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The Search for the C-Store ‘Holy Grail’
Convenience distributors and retailers turn to improved foodservice, ‘dollar store’ items, and innovation to attract and hold customers. Having the right product mix is crucial to serving them all, from Bubba to Joe Commuter to Soccer Mom.
By Bob Gatty
In Bossier City, LA, convenience store distributor Harrison Company, Inc., is working every day to help its retail customers meet the conflicting needs of on-the-go consumers for whom the quest for "convenience" often seems to approach the search for the Holy Grail.
"We understand that today the ever-busy consumer can grab a meal or a sandwich, a beverage, a snack, and do some fill-in-shopping, as we constantly review and update our grocery offerings" says the company’s president and chief executive officer, Hal Martin.
But Harrison Company also understands that "convenience" today means more than a cup of coffee or a cold beverage and a bag of chips, Martin explains, adding that consumers want other services that can be handled quickly and conveniently, such as cashing checks, purchasing lottery tickets, making copies of documents, or getting their film developed.
"The consumer is looking for convenience and a mini one-stop shop environment where they can pick up a quality meal or sandwich, a beverage or snack and possibly several fill-in items that are needed at home," Martin says.
That concept helps define Harrison Company’s service to its c-store customers in Arkansas, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. "Our goal is to identify new opportunities that are on the horizon and be a leader in implementation of concepts and new items that will meet the requirements of the consumer," Martin told Distribution Channels.
While convenience store distributors do not define the trends that spur consumer behavior, they must be poised to respond to changing and often conflicting demands. They must help their retailers satisfy the needs of all customers, from "Bubba" to "Joe Commuter" to "Soccer Mom."
Often those needs seem to run contrary to each other, as some of the more traditional, mostly male customers continue to look for smokes, a drink and some chips, while others need coffee and a portable breakfast for their commute, and still others need something quick, but reasonably healthy, to take home for dinner.
"We must understand that convenience is becoming more and more about saving time, plain and simple," says David Bishop, director, Willard Bishop Consulting, Barrington, IL. Bishop is the long-time food industry consulting firm’s leader within its small store format practice.
While convenience is becoming increasingly important to many consumers, c-store competitors are seeking to capitalize, and to move in on what traditionally has been convenience store turf. Gasoline is one such category.
The research firm The NPD Group reports that high volume retailers’ (HVR) share of retail gasoline sales in 2003 was 7.6 percent, up nearly two points from 2002 and from less than one percent in 1998. HVR companies were identified as Wal-Mart, Costco, Sam’s Club, Kroger, BJ Wholesale, Meijers, Albertson’s, H.E.B., and Randall’s.
On top of that, according to the Food Marketing Institute (FMI), 18.1 percent of supermarkets installed gas pumps, last year, up from just 1.8 in 2002. Plus, FMI said 8.3 percent of supermarket companies have opened convenience stores with gas pumps.
Increased competition against in-store offerings also faces convenience retailers and distributors, as drug stores and supermarkets seek to capitalize on the consumers’ increased need to save time. Convenience items are being included in the merchandising mix, helping these retailers fend off growing competition from such competitors as Wal-mart and Target, Sam’s and Costco.
"Most retailers today are looking for some form of convenience," observes Thomas J. Joyce, director of customer and industry affairs at Hershey Foods Corporation, Hershey, PA. "Convenience store operators start with convenience. It’s in their name."
Overall, the c-store industry is healthy. Record 2003 sales of $337 billion were a full 16 percent higher than 2002, producing $4.04 billion in pretax profits, for an increase of 54.6 percent, according to the 2004 State of the Industry (SOI) study by the National Association of Convenience Stores (NACS).
However, "real" growth, after factoring in consumer price index changes, was about 4 percent, and profits were still below those in 2000, which preceded a three-year slide for the industry.
Two potential causes for concern for distributors are found within the NACS study. They involve fuel and cigarettes, two of the most important product categories for convenience stores.
