C-store Industry Reaped Rewards in 2015, But Risks Are Arising
CHICAGO — 2015 was so good for convenience store operators that Billy Milam, president of RaceTrac Petroleum Inc., said it was “easy” to deliver industry financial data to attendees of the 2016 NACS State of the Industry (SOI) Summit, taking place this week.
“Last year was great. It was the best year ever [for c-store retailers],” he said. “Every single month in 2015 eclipsed 2014 in terms of total transactions (fuel and inside transactions). EBITDA was up 32.3 percent last year.”
Western Washington University Professor of Economics David M. Nelson, Ph.D., provided more good news to the record 600-plus convenience store retailer and supplier executives who assembled at Chicago’s Hyatt Regency O’Hare hotel April 4-6. Although a seven-year economic recovery is often considered long-in-the-tooth, Nelson expressed no concerns whatsoever that the United States is currently on the brink of a recession.
“Economic data does not suggest that,” he said. “Areas of the economy continue to expand, with manufacturing the only area seeing any decline.”
Nelson did acknowledge that annual growth in the U.S. economy is slow on an annual basis, but he stressed this is actually good news. He equated the growth to a running joke in the movie “Zootopia,” which shows slow-moving sloths working at a Department of Motor Vehicles.
“In a word, the economy is slow. But it is better to go slow in the right direction than fast in the wrong direction,” the professor stated.
Nelson pointed to three other factors that should greatly benefit c-store retailers moving forward:
- Strong housing starts that lead to more construction workers frequenting c-stores;
- Robust new vehicle sales, forecasted to reach 18 million new car sales in 2016; and
- A low inflation rate.
Still, despite the c-store industry having one of its best years ever in 2015 — including posting a record $225.8 billion in in-store sales, according to the SOI data released by NACS, the Association for Convenience & Fuel Retailing — convenience retailers face plenty of headwinds going forward.
“We’ve been incredibly blessed with fuel margins for the past two years,” Milam said. “At some point, a reckoning will come. I want us to be prepared for that.”
INDUSTRY RISKS
In the past year, the c-store industry’s Achilles heel has been direct-store operating expenses. This expense area grew faster than gross profits in every month of 2015, the data revealed.
An even bigger concern, though, is the changing labor landscape. This was an issue discussed by multiple SOI Summit presenters, who pointed out that as the unemployment rate goes down in the nation, c-store employees now have more opportunities to be employed elsewhere at a higher wage. C-store operators are likewise feeling the pressure of minimum wage increases being adopted in states and cities across the U.S.
NACS Chairman Jack Kofdarali, president of J&T Management Co. Inc., said the approved minimum wage increase to $15 per hour in his company's operating state of California will be a “nightmare.”
Fellow speaker Joe Kefauver, managing partner of Align Public Strategies, took the labor talk even further, discussing how unions are organizing quickly and effectively. Employee compliance is another concern, he said.
“With break times, holidays, etc., it’s almost impossible to not trip up,” Kefauver explained. “C-store retailers need to have a healthy, expedited, internal compliance conversation.”
COMPETITORS TAKE AIM
Competition, as always, remains another top concern for convenience store retailers, presenters stressed during the SOI Summit.
“We have a target on our back,” said Andy Jones, president and CEO of Southeastern c-store retailer Sprint Food Stores. He specifically focused his attention on quick-service restaurants (QSRs), which he said have taken many ideas from c-store retailers. McDonald’s all-day breakfast and Burger King’s grilled hot dogs are two prominent examples.
To turn the tables, Jones encouraged c-store retailers to learn five things from what QSRs are doing:
1. Franchising and cleaning up balance sheets. QSRs are increasingly getting rid of owner-operator models and moving to all-franchisee models.
2. Twofers. QSRs have followed c-store retailers’ lead and now offer twofers, threefers and even fourfers to attract customers.
3. Health, wellness and sourcing. McDonald’s has committed to having 100-percent cage-free eggs by 2025, and several QSRs are eliminating preservatives and additives.
4. Importance of food safety. Problems at Chipotle Mexican Grill are a prime example of this.
5. Focus on millennials. Taco Bell is just one QSR that is using advertising campaigns to try and attract millennials.
The 2016 NACS State of the Industry Summit concluded Wednesday.