The Trend Setters

How the top 25 retailers are setting the tone for a new retail environment.

By  Melissa Vonder Haar, Tobacco Editor

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Where to Invest in Growth

Of course, growth is more than knowing when to acquire, remodel, sell or spin off—it’s also knowing where to grow. While the top 25 retailers operate across the United States and Canada, one lesson many of them have learned about geographic growth is that it often pays to mess with Texas.

“Texas is the sweet spot. It’s just on fire in terms of the economy,” Herzog says of the Lone Star State. “There’s the weather, the amount of driving people do, the population growth: Texas is the perfect storm. It’s been a huge advantage for the retailers there.”

Texas is a great place to operate stores, and it’s a great place to start a business. Of the 25 retailers on the CSPedia list, four(7-Eleven, CST, Tesoro and Susser) are based in the business-friendly state. And it’s no coincidence that these four retailers are experiencing some of the most rapid growth.

“Who the hell does not want to be in Texas?” Fisher says. “Growth, opportunity, lack of taxes, lack of cumbersome regulations, a ‘business-friendly’ environment; governments (state and local) that support growth, development, and prosperity while not stifling all creativeness and ingenuity: Who does not want to operate in this environment?”

Appealing as the region may be, Herzogbelieves it’s more than Texas’ business friendly environment that’s contributing to c-store success.

“There are a lot of new builds and projects, and that means a lot of construction jobs, one of the key demographics that shop at convenience stores,” she says. “The Hispanic population—broadly in the U.S., but especially in Texas—is growing. And the Hispanic population tends to shop two or two and a half times more frequently inc-stores than a non-Hispanic consumer.”

That’s not to say that Texas is for everyone. Even with the economic, legislative and population perks, the competition is fierce.

“If companies are coming to this state, they had better bring a different game, and that game had better be their ‘A’ game,” says Fisher. “There are strong Texas companies in this industry that play rough on very familiar turf.”

And Texas isn’t the only game in town: Florida is also experiencing a c-store renaissance of sorts, with existing retailers such as Circle K adding new sites and new retailers entering the market, including Wawa, which leapfrogged over its traditional Northeast region to open locations in the profitable Orlando and Tampa markets.

“The state as a whole (from a customer perspective) will see long-term benefits in what is happening,” Fisher says. “It will be cleaned up from a positive standpoint. The new guys are walking tall.”

While the booming economies of both Florida and Texas are tempting, Wawa’s strategy of jumping out of its traditional market is not without its challenges. Moving to a new region—especially one that’s so far from a retailer’s headquarters—means dealing with more complicated logistics when it comes to distribution, supply contracts and staffing. It’s why many retailers opt to expand into neighboring regions, as Sheetz has done with North Carolina (where the Altoona, Pa.-based company just opened its 50th location in that state).

“Wawa and Sheetz both have their historic roots in the Northeast, which is populous but not growing rapidly,” says Nelson.“Their expansion into other markets is partly organic growth as their geographic area enlarges (like Sheetz moving South over time) and partly to get a foothold in rapidly growing state (as Wawa has done),where many people from their historic market are moving.”

Even if a move to Florida or Texas does not make sense for every retailer, even inorganic growth to neighboring states is not an option, most can benefit from keeping an eye on growing c-store markets. One day, the “new” Texas or Florida might be in their neck of the woods.

“Texas is Texas, Florida is trying hard to become Texas, and then there is a big gap, “says Fisher, pointing out that the Dakotas, the Carolinas and much of the Southeast could soon offer similar opportunities.“What is happening in Texas and Florida is a strong message that hopefully will bread and fully appreciated by those in other parts of the country.”

New Ways to Draw Customers

Perhaps the biggest trend over the past several years has been the emphasis many c-store retailers are placing on foodservice. While it certainly helps to recapture some of the margins being squeezed by cigarettes and fuel, foodservice could one day be the game-changing segment for c-store operators, according to Herzog.

