Basking in the Golden Age

In-store sales were up. Gross profits were up. Motor fuel gallons sold were up. But overall revenues were down in what was, once again, a very strong financial performance for the convenience store industry in 2015.

Total c-store industry sales declined 14.4 percent last year to $603 billion, due to sharply lower gasoline prices, according to the 41st annual Convenience Store News Industry Report, the longest-running, continuously-published annual report on the health and performance of the convenience retail channel.

By almost every other measure, the convenience store industry operated on all cylinders in 2015. It was one of the industry’s best years — maybe more impressive than 2014’s record performance. With the lowest pump prices in years, consumers hit the road more often in their cars and had more dollars in their pockets to spend on food, beverages and other merchandise inside the store. Retailers enjoyed record-high fuel profits on those low prices.

“The industry was able to take advantage of lower fuel prices to help drive inside sales, while enjoying historic fuel margins,” said Steve Montgomery, president of c-store consulting team b2b Solutions LLC, one of five industry experts CSNews tapped to lend their perspective to the industry’s financial results.

In-store sales (merchandise and foodservice combined) were up 4.9 percent to $213 billion. This solid gain was achieved despite a less than 1-percent increase in the U.S. convenience store count from 152,749 stores to 154,195 year over year.

Motor fuel gallons sold, which peaked at 148.2 billion in 2007, set a new high last year at 151.3 billion, a 2.9-percent increase from 2014. Motor fuel dollar sales declined 22.2 percent to $390 billion as the average price per gallon fell from $3.41 to $2.58. Motor fuels as a percentage of total industry sales dropped to a more-than-decade-long low of 64.7 percent.

Total industry gross profits were up 3.5 percent to $92.8 billion. This figure is all the more impressive following the leap of 12.5 percent the previous year. Fuel profits were a record high $35.4 billion, a 0.6-percent increase over the previous year, also impressive considering fuel profits skyrocketed by 30 percent in 2014.

Maybe more impressive: In-store profits were up at an even faster pace than the previous year. Gross profits on foodservice and merchandise sales increased 5.4 percent to $57.4 billion, beating 2014’s 3.5-percent gain. Low gas prices and an improving economy appear to be driving sales of “premium” products, according to many c-store retailers.

As a result, gross profit dollars per store rose to $613,129, an increase from $598,942 in 2014. Gross margin as a percentage of sales rose to 15.4 percent, up from 12.82 percent.

In pretax profits, the industry again beat its record gains of the previous year. Total industry pretax profits in 2015 were $9.3 billion, a 3.4-percent gain after the whopping 34.1-percent increase the year before. Pretax profits per store were $61,277, an increase of 2.3 percent from the previous year when per-store profits ballooned by 32 percent.

Foodservice sales (including prepared foods, hot, cold and frozen dispensed beverages) achieved its biggest percentage increase since 2012. C-store retailers’ hottest category grew 7.1 percent to a record $33.5 billion in sales last year. Merchandise sales (excluding foodservice) also saw its largest percentage gain since 2012, up 4.5 percent to $179.5 billion, easily topping the 2.6-percent gain of 2014.

“Foodservice has been one of the primary drivers of growth for c-stores and 2015 proved that,” said Tim Powell, vice president of consulting for Q1 Productions. “Discretionary income was higher, unemployment dropped, the [labor] participation rate increased, and gas prices dropped to historical lows. These were all favorable to in-store purchases in c-stores. Also, from an operational perspective, c-stores have improved their implementation and execution of foodservice programs.”

Average sales per store (excluding fuel) also hit an all-time high of $1,406,866, a 3.7-percent increase from 2014. It was only 10 years ago that average store sales barely topped $1 million.

“The average consumer [in 2015] had about $700 in incremental disposable income vs. 2014, due to deflation in fuel prices,” noted Jon Bratta, vice president of marketing for convenience distributor Core-Mark International Inc. “Foodservice again showed nice gains, as did the core categories, including cigarettes.”

