Leaders Upbeat About Retailing, Less So On National Trends

Social media, fuels, jobs, healthy food and education among the topics discussed by convenience industry leaders

Who are the authorities on the future of the convenience store industry and what can we learn from them?

In a series of exclusive one-on-one interviews with c-store industry leaders that began earlier this year, Convenience Store News' Editor-in-Chief Don Longo explored the most important trends and issues facing the convenience industry and the nation, as a whole.

Six of the convenience store industry's most prominent retailer and supplier leaders have been interviewed so far:

■ Sonja Hubbard, CEO of E-Z Mart Stores, one of the largest privately-held convenience store chains in the nation with more than 300 stores;

■ Jay Ricker, chairman of Anderson, Ind.-based Ricker Oil, a family-owned firm with 49 convenience stores in Indiana;

■ Jeff Morris, CEO of Dallas-based Alón USA, a major refiner and marketer of petroleum products whose wholly-owned subsidiary, Southwest Convenience Stores, is the largest 7-Eleven licensee in the United States, with over 300 stores in Texas and New Mexico;

■ Richard Oneslager, president and CEO of Balmar Petroleum, a distributor of Conoco- and Shell-branded fuel and operator of 7-Eleven convenience stores in Colorado;

■ Greg Gilkerson, president of Professional Datasolutions Inc. (PDI), a leading-edge software developer and enterprise solution provider for the convenience industry; and,

■ Tom Joyce, vice president, global customer and industry affairs, for The Hershey Co.

What follows are highlights of Longo's conversations with these leaders.

Longo: What do you consider to be the most important trends influencing retailing today?

Hubbard: An important trend is social media as a way to communicate, particularly with 18- to 25-yearolds. "Healthier" is a trend, too. I question whether it is consumer-driven or politically driven, but my hope is that eating healthier is being preached so much in schools that children will learn to make healthier choices now and as they grow up.

Ricker: One of the things I'm concerned about is the future of fuels. I think we, as an industry, need to take a leadership position in determining the predominant fuels used down the road. I personally think natural gas is a logical fuel to start blending into the supply mix. America has abundant supplies of natural gas. Cars can be converted over to natural gas relatively easily. It's cleaner burning and better for the environment.

Morris: I still think the big trend to watch is jobs. If people don't have jobs, they can't buy stuff. If they don't have jobs, they aren't driving to work and that hurts convenience stores. I don't see the economy coming all the way back until we get job growth.

Oneslager: One thing that really intrigues me is how enduring the convenience store business is. When the Internet started to enjoy wide use, people talked about how retailers were being dis-intermediated with online transactions; travel agents, music, books. And now people can use their phone at Best Buy to scan and compare prices on TVs. But, we are so temporal. If you want a hot cup of coffee or a cold drink immediately, you can't buy that online. Our business of immediate satisfaction and time just continues to grow more valuable to consumers.

Gilkerson: It is obvious that technology has a key role in retailing. Today, technology is rapidly expanding to include the customer. The networked computing power carried by most consumers today makes many new services and programs possible. These new resources are evolving into a very interactive, real-time retail world with electronic wallets, couponing and loyalty becoming commonplace.

Joyce: The biggest thing that has been going on for a while is the blurring of retail formats. We now see Walmart building smaller-sized stores, for example, and the competition for selling gas is increasing from the wholesale clubs and supermarkets. In the bigger picture, the new economy is going to force the American people to adjust their lifestyles. With high gas prices and flat wages, people have to stretch the money they earned further. Lifestyles will be affected. If you look outside the United States, you'll see other countries have adjusted. They drive smaller cars that get better mileage. They drive scooters in the inner cities. Americans are going to have to make adjustments, too. They will have to learn to live with less, especially the younger generation. The auto industry is calling it the new economy and I think that's true.

"I question whether [the healthy eating trend] is consumer-driven or politically driven, but my hope is that eating healthier is being preached so much in schools that children will learn to make healthier choices now and as they grow up." — Sonja Hubbard, E-Z Mart Stores

Longo: Please comment on the most significant developments relating to the convenience store industry and how these specifically impact your company?

Hubbard: The issue of unfair swipe fees has been our biggest government relations issue. I [also] don't know where fuel is going. NACS has developed a study group to determine the future of fuels. We know corn-based ethanol is not the most efficient fuel. Is it natural gas? Hydrogen? Electric? It's probably some kind of combination. But we need to take a cohesive look at the future alternatives.

