More Good Times Ahead for C-store Retailers

CHICAGO — This year's NACS State of the Industry Summit (SOI) was one of the most upbeat in memory, with speakers heralding a record turnout of 476 attendees, excellent profit gains in 2014, and the promise of continued strong financial results in the current year due to an economy that is slowly recovering six years after the Great Recession.

NACS Chairman Steve Loehr, vice president of operations support at Kwik Trip Inc., kicked off the annual data conference on the same day federal tax returns were due by noting that "the c-store industry collects $170 billion in federal, state and local taxes each year."

He also discussed some of the developments at his La Crosse, Wis.-based convenience store chain that reflect several key trends industrywide, including

• Kwik Trip added butcher-quality meat departments to all its stores.
• The chain is opening larger stores with a bigger grocery section. New stores are about 1,000 square feet larger than existing stores.
• Kwik Trip opened its first no-gas store near the University of Wisconsin last year.
• The chain continues to expand organically, adding 35 new stores in the past year and hiring 400 new workers — from 120,000 applications.
• Healthy food sales continue to grow as the company expands its involvement with the nonprofit Partnership for a Healthier America program.
• In fuel, Kwik Trip keeps expanding in alternative fuels and is now selling compressed natural gas (CNG) at 32 stores, with 10 more locations to be added this year.

Sheetz Inc. President and CEO Joe Sheetz, chairman of the NACS Research Committee, followed Loehr and spoke about the importance of harnessing data. "We use data to make every decision in our company," he explained. "Data gives us the confidence to take on new ideas.”

Among several similarities with Kwik Trip, Joe Sheetz noted that his company was the second c-store chain to sign on with the Partnership for a Healthier America (Kwik Trip was first) and is using its in-store marketing and promotions to build on Sheetz' healthy store choices.

Sheetz Inc. also opened its first location without gas, also in a college town. It’s a 15,000-square-foot grocery café concept on the first floor of an eight-story tower. “It’s not our usual store, but it’s a great sandbox. The data we gain will help plan other locations where gas and parking are not available."

A ROSY PICTURE

Opening speaker and economist David Nelson provided a rosy picture of the national economy that had attendees smiling after several years of gloomy economic outlooks.

He pointed out that the nation last year fully recovered all jobs lost in the 2007-2009 recession. It took 6.5 years to get there — a longer trend than other periods where the economy declined.

As reported earlier this year in the Convenience Store News Industry Forecast Study (January 2015 issue), the national employment picture continues to improve while consumer income also has improved, albeit slightly.

According to Nelson, employment growth has averaged 269,000 jobs per month over last 12 months, representing 61 months of positive growth. He also said labor force participation trends show a substantial decline since 2007. Reasons for this include demographics (aging population), decline in youth employment (this is good if it means they are back in college, bad if it means they are doing nothing), and labor market scarring (people figure out how to live/support themselves without working so they stop looking).

The U.S. unemployment rate is currently 5.5 percent — "what you’d expect in a healthy economy," Nelson said as he projected the rate will drop to 5.3 percent for 2015 and 4.7 percent for 2016.

The Department of Labor has six measures of unemployment and all those measures are lower (from 1 percent to 1.7 percent lower), so unemployment is down no matter how you look at it. “I’m very encouraged” by this trend, said Nelson.

He acknowledged that wage growth is slow, rising only 2.1 percent year over year, giving more energy to the efforts to raise the federal minimum wage above the current $7.25 per hour to as high as $15 per hour. Twenty-nine states have a minimum wage higher than the federal rate, with the highest in Washington State ($9.47). 

The price of oil is down 50-60 percent in the last year and Nelson predicted that gas prices will remain low due to a huge increase in U.S. production thanks to horizontal drilling. 

The impacts of lower crude oil prices are many; most of them positive, but some negative.

Consumers are big winners, as well as retailers that benefit from more discretionary income to be spent in their stores. In the auto industry, more profitable SUVs and small trucks are being sold. Fuel is a big cost for agriculture. The airline, transportation and hospitality industries also win with big savings on fuel.

Losers include the U.S. oil industry (capital spending is down 40 percent, active rig count is down 46 percent). Also hurting are states that rely heavily on oil revenue: Alaska, North Dakota, Texas and Oklahoma. Manufacturing related to petroleum products, like the U.S. steel industry, is also down.

While production soars, demand has not. Fuel consumption per person is down 17 percent over the last 10 years. Crude stocks are at an all-time high — that’s why prices won’t spike again for a while. Oil demand forecasts have been lowered, though U.S. oil demand is expected to grow.

The strong U.S. dollar and low inflation means that imports are rising while exports are not. The U.S. economy grew 2.4 percent last year, while the Euro zone eked out a 0.9-percent increase. The U.S. dollar is up 20 percent in past year. Most countries have fallen relative to the dollar.

ECONOMIC RECOVERY ONGOING 

"We still have a ways to go in economic recovery. Business spending has not yet fully recovered," Nelson told attendees of the SOI Summit. Gross domestic product (GDP) in 2014 was 2.4 percent. Forecasts predict 3-3.1 percent in 2015 and 2.7-3.1 percent in 2016, a healthy but moderate rate of growth.

For now, consumers are the bright spot in the economy. Disposable income rose 3.3 percent in January 2014 and 4.4 percent this January. Consumer spending rose 1.9 percent and 3.4 percent, respectively.

Top categories for consumer spending are: healthcare services, housing and water, recreation, food and beverages, financial services, and food services.

Nelson concluded his speech by listing a number of challenges and opportunities for convenience store retailers in the year ahead:

• More commuters buying gas, shopping in-store;
• More labor turnover
• Lower oil prices will mean low inflation in 2015;
• Lower oil prices will slow transition to alternative fuels; and
• Interest rates will rise but still remain relatively low

Major trends for 2015 will include demographic changes (aging population), economic gains, regulatory changes, innovation, and technology changes, according to the economist. 

Convenience Store News Research Director Debra Chanil contributed to this article.