While both convenience store sales and profits increased in 2003, higher fuel prices, on which retailers took a one-cent per gallon margin increase, accounted for a big part of those gains. The industry’s motor fuels sales jumped 21.8 percent to $220.8 billion, a figure that exceeds total industry sales from as recent as 1998, NACS points out. But that growth was driven by a 4.4 percent increase in the number of stores selling motor fuels, as well as an increase of 15 cents per gallon (to $1.55) in the average price. Significantly, according to the NACS SOI, the average motor fuel gross profit margin was 8.8 percent, down from 9.1 percent in 2002.
Meanwhile, price volatility continues, and uncertainty persists due to the war in Iraq and concerns about the overall stability of the foreign oil supply.
Cigarette sales averaged $304,250 per store for 34.5 percent of in-store sales, up 1.8 percent to $40.8 billion. Gross margin for cigarettes was 22.5 percent, a decline of 2.5 percent. However, over half of c-store gross margin dollars were attributed to buy downs, RDAs and rebates.
Concurrently, on-line and mail order sales of cigarettes ($750 million in 2001 and $1.2 billion in 2002), continue to pose an increased threat to c-stores, and, in turn, their distributors.
"When smokers stop going to convenience stores to buy cigarettes," the NACS study says, "they also leave behind related beverage sales, snack sales, foodservice and motor fuels sales, among others."
Industry consultant Richard Meyer, quoted in the report, projects that the loss of as few as 80 cigarette pack customers in a year can turn a store with average profits into one that is unprofitable.
Savvy distributors are fighting back.
"In unison with our customers and suppliers, we have identified several opportunities to attract consumers into retail outlets," notes the Harrison Company’s Hal Martin. The first, he says, is foodservice.
Focus on Foodservice
The NACS SOI study showed that 2003 c-store foodservice sales increased by 13.3 percent to a record $15.2 billion, making it the number two in-store category behind cigarettes. Foodservice generated a gross margin of 21.3 percent, second only to cigarettes and substantially ahead of the number three category, packaged non-alcoholic beverages, at 15 percent.
"Spearheading the strong growth in foodservice was a 13.9 percent increase in the combined food prepared on-site and commissary/other packaged products (includes packaged sandwiches) categories, as well as a 13.3 percent increase in hot dispensed beverage sales, particularly coffee and specialty coffees," the NACS report said. Cold dispensed beverages (up 11.2 percent to $2.2 billion) and frozen dispensed beverages (up 13.9 percent to $1.4 billion) also saw strong sales increases.
According to the study, 80.23 percent of convenience stores sell food prepared on-site, and 78.75 percent sell commissary/packaged sandwiches. However, serving "dashboard diners" with coffee, sodas and hot dogs or prepared sandwiches is considerably different from providing families with takeout food for dinner, notes Martha Russell, president of Clickin Research, which partners with NACS on its SOI study.
"I think it’s a significant opportunity for convenience retailers, but the operational challenges and the marketing challenges are significant," she says. "Stores and chains that are well-run and that have good training programs, and a good understanding of their markets are the ones who are going to be able to do well." Programs can fail if ordering isn’t right and waste is inordinately high, she adds. "You may not be able to recover from that error."
The key, the experts say, is to be smart in the selection of products offered, making sure it matches customer needs, and to provide those offerings in a clean, wholesome and appealing environment.
"There is no reason that c-stores can’t be a convenient meal stop," says Kim Feil, snack and beverage practice leader at Information Resources, Inc. (IRI), "providing the stores are clean, and that the food, like sandwiches and ready-made salads, is fresh. Someone who is on the run might say, ‘Let’s bop in here and get something to eat on the way home from soccer practice.’"
"The convenience of convenience stores, the quick in and out. That’s really what the draw is," contends Karen Ribler, president, KJR Consulting, LLC, a Washington, DC-based firm. "Quick lunch solutions. Quick breakfast solutions. If you’re a destination for coffee, a breakfast tie-in should be able to move."
Hershey’s Tom Joyce believes it’s working. "Go into a Sheetz or 7 Eleven. They aren’t your father’s c-stores. The operators are focused on providing convenience and product offerings that weren’t available 20 years ago. Families are dining in c-stores today. They are becoming destinations."
