State of the Industry
In year of broken records, industry seeks sustainable growth beyond fuel and cigarettes.
The c-store industry shattered several records in 2011, some good and some bad. Among the good: inside and fuel sales, profits and total number of c-stores. Among the bad: credit-card fees, retail fuel price, and, depending on your politics, record-high taxes.
Through the good and bad, however, the industry has proven remarkably strong in the face of depressed consumer spending and sentiment, gasoline price spikes and the rising and falling fortunes of competitive channels.
“[With] what this country has gone through in the last three to four years, our channel has been recession-resistant,” said Glenn Plumby, a presenter at the 2012 NACS® State of the Industry Summit and vice president of operations for Speedwell, Enon, Ohio. “There are not many channels that can say that, and I think it’s attribute to all the hard work and execution that people in this room do maintaining those customers, keeping those customers and driving increased sales during a pretty rough time for our country.”
As the economy shakes off its recessionary cobwebs, consider the following: Total c-store sales rose 18.5% to hit $681.9 billion in 2011, according to preliminary figures from the NACS® State of the Industry Report of 2011 Data. Motor fuels—up 26.4% to reach $486.9 billion—provided the bulk of the total and the lift. Inside sales rose 2.4% to $195 billion, a slower growth pace than 2010 but back to where the industry was before the recession.
Pretax profits rose 7.3% to total $7 billion, a considerable feat in a year when the national average motor-fuel price hit a record $3.52 per gallon, according to OPIS. Of course, with that rise in fuel prices came a 23% leap in credit-card fees, which totaled $11.1 billion in 2011. And that trend is poised to continue in 2012.
“If you look at our progress over the course of the last six to seven years—$7 billion—we all worked pretty hard to achieve that,” said Plumby. “If you throw card-swipe fees against profitability, $11.1 billion is not only a record. … The gap between swipe fees and our profitability is $4.1 billion—that ties the biggest gap ever. As gas prices continue to rise, that gap will continue to grow.”
Indeed, rising retail fuel prices made the list of five 2012 “watch outs”—trends that will slow and possibly trip up greater industry growth:
Rising Retail Gasoline Prices.According to NACS same-firm figures—tracking retailers who reported data to NACS for two consecutive years—the average selling price for fuel rose 27.6% in 2011 for an average of $3.45 per gallon. In the first 13 weeks of 2012, gas prices rose 58 cents to reach $3.91.
“This hurts our consumers at the pump, and it’s driving up commodity prices, acquisition costs, fuel surcharges,” said Plumby.
Declining Fuel Consumption.Continuing a long-term downward trajectory—pressured by a soft economy and rising fuel prices—fuel consumption has continued its downward trajectory. Perhaps more significant, the decline has transformed into demand destruction.
Same-firm figures show gallons off 0.4%, while total industry numbers reveal a 1.6% dip in barrels per day, reflecting that the same-firm retailers are actually growing share in the face of softening volumes.
Soft Cigarette Volumes and Margins. A 1.0% dip in same-firm sales of cigarettes and 2.6% drop in gross profits show the c-store industry’s biggest instore category was under considerable pressure in 2011, which provided a counterweight to greater in-store growth.
“The forces that drove the business to where it is today are gas and cigarettes,” said Plumby. “In both cases, volumes are soft, meaning we have to work that much harder to make up for the volume losses.”
Rising Break-Even CPG. On the capital-productivity side, break-even cents per gallon (CPG) rose 19.4% in 2011. This upward trend includes top-quartile retailers in the NACS SOI sample, whose break even CPG rose from 6.49 CPG in 2010 to 8.00 CPG in 2011. (See p. 25 for more information on quartile performance.)
Growing DSOE Less Credit-Card Fees. Total direct store operating expenses(DSOE) rose 4.5% in 2011, driven upward by a 23% leap in credit-card charges. After removing card charges from the equation, DSOE rose 2.0%, which included a slight bump in wages and benefits. Overall, retailers did a “nice job” of managing expenses, Plumby said, but with cigarette sales and gallons soft, “on the expense side, we have to do that much better a job managing it to ensure profitability in the future.”
