Keeping Your Dollars Away From Dollar Stores

The rapid growth of dollar stores in recent years poses a serious threat to convenience stores going forward. Dollar stores have directly entered categories that have historically been dominated by convenience stores. At least one major dollar store chain has already announced plans to introduce tobacco products into its stores, a category which accounts for nearly half of in-store sales for convenience stores.

Additionally, dollar stores have recently installed coolers in hundreds of locations, threatening the profits generated from the two billion gallons of beer sold by c-stores every year. Even convenience itself is under fire. Dollar stores now outnumber convenience stores in many areas, and are further emphasizing convenience by reducing their inventories down to as few as 5,000 SKUs and stocking popular items right at the entrance of the store.

If handled correctly, this competitive incursion by dollar stores will be little more than an inconvenience. Since every vehicle owner needs to stop to fuel up, convenience stores hold a distinct and non-imitable competitive advantage over dollar stores.

Research shows that 73 percent of gas customers never make an in-store purchase, but through effective promotions, new product and service offerings, and marketing, these customers can become significantly more profitable. By using in-market testing, convenience store executives have the opportunity to try different initiatives in order to capitalize on their strengths and avoid losing customers to dollar stores.

Promotions
Promotions, especially those involving fuel, are an important tool that convenience stores can use to maintain or grow traffic. For example, a customer may fuel up at the convenience store, but drive down the street to a dollar store, which offers better prices on soft drinks. To combat this, the convenience store could consider a promotion like a 3-cent-per-gallon fuel discount with the purchase of a soda.

If the c-store can draw the customer into the store to purchase other items, the probability of that customer taking a subsequent trip to the dollar store drops significantly. It is important to note the profitability of promotions will vary by location, due to demographic and geographic factors, not the least of which is proximity to dollar stores. According to Adam Schall, director of planning and analysis at Wawa Inc., "In today’s economy, to be successful and gain market share, retailers must tailor different offers to different markets."

Additionally, accurate data on consumer purchasing patterns will inform the promotion design so as to avoid merely giving away margin to customers who would have purchased the promoted item anyway. By testing the program in a subset of stores first, executives can de-risk broader rollout and tailor the promotion to specific markets where it will be most profitable.

New Products & Services
Although dollar stores are expanding their offerings, convenience store executives can mitigate this threat by introducing new products and services. Before introducing a new product or service, however, executives must understand the numerous factors involved.

For example, prepared food (e.g. deli sandwiches) has high margins and can drive increased traffic, but convenience stores must take into account added costs such as the need for increased labor, new equipment and more complex inventory (with higher spoilage costs). Dollar stores are unlikely to have the infrastructure in place to introduce prepared food options, which furthers the appeal for convenience stores to introduce this new service.

To correctly introduce or expand products/services, convenience store executives need to understand the answers to questions such as:

• Will the new product/service drive enough incremental profit to offset the rise in operating costs and upfront capital investment?
   
• How does the new offering impact sales of other SKUs?
   
• What are the cannibalization and/or halo effects?
   
• Which markets/stores will benefit most from introducing the new product?

Marketing
Many SKUs sold at convenience stores are close to the $1 price point and through effective marketing, c-stores have the opportunity to beat dollar stores at their own game. Convenience stores can use a variety of marketing tactics, including window signage, advertisements at the pump, signs on the street and others, to emphasize the low prices of their products.

Chainwide marketing campaigns can be expensive, and understanding the true cause-and-effect impact of each marketing strategy is difficult. It is therefore vital for c-store executives to test and understand the most effective strategies by location to not only drive profits, but also mitigate the potential for large losses.

Dollar stores offer convenience, competitive pricing and now, many of the same products that the convenience store industry has traditionally dominated. The good news for convenience stores is that they can leverage their strengths – fuel sales, high traffic, unique infrastructure and low prices – to optimize their business strategy by testing each initiative prior to chainwide rollout and tailoring it to maximize profitability.

Testing new ideas is the most robust way for convenience store executives to confidently keep their dollars away from dollar stores.

Jonathan Marek is senior vice president at APT, the world’s largest purely cloud-based predictive analytics software company. As head of APT’s San Francisco office, he leads engagements with casual dining, quick-service restaurant, specialty retail, big-box retail and banking clients, helping them improve performance through better capital strategy, new concept development, emerging media strategy, media optimization, store labor planning and site selection. Marek has more than 15 years of experience applying quantitative techniques to critical business issues.

Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.