But Ribler and Clickin’s Russell both caution that with expanded foodservice, food safety is an important concern. "Making sure that food handling is done properly is crucial if the customer is going to feel like the c-store is a go-to place for them," Ribler says.
"I’m saying it’s not a piece of cake," cautions Russell. "The staff has to be trained. And that’s a big hurdle. I think it’s needed, but I also think it’s a significant effort for convenience retailers."
That’s an open door for distributors, Russell suggests. "It takes a significant investment. Maybe there is an opportunity for distributors who are willing to share the risk to help retailers understand their markets so they have the assurance that what they purchase is the right solution."
Consider what Harrison Company is doing.
"Working with manufacturers to identify line extensions and trends, such as the high demand for low–carb items and timely placement of these products will continue to attract customers into convenience stores," Martin says. "We also take a look at the changing demographics of our industry and know that we as a distributor are positioned to meet the needs of the Hispanic population, and their influence on the proper product mix, that will attract them into our stores."
Low Carb or Not…
Feil believes the popularity of low-carb diets is important for c-stores to consider, although Bishop and Ribler believe that "craze" is waning.
"There has been a long-held belief that the c-store shopper is looking for gas, cigarettes, a six pack of beer and some Fritos," she says. "But I believe that perception today is wrong. Many Americans, particularly those on the low carb diet regime, and everybody who is facing the issue of obesity, need some opportunity to obtain convenient products that fit into those needs.
"It is so deadly hard with snacks," Feil says. "C-stores should focus on the between meal occasion and stock low fat and low carb products, in addition to the top two or three regular items in each category, snacks, beverages and candy, to make sure they’ve got a good representation of the highest consumer-demand products.
"We used to say, ‘I’m not going to find anything healthy at a c-store and that’s OK. Well, it’s not OK anymore," she contends.
Feil’s position seems supported by a survey reported in February by Opinion Dynamics Corporation, Cambridge, MA, which said 20 percent of American adults have tried a low-carb diet since 2002, and 11 percent—24 million adults--were still on the diet at the time of the study. Moreover, 19 percent of respondents, or 44 million adults, said they were likely to try such a diet over the next two years.
However, in April the NPD Group’s report, Carbohydrate Consumption Patterns, said Americans still have a "very healthy appetite" for carbohydrates. Virtually none of the 11,000 people studied had cut carbs to the degree recommended by the diets, and only one of four was "significantly" cutting carbs.
Says Bishop, "When you really look at the trend of nutritional items, you’ve got to understand who the convenience store customer really is. I hate to say it, but it’s ‘Bubba,’ male, middle class, age 21-35, often looking for cigarettes. He’s probably less health conscious than much of the rest of the country."
Thus, Bishop cautions against replacing popular proven products in favor of untested low-carb or other "better-for-you" products. "The c-store retailer needs to have a good balance," he says.
That’s a key component of Harrison Company’s strategy. "Whether it be sugar-free candies and snacks, healthy snacks or the plethora of low-carb items that Harrison Company and our retailers now carry in their inventories, these items meet the needs of today’s health conscious consumer and are a viable part of our item mix," says Martin.
But, he adds, "Our core items still make up the majority of products being purchased, but by offering items that meet the nutritional concerns of the consumer, we are able to add incremental sales and create a contemporary image that will attract new customers into the convenience store."
Ask Your Customers
That’s where understanding your customers comes in.
Martha Russell at Clickin Research urges c-store distributors and operators to use store-level research to devise product offerings that meet the specific preferences of the store’s neighborhood. "The customer’s perspective is really what matters--what the c-store means to them," she says.
It’s critical, Russell adds, for store shoppers to know what is available in "their" store, and to be able to count on that. "You may not have a broad range of products, but they need to know what they are looking for will be there."
Tracey Hughes, operations director at Cuba, MO-based Wallis Cos., recently participated in an on-line "cyber conference" with the CSP Information Group. She discussed Wallis’ efforts to integrate shoppers’ viewpoints into the convenience store chain’s business strategy.
