Making HBC Convenient

EXPERT’S VIEW

Category management can boost sales significantly and improve speed and ease for customers

By Paul Rossberger, Lil' Drug Store Products

What makes a convenience store more convenient? It's a question that is vital to c-store retailers, and has been the subject of not just industry but even academic research.

A study that appeared several years ago in Massachusetts Institute of Technology's Sloan Management Review showed that, for customers, retail convenience means shopping speed and ease. The best-performing retailers understand this customer perspective, but go beyond it. They enhance the convenience of their selling experience by enabling customers to speedily identify and select the products they want, an advantage known as search convenience.

PARETO PRINCIPLE OR 80/20 RULE

This idea raises a different question: How can c-stores provide greater search convenience given the huge diversity of products that the typical store has to stock, particularly in the complex health and beauty care (HBC) category? The answer is not to be overwhelmed by the diversity of products available, but instead zero in on the products that consumers really want.

An important tool that can help stores do this comes from the world of statistics, where it is called the Pareto Principle. This principle holds that, over time, most results are produced by only a few causes, generally in a proportion of 90 to 10 or 80 to 20.

When applied to convenience store retailing, the idea behind the Pareto Principle means that the top 10 subcategories in HBC products make up nearly 85 percent of total dollar sales in this category for the typical store. The basic message is simple — rather than trying to be all things to all customers, the truly profitable store should not be complicated, confused or cluttered.

A retailer, working with its suppliers, can use category management expertise to analyze what are the top movers, and use this analysis to handle the product mix for the category. By exercising precise category management focused on the top 10 subcategories in HBC products, the efficiencies can grow store revenue by 20 percent or more.

It's another Pareto Principle application: close attention to the products that make up 80 percent of sales can boost those sales by some 20 percent.

TOP 10 DEFINED

Let's consider some broad numbers first. The nearly 150,000 U.S. convenience stores had total 2011 sales of about $625 billion. More than two-thirds of that revenue in the entire c-store category came from fuel sales, while about 27.5 percent of revenue represented merchandise sales. But that same merchandise category contributed a whopping 52 percent of total gross margin across all c-stores, with HBC contributing a disproportionate and growing share. The lesson is simple: boost merchandise sales and gross profitability grows even more.

So, where should you focus for merchandise sales increases? Research shows that of the 56 HBC subcategories, the top 10 make up nearly 85 percent of total sales share, with all other subcategories accounting for less than 2 percent of HBC sales each.

The 10 category leaders are:

1. Internal analgesics
2. Cold/allergy/sinus tablets
3. Contraceptives
4. Gastrointestinal tablets
5. Cough drops
6. Miscellaneous health remedies (almost exclusively lip balm)
7. Vitamins
8. Eye and contact lens care
9. Sanitary napkins/tampons
10. Cold/allergy/sinus liquids

TWO CASE STUDIES

Identifying these top 10 subcategories as the top 10 products for shelf space greatly simplifies issues of what to stock and how much to order. Take a look in detail at internal analgesics, the top HBC subcategory with approximately 26 percent of HBC dollar sales, equating to $331 million in dollar sales and 172 million in unit sales. Analgesics can be either tablets, liquids or powders, and include feminine pain relievers. The big news in this category is that significant brand name manufacturer outages during 2010-2012 resulted in major product shortages.

C-stores that recognized the importance of analgesics to their merchandise sales, and were aligned with suppliers that could offer quality private label brands in convenience-sized packages without supply disruption, could maintain uninterrupted supply without losing sales or profits.

Greater private label use also puts c-stores on the cutting edge of retailing trends. For example, the Nielsen market research organization has found that while private brand sales are growing 20 percent a year, c-stores stock far fewer HBC private labels than drugstores or supermarkets. Changing this dynamic is the path to more profitability.

An even greater concern applies to the second-ranked HBC subcategory, cold/allergy/sinus tablets.With $129 million in annual dollar and 47.5 million in annual unit sales, supply disruption in this category — which also frequently occurred in 2011 — could be a major problem in any year. This potential threat is especially true in 2010-2012, when warmer-than-average winter temperatures nationwide mean an earlier and longer pollen season, with increased consumer demand for over-the-counter allergy relief products.

Retailers that understand the importance of this category to their overall sales and have lined up suppliers with assured access to both brand name and private label products will benefit from dependable supply, fewer SKUs, accessible prices for consumers and stronger in-store financial results.

The lesson is clear. Stronger sales and profitability performance means providing real convenience to your customers by understanding what products are most important to them and making sure you have an assured supply of those products. By emphasizing those items that are the top focus for customers, the retailer can sales and profits and avoid problems from overstocking too many items that don't add extra sales.

Retailers that try to be all things to all customers, stocking a wide range of merchandise without real analysis of demand or supply trends, may well wind up on the short end of both demand and supply. With the bulk of merchandise sales in the top 10 HBC subcategories, watching those segments closely is the key to merchandising success.

Paul Rossberger is vice president of sales and marketing at Lil' Drug Store Products (LDSP). LDSP is a global consumer products company offering a variety of premium brands through its three divisions: Convenience Retailing, Consumer Products and International. The company is headquartered in Cedar Rapids, Iowa, and can be found at www.lildrugstore.com.

Editor's Note: The opinions expressed in this article are the author's, and do not necessarily reflect the views of Convenience Store News.