Morphing into New Territory

IRI report shows c-stores holding off drug, grocery competition

Published in Convenience Store Products

By
Steve Dwyer, CSP Reporter

Convenience stores achieved an enviable accomplishment in 2012: outpacing grocery and drug store competitors in growing dollar and unit share concurrently.

In a close look at the retail channel’s machinery, IRI’s latest Times & Trends report indicated that convenience retailers posted unit sales growth of 1.2% and dollar sales growth of 2.4%, carried out on the strength of strong first-half 2012 performance, according to the report titled, “Convenience Stores: Keep the Core; Appeal to More.”

The performance was supported by an increasing store count and a business model well suited to address consumers’ on-the-go lifestyles.

Positive indicators can often be accompanied by caveats: The IRI report said that pressure coming from drug and dollar store channels became exceptionally intense in the second half of 2012, and this pressure is poised to sustain itself into the future. The reason is these channels “share a number of similar features, including size, general proximity and some level of commonality across assortment,” says the report.

A recent IRI analysis of convenience-store growth at the ZIP code level revealed that in ZIP codes with no drug or dollar store presence, convenience channel same-store sales climbed 3.5% in 2012. In contrast, in ZIP codes with both drug and dollar presence, same-store sales climbed only 0.7%.

A second cause for concern rests with the uncertain fortunes of gasoline and cigarettes, two major sources of revenue and trip behavior for c-stores. Both face challenges within a blending of high prices, increased taxes and consumer lifestyles shifts.

One can see what’s at stake: Cigarettes are, by far, the largest category within the channel, generating more than $52 billion in 2012 sales receipts. They are also a key driver of trip missions, with 150 store trips per day driven by cigarette purchases in 2012.

One overarching cause for concern is the spotty performance across the top 10 largest c-store categories. Four outperformed the growth rates of industry average unit sales. The strongest performers were tobacco and beverage, while the strongest growth came from energy drinks, with double-digit growth in both unit and dollar sales at 56.4% each, respectively.

Others hit a trough, with the most dramatic being bottled water, which has struggled during the past several years as consumer look to control spending. From 2008 to 2012, unit sales of bottled water slipped 3.1% despite beefed-up promotional efforts and associated price deflation.

Competitive forces
Looking forward, some of the c-store’s core could conceivably defect to competition due to the prevailing challenges in tobacco price and regulations, and gasoline pricing. Appealing to more will require some upgrades in various areas, including foodservice, says Susan Viamari, editor of IRI’sTimes & Trends.

To protect their turf from dollar stores, c-stores needs “to trumpet their value proposition, and by value I don’t mean just price. You need to understand what value is to the most important consumers,” Viamari told Convenience Store Products. “So it might be quick and healthy dinner options to some. To others, it might be assortment of items: don’t just stock one SKU of a particular product type. With so much data and tools at their disposal, c-store retailers can get down to store-level trends for the granular data to determine what’s selling at their store on Main Street vs. their store on Elm Street.”

Viamari says competition from drug chains such as CVS and Walgreens is exhibited through an increase of fresh foods offered, which certifies the channel as a destination stop for grab-and-go fare, combined with the health and beauty care marketing strength the drug channel is known for. The sale of gallon milk is also being recognized as a drug chain destination—adding to the market basket even more.

Silver lining playbook
Counterbalancing competitive challenges are opportunities: The proximity of c-stores is a benefit in times of high gasoline prices, says Viamari. For instance, 10% of consumers say they shop c-stores more frequently in the presence of high gasoline prices due to their convenient locations. Among millennial shoppers, 24% have stepped up convenience channel shopping frequency to save money on gasoline.

The convenience channel’s focus on quick and easy—often immediate consumption and indulgent—products is clearly illustrated in the channel's 10 top-selling categories, many of which are beverages, but also seen in foodservice receipts. Although many consumers are already buyers of convenience channel foodservice offerings, the desire for better-quality offerings is high. “Quality of offerings needs to come into the game, plus become more diverse,” says Viamari.

In addressing health and wellness, two-thirds of consumers indicate they are trying to eat healthier. As such, c-store marketers have an opportunity to help consumers strike a balance between wellness and indulgence. Even in traditionally indulgent categories, such as salty snacks and cookie and bakery snacks, healthier options are available and becoming well received. C-store marketers must develop consumer-centric, 360-degree health and wellness programs, she says.

Innovation creation
The advent of greater innovation was repeatedly cited in “Keep the Core,” and it can be executed several ways. Often, retailers must rely on marketer partners to help drive it. Clean and “green” stores are ways retailers can innovate independently. Another technique is a greater commitment to outside advertising programs, says Viamari.

“C-stores have to do a better job using outside ads at the fueling dispensers as a hook to bring consumers inside the store, because the growth rate is twice as high with outdoor causal advertising compared to doing no advertising,” she says.

The way retailers approach advertising strategies in general must include a blending of media—not a one-size-fits-all approach, Viamari says: “It’s important not to place a blanket ad in the local paper and think it’s going to drive customers to their stores. Depending on the product type, it might be traditional media for this product type, online for this one and social media to drive another.”

Speaking to innovation using a macro lens, Viamari says, “Retailers have to make sure they’re stocking the latest and greatest products available. Coffee and tea have gone great guns with innovation [upstream through marketer partner efforts].”

Energy innovation appears to be driving growth, not only with energy-drink flavor expansion, but also as “energy shots appear to be getting smaller and smaller,” she said.

Speaking of innovation defined by size, c-store kiosk prototypes are a latent trend to look out for. Where she’s based, “in western Massachusetts, there are BP and ExxonMobil kiosks popping up: Going smaller in urban areas with smaller footprints.”