Channel Strategies: Convenience stores weather tough economy
October 15, 2008
Sky-high fuel prices took a toll on convenience stores early this year, say industry experts. But surprisingly, those same costs have come back to benefit convenience store retailers as the year has progressed.
Thom Blischok, president of consulting and innovation for Information Resources Inc., Chicago, says the first quarter of the year was marked by consumers pulling back on away-from-home purchases.
“As gas prices continued to rise, the American consumer sort of shifted much of their thinking around, ‘How do I bring my dining experience or my meal experience back in the home?’” he says.
During the first quarter, IRI measured a 6 percent drop in in-store visits at convenience stores, it reported in its May “Times & Trends: Competing in a Transforming Economy.” As consumers tried to save money, they moved their purchases toward supercenters and dollar stores, which saw trip increases of 5.4 percent and 1.6 percent, respectively.
The second quarter was “quite different,” Blischok says. “We saw a resurgence of convenience stores and traffic.”
As consumers balanced their fuel and food purchases, many of them made smaller, but more frequent trips to fill the gas tank, and subsequently made in-store visits as well. In fact, Blischok says more frequent visits give convenience store retailers an opportunity for further growth if they are able to capture sales for in-home consumption in addition to on-the-go needs.
“What’s unique right now is that the convenience store â€” because of the continued balancing between food and gas â€” is well poised to capture a very interesting portion of the quick-trip from the consumer, if they make the products affordable,” Blischok says.
Within convenience stores, beverages are well-positioned for the transition to in-home consumption, he adds. “The primary beverages that are doing well are going to be beers, wines and [energy] drinks,” he says. “Carbonated beverages are also doing quite well.”
Convenience stores have a reputation for higher prices than supermarkets, and consumers expect to pay a little more, Blischok says. But in today’s economy, “the new mantra around convenience stores should be affordability, which I think will drive a significant amount of traffic increase,” he says.
“Convenience stores, as long as they position their products around affordability, may be a winner in this economy right now,” he adds.
Gas and credit crunch
Jeff Lenard, vice president of communications at the National Association of Convenience Stores, Alexandria, Va., agrees that beverages are an increasingly important segment for convenience store retailers. Nearly 80 percent of convenience stores sell gas, but despite the high prices, operators are feeling the pinch as much as consumers are. The average gas retailer makes a mere penny or two on each gallon of gas, he says. In addition, credit card fees are increasing faster than retailer profits, leaving operators to find other places to make money.
“Those two things have conspired to really make retailers reevaluate how they go to business,” Lenard says. “There are very few retailers today who can possibly run their business based on gas sales. Gas sales can do some good things â€” it can get traffic there â€” but it’s not a profit driver. So what we have seen is that there has been a real move toward becoming refreshment centers.”
Within convenience stores, non-alcohol packaged beverages are the second-largest sellers, accounting for 16 percent of in-store sales, according to NACS. Beer accounts for more than 13 percent of in-store sales. When it comes to gross margin dollars, non-alcohol packaged beverages topped the list at 20.1 percent. When fountain drinks, frozen drinks and hot coffee sales are factored in, beverages account for close to 40 percent of profit dollars at convenience stores, NACS data suggests.
“Beverages do great things for the bottom line,” Lenard adds. “They get the customer inside your store on a more regular basis. If it’s something like coffee, it might be a daily basis and it might be in the morning. The other thing is it can take the pressure off gas margins because the customer might be less price sensitive about what your gas is and more attuned to what your beverage offer is.”
That is particularly true if convenience stores are able to offer products, such as proprietary gourmet coffee or frozen drinks, that consumers cannot find at other retail locations. According to NACS data, hot dispensed beverages such as coffee are profitable for retailers, accounting for 3.8 percent of total in-store sales, but 7.3 percent of in-store profit. More than two-thirds of those who buy coffee at a convenience store do so four or more times a week, NACS says.
Convenience stores can use those trends to build coffee programs and other beverage offerings that attract consumers, especially the ones who are looking to cut down on fuel use and do not want to make an additional trip to pick up those items somewhere else.
“If they’re buying gas at your store and they know that you have an exceptional in-store offer, why drive two miles down the street to get the same thing, essentially,” Lenard says.
That doesn’t mean retailers can sit back and wait for consumers to come in from the pumps, he says. “Your store still has to be a destination. You still have to up the ante in what you offer.”
When it comes to store formats or product availability, Lenard says the decision is often based on locality. “There are all kinds of different ways to achieve the end result, which is to sell convenience and to sell speed,” he says. “What works in one place where they have an upscale state-of-the-art store may not work in another area. So it ultimately comes down to understanding your customers and it still comes down to speed of service.”
The popularity of categories such as energy drinks, bottled water and other products has meant finding additional space within stores to stock beverages. Powdered drink stick packs are a product concept that has allowed beverages to be sold in an area other than a cooler. In some parts of the country, consumers may not insist that beverages be sold cold, but may be more receptive to product stored at room temperature, Lenard says.
Beverage companies also can partner with their convenience store customers on promotions, IRI’s Blischok says. He notes a recent trend across categories in all retail channels has been an increase in sales of larger multi-pack sizes during the beginning of the month, while smaller-sized products gain at the end of the month when money may be tighter for some consumers.
“There is this window of opportunity of having instead of a 24-pack, maybe a 12-pack featured at the end of the month,” he says. “There are some great opportunities for rethinking promotional strategy in the convenience store industry around beverages, especially.”
Some beverage companies have done a particularly good job of demonstrating for convenience store retailers how they can redesign their store shelves to attract more consumers. He cites Anheuser-Busch and Pepsi-Cola as two companies that have done that particularly well.
“I think they’re doing a great job in a concept called demand indexing,” Blischok says. “It’s being able to understand what the market requires vs. just what the shoppers in the store require. They’re beginning to help convenience store operators understand how to re- assort the cold vault … what happens when you do that is you begin to reset the shelves with a much more rich and relevant assortment for the shoppers coming into that store.”
In addition, he says, beverage marketers would do well to consider convenience stores in their new product development.
“I think one of the opportunities that exist for manufacturers today is to really put some marketing muscle behind new product innovation in convenience stores,” Blischok says. BI