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04/26/2022
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The Impact of Inflation: C-store Execs Weigh In

Consumers are willing to spend more, but for how long?

Inflation.

It’s the word on everyone’s minds — and that includes convenience store operators trying to navigate skyrocketing prices, labor shortages and supply chain challenges simultaneously.

As National Retail Federation (NRF) Chief Economist Jack Kleinhenz said in a March 7 news release: “Inflation...has been making consumers and businesses miserable as prices have picked up dramatically over the past year. However you measure it, inflation has become a powerful force and plays a key role in the nation’s economic outlook.”

Just how much power is inflation wielding?

The March issue of NRF’s Monthly Economic Review cited a 7.5 percent year-over-year increase in inflation as measured by the Consumer Price Index in January, along with the core Personal Consumption Expenditures Price Index, which is the Federal Reserve’s preferred measure of inflation, rising 5.2 percent.

David Nelson, a professor of economics at Western Washington University and founder and president of Study Groups, a company that conducts study groups for c-store retailers and petroleum marketers, describes inflation as being “at the highest level it has been in
40 years.”

And Gus Olympidis, president and CEO of Valparaiso, Ind.-based convenience store chain Family Express Corp., believes inflation will continue to rise. 

“The most concerning thing in the c-store space, especially since the recent Ukraine geopolitical disturbance, is that we’re looking at inflation that likely will be in excess of 10 percent,” Olympidis said. “We’re flirting with 1 percent inflation per month, 20 to 25 points of inflation per week, which creates an entirely different dynamic than anything the industry is used to.”

That dynamic isn’t limited to just one or two areas of the store, either.

“It isn’t a question of category or segment,” Olympidis noted. “The lack of stability all over is migrating from subcategory to subcategory, not to just a certain part of the business.”

That is exactly what Jonathan Polonsky, president and CEO of Portland, Ore.-based convenience retailer Plaid Pantry, is also experiencing. “Inflation is impacting every level of our business, from the cost of goods [to] rents we are asked to pay, cost of repairs and maintenance, and the wages we need to offer to remain competitive,” he reports.

Addressing Labor Shortages

As inflation continues to rise, finding and keeping good employees is one of the most significant challenges the convenience channel faces, according to Nelson.

“The biggest issue c-store guys are having is the extremely tight labor market,” said Nelson, who notes that the wage increases employees are demanding — especially the lower-level earners c-stores typically rely on — are creating “severe pressure” for retailers.

His take, however, is that increasing employees’ pay has a silver lining that is often overlooked.

“One thing I would say to c-store operators is that to the extent these lower-income employees are now making more money, that is actually good for your shoppers,” he pointed out. “They have more money to spend, so I don’t view that as a negative for the c-store industry at all.”

Olympidis agrees that labor issues are challenging, but says it goes beyond the employees staffing store counters. “Now, there is monumental competition for middle- and senior-level management,” he said. “It is everywhere, not only in the candy aisle and store-level personnel.”

As much as it might hurt, Nelson stresses the importance of keeping up with wage trends and demands.

“You don’t want to get behind the 8 Ball in terms of what you’re paying — you have to be competitive in your market,” he says. “If I was running a store, I would want to be a bit more than competitive, so my employee isn’t going to quit and run to the store down the street.”

Boosting Prices, Maintaining Margins

With inflation affecting virtually every aspect of convenience retailing these days, price increases are a fact of life that everyone — retailers and their customers — must accept.

“We’re going to see adjustments to margins that are necessary to meet shareholder expectations. That applies to fuel margins and to every category in the store,” said Olympidis. 

Scott E. Hartman, president and CEO of York, Pa.-based Rutter’s Holdings Inc., acknowledges that the company is increasing prices as inflation raises the cost of store operations not only on products, but also on everything from labor costs to credit card fees.

“If we did not raise prices, it would be difficult to run a profitable store, so the goal is to raise prices enough to allow our gross margin dollars to cover the cost increases,” Hartman explained. “Most product categories have seen significant price increases; some 10 percent plus at one time, while others have seen multiple smaller increases.”

Plaid Pantry also has been passing price increases along to consumers, due in part to the fact that manufacturers are offering fewer promotions right now as they struggle with supply chain issues in addition to inflation, according to Polonsky.

“Examples by category would be candy up 10 percent, jerky up 10 percent, and nonalcoholic beverages up 8 to 12 percent,” he cited. 

One interesting development — and a positive one so far — is that consumers aren’t substantially pulling back on making purchases.

“The consumer on the other side of the counter is totally sensitized and understands what is necessary to keep up with inflation,” Olympidis said. “They see it when they go to Burger King and see the increase in prices there.”

“Based on what I’ve seen, [stores] have been pretty much able to make price adjustments to maintain their margins,” Nelson echoed. “No one is balking at paying 10 cents more for an item. They just want the item.”

