Searching for Higher Ground
In 2011 CSP Outlook Survey, retailers attempt to move beyond flat.
Success is relative, poet T.S. Eliot once said. “It is what we can make of the mess we have made of things.” For participants in CSP’s 2011 Outlook Survey, the past year has presented a supreme challenge to grow inside sales even as the national and local economies sputtered and fuel demand slumped. The annual survey, which polled 188 retailers representing thousands of stores on business conditions in the past year and their plans for the next, was conducted in mid-October.
Nearly 57% of Outlook Survey participants describe current business conditions as “flat” or “poor,” compared to 51% in the 2010 Outlook Survey. Only 5.3% characterized conditions as “excellent,” vs. 7.1% in 2010. (Because the participants of the survey and the degree of participation change from year to year, the results represent a directional indicator of industry attitudes.)
“Too much indecision, too much unemployment, no confidence,” says a retailer who is seeing “poor” conditions. “Could be, should be better,” says another.
And the outlook for 2012? The majority—45.2%—expects no change from current business conditions, while just less than 40% expect some improvement. This compares to the 46.2% majority who, as part of the 2010 Outlook Survey, anticipated some improvement for 2011.
“I think it’s going to be a tough year for sales increases,” says Bill Huffman, franchisee of two 7-Eleven stores in Coos Bay, Ore., and president of the Columbia Pacific Franchise Owners Association within 7-Eleven, where he represents 130 stores.
“Being from Oregon, our biggest roadblock is a stagnant housing industry,” he says. “Our two big industries are computers and wood products. We’re highly dependent on it; Oregon ships one-fifth of the [nation’s] lumber supply, so when housing isn’t good, then the timber industry isn’t good.”
With that in mind, Huffman has low expectations for 2012. “Our [two] stores do well for the first half of the year, but the second half, we’re flat.”
Paul Grammer, president of Fastop Inc., dba Circle A Food Mart, an eight-store chain based in Jasper, Ind., also has dealt with flat business. “We’re not looking to be satisfied with flat,” he quickly says, “but it’s the way things have trended. With fuel being so volatile, it hinders or helps what goes on in the store. And with the economy on the slow, sluggish side, we’d be happy if we can hit numbers from the prior year.”
Meanwhile, for Bill Douglass, CEO of Douglass Distributing Co., Sherman, Texas, which operates 15 Lone Star sites, a flat outlook isn’t necessarily a bad thing—relatively. “If I can have the same ‘flat’ next year, I’d be pleased,” he says. While fuel sales are down 5% in his markets, inside sales are up, buoyed by higher cigarette sales. However, there is no sharp upward trajectory he can see in the distance, largely because of his local economy.
“Our single biggest customers are the construction trade—and that’s the one we lost when the economy went south,” he says.
From year to year, the biggest challenges retailers cite in the Outlook poll stay steady, and 2011 is no different. Beyond dampened consumer demand, credit-card fees were again chosen as the biggest issue, followed closely by volatility and reduced margins on fuel. “Credit cards are going to continue to be a problem,” says one respondent. “The legislation that was passed did nothing to slow the outrageous charges,” citing the Durbin Amendment, which led to the capping of debit-card swipe fees.
In a departure from previous years, increased competition from other channels moved up into the top three, knocking tobacco down to fourth. “Drug is becoming more of a c-store and is considered the female c-store,” one retailer observes. “If they get into fresh foods on a wide scale, it will become a game changer.” While it wasn’t part of an official question presented to retailers, rising costs was commonly cited as an issue with which they continue to grapple.
“Compressed margins are starting to come from major players in the c-store product assortment,” says one respondent. “Snacks and beverage offerings are available from fewer and fewer players, constricting margins as manufacturers preprice merchandise and/ or control the retails on the street. Lower margins make it harder to pay the bills in the traditional and nonchain stores.”