Finding Opportunities to Drive Sales
As he presented data on the c-store channel’s in-store categories at the 2012 NACS® State of the Industry Summit, John Zikias encouraged attendees to look at the bright side and pursue opportunity when confronted with negative numbers.
“While we’ve gone through tough and trying times, we’ve survived, and many thrived and grew their business in tough times,” said Zikias, senior vice president of category management and supply chain for Thorntons Inc., Louisville, Ky. “Where do you have opportunities in business? What are you doing to drive sales? How are you trying to solve customer missions and be famous for something?”
The top 10 categories—which supplied 92.4% of in-store sales in 2011, up 1.4 points from 2010—provided some fertile ground for retailers. The ranking stayed relatively the same in 2011, led by cigarettes, foodservice, packaged beverages, beer and OTP, according to preliminary figures from the NACS® State of the Industry Survey of 2011 Data. Cigarettes lost the greatest share—off 1.4 points—while foodservice and packaged beverages gained the most ground. Packaged sweet snacks shifted ahead of milk to reach the No. 8 category.
More than 89% of in-store gross profits were supplied by the top 10 in 2011. Foodservice led the pack and grew share nearly 1 point. It was followed by packaged beverages—also gaining share—cigarettes, beer and candy. Cigarettes again lost the most ground, off 1.2 points to provide just more than 18% of in-store gross-profit dollars.
Among the top 10 merchandise categories, cigarettes’ 1% dip in sales and 2.6% drop in gross-profit dollars were among the few negative growth stories among the in-store categories. Examining the category through syndicated data from Chicago-based SymphonyIRI Group, premium cigarettes grew share by six-tenths of a point, much of it driven by programs such as Altria’s Marlboro Leadership Price(MLP). Total c-store cigarette sales grew 1.1%, with units off 0.3%.
“We’ve talked about sticks declining 2% to 3% per year, and in the beginning of 2011, it was even greater than that,” said Fikias. “As we see units down only 0.3%, it appears that many of the programs put in place to help drive units are starting to pay off.”
Packaged beverages had a strong 2011, propelled by gains for alternative beverages—i.e., energy drinks—and sports drinks, according to figures from the NACS® State of the Industry Survey of 2011 Data. The largest subcategory, carbonated soft drinks (CSD), lost 1.3 points in share of category sales. But examining c-store sales data from Nielsen, CSDs actually grew units 1.5% and sales by 2.5%. This pales in comparison to the double-digit growth for alternatives and sports drinks, but still shows positive growth after several years of negative momentum.
While the top 10 categories understandably receive the most attention, opportunities exist in the next 10. Consider, for example, health and beauty care, which grew sales by 5.6% with gross-profit dollars up 8.3%, thanks to the strong performance of energy shots. Alternative snacks, which includes meat snacks and protein bars, also posted strong gains.
Just as in the top 10, however, the next 10 categories are under pressure. In edible grocery, sales fell 1.8% and gross profits were off 7.4%, while no edible saw sales off 16.8% and gross profit dollars down 21.8%. Here, Zikias suggested retailers ask whether they are seeing a similar retreat because of strategy—or neglect.
“We expanded foodservice at the expense of grocery,” said Zikias. “If you are, then the trend isn’t as concerning. But if you’ve dedicated the same amount of space in your business and you’re seeing similar trends, you might want to take a look at how you’re allocating your macro space and look for other opportunities to grow your business.”
Zikias cited a similar dynamic taking place within the candy category, where units fell 0.5% while sales rose 5.8%.“Whenever you see a unit decrease and see sales and gross-profit dollars increase, it’s a little of a concern,” he said. “It’s important to see where you’re getting the growth from. As we try to drive sales with seasonal as well as king-sized bars, we’ve seen units decline a little bit, but that’s driven our revenue, so it’s not as great of a concern for us.”
Foodservice, a category that encompasses the hopes and future of the industry perhaps more than any other, actually grew through strong sales of prepared food—up 13%, with gross-profit dollars up 13.8%—and cold dispensed beverages.
Meanwhile, sales and gross-profit dollars for packaged sandwiches and hot and frozen dispensed beverages were in the red for 2011. For hot dispensed beverages, retailers appeared to hold the line on prices against quick-serve restaurants, which in turn hit margins, Zikias said.
