Convenience

Gasoline prices, credit costs and progressive thinking have helped fuel a move toward reinvention among the nation’s savviest c-store operators.

Channel Leaders*
Chain Annual Sales
(in billions)
1. 7-Eleven$13.0**
2. Couche-Tard$8.8**
3. Wawa$5.0**
4. The Pantry$4.4
5. RaceTrac Petroleum$4.0**
*For 2005
**Estimate by Stores Magazine
With 140,000-plus stores nationwide and plenty of prime real estate, the convenience channel is in the right place(s) to satisfy the demands of impatient, time-stressed shoppers.
But for much of 2005 and 2006, soaring gasoline prices and margin-deflating credit costs stressed c-store operators. Then there is the mounting competitive threat from other channels — supermarkets that have added fuel pumps and drug store chains stocked with all the grocery fill-in essentials.
Bright Idea!
Because candy is such a fast-moving category with new items introduced throughout the year, retailers with set plan-o-grams can have a tough time working the items in. Consultant Steve Montgomery, president of b2b Solutions LLC, Lake Forest, Ill., has a suggestion for coping with this reality.
"We advise our clients to leave space for new items in their plan-o-grams and label it as such,” says Montgomery. “This may mean the new line extension is not next to the other items in the line/brand, but customers quickly learn to look for new items in this area. Once an item has proven itself worthy of shelf space, then it can be cut into the plan-o-gram during the next reset."
Little wonder then that the savviest players have begun to re-think business strategies and to reinvent store formats. British retailer Tesco is expected to shake up the convenience retailing landscape in 2007 when it unveils its Tesco Express stores, noted for top-notch fresh prepared foods, on the West Coast. There’s plenty of homegrown innovation afoot as well. Altoona, Pa.-based Sheetz Inc., has introduced a 10,000-square-foot convenience restaurant concept that offers patrons food options ranging from brick-oven pizza to gourmet salads and Panini sandwiches. The new format from Pleasant Prairie, Wis.-based Open Pantry Food Marts of Wisconsin, woos shoppers with free wi-fi, gourmet coffee and aesthetically appealing décor that includes red leather chairs for lounging before a beautiful limestone fireplace.
“We hope it’s appealing to women and to the younger generation because that is the incremental customer that we want to have comfortable in our stores,” says President and CEO Robert Buhler. “I don’t think that segment of the business has been appropriately focused on and catered to.”
So committed to reinvention is Open Pantry that the chain this summer announced plans to sell off up to 10 of its sites in order to generate revenue to invest in developing new-format stores. The new stores will be located in flourishing communities in the corridor between Milwaukee and Madison, Wis., two cities where the chain already has a presence.
At press time, seven of the chain’s sites had been contracted to new owners. “We could sit on them and enjoy the cash flow, and life would be good,” Buhler reflects. “But the good retailers, I think, continually look at their portfolio and continually look at getting out of scenarios that may not be optimal for growth.”
Forces of change
With gasoline prices in the vicinity of $3 a gallon for much of 2006, c-store operators faced higher losses as more customers skipped out without paying, as well as higher credit costs. Not only did more customers make gasoline purchases with plastic — 45 percent in 2005 vs. 39 percent in 2004, according to the National Association of Convenience Stores, but retailers’ credit costs spiked because credit card fees are linked to the dollar value of the purchase. Thus retailers paid more to credit card companies, while their margins remained the same.
C-Stores: The Peak of Candy Performance

The convenience store channel is tied with mass for its 14 percent share of the confectionery market. But c-stores can be especially proud of their even stronger sales gains, the strongest, in fact, of any single channel.

2005 Data

Convenience Channel Candy Sales: $3.8 billion
Candy Sales Change:
8.8%
Share of $27.9 billion Confectionery Market:
14%

2006 Data

(based on 52 weeks from July 2005 to June 2006)
Convenience Channel Candy Sales:
$4.1 billion
Candy Sales Change:
7.2%

Source:
Sales figures are compiled by National Confectioners Association (NCA) based on input from Information Resources Inc. NCA/CMA Monthly Shipment Reports and U.S. Department of Commerce
That scenario is persuading many retailers “that they must be successful at running their stores and that they cannot rely on gasoline for the historic profits it brought,” says consultant Steven Montgomery, president of b2b Solutions LLC, Lake Forest, Ill. “Many of the changes seen today are the result of this shift — larger stores, more services being offered, the emphasis on foodservice and so on,” Montgomery continues.
“More and more retailers are expressing a desire to be less — or not at all — dependent on gasoline for profits,” agrees David Bishop, vice president, Willard Bishop Consulting, Barrington, Ill., and an expert in small-format stores. “They have to get the in-store business model right” in order to reduce the pressure for profits at the pump, he emphasizes.
Jim Callahan, director of marketing for Geo. H. Green Oil, a Fairburn, Ga.-based fuel supplier, which owns about 50 c-stores, agrees that staying profitable in the convenience business is not a slam dunk.
One strategy that Green Oil is experimenting with is developing a large retail space and leasing out portions of it to other businesses. In Fairburn, the chain rehabbed a 17,000-square-foot building, in which the company’s c-store occupies just 4,000 square feet. The rest of the space houses restaurants and other businesses.
Getting the tenants to cover the overhead, has worked out “really, really well for us,” says Callahan. “We’re looking at doing more of that.”
Shoppers want value
Although the price of gasoline has recently dropped to closer to $2 than $3, consumers remain very value-conscious, convenience retailers report.
“We are noticing that people are starting to give a second thought as to whether they want to make that additional purchase,” says Callahan.
To combat that mindset, he has worked extra hard at coming up with really attractive promotions. One of his favorite strategies is seeking out candy display shippers on which the product is within 60 to 90 days of the “purchase by” date. It’s a win/win situation for both retailer and vendor, notes Callahan, and consumers are big fans as well. “They realize that this is a place where they can find a bargain,” he says.
Marie Read, candy, snacks and ice cream category manager for Wawa, Pa.-based Wawa convenience stores, says she’s noticing more consumer interest in value as well, even among kids and teens.
 “We’re seeing that people are going more to the value item. … They feel like they’re getting more value for a peg purchase than they’re getting for a king-size or standard [candy bar],” she observes.
Consultant Bishop advocates a “fair price strategy” for c-store operators. “With a fair price strategy, it’s incumbent not to have the lowest or the highest price so the consumer isn’t walking away from the store feeling that they’ve been taken advantage of,” he reflects.
SWOT Analysis
Strengths
• Location, location, location – c-stores are everywhere
• Progressive players like Canada’s Couche-Tard are acquiring more chains
• In-store sales growth was a very healthy 14.4% in 2005, according to NACS

