Despite the number of hurdles that it has faced within the past year, the convenience store channel still is holding steady, experts note. Carl Boraca, vice president of content product management for Chicago-based Information Resources Inc. (IRI), notes that dollar sales were up by more than 2 percent last year. Those numbers were consistent with other channels such as grocery and drug, which also were up 2 percent, he adds.

“However, the plus 2 percent convenience growth quickly becomes a more complicated story when one looks under the hood, as it is a tug-of-war between growing edible categories — plus 3 percent — and declining non-edible categories — minus 0.5 percent,” Boraca says. “Price increases rather than additional product sales are driving much of the dollar [sales] increase with convenience total unit sales up less than 1 percent.”

For instance, the decline in consumer smoking has impacted the channel, says David McGoldrick, research associate with Chicago-based Euromonitor International. McGoldrick explains that the decline has hurt convenience stores in two ways: “It takes away direct revenue from cigarette sales, and people who are quitting smoking aren’t going to c-stores quite as often,” he says.

The channel also fell victim to the frigid temperatures that affected many different regions of the United States earlier this year, says Jeff Lenard, vice president of strategic industry initiatives for the National Association of Convenience Stores (NACS), Alexandria, Va. Lenard notes that on an average day, the convenience store channel serves 160 million consumers; however, the channel experienced far fewer visitors than usual on days with below-zero temperatures.

“If you’re snowbound for three days, and odds are you were going to be in a convenience store once or twice in that period, those are chances that are not coming back,” he explains. “You’re not going to double up in the next few days.” That created a challenging business environment for retailers as fewer customers were out and about because of the weather, and retailers were not able to sell them some of the traditional items like cold beverages, he notes.

The increased competition within the retail market also has had an effect on convenience stores. Euromonitor’s McGoldrick notes that other channels like dollar chains, mass merchandisers and drug stores are using grocery and snacking items to capture the grab-and-go consumers. Within beverages, Jonas Feliciano, beverage analyst for Euromonitor, adds that supermarkets, hypermarkets and large-format stores are trying to encroach upon the single-serve market.

“I think a lot of [larger-format] stores are starting to implement a large beverage cooler with a variety of soft drinks available chilled right near the store entrances and coolers next to the checkout aisle to try and encourage consumers to stop into the stores rather than just being able to get those beverages cold from convenience stores,” he says.

However, convenience stores have primed their assortment and layout to appeal to the on-the-go consumer. “Our industry sells immediate consumption,” NACS’s Lenard says. “Eighty-four percent of what we sell inside the store is consumed within the hour, so if it’s for immediate consumption, it’s going to move off our shelves.”

Refreshing sales

Although other channels are trying to capture single-serve beverage sales from convenience stores, the beverage industry has fared well in the convenience market, experts note.

“Beverage dollar sales growth has outpaced overall convenience store growth, with non-alcoholic beverages up 3 percent and alcoholic beverages up 4 percent,” IRI’s Boraca says. “Unlike other convenience categories, the improvement in beverage performance is driven by additional product sales, with price increases only con-tributing about 1 percent to dollar growth.”

According to the “NACS State of the Industry Report of 2013,” non-alcohol packaged beverages including carbonated soft drinks, alternative beverages, sports drinks, juices, waters and teas accounted for 15.5 percent of in-store sales, while beer made up just shy of 8.3 percent in 2013.

Jackie Gray, director at Barrington, Ill.-based Willard Bishop, notes that beverages are in more baskets than any other category, including tobacco, signaling that thirst could be an important trip driver and an opportunity for convenience stores to build more sales. “Offering product-pairing promotions, i.e., soda and snacks [or] beverages with a sandwich, is a great way of adding one more item in the basket,” she says. For example, with the low cost of goods and high margins, fountain drinks used in product-pairing promotions can help the retailer to incentivize purchase of higher-priced/-margin items with nominal investment.”

In contrast, IRI’s Boraca says that beverages are not a primary trip driver when compared with refueling, tobacco and lottery sales; however, he does note that beverages carry a higher margin than the previously mentioned trip drivers. Because of this financial benefit, beverages can be a lucrative add-on for a store operator, he adds.

“To capitalize on this opportunity, beverage manufacturers should partner with convenience operators to create an environment where impulse beverage purchases are more likely to occur,” Boraca explains. “For instance, a customer paying for fuel, buying a lotto ticket, or getting a pack of cigarettes is likely to only visit the checkout counter and not travel back to the beverage cooler. A well-placed cold display containing beverages near the checkout counter can be just the right setup to entice impulse purchases from these trips and build basket dollar sales.”

NACS’s Lenard adds that if a convenience store operator wants to make his or her location a destination for beverage purchases, it starts with the gas island. Offering competitive prices will draw consumers into the gas aisles, and promotions like pump toppers or other signage can be used to entice them to enter the store for additional items, he says. However, competitive pricing can only go so far.

“It doesn’t matter how good your gas price is; if nothing else about your store is appealing, people won’t go inside and get a packaged drink, no matter how good your price is,” Lenard says.

To combat this, Lenard emphasizes the importance of maintaining a clean, well-run facility.

