C-Stores Target Changing Consumer Needs

Sept. 21, 2007
What’s happening in convenience stores that matters in your business? Plenty.

What’s happening in convenience stores that matters in your business?

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What do convenience stores and vending and onsite foodservice operators all have in common? All are in the “immediate consumption” business. Over 80 percent of c-store sales are consumed within 15 minutes of purchase. We expect that it’s much the same for vending. Operators in these channels face many of the same challenges and enjoy many of the same opportunities.

Let’s take a closer look at what c-stores are doing lately. It appears c-stores are doing much better than vending and onsite foodservice operators at overcoming challenges and capitalizing on opportunities.

Since c-stores are your toughest competitors, you should be knowledgeable about what they’re doing. We looked at the 2007 State of the Industry (SOI) Report from the National Association of Convenience Stores (NACS).

We have some good news and some bad news for you about c-stores.

First, here’s the good news. C-store operators are under pressure. They face most of the same challenges you do. There are also some unique challenges for these retailers of gasoline, beer and tobacco products.

But there’s bad news for vending and onsite foodservice operators. Especially since these tough competitors are about to get even tougher. Expect to see even more stores – there are about 145,000 convenience stores in the U.S. now. Leading chains are ramping up for growth. Major expansions are in progress. There are lots of acquisitions and consolidations. Some chains are planning to drive store count through franchising (7-Eleven).

And expect to see even better stores. Some are opening convenience restaurants (Sheetz). Foodservice is becoming much more important to the growth plans at convenience store chains (Alon USA).

Fresh food sales are increasingly the point of differentiation for c-store operators (Wawa). And supermarket chains are in the business, too; they are opening convenience stores and selling gas with the full range of products and services (Kroger, Albertsons, Giant Eagle and others).

C-stores are experiencing slower traffic due to fewer visits from customers. The NACS SOI reports that from 2003 to 2006, the number of visits a customer makes is down from 6.87 to 6.69 times in a 30-day period. Fewer visits would mean lower sales. However, c-store operators are learning how to sell more to their customers every time they come inside the store.

Product mix changes in c-stores

High gasoline prices are changing customer behavior. The mix of sales has changed. Many mid-grade and premium grade gasoline users have shifted down to regular grade gasoline. That has hurt fuel margins for c-stores selling gas. And, the rising price of gasoline takes discretionary dollars from potential in-store customers.

To counteract these trends, many c-store operators have dramatically upgraded their foodservice programs. There have also been aggressive moves to enhance the shopping experience through store redesign initiatives. Anecdotal reports from chains where store redesigns were implemented indicate sales increased well above prior year trends.

Merchandise sales for c-stores were reported to be up 8.7 percent in 2006 versus 2005, a total of $144.8 billion in 2006. Foodservice sales at c-stores also showed positive growth, according to 2007 NACS survey – that’s an increase of 5 percent.

Food prepared in-store was 41.4 percent of foodservice sales – up from 28.4 percent in 2002. By comparison, commissary/packaged sandwiches were 5.9 percent of sales in 2006 – down from 14.8 percent in 2002.

What food items are prepared in-store? That might not be the right question. The right question is, “How are c-stores delivering a ‘fresh food perception’ to their customers?” It’s being done by taking the ingredient preparation further back in the supply chain.

Sandwiches and other food items can be finished in-store and customized to meet the exact specifications of the customer, sometimes by the store foodservice staff and sometimes by the customer, says David Brewster of David Brewster Design, a foodservice and retail planning design firm based in Wadsworth, Ohio.

Sandwiches and salads are the primary foods being prepared fresh in-store. Even if there is a commissary prepping the sandwich ingredients and garnishes, the customer experience delivers what is a freshly made product.

Fresh food grows faster than foodservice in c-stores

What is important to note is that for c-store operators, the incidence of fresh food purchases is growing faster (beyond 13.2 percent per year) than their foodservice offerings.

Fresh food has grown to become very important in c-stores. The competition for fresh-made sandwiches is Subway, Quizno’s and other sandwich shops. The perception of fresh is the issue, and either a commissary or a manufacturer slices the meat and preps the garnishes while the store personnel bakes the sandwich rolls. It’s this fresh perception that will be a tough point of differentiation to compete against for vending and onsite foodservice operators.

Coffee jumpstarts morning sales

Coffee starts the day in c-stores around the country. That leads to selling more breakfast foods and more fresh pastries. The breakfast daypart is growing strong – not only for c-stores, but also in fast food restaurants and coffee shops. Look at Starbucks adding breakfast foods to be sold during their morning rush.

Did you notice that McDonald’s and Burger King upgraded and branded their coffee programs to enhance their breakfast menu sales? Do you “clock” your sales to see if your breakfast and early morning sales are growing faster than other dayparts? What are you doing to capture more breakfast sales?

The environment and shopping experience are gaining emphasis in c-store design plans. Why? “It’s about the physical and emotional bond between the shopper and the retail location. The bar has been set by Starbucks with their ‘my place’ or ‘third place’ strategy. Convenience stores are looking to build their own physical and emotional bond with their customers – recognizing that different stores cater to different customer demographics,” according to David Brewster of David Brewster Design, a foodservice and retail planning design firm.

What sort of physical and emotional experience are your locations creating to bond your business with your customers?

New on the horizon: iced coffee

Iced coffee has become big news in the coffee business. More c-stores are adding it to the menu to compete with the coffee shops for another coffee purchase opportunity each day. For coffee shops, here is a product to compete with c-stores for cold drink sales.