But while some retailers may feel discouraged by the surprisingly slow pace of economic recovery and growing business challenges, and have tried to moderate their expectations for 2012, others have grasped at the silver lining. “We … realized some time ago when you have less people in Michigan with less income, the aging of existing and potential customers, and many people worried/stressed as to keeping or not keeping their current jobs … we needed to hire and develop our people to better serve the customers we do have so we get more visits to our stores,” says a Michigan operator who is seeing “good” business conditions and expects them to remain the same. “
In other words: Grab market share.” In what locals describe as “the Appalachia of the Northwest,” unemployment has hit 13%, says Roger St. George, president of St. George Stores Inc., a 7-Eleven franchisee with three sites based in Aberdeen, Wash. This compares to the national average of 9.1%. At the same time, St. George’s stores have seen an 8% sales increase in the first nine months of 2011, thanks in big part to some new economic activity in the area, include a new bridge under development in the port town.
And another Midwest operator is one of the few enjoying “excellent” business and expecting “some improvement” in 2012, despite wider economic challenges in the region. The large chain attributes its strong 2011 performance to a heightened focus on building relationships. “Like anything else, success is about building positive relationships with customers and vendors, along with paying attention to all of the little details,” he says.
Of course, while each retailer may approach economic malaise differently, ask any of them what ultimately determines whether they will have an excellent, good, flat or poor year, and there will be unanimous agreement: the consumer.
“Customers are still demanding quality and price,” says a survey participant. “As long as our offering is seen as a value, then we will continue with good business. When price becomes the predominant attribute of purchasing decisions, then no one will have good business.”
Change Is Coming
Despi te the economic headwinds— or perhaps because of them—more than 65% of respondents to the 2011 Outlook Survey plan to make changes to their business model in the coming year. An increased emphasis on inside sales and the addition or expansion of profit centers are at the top of the list. This compares to the 2010 Outlook Survey, in which 52.2% had plans for change.
Growth by acquisition also moved up the ranking as a more popular option, with more than one-quarter of Outlook Survey respondents putting it on tap for 2012, compared to 8.8% in the 2010 Outlook Survey.
For those adding or expanding profit centers, more than 45% of respondents selected foodservice for future focus, followed distantly by coffee and fountain.
Grammer of Fastop Inc. plans to build off his successful Sunny’s proprietary foodservice program, which includes deep-fried chicken tenders with a choice of standard and limited-time-only sauces, fresh-made sandwiches and breakfast sandwiches, which have been providing steady growth.
The category’s 2011 growth paced 9% (compared to 2% for overall in-store sales) and contributes more than 20% of inside sales at Fastop’s Circle A sites, compared to the industry average of 12.9%, according to the NACS State of the Industry Report of 2010 Data.
In October, the company was starting to make 2012 plans for foodservice, “getting our store managers together to brainstorm, and see what problems we can try to fix with food, cut down on waste and build promotions,” says Grammer. Fastop adopted a yearly calendar to identify eight to nine windows for promotions, including combo meals tying foodservice to coffee and fountain.
For those not making a change, a lack of access to capital and regulatory burdens were the most popular reasons. “We are trying to expand but banks are not the most willing, even with 30% down payments,” complains one retailer.
With more than 45% of Outlook Survey respondents expanding or adding a profit center with foodservice as their vehicle for change, CSP examined the most popular approaches. More than one-third had a made-on-site program, while 30.6% partnered with a nationally branded quick-serve restaurant (QSR).
For those planning a change to their current foodservice program, most— 37.3%—will expand their current proprietary offering or coffee bar (35.2%). Among retailers launching a new offering, approaches include partnering with a nationally branded QSR (14.8%) and a proprietary program (11.3%).
For St. George Stores, roller grill has presented opportunities for sales growth in a high-unemployment market. The company offers a proprietary taquito and hot-dog program, and it has created bundling promotions—get a free cup of coffee with the purchase of a taquito, for example—that have kept interest alive. As company president St. George sees it, his 7-Eleven locations offer variety to townspeople with few choices.
“The only national chain restaurant in town is a Denny’s,” says St. George. “There are not a lot of places to eat, so we’re an attractive alternative.”
CSP also asked retailers about their attitudes on fresh and healthful food. More than 63% say they sell fresh and/ or healthful food, with fresh fruit (68%), sandwiches and/or wraps (64.1%) and cereal and granola bars (55.3%) the top sellers. While more than 76% saw demand for these products growing, slightly more than one-half of these respondents have not yet decided whether or how they will change their offering to meet the clamor.