Success drivers

As convenience store operators look for ways to increase their beverage sales, it also will be important to know which categories have had the most success within the channel.

“In non-alcoholic beverages, carbonated soft drink dollar sales have been soft — minus 1 percent — while water, sports and energy drinks have been stronger — up 3 to 5 percent,” IRI’s Boraca says. “Smaller convenience beverage categories like bottled coffee, bottled tea and juices also experienced robust growth of up to 6 percent. These changes partly reflect moves in consumer shopper patterns to healthier beverage options.”

Boraca adds that beer sales were up 3 percent in 2013, while wine and spirits categories — smaller segments within convenience — increased double digits in terms of dollar sales. “Both non-alcoholic and alcoholic beverages share the same theme of a portion of sales moving from the traditional convenience beverage mainstay to alternative offerings,” he says.

Euromonitor’s Feliciano says that liquid water enhancers such as Mio, a brand of Northfield, Ill.-based Kraft Foods Group Inc. that launched in 2011, and off-shoot brands have seen a boost within the convenience store channel. “Whether consumers are purchasing that at the store with a bottle of water or just purchasing it to put in their purse or pocket to add to water at home or work, that category [has seen] some strong growth over the last year when you combine the previous years since that type of product has been launched by Kraft,” Feliciano says.

NACS’s Lenard also notes that the channel could see an uptick in dispensed water sales. With municipalities like San Francisco looking to restrict sales of plastic water bottles within their city limits, convenience stores could see an increase in dispensed water in order to support consumers’ hydration needs, he explains. According to a March 13 MSNBC article, San Francisco’s board of supervisors approved the ordinance to ban the sale of plastic water bottles on city-owned property. After one more board approval, it will head to the mayor’s desk, the article asserts. The ordinance would exempt sporting events and give large food trucks and large nonprofit organizations until 2018 to comply, it adds. Violators found selling plastic bottles of water 21 ounces or smaller on city grounds after October 2014 would be subject to a fine as high as $1,000, according to a March 4 San Francisco Examiner article.

Within the service model, Willard Bishop’s Gray explains that convenience stores have been bolstering their foodservice offerings. “Convenience stores are expanding their offerings around food, [and] beverages will continue to be a big part of that expansion,” she says. “Coffee service has expanded to compete with coffeehouses. As beverages innovate and become mainstream — [e.g.] coconut waters, caffeinated beverages, functional beverages, new flavors, healthy juices, iced coffees and tea drinks, etc. — so will c-store offerings.”

Making room

As these new innovations gain steam, convenience store operators are challenged to find ways to accommodate them on the shelf. “The stores are not accordions,” NACS’s Lenard says. “They can’t expand and contract.”

Euromonitor’s McGoldrick notes that SKU proliferation is being fueled by consumers’ demand for choice, which particularly comes from millennials.

“A lot of the younger consumers — the millennial generation — they want a lot of different options, so it is difficult for the convenience stores, especially since they have such limited display sections,” he says. “So, they really need to stay on top of what their trends are by [noting] what is driving their sales. They really have to pay close attention to these things and be willing to drop products if they’re not working and focus on what their core growth drivers are.”

One of the categories that millennials seem to be looking for is a diverse craft beer portfolio, McGoldrick notes. “[Millennials] are looking for variety when they go to the c-store, rather than just the standard fare that they’ve had for a long time,” he says. “A lot of c-stores have tried to be on point with the seasonal beverages by having summer ales at the right time [and] having Oktoberfest fall beers and spring beers that they’re rotating through to keep up with the seasonal beers of the time.”

Although space is limited, con-venience store chains have shown a willingness to be an incubator for new products for their main customers. For instance, PepsiCo Americas Beverages (PAB), a division of Purchase, N.Y.-based PepsiCo Inc., test launched Gatorade Strawberry Lemonade within 7-Eleven outlets. The variety now is rolling out nationwide. This year, the brand is testing another flavor: Fierce Green Apple.

“7-Eleven has helped us develop some of our most successful flavors,” said Debra Crew, president of PAB, in Beverage Industry’s July issue. “Last year, we had Strawberry Lemonade with 7-Eleven that did very well, and now we’re expanding distribution across other channels and customers. This year, we’ve launched [Fierce] Green Apple, [which] is also off to a terrific start.”

The convenience store chain also partnered with Santa Monica, Calif.-based Red Bull North America, a division of Red Bull GmbH, to launch its limited-edition variety Summer Edition. Featuring tropical fruit flavors, the energy drink was available exclusively at 7-Eleven stores nationwide during July and August this year.

Euromonitor’s Feliciano says that partnerships like these are an opportunity for the manufacturer and retailer to deepen their relationship. “I think the way that beverage manufacturers are trying to continue to promote and help out c-stores is [by] trying to launch products that make a c-store visit more special or to make a product that’s only available in a certain c-store,” he says.

 However, with all of these new products, convenience stores are employing more ways to expand the chilled space within the store. NACS’s Lenard says chilled bins or tubs can be an option but notes that adding such real estate should not detract from a clean, well-maintained facility. Operators should be wary of melting ice, he adds, but in the end it is about thinking creatively to offer consumers a chilled, convenient product.