with fresh new ideas to build their foodservice programs. More information about the AWMA Show can be found at: www.AWMASHOW.com.

Sidebar

Louie Sheetz Reveals Secrets of Success at AWMA Summit

Regarded as one of the most successful and forward-thinking convenience store chains operating today, Altoona, PA-based Sheetz Inc. has been ranked on the Forbes list of Top Private U.S. Companies. Owning and operating more than 378 stores in six states, including Pennsylvania; Maryland; Ohio; West Virginia; Virginia; and North Carolina; the retailer’s revenue exceeded $3.7 billion in 2009

Louie Sheetz, Sheetz’s executive vice president of marketing, will share key ingredients to his chain’s success at AWMA’s 2010 Summit & Business Exchange (ABX). The conference will be held Sept. 13-16 at The Ritz-Carlton in Key Biscayne, FL.  

Created in 1952, Sheetz has evolved from a small dairy/deli to one of the fastest growing, family-owned convenience store chains in the world.

Louie Sheetz leads all areas of sales and business development for the operation, including brand and product development. He also has been instrumental in the chain’s rise to regional and national retail prominence since 1977.  
As vice president, he has led important strategic marketing initiatives, including the development of Sheetz’s foodservice business, the MTOä brand and Sheetz Bros. Coffee as well as the company’s design and development of the Sheetz Distribution Center and the new Sheetz Bros. Kitchen.

At AWMA’s Summit, Sheetz will share the culture of the company’s success — from getting it right for consumers to managing assortment as well as other best practices. – LW