Polonsky, too, reports little pushback. “Customers are still willing to spend, but a slight decrease in lottery sales tells me they have a little less than they did this time last year,” he shared. “We have not seen folks trading down yet.”

Hartman also sees consumers accepting higher prices — but he isn’t confident it will last.

“Customers are not happy with it, but they’re coping,” he said. “As their wallet gets squeezed more, the unhappiness will percolate more. They’re not buying less yet. But if it continues, they will begin to pare back purchases. I think we are at the beginning of when consumers begin to test less expensive options — not everyone, but the more pinched customer first and then a domino [effect] as it pinches more people.”

Some of the biggest question marks, of course, revolve around fuel costs. The national average for a gallon of gasoline hit a record of $4.33 on March 11, according to AAA. 

How high will prices go, and how will retailers and the driving public respond?

“With the war and its impact on oil and gas prices, c-stores are having a terrible time getting the retail price up as fast and as far as the wholesale prices they’re paying, so there is big margin compression,” Nelson said. “When everyone is screaming about
the price [of gas], the stores aren’t doing well.”

Olympidis does not think the situation is going to change anytime soon.

“I predict that individual fuel margins over the next four to five years will exceed 50 cents a gallon. That is particularly relevant because the industry is currently enjoying what I think people naively interpret as very good fuel margins,” he said. “But by today’s standards of what’s appropriate — driven by shareholder expectations — I think these margins we’re currently enjoying are anemic compared to what they will be in four to five years on fuel.”

The hard fact is that raising prices is the only way to stay ahead.

“When faced with cost pressures on products you’re buying, raise prices as much as you have to and don’t worry about what other stores are doing,” Nelson advises. “Everyone is facing these pressures and you have to maintain your margins or you’ll go out of business.”

Predicting the Future

What will happen over the next several weeks, months and, let alone, the next year or more is impossible to predict. However, the pros on the frontlines of the industry are willing to weigh in on what they believe the future might hold.

“I think inflation will ease somewhat by the end of the year, but we will likely see the new ‘normal’ at 3-4 percent for the next several years, not the 2 percent we saw pre-pandemic,” Plaid Pantry’s Polonsky predicts. “I think this will be due to persistent wage inflation.”

Hartman of Rutter’s believes the pendulum will swing back, but admits that it is hard to predict because it will depend on the federal government’s monetary policies, which he says are “always out of sync with the real world.” 

He cites interest rates as one example. “Raising interest rates is a terrible idea since we are experiencing a shortage on the supply side, not an overabundance. That will not cure the supply problem — it has to cure itself,” Hartman maintains. 

Without government interference, he anticipates the supply chain will be fixed in about nine months, or by year-end. “If they raise rates and pass government spending bills at the same time, lord help us. They’ll make things worse, not better for most,” he continued. “In an election year, hands-off policy is not likely, so expect some bad economic years from 2023 to 2025.”

Getting Ahead of It 

Whatever the future (immediate or long-term) holds, Olympidis says c-stores must change the way they operate to successfully clear the hurdles inflation has placed in their path.

“This industry hasn’t experienced hyper-inflation since the 1970s, and the industry’s systems and processes are not designed for this level of inflation,” he explains. “The challenge is that we must find ways to preemptively get ahead of it — nothing in the previous system has prepared you systemically!”

The key, the Family Express founder says, is to create an immediate culture of managing inflation almost daily and not allowing it to outpace you. 

“We’re telling the management teams of the company to look at inflation as a different animal than before — same work, different animal,” he added. “Stores have to manage inflation on an ongoing basis, not just every quarter or six months. In the past, when there was 2.5 percent inflation, the process was to manage it incrementally and periodically. If you stay with that model, you will fall behind.”

As challenging as the current economic climate might be, maintaining a positive attitude while moving forward as best you can remains an important approach. That is what Hartman says the Rutter’s team is doing.

“We try not to let the inflation static cause us to stray from our long-term growth strategies. We continue to keep our head down, are building new stores and remodeling stores. We grow in good and bad years — it’s just part of a multigeneration family philosophy,” he said. 

    Demographics Drive Consumer Response to Inflation

    As challenging as inflation is for convenience store operators, data shows that U.S. consumers are not being affected equally by the rising prices of goods.

    A January 2022 Gallup survey found that 9 percent of U.S. adults have been caused severe financial hardship by the latest surge in inflation; severe meaning that it might affect their ability to maintain their current standard of living. Another 40 percent face moderate hardship, meaning that price increases affect them but don’t threaten their standard of living. 

    “While 66 percent of those living in households with an annual income of less than $40,000 experience some kind of financial hardship these days, just 32 percent of those earning $100,000 or more claim to do so,” reports Statista, which specializes in consumer data. 

    Information from the National Retail Federation (NRF) echoes this finding. As NRF Chief Economist Jack Kleinhenz said in a March 7 news release: “Inflation is at a 40-year high, but isn’t hitting all consumers as hard as topline numbers might suggest.”