Channel Strategies: C-stores face more competition
October 15, 2009
The convenience channel is getting a run for its money from alternative retail formats in the battle for quick-trip customers, say retail industry experts. In addition, today’s price-sensitive consumers are looking to save more than just time, and they are shopping multiple channels for value.
According to Information Resources Inc. (IRI), Chicago, household penetration in the convenience channel has remained flat so far this year. By comparison, the market research firm reported in its August 2009 “Times and Trends” report that the same measurements have supercenters up 1.8 percent, dollar stores 1.4 percent, and club stores and drug stores 0.7 percent. Like convenience stores, grocery was nearly flat, up a slight 0.1 percent, but grocery has a 99.1 percent household penetration rate vs. convenience stores’ 27.2 percent.
In terms of average purchase occasions per household, convenience stores gained 0.4 percent, where dollar stores jumped 10 percent, supercenters 7.9 percent, grocery 5.2 percent, club stores 6.4 percent and drug stores 3.3 percent.
“The big thing that they are challenged with currently is the trips to the stores,” says Matt McCourt, director of convenience stores and spirits at IRI. “We’re actually seeing a decline in this channel vs. the grocery, drug, mass and supercenter channels as far as quick-trip convenience stops. So the big thing is how do the c-store operators continue to hold and grow their current consumer base?”
Last year, high fuel prices kept consumers out of stores, but 2009 has been impacted more by the overall economic decline than any specific factor.
“Unlike last year, the fuel prices are not impacting the consumer’s ability to go and seek out the best value,” says Dan Wandel, IRI’s senior vice president of beverage alcohol client solutions. “They’re actually shopping in five or more channels. That was not the case last year when the gas prices went up, but now that they’ve moderated, we’ve definitely seen the consumer today going out and seeking out the best value, regardless of where they have to drive to go get it.”
In addition, traditional take-home channels such as grocery and mass merchandise outlets are competing for the on-the-go consumer.
“It’s a channel that continues to be under attack by other formats,” says Nick Lake, vice president and group client director at the Nielsen Co., Schaumburg, Ill. “What I mean by that is a lot of retailers are experimenting with small formats.”
He cites Kroger, Wal-Mart and Tesco as non-convenience retailers that have created small-format stores to attract the quick-trip shopper.
Despite the challenges, the convenience industry grew overall sales 8 percent last year, with in-store sales increasing 3.2 percent, according to the National Association of Convenience Stores’ State of the Industry report. The industry saw a drop in the number of stores nationwide, as about 1 percent of stores closed their doors due to poor economic conditions. Last year’s high fuel prices did nothing to help the retailers who sell gas, the association reports, citing low fuel margins as another reason for the store closings.
While single-store retailers make up the majority â€” 62 percent â€” of the convenience trade, they also accounted for the most store losses last year. Of the 1,419 stores that went out of business, 1,116 were single-store operations.
Beverage sales helped the 2008 sales increases, according to NACS. Non-alcohol packaged beverages grew 14 percent, while beer, the top-selling beverage in the convenience channel, was up a little more than 10 percent.
That trend has not held so far in 2009. IRI reports that beer sales through the convenience channel are down about 1.5 percent in dollar terms and almost 4 percent in volume. The difference between the two is indicative of overall price increases that the beer industry has managed to implement, despite consumer price sensitivity, IRI’s Wandel says.
Carbonated soft drinks are up a little less than 1 percent in dollar sales, but down nearly the same in volume. The only stand-out beverage categories this year seem to be energy shots, refrigerated teas, and shelf-stable ready-to-drink teas.
Foodservice also is an area of interest for a growing number of convenience retailers. In fact, foodservice represents the largest portion of convenience store retailers’ gross margin dollars, at almost 24 percent, NACS reports. Packaged beverages account for 16.6 percent of those gross margins, and beer 6.9 percent.
Industry experts say foodservice is one area where beverage manufacturers can partner with convenience store operators.
“The primary focus for the channel certainly has been foodservice,” Lake says. “I think there’s a lot of retailers that have been doing interesting things with foodservice, whether it be hot dogs, pizza, coffee… and they’ve been driving those with a lot of promotion.”
NACS says the average convenience store does $20,000 a month in foodservice sales, which includes prepared foods at $11,600 per month; hot dispensed beverages at $6,900 per month; cold dispensed beverages at $2,200 per month; and frozen dispensed beverages at an average $2,000 per month.
Lake recommends beverage companies “try to partner with convenience retailers on the foodservice end so that foodservice operators can become full meal replacement destinations ... think pizza and beer, for example, or a hot dog and a Coke.”
Convenience store retailers are shifting their product mix a bit to compete with bulk sales through grocery and supercenter outlets. Large pack sizes such as 24- or 30-packs are more common in convenience outlets these days, say industry experts, as retailers pick up on some of the habits that are driving consumers to other channels.
Despite its low growth rate, beer is benefitting from large pack sizes, IRI’s Wandel says.
“As more and more home entertainment occurs, we’re seeing a lot more stocking up trips, and that would include beverage alcohol,” he says.
However, smaller single-serve items such as 16-ounce soft drinks allow for a lower price point, and also are making a showing.
“What that does is that allows for a 99-cent price point, whereas when you get to that 20-ounce, it’s a little more difficult to get to that 99-cent price point,” Lake says.
A seemingly opposite shift has led many convenience retailers to add more craft beer.
“The retailers are starting to take a harder look at something like the craft segment, which despite the economy, continues to grow in supermarkets, liquor stores and drug stores at a pretty good rate,” Wandel says. “That’s another trend that you might see some of the convenience retailers starting to jump on.”
Nielsen’s Lake agrees “The convenience industry has seen about a 14 percent growth in craft styles,” he says. “You have to keep in mind, it is a fairly small percent of the business â€” craft beer represents only 1.5 to 2 percent of the convenience channel’s total beer business.”
But, he adds, “As more and more convenience stores see the value in selling higher-end products, you’re going to continue to see that grow. It’s a huge opportunity for the convenience channel.”
Experts agree that any beverage company that hopes for success in convenience stores has to keep in mind the very fragmented nature of the channel.
“You’re going to have to see who’s shopping the retailer that you’re calling on and understand who their shoppers are,” McCourt says. “The old adage of just one promotion and blanketing it across a whole channel doesn’t work.”
He also recommends a focus on healthier items as a way to draw more women into stores, which historically have been dominated by men.
“When you’re doing promotions, look at the female consumer and what they’re looking for,” he says. “Sugar drinks and things of that nature are just not top of mind with moms. You’re looking at people who want to look for healthier choices.” BI