Many retailers—top-quartile operators in particular—have embraced foodservice to drive sales in other categories, and indeed are trying to become famous for their food offerings. It’s a drive that can only bring the industry forward.
“We’re rooting for everyone in hereto do better with food,” said co-presenter Glenn Plumby, senior vice president of operations for Speedway LLC. “Our research shows about one-half of consumers even look at c-stores as an alternative for food. … We need as a group to continue to progress and do better so we can draw more consumers into our channel and get them to understand we do a very good job with food.”
Top Decile Widens the Gap
Even as the separation between top- and bottom-quartile performers among c-store operators continues to widen, the NACS®State of the Industry Report of 2011 Data delved even further this year, moving beyond the top 25% metric to the top “decile,” or top 10% of the participating c-store population by store operating profits. It revealed a significant gap even among the best of the best.
Surprisingly, ratios between top, middle and bottom performers among the industry’s top decile mimic the divides between top and bottom within the larger population, with a noticeable separation between the very top performers and the rest of the top 10%.
For instance, the top decile performed 1.7 times better in store operating profit than the second decile, according to DaeKim, vice president of research for NACS, in a presentation of the data. “It seems even the top-quartile companies are pulled up by the top decile,” he said.
At the quartile level, the gap between top and bottom continues to expand. In terms of store operating profit, the top-quartile companies made $25,611 per store per month in store-operating profits, six times as much as the bottom at only $3,686.
Even more telling were cents-per gallon(CPG) break-even averages. As gasoline consumption continues to wane, retailers have focused on in-store profitability as a way to reduce their reliance on fuel sales. They estimate how many CPGs on gasoline that they need each month to break even. The smaller the number, the better; ideally, it is a negative number, which means inside sales are so strong, a retailer can actually lose money on gas and still cover his or her monthly expenses.
Top-quartile performers needed less than half of the CPG that bottom-quartile retailers needed, the report said, with the top quartile needing 8 cents and the bottom 19.54 cents.
“Break-even CPG is on the rise for bottom performers,” said co-presenter Glenn Plumby, vice president of operations for Speedway LLC, Enon, Ohio. In analyzing the numbers, Plumby singled out second-quartile performers as appearing to have a “different model” from other respondents. Despite having lower fuel gallons and merchandise sales averages than respondents in the next quartile down, the second quartile’s store operating profits are almost double that of the third quartile. Part of that standing was due to better foodservice sales, but even that didn’t make up the deficit, with Plumby ultimately attributing it to the tier’s business model.
As disparate as the quartile numbers may be, the decile data proves that some companies are taking profitability to an all-time high.
The top 10% of surveyed companies not only had 1.7 times store operating profit than the second decile, but it also continued the streak through to pretax profit (1.8 times) and earnings before income, taxes, depreciation and amortization(EBITDA) at 1.7 times the second decile. EBITDA figures for top-decile companies was $29,998 per month vs. the second decile at $17,612. Bottom-quartile retailers averaged only $90.
In terms of break-even CPG, the top 10% came in at 6.91 CPG, while the second was 10.2 CPG and the lowest—companies in the tenth decile—came in at 18.20.
In many ways, the top decile seems to have brought up all averages. For instance, the average of motor-fuel gallons sold by all companies was 127,000. Taking out the top 10%, that average dropped to 112,358. Average merchandise sales was $108,965. Less the top decile, the number fell to $98,021. Even in foodservice, the numbers were telling: The top-decile figure was $46,625; top quartile, $36,067; average for all, $26,064; and the average less the top decile fell to $18,948.
Direct-store operating expenses were higher for the top decile, at $61,927 vs. the second decile, at $43,074. And labor costs were higher, with average costs per hour for the top decile being $15.13 vs. the average at $12.48.
Yet productivity per labor hour appears to be higher, with top-deciles ores at $34.45 gross profit per dollar per labor hour—1.4 times the second quartile. In-store sales per square foot were also dramatically higher, with the top 10% making $106 and the top 25% averaging $62.23.
The number of stores didn’t seem to matter either, with five of the 19 operators in the top decile being single-store operators, Kim said. Top-decile performers average only 124 stores, 4.2% fewer stores than the second decile.