There's a convenience niche for foodservice. People have a more sophisticated palette now and they want more diverse tastes. And ethnic groups have their own diverse tastes as well. When I spoke at the AWMA (American Wholesale Marketers Association) show, I pointed out that home meal replacement is a huge unmet need that we, as an industry, have had problems fulfilling. But we can collaborate with manufacturers to do it.

Ricker: A huge issue for the convenience store industry is whether customers at the pumps come into the store. Do we have the right products? A retailer has got to be on top of what customers want because everything changes so quickly. Prepaid products are a good example of how we supply the products customers want. What's going to be next? I don't know, but we must stay on top with both the right products and the right-sized options for our customers. I saw a lot of new products at last year's NACS Show, but the products you haven't seen before weren't from the big suppliers, they were from the smaller guys.

Morris: The big trendline in the industry is still foodservice. If you look at the history of our industry, we started as mini-markets and sold general store goods. Then, 30 or 40 years ago, we transitioned to fuels, and that was great for the industry. Now, we've been in this transition to foodservice for a decade and still have a long way to go. Margins on fuel and other high-volume products we sell are not high enough, so we've had to move into higher-margin areas like single-serve beverages, foodservice and candy.

In our industry, there are retailers ahead of the curve in foodservice, like Sheetz and Wawa. There are middle-range players like 7-Eleven and QuikTrip, and there are companies whose foodservice is still developing. Then, there is a very large segment, especially among single-store operators, who are still trying to figure out what to do, but they are going to have to figure it out if they want to survive. Foodservice is our industry's new high-margin product and we have to figure out how to do it right. The old standbys of fuel, beer and cigarettes are all mature categories.

Oneslager: Looking at the competitive landscape, we obviously see chain drugstores like Walgreens coming after the convenience business, but I'm more concerned with the fast-feeders, the QSRs (quick-service restaurants) like McDonald's, going after the snack occasion, the healthy meal options and most importantly, the dispensed beverage business. In Colorado, McDonald's is very aggressive on fountain drink pricing — 99 cents for any size cold drink, for example. They have blown it out of the water with their coffee program, and are now launching drinks like smoothies and frozen lemonade. McDonald's same-store sales just keep going up because they've been able to take what people perceive to be a very consistent brand image — though recognized as consistent for unhealthy, mediocre food — and use that to establish credibility in other areas like salads, premium coffee, etc. They have demonstrated to our industry that you can earn credibility with customers and a new perception when you innovate.

"The networked computing power carried by most consumers today makes many new services and programs possible. These new resources are evolving into a very interactive, real-time retail world with electronic wallets, couponing and loyalty becoming commonplace." — Greg Gilkerson, Professional Datasolutions inc. (PDl)

Longo: The challenge to build closer connections with shoppers is a mandate before all retailers today. How have you traditionally marketed your offerings to consumers and whafs different about how you do it now? What are your thoughts on RFID, social media and mobile shopping and how these will impact c-stores?

Hubbard: Social media is the way to communicate with people in the younger age bracket. Facebook, Twitter — these are going to be the future of marketing. We don't do a lot of radio or TV [advertising] because our stores aren't so heavily concentrated. We do a lot of advertising pieces inside the store. It's very colorful with lots of signs screaming at you, so we have to be careful not to overdo it. In numerous stores, we added TV screens inside, flashing promos. Pump toppers have also been effective at getting people to come into the store. But, if we can do it right, the most effective form of promotion is the clerk. We're focused on training them in suggestive selling because they will pay off in the long run.

Ricker: We market in all the traditional ways, but now we also have hired someone to handle all our social media. We have a large Facebook following now. But the question is: Is it driving our business? How do we use it to get more people through the door? I was talking to Brad Call of Maverik and he said, "there's so much technology out there it almost gives you a headache." This is a huge area for our industry to get our arms around. We've made it a focus to utilize social media and use it to give back to the community. We recently came up with prizes for customers if they bring new people to our Facebook site. I know just enough about "apps" to be dangerous. We're really pushing Facebook and apps now.

Morris: We're still interested in RFID (radio frequency identification) technologies, and we've used texting to reach customers with mobile phone coupons. We're also experimenting with social media networks.

Oneslager: In the area of social networking, we're just following along with what the brands we represent (7-Eleven, Shell and Conoco) are doing. Being on Facebook and Twitter is just table stakes these days for most companies. I think the real payback and opportunity will be how we use these platforms internally. Why shouldn't we communicate with our employees on a 24-hour basis when everything else is immediate? Employees will be able to ask for help in real time and get immediate answers. Many of our younger employees today don't even use e-mail — it's text or Facebook. We need to use these technologies to be relevant to our employment base.

