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Inside the Box
Solutions for distributor and retailer success in a rough and tumble environment
By Bob Gatty
What will the "convenience store of the future" look like? Who will be the target market? How will that change things? Is Bubba still in charge, or is Betty moving into his turf?
Some of the industry’s most aggressive chains clearly are focusing on Betty, who David Bishop, a national consultant to the convenience store industry, believes is the secret to future success even more so than old reliable Bubba. He advises companies to make the box that is the store as attractive as possible through design, décor and merchandising to attract Betty and her friends.
But others say, "Hey, wait a minute. We can’t all do that."
Thus, Kit Dietz, another top industry consultant and former convenience store distribution company president, believes the solution for long-term success for many companies is much more practical and basic—determining how to use retail space inside that box as intelligently as possible and maximize profits by making tough business decisions based on what will produce now, and by how much.
Not all retailers, Dietz says, have the resources to develop the larger, glitzier stores. For those who cannot, including many small, independent operators, the emphasis must be on determining which product categories, brands and SKUs will provide the most margin and then concentrating on them. For example, warehouse-delivered snacks will often deliver more margin than DSD products, he says, so giving them preferred merchandising treatment can mean higher profits.
And don’t forget about cigarettes and other tobacco products, Dietz advises, noting that drug stores and supermarkets have made it tougher for smokers to buy their smokes, almost ceding that still profitable business to c-stores. "Nothing can replace cigarettes and the role they play in the supply chain," says Dietz. "They are small cube, high volume, high profit products. Profit in the category may be declining slightly, but that’s only when people are not doing the right thing. We need to ride cigarettes as long as we can."
So, while we hear a lot about the importance of "thinking outside the box" these days, in this rough and tumble, competitive environment in which c-stores and their distributors operate, what happens inside the four walls of that typical 3,000-sq.-foot unit can be the difference between success and being consumed by competitors. Obviously, distributors have a huge stake in the outcome.
Some key numbers
According to the 2005 State of the Industry (SOI) report by the National Association of Convenience Stores (NACS), total convenience store sales last year increased by 17.1 percent over 2003. In-store sales rose by 13.7 percent compared to a 6.3 percent boost in 2003, while motor fuels sales jumped by 18.9 percent, a decline from the 21.8 percent increase in 2003. Total 2004 sales reached $394.7 billion, up from $337 billion the previous year. In-store sales accounted for $132.1 billion of that total, with $262.6 billion generated by motor fuels.
Industry profits of $4.989 billion compared to $4.044 billion in 2003. Pretax profits per store were up 17.6 percent to $36,095, with in-store sales generating a profit margin of 29.7 percent, down from 30.8 percent in 2003. "There is some feeling that the motor fuel prices forced customers to tighten up their spending," NACS SOI report states. "Retailers responded by accepting lower margins to move product."
Cigarettes continued as the top product category for c-stores in 2004, generating 34.7 percent of sales. C-stores held a 62.3 percent share of the cigarette market, far outdistancing any other format, with tobacco outlets the next closest competitor at 12.4 percent, a decline of nearly 1 percent over 2003. For 2004, cigarette gross margins were 19.5 percent, down slightly from 19.8 percent in 2003.
Motor fuel margins in cents per gallon set a record in 2003 at 13.7 cents, but that declined to 12.7 cents in 2004, reflecting higher prices and reduced volume demand for less profitable lower-octane fuels.
Only time will tell how this year’s skyrocketing fuel prices play out, but there is serious concern that fuel costs that were fully $1 per gallon less in August 2004 (before the devastating impact of Hurricane Katrina) will reduce disposable income and thus dampen in-store sales of impulse items, further forcing retailers to accept lower margins—unless they can find other ways to preserve those sales and maintain profits.
But Dietz, president of Dietz Consulting, Huron, OH, urges distributors and c-store operators to keep their eyes on the ball, stressing that retailers large and small, upscale and conventional, must pay attention to the basics in order to succeed.
"Instant consumables is what the convenience store is all about," he says, "and optimizing category management and encouraging impulse buying makes a lot of sense." Space in a convenience store is the number one cost, and committing limited space to a category that is not going to bring a lot of return for some years is a questionable strategy for many companies."
Dietz was referring to a suggestion that expanded foodservice emphasizing healthy offerings might be a solution for companies pressed with competitive challenges and reduced profits from traditional in-store product sales. "Devoting space for healthier choices is difficult because of the return that can be provided by the snack multi-vendor endcaps (MVEs)," he says. "Do you invest in space for the long term? You don’t have the luxury to build a new category over time."
