Rethinking Convenience Retailing
By Mary Ellen Kuhn
Change is constant. Consumers can be fickle. Competitors are everywhere. And the price of gasoline is ridiculous! Such are the realities facing the nation’s 140,000-plus convenience stores.
But still the industry continues to prosper by many measures. Fueled by dramatic increases in gasoline sales dollars, the U.S. convenience industry saw total sales increase by 25.5 percent in 2005 to reach a record total of $495.3 billion, according to the National Association of Convenience Stores’ 2006 State of the Industry Report.
Increased motor fuels sales accounted for 81 percent of the increase in total sales, the report states. In-store sales grew as well, however, up 14.4 percent vs. the prior year for a total of $151.1 billion. Pre-tax profits for the industry increased for the third consecutive year, up 18.2 percent in 2005 for a total of nearly $5.9 billion.
Certainly the soaring price of gasoline brought with it problems for both the consumer and the convenience retailer in 2005, problems that have continued to dog us in 2006.
“Gasoline is a stress for us all — for those who purchase it and those who sell it,” says Jim Fiene, senior vice president of sales and operations for Open Pantry Food Marts of Wisconsin, based in Pleasant Prairie, Wis. “We make as much on a gallon of gas whether we sold it at $2 or whether we’re selling it at $3,” Fiene continues. “The difference is we’re handling a third more money inside of our stores. Our employees are stressed with that, handling that kind of cash.” Losses are higher too, Fiene adds, because it used to be that when a customer skipped out without paying after filling his vehicle’s tank, the lost sale was $40; now it’s $60.
Then there’s the biggest issue of all — the cost of credit. “The high unit cost for fuel means that, in many cases, the credit card company makes more money than does the retailer,” says convenience retailing consultant Steven J. Montgomery, president of b2b Solutions LLC, Lake Forest, Ill.
He explains that credit card fees are linked to the dollar amount of the purchase, while retailer margins are based on cents per gallon. Thus retailers must pay more and more in credit card fees as gasoline prices spiral upward, while their margin remains the same. Compounding the problem for retailers is the fact that the skyrocketing price of gasoline has prompted more people to use plastic to pay for it — 45 percent in 2005 vs. 39 percent in 2006, according to NACS.
In this climate, convenience retailers are taking a long, hard look at their businesses, explains David Bishop, vice president, Willard Bishop Consulting, Barrington, Ill., and an expert in small-format stores.
“More and more retailers are expressing a desire to be less — or not at all —dependent on gasoline for profits,” says Bishop. “That means that they have to get the in-store business model right.”
Business models that position themselves to meet the “evolving needs and desires of consumers” will be those that flourish, he continues.
Confectioner’s cover story retailer, the aforementioned Open Pantry, is a case in point. The chain’s top executives have devoted considerable time to rethinking their version of convenience retailing and are moving aggressively to reinvent their business via upgraded food and coffee offers, shopper amenities, an expanded product assortment and vibrant new décor.
“What Open Pantry is doing is very interesting because it’s potentially signaling the way that retailers are working to redefine themselves,” Bishop concludes.
One thing that did not change in the convenience arena in 2005: Candy remained a strong c-store performer, coming in at No. 6 on the list of top 10 product categories. Candy’s share of in-store sales was 3.6 percent, up from 3.4 percent in 2004.