Flat: The New Good
CSP Outlook Survey documents industry resilience; active steps may help some thrive in 2011.
Outlook 2011 Many retailers believe an improved though somewhat tempered year awaits them in 2011. What follows are results of the 2010 CSP Outlook Survey as well as insights from retailer respondents.
“We are doing all types of promos to maintain sales, [including] slashing margins to get people in the door. ... [As a result], sales are good but margins are suffering.And expenses cannot be cut because labor must remain the same to service the customer, but utility expenses, credit-card and bank fees continue to hammer the bottom line.”
“The working class—our No. 1 customer—is not working.”
“In our market, we are doing very well; however, I would [say] overall that the convenience business is doing well.”
From Massachusetts to Arkansas, Arizona to Washington, convenience- store retailers describe 2010 as a mixed bag of new regulations and a cost-conscious but steady customer base, while 2011 may prove an opportunity for modest gains as the economic recovery continues its drawn-out pace.
That tempered but nonetheless optimistic viewpoint emerged during the 2010 CSP Outlook Survey, conducted in late October and now in its seventh year as an industry barometer. Overall, the 182 respondents reported satisfaction with the resilient nature of the business and sensed a slow but steady return.
“Flat is the new good,” said one retailer.
In the survey, nearly 42% of respondents described 2010 as a “good” year for their c-stores, while an almost equal number at 40.1% called it “flat.” Though year-to-year comparisons of Outlook Survey results are unscientific, given the fluctuating number of respondents and how specific individuals change, those who participated in last year’s survey described 2009 as mostly “flat” at 51.5% vs. “good” at 36%. The situation could very well be that retailers have embraced a new benchmark, one in which flat is the new good, as suggested by a retailer who said his sales matched the 2.5% rate of inflation. Even more ambivalent, another retailer described 2010 as “slower than last year but not too bad.” From category movement to proprietary brands, retailers expressed their views on 2010 and their plans for 2011. Here’s how things stand for a sampling of retailers:
Thriving Off Effort and Luck: “Our sales have picked up over the past year. I attribute that success to three things: First and foremost, my employees. We enjoy our customers and are on a first-name basis with most of them. Secondly, the Arkansas Lottery just completed its first full year. We are No. 73 in sales out of approximately 2,200 retailers. The third contributor is that we currently are the only retailer that sells 100% pure gasoline (no ethanol). People drive out of their way just for that reason alone.”
Steady as She Goes: “In Colorado, there is no growth in jobs, but we’re not losing jobs either. The growing pressure of regulations and costs from the federal government could cause the business environment to turn poor.”
Ups and Downs: “We had a record tourist season near Glacier National Park and we are also located on an Indian reservation, where EBT (electronic benefits transfer) and welfare are booming.”
Pressure on All Sides: “Sales are flat but gross profit is down due to a cigarette-tax increase in the state of Washington. Unemployment remains at 13.5%, one of the highest in the country.” For c-store operators, 2010 had its highs and lows. Unemployment in many areas remained unacceptably high. But there was some very good news, too: Gasoline margins climbed higher than expected, and the industry reaped the benefits of a summer that was warmer than it’s been for the past two years.
The industry took its share of national headlines as well. BP-branded retailers had to deal with public backlash from the Gulf Coast oil spill; cardswipe fee reform prevailed on Capitol Hill; and Midwestern powerhouse Casey’s General Stores staved off a yearlong hostile takeover bid by Circle K’s owner, Alimentation Couche-Tard.
Yet despite the twists of 2010, retailers seemed optimistic. “I would rate national business conditions as flat, but these conditions are creating opportunities for continued growth for us,” says one retailer. Along the same lines, another believes: “Companies that are innovative and that can address the needs of today’s business will do well.”
TALE OF EXTREMES
Of course, averages and consensus opinions tell only part of the story. A retailer in the New England market may be enjoying an economic boom, while another out West may report perilous conditions. Such is the case in comparing a retailer in Boston with one in Tucson.
Bob Mahlstead is president of Catalina Marts, a 17-store chain based in Tucson, Ariz., where two major operators are staging a turf war. Tulsa, Okla.-based QuikTrip Inc. is pushing into the market, having built six stores and potentially moving on a seventh and possibly more. At the other end is Circle K, which built a new store in what Mahlstead describes as a blatant move to go toe-to-toe with QuikTrip.
Gasoline postings have been unreal, he says. Because he’s a branded retailer who refuses to sell without margin, in mid-fall he was 15 cents off market postings. Earlier, he had been as far off as 26 cents to 30 cents per gallon. His gasoline business has fallen 10%, he says.