Feminine allure
However, David Bishop, Willard Bishop Consulting, Barrington, IL, takes a slightly different view. He says there are three core components that c-store operators should consider today:
- Going Upscale
- Focusing on Fresh
- Appealing to Females
Growth, he says, is measured in units sold, and it is the female customer who can deliver that winning margin for c-stores.
"The female sector is under developed," he contends, because convenience stores have traditionally spent their time cultivating Bubba and his pals, and in recent years perhaps, his cousin, Commuter Joe. "But it is the female who will reward the retailer by spending more dollars inside the store." In fact, Bishop says females typically spend from 10 to 12 percent more than men.
Plus, he adds, products that females tend to purchase are among those with the highest profit margins in the store, such as general merchandise and health and beauty care.
"Females also tend to be more loyal to a store," Bishop says, cautioning, however, that such loyalty must be cultivated by providing an environment more inviting than in the past—cleaner, better lit, better kept and better merchandised, with brighter interior colors.
By focusing on fresh foodservice products, Bishop contends c-store operators can increase profits and develop a business that will grow. According to the NACS SOI, 52.9 percent of companies in their "same store trends" survey have prepared food on-site and 15.5 percent sell branded fast food. Foodservice sales increased by 5.5 percent in 2004 over 2003, providing an overall gross margin of 28.7 percent.
Bishop also contends that providing freshly prepared foodservice offerings gives c-store operators a means of differentiating themselves from their competitors. Consider Wawa, the Philadelphia-based c-store chain known for its hoagies, for example. While those sandwiches certainly helped the company build its reputation and help draw customers from the gas islands into the store, Wawa also offers freshly prepared salads and low-fat wraps, complete with nutritional information for the consumer. Their stores are a model of cheerful décor, well-maintained merchandising – bright, open and clean.
"I think the Wawa and Sheetz models will grow," says Dietz, referring also to the Altoona, PA-based c-store chain known for its ample, vibrant stores that often include restaurants and huge motor fuels areas.
"But it takes a lot of resources to achieve that. They do very well. But the independent doesn’t have that kind of investment capital available." Still, he says, there are "big opportunities in store layout and design, and for better utilization of space in stores," such as the use of warehouse snack MVEs.
"Fresh and inviting foodservice pays dividends elsewhere in the store because of the incremental sales that are generated when a customer purchases a foodservice item," Bishop says, noting that the female shopper is most likely to do that.
Store of the future
The strategy espoused by Bishop appears to be the approach being taken by Sheetz, whose latest store, a 6,000-sq.-ft. red brick unit that opened in Danville, PA, in late August, was described by Executive Vice President Louie Sheetz as "our [Sheetz’s] vision for the future." The chain operates 314-locations across six eastern and mid-Atlantic states.
The new Sheetz location offers customers a "fun, high-energy restaurant-style atmosphere," a company press release says. [Jill, we have a good shot of this restaurant, which you can run near this spot in the story.] There is a bright interior with high ceilings and seating for more than 40 people. Customers will experience digital menu boards that show food selections, which can be easily and quickly ordered at electronic touch-screen order kiosks.
"We have blended the best from our convenience restaurants with what our customers have told us they want from a convenience retailer to create a unique destination that easily fits into everyday life," Sheetz says.
New convenience items include a self-serve bakery, bulk candy and peanut dispensers, cold grab’n go case, Teazzer iced tea and self-serve milk shakes. Customers can also place their food order from touch-screen terminals located at the gas island while fueling with Sheetz' 100 percent guaranteed petroleum products with the added convenience of cash or credit pay-at-the-pump on all fuel purchases.
According to Sheetz, the company is committed to fulfilling its promise of Total Customer Focus (TCF) – the company's customer service mission to provide fast and friendly service, quality products and clean and convenient locations. "We look for great, high-energy people to work in our stores and we train them to be respectful of the needs of our customers," he says.
One of the key strategies to converting motor fuel customers to in-store customers, Bishop says, is to offer a "compelling enough set of products to motivate those customers who buy gas to come inside." Outside signage and promotions are crucial to achieve this, he adds. Of course, providing a way to order food directly from the gas pumps to be picked up inside is another way, enabled by technology.
A similar strategy is being employed by Wisconsin-based Open Pantry Food Marts--decidedly upscale, from the stores to the merchandise selection and approach to customer service.
