Shaken & Stirred
Mix of economic turmoil, shifting vendor support shakes up c-store beverage sets.
One might equate Ed Oliveira’s discovery to finding a silver lining in an otherwise dark cloud. During the economic mess of 2009, Oliveira spotted a serendipitous trend: Carbonated soft drinks, a mammoth subcategory whose sales in recent years have been flat or even slightly down, made some surprisingly nice gains.
“We were up 5% in Coke and up 4% in Pepsi [in dollar sales],” says Oliveira, category manager for Verc Enterprises, a Duxbury, Mass.-based chain of 20 convenience stores in Massachusetts and New Hampshire. “I think the growth was due partially to the economy but also because we changed our promotional strategy” by offering more twofor deals on 20-ounce and 2-liter bottles at a reduced price.
Such bubbly increases came despite the fact that four years ago Verc stores cut back on space allocated to CSDs, going from two doors for Coke products and two for Pepsi products to one door each, to give more room to quicker-turning sectors such as bottled water and energy drinks. “Our [CSD] sales didn’t plummet,” Oliveira says, “which we were somewhat expecting.” Yet the revival of “ol’ reliable” CSDs is one small part of a topsy-turvy reordering of the cold vault (see chart, p. 86) caused by a storm of largely uncontrollable factors. Beginning with the feeble economy and what Oliveira calls a “terrible, terrible” summer of 2009, retailers have also seen bottlers and brewers shift away from introducing a rash of new items and “trying to see what sticks,” in favor of marketing their tried-and-true heritage products more aggressively. “We’ve seen some weird things,” says Bret Richards, chief operating officer for Richards Enterprises Inc., an Irwin, Iowa-based operator of 11 Country Stores. “In the last two years it seems [vendors] have tried every new product and have been turning new items constantly. It’s good because innovation drives sales, but it’s bad because you’re always trying to make space for something else and wreaking havoc on plan-o-grams.”
Some noticeable trends that have kept Richards and other retailers guessing: Bottled water and sports drinks have dipped significantly, caused in part by uncooperative weather and, in the case of sport drinks, what one retailer calls “misguided innovation.”
Moreover, sales of ready-to-drink teas have exploded; energy drinks have slowed somewhat, possibly the result of cannibalization by lessexpensive energy shots; and premium beers, including some of the most iconic brands in the consumer-packaged-goods world, continue to flounder while crafts and below-premium beers thrive.
Brian McKee has a very simple explanation for the current cold-vault turbulence: Having less expendable income in times of uncertainty, he believes, has caused consumers to stick with what they know, what feels good and, of course, what they can afford.
“Fads go away, and people come back to the winners: the Cokes, the Dr Peppers, the Mountain Dews,” says McKee, co-owner and vice president of merchandising for 18-store Pak-A-Sak Inc., Amarillo, Texas. “I think tea is the big fad right now; iced tea is up 14% [in gross profit] for us this year.”
To keep up with the “fads,” Pak-A-Sak continues to build bigger stores with ever-expanding cooler sets, at times bringing store designers back in during the development phase to add more doors to the floor plan. Its newest stores measure 5,000 square feet and have as many as 22 cooler doors. (Conversely, the company recently opened an experimental 1,750- square-foot Pak-A-Sak Express in a shuttered Starbucks coffeehouse, featuring just a few cooler doors stocked with “the best of the best,” says McKee.) The company’s newest store, set to open this month in Pampa, Texas, will have eight doors solely for beer and wine.
“We’ll do major beverage resets twice a year, but we’re tweaking all the time,” McKee says. “It’s my baby, and that’s where I spend most of my time. In the past, our coolers have given us about 28% of our gross profit. It’s a category with so many new SKUs coming in, and you really have to pay attention to it. … A lot of retailers will ‘sell’ all their shelf space, but I just don’t do that.”
At Top Star Express, a 30-store chain based in Emmaus, Pa., no two cooler sets look alike, according to operations manager Megan Stark. Coolers are set according to scan data on a store-by-store basis, which figures to be a tedious amount of work. Consider: The company works with four different dairy-tea vendors to accommodate regional tastes. Instead of uniformity, Top Star shoppers find great diversity.
“We had a good 2009 and actually had double-digit growth in our cooler,” Stark says. “What we decided to do was, instead of having thousands of flavors, we limited it down to the ones that sell and then multi-face them. If we have to give Coke Classic and Mountain Dew a whole shelf to make sure we’re never out, we’ll do that.”
At the same time, the company worked to eliminate backstock by getting more-frequent deliveries from key vendors. Its primary wholesaler, South San Francisco-based Core- Mark International, delivers dairy teas twice per week, while direct-storedelivery beverage distributors replenish stocks at least once per week. “There’s no way we would have had the year we did last year if not for our vendors,” Stark says.
Depending on layout and square footage, Top Star Express stores feature as many as nine cooler doors and as few as three. Also, 24 of the 30 stores have open-air coolers to give more of a stage to top sellers. It’s also a way to capture incremental sales of items such as orange juice and bottled water from customers who might make a beeline for the coffee bar and then the register without shopping the cold vault.
Stark also has her eye on three beverage “hot spots” she believes could dramatically affect her packaged-beverage sales for the better: the availability of coconut water (“It’s elite, it’s expensive, and it’s what every person in Hollywood is drinking,” she says) and anti-aging water in the Northeast; and, in light of a recent court ruling that granted Altoona, Pa.-based Sheetz Inc., the right to sell beer at one location, the possibility that one day soon other Pennsylvania c-stores can legally add beer to the merchandise mix.