“Foodservice will be critical to the future of this industry,” she says. “Whoever wins in foodservice will win overall. It’s a traffic driver; it not only brings more customers in the door, but it also increases the basket size. It drives not only the growth, but overall margins for c-stores.”

When a foodservice program is successful, the numbers can be staggering. Susser operates its proprietary Laredo Taco Company at more than 75% of its 500 stores, with Laredo Taco sites selling more than 200,000 food items a day and accounting for approximately 30% of the Corpus Christi, Texas-based company’s gross profits in 2010.Perhaps more impressive, Susser’s statistics show that 70% of foodservice customers make an additional purchase.

Similarly, Sheetz has rebranded its stores as “convenience restaurants,” prompting retail expert Burt Flickinger to call the company’s meal-to-go program “one of the finest anywhere in the world.”

“Foodservice has such a range of offers (from fountain and coffee bars to full-blown kitchens, bakeries, commissaries, etc.)that a retailer needs to define what is doable given their business model,” Nelson says, pointing out that “a Sheetz program is not viable for most operators.”

For an extreme example of thinking outside the foodservice box, one need look no further than the pizza program executed at Casey’s General Stores. Not only is Casey’s now the sixth-largest pizza chain in the United States, but the Ankeny, Iowa-based company has also found success in offering pizza delivery at an estimated 225 of its locations (a number that the company intends to increase).

“For the most part, we have delivered pizza, maybe some 2-liter sodas,” Casey’s CFO William Wall jasper said during the company’s third-quarter fiscal 2013 earnings call. “But as we get more comfortable in that particular initiative, it’s certainly now[within] the realm of possibility to expand the delivery options.”

While pizza delivery has been profitable for Casey’s—which typically operates in very small towns where other delivery services may not be an option—it’s clearly not for the average retailer. But its success speaks to Nelson’s advice that retailers identify the type of program that fits a company’s business model and fills a need within the market.

“There are lessons retailers can learn from a company like Casey’s, who expanded outside their comfort zone and developed a needed service,” says Herzog. “The pizza delivery business has really resonated within their communities.”

Another way top retailers are trying to resonate with customers is through value-driven private-label offerings. While the recession has certainly increased the demand for private label, it’s a trend that could easily survive as the economy improves, Nelson says.

“A private-label product can become as much of a brand in particular market area as a national brand,” he says. “Consumers are looking for a great value proposition, and if a private-label product delivers that, then it will survive. Many core convenience shoppers have not seen their real incomes grow for 20 years, so value is, and will continue to be, very important.”

Herzog believes it’s also crucial to consider what kind of private-label products consumers are more likely to purchase. Although several top 25 retailers are offering private-label energy drinks, Herzog (who also covers the beverage industry) predicts a lower price point will not be enough to lure most consumers away from brand names.“Energy drinks are still a very brand conscious category,” she says. “You really are associating yourself with that can. Although certainly there’s some opportunity(for more value-driven consumers),my assumption is it won’t ever be a large opportunity, especially as a single-serve.”

Meanwhile, Herzog believes there’s a significant opportunity for private-label products that are meant to be consumed in the home, such as grocery and dairy.

Regardless, many retailers are doubling down on private label: Kum & Go estimates private label makes up 10% of its total store mix. Kwik Trip boasts 300 SKUs of private-label brands, including its Kwik ‘n Lows line. 7-Eleven also offers about 300 different private-label products.

“There is still an opportunity for c-stores to no doubt make up for some margins elsewhere,” Herzog says. “The consumer still tends to gravitate toward these offerings in certain categories. There’s certainly an opportunity, especially when the gap is wide enough.”

As consumers gravitate to the next big things in the continuing evolution of the c-store industry, it makes it all the more important for retailers big and small to look at what their peers have done to survive—and to thrive.

“The source of all fundamentally strong and accurate innovation does not necessarily go from big to small or big to little,” says Fisher. “It comes from the nimble and quick, from those who are complete and total opportunists, and those who see, focus and respond.”

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