Gilkerson: RFID technology is still plagued by physics. It's not practical for a retail item tracking system. It has more relevance in the distribution arena and customer identification. As a descendant of RFID, millions and even billions of dollars are being spent on Near-Field Communication (NFC) — think high-tech customer number and updatable wallet. Every phone will have these NFC chips within two years (you can use stickers to put them on any phone). This will provide marketing opportunities to consumers and facilitate lower-cost payment for goods. It's fascinating and worth watching.

Social media will struggle some. We are past the fascination/infatuation stage and need to find new ways to be relevant, as people will get fatigued/bored/irritated by irrelevant messaging and promotion; some will figure it out! We see huge potential in using social media technologies to connect our customer community. Mobile shopping will be a way of life. In five years, no one will think twice about using mobile shopping, payment and promotion.

"In the bigger picture, the new economy is going to force the American people to adjust their lifestyles, with high gas prices and flat wages, people have to stretch the money they earned further. Lifestyles will be affected." — Tom Joyce, The Hershey Co.

Joyce: At Hershey, we are certainly running as fast and as hard as we can to keep up with the speed of change in social media. If a company is not doing that, it is missing out on an opportunity. Web-based retailing is growing fast. I can't express the rate of speed we are seeing, and it's happened with lots of different products. This is a worldwide trend. It's everywhere. Direct-to-consumer distributing companies like Amazon are giving traditional retailers a run for their money. Hershey has a dedicated team that works on just new media. They look at the effective use of web-sites and social media, as well as traditional media like ,TV radio and print. This is a whole new world.

Longo: Please discuss the role that manufacturers play in today's convenience store industry and how the retailer-supplier relationship has evolved over the past five years? How is it likely to change in the next five years?

Hubbard: I said in my speech before the AWMA earlier this year that to be incrementally better, you need to be competitive; but to be exponentially better, you need to be cooperative. What I mean by that is that we've been so competitive over the years, squeezing every cost out. But there's so much more we can do by cooperating, such as developing the home meal replacement category. In Europe, you see these high-quality, hermetically sealed foods. Manufacturers have so much more information and data than retailers. They can help us individualize and customize our stores — for example, they can tell me which stores I can successfully sell sushi in. We should be partnering and even sharing the costs of these efforts. Another example of cooperation — we could be sharing a commissary, perhaps working with schools that are having budgetary issues.

Ricker: I think we are well-served by manufacturers and wholesalers today. We're viewed as a very important retail channel because we have a very unique customer. Our customer purchases so much of their stuff for immediate consumption, unlike grocery store customers. For example, if you're a candy company, you can sell to other channels of retailing, but only the c-store customer is looking to buy an immediately-consumable candy bar. So, we are the primary place for them to sell that candy bar to.

As for the future, I like what Joe DePinto of 7-Eleven is trying to do to make the supply chain more efficient. He's trying to get suppliers to consolidate deliveries so fewer trucks have to go to each store each week. It underscores the importance of fresh foods and making multiple deliveries during the week. Nobody but a handful of retailers are good at that today.

I think it's inevitable that we are going to see more fresh food. Wholesalers are investing in more refrigerated loading docks. To justify making more deliveries, wholesalers are going to want to sell us more products. I would buy more from a wholesaler if that could help justify three deliveries per week instead of one.

Morris: I'm very optimistic about convenience retailing, and suppliers are recognizing that our segment is more resilient than any other retail segment. We need to use that leverage. Some of the big chains have put in their own distribution systems and created more competitive pressure for distributors. The people who are doing foodservice well, for example, are doing their own distribution. The distributors in our business may be under the greatest pressure of anybody. They will have to adjust or more retailers will do it themselves.

"My biggest personal concern revolves around education. As federal budget issues trickle down to the state level, I'm worried about the dismal state of our public school system … There is not much that Obama says that I agree with, but he has called our failing public education system 'the biggest civil rights issue of our generation.' For once, I agree with him." — Richard Oneslager, Balmar Petroleum

Oneslager: When it comes to manufacturer-retailer relationships, ultimately the outcome you get is the outcome you deserve. If we aren't getting good deals, it's because we're seeing a lot of consolidation and vertical integration in the supplier community. Historically, the major CPG manufacturers have brought an entrepreneurial spirit to their representatives in the convenience store channel. We have been blessed with some really great people. As these companies get larger and larger, I'm worried we will lose that.