In terms of categories, top-decile companies remain competitive with basics such as fuel, selling at about the same retail price as second-decile companies($3.52 per gallon), but top-decile companies make less margin than the next decile(19.55 vs. 20.58 CPG).
In categories such as packaged beverages, beer and salty snacks, the averages are closer together. The notable exception is cigarettes, with top-decile companies making $96,336 in sales vs. $74,535. The larger average for cigarettes is $47,574, and the average less the top decile is $37,993.
Rising Prices, Falling Demand
Fuel, the industry’s biggest sales producer, mirrors the slow motion decline of the industry’s biggest in-store category, cigarettes. Supplying 71.4% of total sales, according to preliminary figures from the NACS®State of the Industry Report of 2011 Data, it continues to cast a large shadow on the industry, and it also serves as a potent traffic driver. But at only 35.9% of gross profit dollars, it is not as potent a money earner as it used to be.
Further pressuring the forecourt is along-term national decline in fuel consumption and miles driven, dating back to a peak in 2007. According to figures from the Energy Information Administration(EIA), fuel consumption fell by 1.6% in 2011. Meanwhile, the most recent data from the Federal Highway Administration shows that traffic volume fell 0.9% in November 2011 compared to November 2010, or a drop of 2.1 billion vehicle miles.
Part of the decline was a summer driving season that never fully materialized.
“In 2011, the summer driving season started out as anticipated,” said presenter Glenn Plumby, vice president of operations for Speedway LLC, Enon, Ohio.“Then around week 26, it just died.” By the end of the year, gasoline volume was off 6.5% compared to the same time in 2007. “Those are gallons that came right out of our pocket—demand destruction that makes the rest of the business that much more difficult.”
And that wasn’t the bad news. In 2012, volumes started off 7.1% below 2007 and 4.8% below 2008. The most current figures from week 13 of 2012 showed volume down 9% from 2007.
Examining the trend through samefirm data from the NACS® State of the Industry Report of 2011 Data shows that some retailers are faring better than the average. For these operators, fuel volumes fell 0.4% in 2011 to 123,710 gallons per store per month. “Same-firm companies are taking share,” said Plumby. “In view of declining consumption, the only way we can continue to make hay is to grow share. It’s pretty impressive that the same firmgroup of stores is able to do that.”
Fuel sales grew 27.1% to hit $427,097 per store per month, according to the same-firm sample. This was driven by a 27.6% leap in average selling price to $3.45 per gallon—which presents the second challenge for today’s fuel retailers.“Spending is up nicely, but our consumer is certainly going to be challenged when you look at these gas prices and what’s happened inside the store,” said Plumby.
Data from Oil Price Information Service (OPIS) shows that the country set a record for retail fuel prices at $3.52 per gallon in 2011. Moving into 2012, comparing weeks one to 13, gas prices were up 58 cents to hit $3.91.
Whereas in the past, fuel demand may have bounced back after price spikes, there has been gradual erosion in consumption going all the way back to 2007. For example, compare the years 2007 and 2010, when the average retail fuel price was around $2.80. In those three years, volume fell 2.8%.
Meanwhile, retailers made more money from less gallons, according to the NACS®State of the Industry Report of 2011 Data. Same-firm figures show that fuel gross profits rose 11.2% to reach $22,759 per store per month. Fuel margin rose 2.4 cents per gallon (CPG) to reach 18.4 CPG. Remove credit-card fees, however, and margin falls to 12.1 CPG, up only 0.8 CPG from the year prior. On a percentage basis, fuel gross margins winnowed from 5.6% to 5.2% in 2011.
As a percentage of overall sales, credit and debit-card fees were 1.6% of total industry sales dollars, factoring in all forms of payment, including cash and check. Credit and debit-card fees added 5.7 cents to each gallon of gasoline that c-stores sold in 2011, according to NACS.
The industry typically earns its greatest fuel profits during the summer driving season. An examination of recent summers and break-even CPG, however, finds this seasonal upswing is becoming less reliable. In 2009, break-even was 10.49 CPG, while in 2010 it was 10.71 CPG. Break-even inched up 1.1 CPG in 2011, much of it driven by credit-card fees. It’s one of those metrics for which an increases not a positive.
“Whenever you have a 1.1-cent increase in break-even, it really makes [earning a profit] that much more difficult,” said Plumby.