Led by Tobacco, In-Store Merchandise Performs Well for Murphy USA
EL DORADO, Ark. — Tobacco emerged as a bright spot for Murphy USA Inc. in the second quarter of 2020, seemingly unaffected by the decreased fuel traffic experienced by the retailer during the ongoing coronavirus health crisis.
"Our multi-pack and carton cigarette offers have become a destination trip for consumers, and second-quarter results compare strongly against the already impressive high-single-digit contribution gains we put up last year," Murphy USA President and CEO Andrew Clyde said during the company's second-quarter earnings call on July 21.
Pre-COVID, cigarette carton volumes averaged in the mid 40-percent range. They have leveled off in the high 50-percent range, with no difference in contribution margin per pack.
"In a world of fewer trips, our enhanced focus on inventory management and pricing precision, coupled with loyalty benefits and our best-in-class upselling, has paid off handsomely," Clyde noted.
The performance of in-store merchandise categories is one of three key trends driving Murphy USA's performance. The retailer turned in a record second quarter of 2020.
For the quarter, total merchandise contribution margin was up about $13 million vs. 2019. Of this increase, $11 million came from tobacco — approximately $8.3 million attributable to cigarettes and $2.3 million attributable to other tobacco products (OTP).
"...Results reflect exceptional execution through managing our in-stock position, providing effective visual merchandising, and offering an appealing product assortment including enhanced promotion on larger packs and SKU sizes," the chief executive explained.
The retailer's Murphy Drive Rewards program is also introducing new products, like oral nicotine, to adult tobacco consumers. According to Clyde, oral nicotine pouches now make up more than 5 percent of the company's OTP segment.
"With over 700,000 new Murphy Drive Rewards participants added since March 1, we currently have insights on eight out of every 10 tobacco purchases, leading to more focused promotional offers and manufacturer investments with higher customer redemption levels," he said.
Along with tobacco, other in-store merchandise categories where Murphy USA saw sales and margin growth in the second quarter were lottery, beer and general merchandise, particularly items like masks and hand sanitizer.
"While the good news is we sold much more of these products, the less good news is they were predominantly lower margin categories — specifically lottery, where sales were up 31 percent but came with a mid-single-digit unit margin," said Clyde. "In fact, 55 of the 60 basis point decline in our all-in merchandise unit margin of 15.4 percent was attributable to lottery. Nevertheless, we're thrilled with the performance and will gladly accept lower average unit margins when growing total contribution dollars due to more sales and to more customers."
While the COVID-19 pandemic showed that its tobacco business is not connected with fuel traffic, some of its non-tobacco offers did prove more dependent. Categories more closely tied to foot traffic like candy and packaged beverages are starting to see sales improve as fuel volumes recover. However, Murphy USA is not seeing much recovery yet in the foodservice business.
"We are obviously not seeing much recovery in our fresh food offer due to the COVID-related restrictions, but we are not sitting on our hands simply waiting to heat up the roller grills again," Clyde explained. "We are taking this opportunity to evaluate and overhaul our food and dispensed beverage offer across the existing network and with a specific focus on optimizing our new larger 2,800-square-foot format. With new talent and capabilities, these opportunities will represent significant potential for incremental growth and margin in 2021 and beyond."
El Dorado-based Murphy USA's network totals approximately 1,500 stores, consisting of Murphy USA sites and Murphy Express sites.
Check Convenience Store News for additional articles on the key trends as detailed by Murphy USA's President and CEO Andrew Clyde.