There are three components:
- Interactive Marketing. Wallis developed an interactive online database with thousands of shoppers who receive regular discounts via email. The company also established a 400-person customer advisory board that assesses store initiatives and promotions.
- Customer Intercepts. Workers at each of Wallis’ 43 company-run stores are expected to survey at least 25 shoppers a month on various topics, from service at their car washes to the proprietary foodservice program.
- Targeted Discounts. Wallis, a franchisee of On The Run outlets, has concentrated on growing its Speedpass base, noting that users spend 1 1/2 times more than cash customers.
"Speedpass customers are our most loyal customers," says Hughes. "So we wanted to reward them and continue to build that relationship."
‘Dollar’ Programs
A second opportunity identified at Harrison Company to attract and hold customers is the introduction and implementation of "dollar programs," according to Martin.
"Variations to the offerings of the price conscious dollar formats not only meet the needs of the fill-in shopper, but in many instances, have now become a destination that meets the demands of the on-the-go consumer," he explains.
The NACS SOI study noted that general merchandise was fifth among the top five in-store categories last year, following cigarettes, foodservice, packaged beverage (non-alcoholic) and beer.
GM saw growth of 19.1 percent to $5.2 billion, largely due to increased sales of prepaid telecommunications and an increase in undefined items in the "other" general merchandise category. NACS speculated that this stemmed from "dollar-store format type merchandise."
Dollar store items often include household cleaning products, consumable staples like paper towels, batteries and light bulbs; commonly used products like paper, pencils/pens, tape, greeting cards; health and beauty care items such as aspirin, tissues, toothpaste and mouthwash; and even such consumables as cookies, crackers, nuts and candy.
Last January, anticipating the importance of this trend, AWMA commissioned a study by Gerke & Associates, Inc., a management consulting firm.
"In the highly competitive retail environment, convenience retailers must recognize that dollar store chains are likely impacting their sales of general merchandise, grocery and snacks," the report cautioned. Gerke & Associates noted that by carrying dollar store items, c-stores could help stabilize or even increase market share in these categories.
Eighty-one percent of C-store distributors surveyed for the study saw the addition of dollar store-type items as at least a "moderate" or better opportunity over the next five years.
In fact, about 40 percent of AWMA distributor members said they currently handle dollar store products, and 38 percent said they may carry them soon. Only 22 percent had no plans for including dollar store items. However, Gerke suggested that if strong consumer demand continues, many distributors will change their mind.
Encouraging Loyalty
With all of these challenges offered by changing consumer needs and an intense competitive environment, distributors need to find ways to engender the loyalty of their retailer customers, who in turn, need to encourage consumer loyalty to their stores.
"The first step is service," says Hal Martin. "At Harrison, our first priority is understanding and meeting the needs of our customers. The next step is to be there for the customer. Issues arise, that’s the business we are in – ‘problem solving’. We gain the respect and loyalty of our customers when we can assist and bring new ideas to the table and reduce or eliminate the issues that our customers face."
The third way for a distributor to develop loyalty, Martin adds, "is to be honest with our customers. Explain why a situation has occurred and what you are doing to resolve the problem. And finally, follow-up on all questions, concerns and opportunities. Don’t leave the customer hanging! This creates frustration and erodes the foundation of loyalty that has been developed by doing everything else properly."
And what can c-stores, in turn, do to retain their loyal customers?
IRI’s Kim Feil suggests creating a loyalty program where purchases inside the store count towards a discount on gasoline. Of course, that would require scanning, and David Bishop notes that only about one-third of c-stores have that capability.
However, he suggests using a simple punch card to support such programs as coffee or other foodservice items.
But above all, he says, make sure you’re in-stock on the high volume, popular items that people need every day. "Customers will give a store as few as one chance and at the most, maybe three, before saying enough is enough," he notes.
Maybe it’s just as simple as this, note’s Hershey’s Tom Joyce: "Provide the products at prices that the consumer expects to pay and do it in a clean, friendly and convenient environment."
Is that the key to the Holy Grail?
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