“We generally have not had a good correlation between gas sales and store sales from store to store,” Mahlstead says. “We’re definitely in the realm where gas sales are impacting store sales. It’s a high correlation, something we’re going to see next year.”
Mahlstead attributes the ongoing competitiveness to the area’s slow economy and the stance that Circle K appears to be taking over QuikTrip’s incursion. He senses that QuikTrip is hoping for the kind of success the chain saw in Phoenix, but with a more vigilant company behind Circle K today (vs. an oil company 10 years ago), the climate is completely different.
Meanwhile, the story for 190-store Tedeschi Food Shops Inc., Rockland, Mass., is a brighter one. Warmer weather boosted core categories on some days into the double digits, says Joe Hamza, vice president of sales and marketing. Remodels and investments in data intelligence helped improve the look of stores and develop an assortment more in line with demand. And initiatives in foodservice development also increased sales, with packaged sandwiches, for example, rising by 25%.
Adding to Tedeschi’s success, Hamza says, is the chain’s privatebranding efforts. Launched three years ago, the segment now accounts for 8% of the company’s sales, with every product added achieving double-digit increases. “Some private brands are outselling [nationally] branded product,” he says. “The reason: We’re delivering a valued, high-quality product for customers who don’t want to spend 30 or 40 cents [extra].”
For 2011, the chain will focus on developing what Hamza describes as a better “healthy” appeal. He says it’s testing a number of natural and healthfocused items and categories. “As an industry, we’ve not done a good job in this area,” he says. “We see it as an opportunity not just with snack foods, but gluten-free, heart-healthy, organic and environmentally friendly products. We see it as a catalyst for growth.”
FOCUS ON CHANGE
This year, a slightly lower number of retailers said they were intent on changing their business model (47.8%) vs. leaving things the same (52.2%).
But when it came to investment, optimizing existing sets far outpaced acquisitions or other substantial cash investments. Specifically, “increase emphasis on inside sales” (28%) and “add or expand profit centers” (25.8%) led the pack of changes, while “new store design” (11.5%), “small, strategic selloffs” (9.9%) and “growth by acquisition” (8.8%) rounded out the top contenders.
Taking the idea of driving inside sales category by category, Jamie Pukylo, sales manager for Country Fair Inc., Erie, Pa., says new flavors of chocolates boosted the company’s candy category by 10% this year, augmented by impulse placement near the checkout counter. Candy sales at the 74-store chain were further buoyed by developing a warehouse-snack strategy, curtailing direct-store-delivered (DSD) options in favor of highermargin chips and meat snacks.
As in past years of the Outlook Survey, foodservice (50%) was the go-to profit center for retailers contemplating growth. Coffee (33.3%) and fountain (16.7%) followed previous patterns, finishing an important yet distant second and third place.
Though still a much-scrutinized profit alternative, private branding remained a focus for about 20% of respondents. In that area, alternative beverages (including energy drinks and sports drinks), bottled water and snacks were top choices.
While not addressed directly in the Outlook Survey, the topic of loyalty programs has emerged as high-profile deals between major-oil companies and grocery stores began to play out in 2010.
To address where retailers stand on the topic, CSP Daily News conducted a poll asking retailers where they stand on loyalty programs. Of the 92 respondents to the late-October poll, nearly 62% said they either had one or were planning to have one by end of next year, or were researching the investment in such a program.
For Mark Schumacher, director of fuel management and convenience operations for SUPERVALU Inc., a major grocery-and-convenience retailer based in Eden Prairie, Minn., loyalty was integral to success in 2010. “When I look at this year vs. last year, we’re still cycling on euphoria because we launched our gas rewards across most markets where we had c-stores,” he says. “That caused a huge spike in volumes and convenience sales. Customers really liked the discounts they were getting on gas when purchasing groceries in our stores.”
With foodservice the most popular option for expansion among respondents, Kirk Matthews, senior category manager for TravelCenters of America, Westlake, Ohio, says innovation within the category as well as a growing freight-travel business has been driving their numbers of late.
“We’ve been able to ride that momentum with a lot more people coming into the travel-center business to eat,” he says. “We also have a lot of QSRs [quick-serve restaurants] in our business, but we’ve been able to compete with those guys, [mostly because] there’s a lot of innovation in the category.”
In the Outlook Survey, the dominant choice for any retailer planning foodservice change was “expanding current proprietary foodservice” (42.9%).
The other largely scrutinized category in terms of the Outlook Survey was tobacco. Though most respondents are opting to not change their strategy (57.1%), those considering change look to other tobacco products (OTP) as a prime choice.