With 33 stores and four more on tap this year, Open Pantry operates seven "boutique-type" units that deliberately cater to on-the-go, time-pressed female customers. Jim Fiene, Open Pantry senior vice president, says the strategy is intended to establish an overall competitive advantage as well as to counter pressures from hypermarkets.
"We adopted the strategy about a year ago," he says. "Our industry is known for focusing on its number-one customer, the male between 18 and 40. Our goal is to bring the female consumer, who is a very discerning, quality-oriented boutique-type shopper, into our stores. If we can provide an offering that satisfies her, we will get the male customers as well, and that will help us build our business and maintain a quality offering."
The upscale units now being operated by Open Pantry include soaring light-filled atriums, leather seating, internet-linked computer and Wi-Fi service, along with foodservice offerings that include branded specialty sandwiches similar to those sold at Green Bay Packers and Milwaukee Brewers games. "We have devoted a lot of space and effort to this and it’s working," Fiene says.
A key ingredient, he adds, is coffee.
The stores’ Willow Creek coffee, according to Fiene, is "a great offering" that competes with Starbuck’s quality, but at a much lower price -- $1.29 to $1.39 per cup. In those stores, coffee is generating 20 percent of total sales, compared to an industry average of 3 percent, according to Fiene, who says the entire company is being "transformed" into the program.
Open Pantry uses the marketing theme, "You need time. We can help at Open Pantry." It is targeted specifically at women, Fiene says, noting that today, with jobs and families to care for, the most valuable commodity for them is time.
Customer focus
"What the wholesaler and retailer need to do is focus on how they can do a better job of creating value for the end consumer," Bishop says. "It may be with promotional pricing over the short term to increase demand, but over the long term, it must be to develop an offering that will maintain relevancy with the customer so they will make the decision to spend their money with them and not elsewhere. The retailer that has created a unique niche in the marketplace will be more relevant to the customer, and will insulate themselves against the high cost of fuel."
That’s why it is so important to understand the "behaviors of the customer, according to Dan Raftery, president of Raftery Resource Network, a long-time food industry consultant based in Antioch, IL. "You’ve got to have a handle on your customers’ lifestyles and behaviors."
Beverages may be a good way to attract customers inside, Raftery says, and maybe coffee is the thing for harried commuters who want to stop for gas as well as coffee on the way to work. With the right coffee offering, those customers can be enticed into the store every morning—not just once a week when they stop to gas up.
"These are called convenience stores for a reason," Raftery says. "Something needs to make customers pull off. It needs to be a planned habit kind of thing."
Raftery recommends simple, basic tools to understand those behaviors. Simply ask customers who stop what they would like to see, he advises. Or conduct more formalized focus groups. But above all, c-store operators need to figure out how they can connect with the consumer.
How can distributors help?
"The model is the wholesaler in the grocery industry who serves the independent retailer with a variety of services besides warehousing and delivering groceries," he says. "If, as a distributor, you are not doing it, you might want to think about how you can help your c-store customers get in tune with their customers."
All about convenience
Thomas Joyce, vice president, customer and industry affairs at The Hershey Company, believes being good at the basics is still essential.
"Safe, clean and convenient are the keys to attracting the consumer," he says. "The c-store operator needs to remain competitive on price, but what they have is convenient locations and other product offerings (besides motor fuels) all at one location. They need to do what they do right and do it better than the next retailer. Don’t focus on what the other guy is doing, but on what you do and do it better."
Joyce emphasizes the importance of the distributor staying abreast of consumer trends and working in close partnership with his retail customers. "The distributor must change with the consumer and provide not only the goods, but also the services their retailer needs to remain the destination of choice by the consumer."
"In my opinion," says Joyce, "gas prices will not decline. The operator is still making money on gas, but their new competitors, Wal-Mart, Sam’s Club, Costco, Albertsons, etc. are all discounting their price of gas to try to get the consumer inside the store. It is a loss leader. That is the challenge for the c-store operator. Is their in-store offering attractive to the consumer? The distributor’s role is to stay current on product offerings and provide the service to help with in-store changes and deliveries."
Open Pantry is served by McLane Company, Inc. as well as Lipari Foods for foodservice. "Our distributors are critically important partners for us," Fiene says. "They do an outstanding job."
Bob Gatty is a writer and editor based in Poolesville, MD. He can be reached at bob@gattyedits.com.
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