"Just look around—there is a real opportunity."—Interview respondent, 2002

All indicators show foodservice to be the major growth category in the convenience store industry. Its margin characteristics are right, and the need for a new growth opportunity is present.

In today’s competitive world, supermarkets, superstores and discount club stores are beginning to offer gasoline pumps—traditionally one of the main attractions of convenience stores to harried, hurried shoppers. The NACS 2002 State of the Industry study reports that overall convenience store industry profits were down 24.6 percent. With motor fuel being sold at discounted prices by the competition and the tobacco/cigarette category providing less margin, the convenience industry is at competitive crossroads. In an effort to fight back, many convenience store operators are turning to meal solutions to capture profitable sales and attract customers.

A spokesman for one of the largest convenience store companies, 7-Eleven, said in December 2002 that it expects "fresh food to represent a pretty meaningful percentage of our growth." He added that the new fresh-made foods offered by 7-Eleven nationwide include everything from high-end seafood salads to microwaveable meals like lasagna.

Sheetz Inc. also is proud of its successful meal solutions strategy. To strengthen its successful sandwich and sub program, Sheetz is now testing a new touch-screen technology that allows customers to order their sub or sandwich while they pump gas.

Kevin Coupe of MorningNewsBeat.com points out that, although meal solutions account for only 13 percent of convenience store sales (excluding gasoline sales), they generate 25 percent of the profits for c-stores. Additionally, they increase store traffic.

The increased financial incentives and traffic flow are leading many convenience store operators to get serious about jumping on the foodservice bandwagon. The move is an effort to stay profitable in the face of extreme competition from supermarkets, drug stores and superstores, as well as the declining tobacco/cigarette margins.

The new focus on foodservice appears to be part of a trend nationwide of convenience stores weaning themselves away from a dependence on gasoline sales for survival. For example, Thornton’s of Louisville, KY, said in a recent announcement that it was aggressively seeking foodservice as a growth category. Its strategy: Zero by zero-seven. In other words, zero reliance on gasoline margins by the year 2007.

Much media attention has been focused recently on how convenience stores are positioning themselves as a provider of meal solutions for their local community—and the reasons behind this shift. According to the 2002 NACS State of the Industry, foodservice is considered a growth category for the industry. The survey notes that approximately $12.7 billion convenience store sales dollars can be attributed to the foodservice category. The study also tracks the sharp increase in the percentage of stores with food prepared on-site: 73 percent in 2001—up sharply from the 62 percent of the previous year.

Methodology
To develop an overall picture of the foodservice opportunities afforded convenience distributors, the American Wholesale Marketers Association (AWMA) commissioned Karen Ribler, president of KJR Consulting, to conduct a research study. The objectives of the project are to shed light on

• the degree of opportunity foodservice offers the convenience channel;
• the level of foodservice involvement among AWMA’s member companies; and
• the requirements and issues foodservice presents to distributors.

The study was initiated in May 2002 with the content guidance provided by a member taskforce and the project’s sponsors. Taskforce members include representation from Merchants Grocery Co. Inc., GSC Enterprises Inc., Cash-Wa Distributing Co. Inc., J. Polep Distribution Services, Head Distributors (now a division of Fleming Inc.), Dearborn Wholesale Grocers L.P, Spartan Stores Inc., Burklund Distributors Inc. The project’s sponsors include Dot Foods Inc., General Mills Inc., Integrated Data Solutions, L.L.C., and Trade Dimensions.

To document the level of foodservice activity within the AWMA membership and to identify strategies used to harness the potential offered by foodservice, two methodologies were employed—a paper-based questionnaire and in-depth telephone interviews.

The survey questionnaire was designed to be self-administered and contained 25 multiple-choice questions. The last question asked if the respondent was willing to participate in a follow-up interview to explore the organization's strategies and experience with foodservice more fully. Forty-eight percent of the respondents were willing to participate in the follow-up interviews, which were conducted in August and September.

All 400 AWMA members were faxed the questionnaire in early June and mailed an additional copy two weeks later. Sixty-six organizations responded--a 17 percent response rate.

Survey Findings
Of the 66 organizations responding, 56 said their company offered foodservice products and services. This represents 85 percent of the sample.

The vast majority of the membership responding to the survey questionnaire—83 percent —expressed their belief that foodservice offers a future growth opportunity for their business. Another very impressive 81 percent indicated they think foodservice offers a growth opportunity for their business today.

Telephone interviews with 22 member companies provided insights on the strategies employed by convenience distributors that are entering into foodservice or are expanding their current operations. As one interview participant said, "Offering foodservice products is different, not necessarily harder."

The survey found that member companies are using one or more strategies to facilitate growth in foodservice, address warehouse limitations, and minimize the risk of entering the foodservice business.

Warehouse space and operations are major considerations among convenience distributors. Products warehoused or offered vary by region, by customer and by strategy adopted by the company. Addressing temperature-control requirements, implementing product-handling and food-safety procedures, and providing product knowledge are among the issues acknowledged as key to profitability.

The study revealed optimism mixed with concern. Finding a way to serve the customer successfully was a theme running throughout the strategy discussion. The strategy chapter provides pros and cons of each approach.

Future Focus
The NACS 2002 Sate of the Industry Report underscores the high velocity of items in the foodservice category, noting an "all other foodservice" inventory turn rate of 53.3. This puts foodservice in the top 10 movers in merchandise sales.

As NACS 2002 Chairman Hank Armour stated in an industry address, the c-store future rests in holding its convenience edge—what made it different and profitable in the first place. If c-stores capitalize on their accessibility and offer top-quality portable meals, they—and their distributors--can ensure increased customer traffic, sales and profits. Add in the potential for good margins and quick turns, and the convenience store channel has a winning combination.

For the convenience distributor, this category promises enormous growth. It also presents real challenges and risks, which are outlined by the AWMA distributors themselves in the following chapters. To some companies, the magnitude of the challenges and risks may be daunting.

To those companies that are committed to implementing foodservice, it is full speed ahead. For them, foodservice represents the future. And they consider the worst risk is being left behind, while others move forward aggressively in building this newest dimension of the convenience store channel.