SALES ANALYSIS

The top 10 categories (as defined by Nielsen) accounted for 89.86 percent of in-store sales last year — a figure that has been fairly consistent over the past several years. Cigarettes remained the highest-grossing category, comprising 30.84 percent of in-store sales. Industrywide, cigarette dollar sales increased 3.9 percent last year.

Foodservice was again the second-largest category in in-store sales, accounting for 15.71 percent of the total. Within foodservice, prepared food sales rose 7.7 percent, hot dispensed beverages were up 5.8 percent, cold dispensed beverages jumped 9.1 percent, while frozen dispensed beverages saw a 1.1-percent gain.

The third-largest category in in-store sales was packaged beverages, which comprised 12.69 percent, driven by a 7.3-percent sales gain last year. Beer/malt beverages is next at 9.51 percent (a 3.1-percent gain year over year), followed by edible grocery (5.11 percent of sales, a 4.5-percent increase), other tobacco products (4.91 percent of sales, a 5.4-percent increase), general merchandise (3.25 percent of sales, a 4.9-percent sales gain), candy/gum (3.22 percent of sales, a 3.5-percent sales gain), and non-edible grocery (1.89 percent of sales, a 3.7-percent gain).

Among smaller categories, wine and liquor (up 10.7 percent in sales), alternative snacks (up 8.4 percent) and packaged sweet snacks (up 8.3 percent) had stellar years.

PROFITS ANALYSIS

Foodservice retained its crown as the c-store’s most profitable category, generating $96,662 in gross margin dollars per store last year, a 5-percent increase. Cigarettes just edged out packaged beverages for the spot of second most profitable category — with $59,256 in gross margin dollars vs. $58,569 per store for packaged beverages.

Other top profit-generating categories were beer/malt beverages ($25,027 in gross margin dollars), edible grocery ($22,630), candy/ gum ($19,902), general merchandise ($17,497) and other tobacco products ($16,817).

More highlights of this year’s Industry Report include:

• Credit card transaction fees declined last year from $74,374 per store in 2014 to $73,167 per store, or about 12 percent of store profits.
• Total direct-store operating expenses, though, continued to rise — topping $536,000 per store in 2015, up from $515,000 the previous year. The biggest expense culprits were wages and health insurance.
• In-store transactions were the highest in nine years, and the average in-store transaction hit a new high of $8.22.
• Shrink held steady at about 1.44 percent of sales.

“The biggest hurdle to c-store growth, outside of the fundamental economic factors, are the c-stores themselves,” noted Powell of Q1 Productions. “It is still a challenge to hire quality, dependable staff, keep up with wages and health care costs, and to instill excellent customer service and store cleanliness on a daily basis.”

Most retailers are basking in the glow of what CSNews dubbed “The Golden Age of Convenience Store Retailing” in its January 2016 issue. However, some operators are wary about the future. Fuel margins are on the decline with prices at the pump inching higher. This is putting more pressure on retailers to generate stronger in-store merchandise sales, and specifically to increase made-to-order foodservice sales.

“The economy, although slowly improving, still has its challenges as it relates to the rate of recovery,” Bratta of Core-Mark pointed out.

The biggest challenge of 2016 will be to manage internal and external expectations, according to Montgomery of b2b Solutions. “Fuel margins have dropped this year in many areas of the country. Retailers seeking to offset this will seek to grow gallons, which will likely result in lower margins. Externally, the industry has attracted a great deal of attention from private equity firms and other investors based on 2015 results. Sustaining that interest will require offsetting the loss in fuel margins with growth of inside sales and margins.”

2015
REPORT CARD AT A GLANCE

C− TOTAL SALES

Sharply lower fuel prices sent total revenues tumbling by 14 percent

B+ IN-STORE SALES

A solid 4.9-percent increase

A MOTOR FUEL BUSINESS

Revenue plunged 22 percent, but gallons were up 2.9 percent and profits beat the previous year’s record increase

B− STORE COUNT

The U.S. c-store industry added 1,401 stores

A PROFITS

Gross profits were up 3.5 percent and pretax profits were up 3.4 percent — both figures exceeded the prior year’s record highs

B+ FOODSERVICE SALES

The category saw its best sales gain since 2012, up 7.1 percent