Weaknesses

• Channel is underdeveloped with teens, women
• Store traffic declined by 4.8 percent in the NACS “Same Store Sample” tracked in 2005  
• Credit costs have increased dramatically and more shoppers are paying with plastic

Opportunities

• Carefully plan promotions with candy vendors to maximize sales and profit
• Promote candy at the pump; it’s a natural for that
• Drill down to the store level to establish an assortment that’s right for the market

Threats

• More big-box retailers (Wal-Mart, Costco, Kroger, etc.) are selling fuel
• Drug store chains like Walgreens have convenient locations, expanded food offerings, as do a growing number of dollar stores
• The cost of building and maintaining viable c-store sites is increasing rapidly

What’s Ahead
Finally, as for the big picture for the channel, Montgomery has this take on it. “I believe the trend will continue to fewer, larger c-stores with an increased emphasis on foodservice and services,” he says. “We have gone from being the industry where build it and they will come was the mantra, to realizing that we have to offer the customer a reason to shop with us.”
Candy's Place in the C-Store
Candy Made the top 10 List Once Again in the 2006 National Association of Convenience Stores State of the Industry Report.
Candy was No. 6 on the “Top 10 Product Categories” list, racking up 3.6 percent of total in-store sales. And at nearly 45 percent, candy’s profit margin is nothing short of sweet. In a list of 25 product categories sold in convenience stores, only ice boasted a higher gross margin, according to the NACS report.
Candy Delivers Dollars
Consultant David Bishop, vice president, Willard Bishop Consulting, Barrington, Ill., shared some key figures from the consulting company’s “2005 Convenience SuperStudy” based on an analysis of three national convenience chains.

230 –
Average number of SKUs in the candy set among the retailers analyzed.

$9.75 –
Gross profit per square foot of space generated by candy weekly, according to the SuperStudy. This compares with an average profit of $5.15 generated by center-of-the-store merchandise. Thus, the retailers tracked were making almost twice the profit on candy vs. other center-of-the-store items.

13.5% —
Candy’s square footage share of sales space. “Its share of the gross profit percentage was 25.6 percent, so anyone doing just a simple share analysis can say that candy delivers more than its fair share of gross profit dollars based on the amount of square footage in the store,” says Bishop.

Source: 2005 Convenience SuperStudy, Willard Bishop Consulting
“Candy is very important strategically,” says consultant David Bishop. “Its economic importance is clear. It’s a growing category; it has very strong margins.” What is more, he continues, “It has the ability to support cross promotions with drinks — both on the cooler and by the fountain. And with its impulse nature, we see its value at the front end and its ability to trigger conversion at the pumps.”
Candy works so well with pump promotions because it has such powerful impulse appeal, Bishop explains, contrasting it with cigarettes. When cigarettes are promoted at the pump, he says, retailers typically use a “price message,” but with candy, it’s not usually necessary to promote on price. “A lot of retailers have been able to maintain full margin,” he says, “because it is a growth category.”
Another bit of bright news with respect to candy promotion is the fact that consumers respond so well to the “two for” strategy for both standard and king-size candy bars, and it doesn’t necessarily require a huge discount for the promotion to work effectively. Bishop cites the example of putting two king-size bars regularly priced at $1.19 each on special at 2/$2. It’s not a dramatic discount, so the margin is still okay, and it also provides an incentive for a higher ring.
As something of a side note, Bishop says he’s observed that in some markets, 7-Eleven stores now are pricing standard-size candy bars at 85 cents vs. a more traditional strategy of pricing on the “9s” – i.e. either 79 cents or 89 cents. “It’s splitting the difference, basically,” says Bishop. “It allows the retailer to take a price increase (vs. 79 cents) that is more gradual, and thus with a lower risk of alienating shoppers.
Candy is such a mainstream category that sometimes c-store operators do tend to take it for granted, Steve Montgomery, president of b2b Solutions LLC, Lake Forest, Ill., reflects.
To maximize its full potential, he notes that, “The key word is ‘plan.’ Plan what you are going to take, where the display is going to go, when it goes in, when it goes out, the price point you intend to use, the promotional materials that you are going to use to communicate the offer to the customers, how you are going to track its effectiveness.”