Beating Qsrs At Their Own Game

While the marriage with QSRs is still strong among regional c-store players, many chains are going their own way in foodservice

Having partnered their distinct customer service strengths and brand equities for nearly 30 years, convenience stores and quick-service restaurants (QSRs) are becoming more competitive as c-stores continue to roll out their own foodservice amenities.

Booming sales and margin growth, and whopping same-store sales increases on c-stores' fresh prepared meal and fountain beverage transactions — at rates that not only outpace the restaurant industry in general, but every category in foodservice — are drivers motivating c-store operators to run their own proprietary in-store restaurants.

Beyond the riches being mined in proprietary foodservice, another factor splintering the relationship is franchised restaurant brands that are dropping the ball on field audits, brand quality protection and communication. Reports are surfacing that some emerging fast-casual and QSR franchised brands are too aggressive in recruiting at the expense of quality control. They are over stretched and inconsistent in servicing and consulting with their partners, and lack the depth of infrastructure and franchise experience to help their licensees that are hundreds of miles from their headquarters.

The long-running marriage between convenience stores and QSRs, however, remains strong and entrenched, particularly among countless numbers of regional c-stores and gasoline stations that partner with the likes of Subway, Quiznos, Burger King Corp., McDonald's Corp. and Yum! Brands' QSR concepts.

Meanwhile, a host of the larger c-store chains such as 7-Eleven Inc., Wawa Inc., Casey's General Stores Inc. and Alimentation Couche-Tard Inc.'s Circle K division are expanding their own foodservice operations that compete head-to-head with QSR concepts.

Perhaps no c-store company epitomizes the industry's strategy to run its own foodservice engine more than the 600-unit Wawa chain based in Wawa, Pa.

Selling Pizza Hut and Taco Bell products since 1996, Wawa has evolved into a formidable and prosperous foodservice operator on its own, and recently upped the ante by disclosing that it will soon debut a new store design that's meant to go head-to-head against the restaurant industry's hottest segment: fast casual.

Speaking to senior restaurant executives in February, Wawa's soon-to-be-outgoing President and CEO Howard Stoeckel boasted that the prototype will be nothing less than "a restaurant that sells gasoline."

"We want to be more like you when we grow up," Stoeckel told his future competitors at the event. Wawa's new design will have a mini-kitchen with baking equipment, a dedicated barista to serve specialty coffee and a few seats, according to media reports.

Wawa's confidence, though, doesn't worry Allison Morrow, director of new business development for Milford, Conn.-based Subway, Subway, the the largest largest restaurant chain in the world under whose brand a new unit opens somewhere on the planet every two hours.

Of Subway's 35,800 franchised units (only one store is run by the company), Morrow is responsible for driving non-traditional growth beyond the 8,500 units the chain currently boasts. Of that non-traditional number, 3,700 are convenience store franchises.

"Non-traditional locations like airports, hospitals and truck stops are very important to us and convenience stores play a big role, here and in Canada," Morrow said. "When you combine c-stores with truck stops, it is, by far, our biggest [non-traditional] category and it is definitely an area where we will continue to grow, here and internationally."

With a brand name that consumers associate with a healthy alternative to fast food and good quality, along with kiosks that easily pass safety codes by not having frying or grilling equipment and boast attractive designs, Subway requires little investment for a c-store franchisee to grow its total unit sales, Morrow maintained.

Subway's c-store franchisees range from giants such as the 7,700-unit Circle K chain or the 2,100-unit Mac's chain based in Ontario (both divisions of Alimentation Couche-Tard) to the 50-unit Ricker's chain in Indiana and 17-unit Pitstop in central New York. In almost every case, the c-store franchisee has its own proprietary foodservice complement to the Subway QSR franchise.

7-Eleven, which has put experienced chefs and culinary graduates on the payroll to develop new products and run its test kitchens and commissaries, is aggressive when it comes to running its own foodservice brands.

Nothing speaks more to 7-Eleven's head-to-head competition with QSRs than its decision to roll out a dozen new products a week to keep the big-name, brand-name fast feeders at bay and its customers excited.

Strip off the logo from 7-Eleven's fresh prepared menu and it would be easy to assume that one were reading the food offerings of Panera Bread, Chipotle, Starbucks, Wingstop or any of the dozens of signature fast-casual and QSR menu items that 7-Eleven has learned to replicate on its own. 7-Eleven even makes its own personal and family-size pizzas with an oven that bakes the pies in 90 seconds.

PROOF IN NUMBERS

A wealth of recent macro- and micro-economic surveys, analyst reports and anecdotes from the field underscore that c-store chains' bullish investment in their own propriety restaurant brands is justified.

Using the same number of stores it polled when it began to benchmark foodservice sales in c-stores in 2007, research group Technomic Inc. reported in February that average same-store sales from prepared food in c-stores jumped more than 10 percent in 2011, to $136,000. More impressive, the researchers reported, is that the rate of foodservice sales growth will continue to outpace the restaurant industry. Technomic said it expects c-store food-service sales to grow 3.4 percent (minus inflation) through 2014 — compared to a nominal 2.5-percent growth rate going forward for the foodservice industry overall.

At The NPD Group, which tracks retail and food-service consumer traffic and visits, restaurant industry analyst Bonnie Riggs said consumer traffic to convenience stores for fresh prepared meals is surging, highlighted by the breakfast daypart, which is smothering QSRs. Last year, the c-store segment attracted 34 percent of all customer visits during the breakfast daypart, while QSRs' share of traffic during the same time was 22 percent. But for lunch and dinner, QSRs maintained their historic dominance.

FRIEND VS. FOE

Steven Johnson, who had a long career as a fast-food and full-service franchisee and is a widely read restaurant and food retailing brand extension expert, said it's the franchising piece that is undermining the c-store and QSR relationship.

The most vulnerable soft spot in the franchise relationship and the biggest source of frustration, Johnson said, is the franchisor's inability to control the customers' beverage purchases, which carry high in-store margins.

"So, what happens is a guy fills up his tank, gets a pack of cigarettes, orders a sandwich or a salad from the QSR kiosk, but rather than buy a fountain beverage from the franchise, he gets a beer or his favorite power drink," Johnson noted.

Because many small-growth QSRs in the fast-casual segment are franchising with small and regional c-stores hundreds of miles from the QSR's home base, another problem is that franchise consultant visits are fewer and brand equity gets diminished, he added.

"Over time, with the franchisee getting these bad internal audits, they reach a point where it is time to do their own thing rather than license them and keep the money."