For John Strickland Jr., president of the Ballpark Stores chain of 14 sites based in Goldsboro, N.C., OTP is seeing gains. “This year we’re up another 25% in the category and we’re still commanding a higher-than-normal premium share [on a] product-sales basis,” he says. “And as long as we continue to have the product priced appropriately to bring the customers in, [they’ll stay successful].
“Customers are searching for the product,” he continues. “The difference today is consumers are searching for the best price on the product and they will price-shop around today to find it.”
A part of Strickland’s concern these days is how the cigarette category is shaking out. Federal taxes that went into effect last year, in addition to packaging mandates that started this year, have put pressure on the mid-tier categories. His company introduced a fourth-tier product just this year; within six months, it had taken a whopping 4% of total volume overall.
“People now are still gravitating toward premium or they’re gravitating toward the bottom of the barrel, the lowest price cigarette they can get,” he says. “The concern there is the low-end fourth tier and the mid-tier, and our … premium [business] has not compensated for our loss. So we’re in a declining situation. Even by introducing the fourth tier, we’re not making up the ground that we’ve lost at this point.”
TAKING ON CHALLENGES
In terms of challenges facing the industry in 2011, respondents gravitated toward choices they’ve pointed to in the past, namely credit-card fees (55.5%), gasoline volatility (54.4%) and tobacco challenges—taxes, legislation, illegal sales (37.4%). Increased competition also came in a close fourth at 36.3%.
Competition from larger regional chains are eroding fuel margins as they penetrate into new markets, one respondent reports. “In addition, they are eliminating the small neighborhood deli and the very fiber of small towns and villages,” he says. And yet other companies welcome the advances. “Competition is healthy,” says Hamza of Tedeschi. “We learn from it. Everyone has a game plan, so we have ours.”
Change Held Hostage
The economy is making many retailers hesitant about taking on innovation and change. Here’s a sample of what retailers are saying:
“We do not want to risk any large investment in a flat economy.”
“We are still trying to build capital. We have some ideas for 2011 that might be possible, but for the most part, we have our model plan in place for the next six to nine months. And it seems to be working for us.”
“It is a proven model and we are exceeding the inflation scale of 2% in sales; our margins continue to improve. We are stealing the business from other retailers.”
Other retailers bent on change talk in similar themes:
“There are always ways in which to improve and enhance the consumer’s shopping experience.”
“We intend to identify and pursue new opportunities that were previously overlooked or were not a priority.” “If capital is available and cash flow continues, we must and will remodel.”
“We are really pushing foodservice.Our strategy includes menus for call-in orders as well as prepared food ready for consumption. It’s working well. We also have a philosophy of highquality and fresh [foods].”
Gasoline continues to be a focus as retailers tread water in markets where street prices remain extremely competitive. Some of their stories follow:
“With fuel sales stagnant and a number of retailers ‘giving away’ their fuel at or below cost, it’s becoming difficult to remain in business.”
“ARCO continues to hold down fuel margins in this marketplace. Their retail pricing strategy is abnormally low.”
“The large-box retailers and c-store chains are using their size and buying power to put smaller operators out of business. One way is to reduce gas margin to a negative and hold it there.”
Retailers continue to examine the foodservice category in an attempt to increase profitability. Here are a few retailers’ thoughts:
“We are exploring a transition to air pots from glass pots in our coffee offering. We’re slowly trying to find a good foodservice fit for our franchise.”
“We’ve got strong deli promotions ongoing and have added an outside-seating patio area for 20 that’s open from April through Thanksgiving. We’ve added 16 seats [4 tables] inside and will expand that as needed. We also just changed coffee vendors after 20 years and can now do a selfserve that will compete with Starbucks and Dunkin’ Donuts. We’ve also added a limited delivery service, one that emphasizes catering, and have aggressively hammered vendors to come up with new promos even if we need to slash some margins.”
“We’re not necessarily going to change more than one or two of our stores’ coffee offering, but that’s one area that I’ll be looking to improve on.”
Retailers answering questions about roadblocks to success into 2011 focus on a wide array of industry challenges.
“Credit-card fees still pose the biggest challenge, forcing many stations to switch to a cash-credit pricing structure. Recent tax increases in New York have also had a negative impact on tobacco sales and overall c-store sales, as customers look outside the city for cheaper prices.”
“Larger companies are able to obtain the financing and achieve economies of scale. This makes it difficult for those companies trying to penetrate markets with improved quality and service.”
“Dollar General is aggressively building small-format stores in many markets with very small populations.”
Though not a big priority for retailers responding to this year’s Outlook Survey, private branding continues to play a role for c-stores going forward.