According to a study by Meyers Research Center, purchasing a cold drink is the number one reason people stop at c-stores – for 29 percent of those surveyed. Compare that to 19 percent who purchase gas, 16 percent who stop for cigarettes and 12 percent who buy a snack.

Snacking is changing and yet snacking is the same. Your customers are still snacking. What’s changed is what they’re having, when they’re having it and where they’re buying it.

People are eating four or five times a day. That means some of those eating occasions are snacks. Don’t forget the brown-baggers. If you don’t stock it, they can bring it from home – or pick it up at a local c-store or from a nearby fast food restaurant.

There are 145,000 U.S. c-stores and more than 280,000 U.S. fast food restaurants. That’s 425,000 locations competing for the same customers you serve.

C-stores improve candy sales more than vending

C-stores outsell vending when it comes to candy. According to the National Confectioners Association, c-store sales of candy were $4.2 billion in 2006, up 9.4 percent over 2005. By comparison, in 2006 vending sales of candy were essentially flat, according to both the National Confectioners Association and the Automatic Merchandiser State of the Vending Industry Report.

Packaged beverages (non-alcoholic) in convenience stores are 13.8 percent of in-store sales. Alternative beverages were 15.4 percent of sales in 2006, up dramatically from 10 percent in 2005. That’s the fastest growing product categories in packaged beverages. What’s driving that growth? Energy drinks. There are cans, bottles and more flavors than you can count.

We were visiting State College, Pa. a few weeks ago – home of Penn State University. In a c-store one block from campus, there were eight or nine cooler doors of soft drinks, teas, energy drinks and more – almost all single-serve packages. And the milk and other dairy products were elsewhere in the store. You could also find multi-packs on the grocery shelves.

Vending and onsite foodservice operators do not have to match this vast product array. But they do need to understand what beverages are driving the demand from customers we serve.

What’s interesting, from Beverage Marketing Corp., is that the 32-ounce size captured 44 percent of energy drink sales in 2005.

Salty snacks are 3.2 percent of in-store sales at c-stores. Pretzels, nuts, seeds and crackers showed the strongest growth.

Packaged sweet snacks (snack cakes, pastries, muffins, doughnuts, etc.) generated 1.5 percent of in-store sales, down from 1.9 percent in 2005.

You compete in the categories noted above. How do your sales trends compare with the growth c-stores are experiencing?

Don’t think that vending and onsite foodservice operators have only challenges to overcome. There are opportunities, too.

Vending can lead consumer trends

Why don’t we see vending and onsite foodservice operators take the lead in developing new categories? Why allow the c-stores to be the innovators? Think about how you can sell iced coffee.

And don’t think for a minute that c-store operators have it easy. Think about what would happen if Wal-Mart took all of their store operations expertise and their cost-effective logistics expertise and applied it to opening c-stores.

Vending and onsite foodservice operators are good at what they do everyday and are getting better at route management and operations. What we need to be very good at is understanding customer behavior. How do we turn shoppers into buyers?

Iced coffee is an opportunity for operators in vending, onsite foodservice and office coffee service. “Looking back 20 years, iced coffee was almost exclusively found in the Northeast. In the South, iced tea was the cold (non-soft drink) of choice. Across the Mid-west, Great Plains and the West Coast, neither iced coffee nor iced tea had made much of an impact” according to Gary Lillian, president of Javo Beverage Co., Inc., a provider of coffee and tea-based beverages to the foodservice industry.

Dunkin’ Donuts first introduced their own iced coffee in 1994. It was Starbucks that really brought iced coffee to the national scene and changed the preferences of coffee drinkers. Today, convenience oriented retailers like McDonalds and 7-Eleven are doing a brisk business in iced coffees and lattes. And to the delight of these retailers, sales are incremental to their fountain soda and coffee trade. The product sales skew to younger (18- to -34-year olds) and female consumers. Peak consumption is the afternoon – when hot coffee sales are slow compared to the morning coffee rush.

Iced coffee and coffee drinks (cappuccinos and lattes) have redefined the coffee service line-up for c-stores. “There was a time when customers defined good coffee service by the number of flavors available. Now, having iced coffee drinks on the menu has become an integral element in providing a first-rate coffee service” stated Gary Lillian of Javo Beverage Co. Inc.

Vending and on-site foodservice operators have plenty of opportunities to become more relevant to consumers. In order to seize these opportunities, operators must be up to speed on their customers’ needs.

C-stores: 1-year trends at a glance
2005 2006 % change
Number of stores 140,655 145,119 3.2
Total sales $495.3 B $569.4 B 15
Merchandise sales $133.2 B $144.8 B 8.7
Foodservice sales $17.9 B $18.8 B 5
Motor fuel sales $344.2 B $405.8 B 17.9
Industry profits $5.8 B $4.8 B -23.5
Number of employees 1,545,741 1,543,180 0
In-store gross margin 29.50% 28% -5.1
Source: NACS 2007 Survey
Candy sales in c-stores
% of % change
Type total candy in 2006
Gum 27.73 1.03
Roll, mints 7.21 -0.45
Chocolate bars/packs 38.76 -1.85
Non-chocolate bars/packs 15.34 0.43
Bagged 6.55 0.01
Novelties (seasonal) 1.71 0.01
Bite-size single-serve 0.71 -0.11
Other 1.99 -0.12
Source: NACS 2007 Survey