Gilkerson: We can't really speak to other suppliers, but this industry is fortunate to have a cast of suppliers that bring most of the needed technology function to the table, leaving retailers to concentrate on their business. Many other industries that adopted technology earlier than ours are burdened with lots of legacy systems and related development that is very expensive and hard to get rid of. Over the next few years, the challenges will really remain the same. We need systems that provide data integrity and easy ways to integrate data from many sources.

Joyce: In the past, suppliers and retailers sometimes had difficult relations, but that doesn't seem to be the practice today. I see retailers and wholesalers now more than ever looking to manufacturers for solutions. You can't just throw an item on a desk and say, "trust me, it'll sell." Now you have to back it up with comprehensive consumer information and turn the process into a collaborative relationship. That seems to be the trend today more than ever — retailers and suppliers working together for a solution that works for both of them.

We also see suppliers working with retailers on loyalty programs and social media. We are all growing together, trying to figure out new ways to reach the consumer. Retailers are seeking out suppliers willing to bring their insights and knowledge to help them succeed with their new marketing/communication efforts. We all want to sell more profitable products.

Longo: Switching gears, what are the foremost non-industry specific retailing issues that are on your mind?

Hubbard: I worry about the budget deficit. It's a huge problem. Our entitlement programs have grown so huge and unmanageable. We do have a crisis in health care, but I hate the mandates of the new health care law. And my biggest long-term concern is the state of education in this country. We have dumbed down our educational system to the point where we are not competitive with the rest of the world. For example, did you know that India's top 25 percent of performers outnumber our entire study base in the U.S.? We have to focus on improving and individualizing our educational system in America.

Ricker: I think the big concern is inflation. I am concerned that gas prices will keep rising. I also worry about what I call the "Californization" of the country. For example, it is so much more difficult to get a store built today in suburban Indianapolis because of all the red tape. The impact fees we pay now are triple what we used to pay. And the methodology they use to come up with those fees is flawed for convenience stores because they count trips twice, both coming into and leaving the c-stores.

"A huge issue for the convenience store industry is whether customers at the pumps come into the store. Do we have the right products? … we must stay on top with both the right products and the right sized options for our customers. I saw a lot of new products at last year's NACS Show, but the products you haven't seen before weren't from the big suppliers, they were from the smaller guys." — Jay Ricker, Ricker Oil

Morris: The cost of credit and banking regulations is going to be real important to us over the next couple of years. There has to be a rebalancing between the credit issuers and the credit users. As these issues play out over the next three to five years, retailers need to remain engaged because the future of transaction fee reform will have a huge impact on us.

Oneslager: My biggest personal concern revolves around education. As federal budget issues trickle down to the state level, I'm worried about the dismal state of our public school system. If you saw the documentary, "Waiting for Superman," (the 2010 documentary from "An Inconvenient Truth" director Davis Guggenheim about America's failing public schools), it seems like we've become accustomed to failure. Kindergarten to 12th grade education in Denver is taking a big hit due to budget constraints. As a nation, we are falling behind in competitiveness with the rest of the world but more importantly, from a moral standpoint, it's not right. There is not much that President Obama says that I agree with, but he has called our failing public education system "the biggest civil rights issue of our generation." For once, I agree with him.

Gilkerson: We are really interested to see how rapidly mobile payments take off, and we are interested in seeing how effective "cloud computing" will be and what applications makes sense. There have been some recent outages that create significant credibility issues for the concept. It has great potential to lower the cost and complexity of computing, but we need to see what happens over the next few years. Finally, all this technology stuff falls apart if you don't have great people. A positive, high-performance and highly disciplined organizational culture is paramount. When you see organizations do this well, it's really fun.

Joyce: I think the biggest challenge for all business people today is to understand the global economy. The growth of population in some developing countries is having a big impact on commodity prices. As people in these developing countries move up toward the middle class, they are putting a greater strain on commodity supply. They are consuming more consumer goods, more corn, more wheat, and using more fuel. If you are a manufacturer and the prices of commodities continue to rise, you have to figure out ways to develop more innovative, profitable products that meet consumer demand. You must have your eyes open to what's going on around the world and understand how it impacts you and your company. We certainly are living in interesting times.

"The cost of credit and banking regulations is going to be real important to us over the next couple of years… As these issues play out over the next three to five years, retailers need to remain engaged because the future of transaction fee reform will have a huge impact on us." — Jeff Morris, Alon USA