As Douglass of Douglass Distributing explains, acceptance of healthful options, especially in his rural markets, is gradual. “It’s more about changing their impression of your store than it is about profits,” he says. His sites sell sandwiches, wraps, salads and yogurt in open-air coolers. “It’s worth your time because that’s where [business] is going.”
Fuel Under Pressure
Outlook Survey participants have seen fuel margins either better, worse or about the same in 2011 compared to 2012. The percentage of those picking any one option broke out roughly the same: A slight majority (33.3%) saw the same level of margins, 29.6% described them as “lower,” and 29% said margins were “higher.” This compares similarly to respondents in the 2010 survey.
For many of those retailers experiencing lower margins because of higher fuel prices, and/or declining demand, it has had a clear effect on inside sales.
“During the last four years, higher gasoline prices have eaten into inside sales at convenience stores,” says one retailer. “Profit margins for tobacco products, drinks and candies have dropped. Making money on gasoline sales is definitely a losing proposition.”
“Petroleum sales are down, customer counts are down accordingly,” says another. “[We are] maintaining inside unit sales with minimal growth in dollar sales.”
More than 18% of respondents plan to make a change to their fuel offering in 2012. Upgrading fueling equipment was the most popular choice, with 37% of those who sold fuel making that move. This is followed by changing fuel brands and upgrading the fuel island (both at 33.3%).
A smaller percentage has plans to invest in alternative fuels, with E85 and biodiesel (both at 14.8%) the top picks, followed by adding an electric-car charging station (11.1%). Douglass Distributing added E85 to its Texoma, Texas, location in October. The site already has a free electric-car charging station, a propane fueling dispenser for propane vehicles, and low-sulfur diesel.
As Douglass explains, his company added E85 to “spark interest” within his community, but he concedes the demand has been very weak for that product and the charging station. Diesel sales, meanwhile, have been eclipsing gasoline because many of his rural customers are switching to diesel-powered pickups.
Fastop’s Grammer also sells E85, as well as propane, at one cardlock site, and is now exploring an even newer market: compressed natural gas (CNG). He describes installation plans as “stalled” for the present, largely because he hasn’t yet found an anchor tenant. “A couple companies said they were looking into it, but no one has committed dollars into putting it into their fleet,” he says.
In the tobacco category, nearly 43% of Outlook Survey respondents plan to keep their set the same in 2012, while more than 30% will grow some subcategories and shrink others. The most popular areas to grow: flavored cigars and moist smokeless. Respondents say they will primarily cut premium cigarettes (54.6%). A catalyst for premium cigarettes has been Altria’s Marlboro Leadership Price (MLP) program, which recommends a “maximum” price for Marlboro cigarettes. Douglass’ inside sales are up largely because of a 25% leap in cigarette sales tied to his adoption of the program. At the same time, he took a large hit in gross profits by more than that figure. For St. George Stores in Oregon, unit sales of cigarettes have been steady, although the company is not participating in the MLP program. “There’s definitely growth in OTP,” St. George says. “But the biggest challenge is shelf contracts out there from Reynolds and Altria really limit creativity.”
More than one-half of Outlook Survey respondents plan to keep their packaged-beverage offering the same in 2012, while 24.5% will make trims and additions. Energy drinks lead as the most popular subcategory for expansion, followed distantly by beer and iced tea. More than 26% of respondents who are shrinking their offering are targeting carbonated soft drinks. A veteran Southwest retailer credits several things to this year’s solid year-over-year performance. Most notably: a strong year for beverages, especially water and packaged beverages. “We did have to get more competitive as we saw people shopping more for price, so we didn’t necessarily get the margin we wanted,” he says. “But the volumes for soft drinks and adult beverages have been there.”
Among the participants of the 2011 Outlook Survey, prepaid will see relatively few changes in 2012, with more than 63% planning to keep their offering the same in the coming year. For those looking to grow, gift cards (54.3%) and prepaid debit or credit (45.2%) led the ranking. For those planning to shrink the set, prepaid wireless topped the list (54.3%).
Of the nearly 43% of respondents with car washes, most— 47.8%—planned to make no change to the business in 2012. Of those who did, more than 20% will buy new equipment, followed by nearly 19% adding new locations. CSP also asked how they market their car wash: Nearly 58% cross-promote with fuel purchases, while 31.9% offer coupons. The next biggest group does not market their car wash at all (23.2%).