“This year we converted our freezers to coolers to allow more space to accommodate our top sellers, but hopefully that extra space will help us prepare for sales of beer,” she says. “We don’t do ourselves any favors by changing our freezers to coolers and just waiting to be allowed to sell beer. All we can do is prepare for it, so it’s important to continue to be creative and do business the way we do every day.”
WHERE TO BEGIN
Outside of Pennsylvania and other states that prohibit c-store sales of alcohol, beer remains a category cornerstone that has outperformed its nonalcohol counterparts on an annualsales basis, according to Nick Lake, vice president and group director of client service for The Nielsen Co., New York. He advises eligible retailers to consider anchoring their strategies around beer, which did more than $14.4 billion in c-store sales for the 52 weeks ending April 3, 2010, a 0.2% increase over the same prior-year period.
“The premium [beer] segment dominates so heavily, so what you see is that premium is probably underspaced because of the relative size of the category,” he says. “The top five brands in the channel represent over half the category volume. The top 15 brands represent 80% of category volume. If I were a c-store operator, I’d start there.”
That said, premium and import beer brands have struggled recently, though the tea leaves suggest a turnaround is on the horizon. Nielsen data shows imports’ unit volume down 6.5% for the 52 weeks ending April 3, 2010, while the segment’s unit volume actually increased 2.3% for the most recent four weeks.
“I’m not 100% certain we will get back to growth, but I do think the losses or the declines have hit a bottom and will start trending up,” Lake says. “There’s a real focus on promotion and making sure the price gap between imports and premiums is a bit more manageable,” thanks to increased promotional activity from import distributors. Beer’s growth has come from the opposing bookends of subpremiums and high-margin crafts (see chart, above). Growth in subpremium has been driven primarily by price-sensitive beer drinkers, while craft’s success comes from consumers seeking brief moments of indulgence.
“The share levels for crafts are nowhere near double digits, but the profits are two to three times greater than premium products,” says Tom Fox, managing partner with Troy, Mich.- based consultancy CM Profit Group. “If someone had a four- or five-door cooler, taking a shelf to devote to crafts makes a lot of sense. There’s no risk there.”
In the Midwest, most of Bret Richards’ stores don’t do much business in craft beer, but he’ll be the first to admit that Iowa tends to “follow everybody else, with a delayed and subdued response to trends.”
For example, subpremium brands such as Busch Light and Natural have remained consistently strong over the past two years. He has, however, noticed consumers purchasing a greater amount of smaller pack sizes—sixpacks and 12-packs vs. 18-packs and case packs—which could be caused by consumers trying to stretch their monthly incomes.
Most retailers reset their beverage doors at least once a year, followed by minor tweaks throughout to account for seasonal changes. Pennsylvania’s Top Star Express, for example, resets coolers between February and April and then does a post-summer housecleaning to pare down warm-weather items such as cold bulk water. Given the abnormal turbulence of 2008 and 2009, however, some retailers are waiting for something akin to a full recovery to make significant alterations to their beverage sets.
“We were up three-quarters of a percentage point [in overall beverage sales] last fiscal year; we had been seeing increases of 5% to 10% until last year, which was an anomaly,” says Oliveira of Verc Enterprises. “We’ve kept things the way they were this year because my feeling is that water is going to come back, and I think energy is going to have a stronger year. With beverages in general, I can’t imagine us having as bad a year as last year.”
So far, his strategy appears to be on target. Although Verc’s bottled-water sales were down 8% in 2009, this year’s results seem to be more in line with past performance. In its first fiscal quarter, Verc’s shipment reports show bottled-water sales up more than 7% thanks to strong price promotions on multipacks from the likes of Nestlé Waters North America. It’s a far cry from the double-digit increases from just a few years ago, but, as the Confucian proverb goes, a journey of a thousand miles begins with a single step.
Beer Goes Private
Dallas-based 7-Eleven Inc. is working toward a feat accomplished by few, if any, other retailers: making private-label beer into a success story. Dubbed “a premium beer at a below-premium price,” 7-Eleven’s newly launched Game Day lager follows last year’s winning introduction of a proprietary wine label called Yosemite Road. Game Day has been in development since mid-2009 and was fueled in part by shifting consumer behavior amid a stubbornly slow-to-recover economy, according to Dan Skinner, 7-Eleven’s national category manager for alcoholic beverages. Early results—namely, first-run sales and a “thumbs-up” from franchisees—have been encouraging.
“Our initial success story is the rapid product participation we have achieved to date,” says Skinner. “In less than three weeks we have product ordered in nearly 90% of eligible stores. … Sales are gaining momentum each day.”
Game Day is available in Light and Ice varieties and two package sizes: a 24-ounce single ($1.49 to $1.89 SRP) and a 12-pack of 12-ounce cans ($6.99 to $8.99 SRP). Game Day 12-packs typically get two to four facings in 7-Eleven stores, while singles receive four to nine facings, according to Skinner.
Some beverage analysts have suggested in the past that private-label beers would fall flat due to beer drinkers’ devotion to their favorite established brands. But economic stagnation and the widespread acceptance of nonmajor brands in virtually every other product category have helped turn the tide.
“No one has had a lot of luck with private-label beer, so they have their work cut out for them,” says Tom Fox, managing partner for packagedbeverage consultancy CM Profit Group, Troy, Mich. “It will be interesting to see if Busch, Natural Light and Keystone consumers will trade over. … I certainly understand why [7-Eleven is] doing it, and if they’re successful, I wouldn’t be surprised to see other retailers follow their lead.”