No Foodservice, No Future?

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No Foodservice, No Future?

By Linda Lisanti, Convenience Store News - 09/07/2009
"Well, time to replenish the hot dog roller. La, la ... oops. Oh no, it is encrusted with filth. Oh well. Let's sell it anyway." -- Apu Nahasapeemapetilon, Kwik-E-Mart ("The Simpsons")

The cuisine at convenience stores has long been the butt of jokes on primetime TV cartoons (like the above comment from "The Simpsons") and late night talk shows, but if David Letterman or Conan O'Brien were to go into a number of c-stores today, they would find the punch lines a lot harder to come by.

That's because foodservice -- particularly prepared foods -- has become the bread and butter of convenience stores across the country. With gross profit margins on fuel and tobacco declining every year, retailers and industry experts say foodservice is no longer optional for c-store operators, it's a necessity for survival.

"Just to stay competitive, everybody in the industry will have to get into some degree of foodservice," said Jerry Weiner, vice president of foodservice for Rutter's Farm Stores, a chain of 55 c-stores based in York, Pa., and known for its made-to-order food program. "The depth of foodservice will vary depending on each retailer's level of commitment, but some form of foodservice will definitely be part of the business model going forward."

As a result of these do-or-die conditions, c-stores without foodservice are quickly jumping in, while operators with existing foodservice are stepping up the caliber of their offerings and making the category a top priority -- if not the most important category in the store.

Reporting by Convenience Store News over the last 12 months shows dozens of c-store retailers have expanded or enhanced their foodservice programs.

"Foodservice is the No. 1 priority in our stores, and it's going to be No. 1 next year and it will probably be No. 1 the year after that," said Larry Bullis, merchandise marketing manager for the 34-unit Dash In Food Stores chain based in La Plata, Md. "We have a captive audience. Our customers are looking for a total foodservice offering. If you're pinching pennies, you can give up some things, but you always have to eat."

Convenience stores are increasingly becoming the consumers' choice for where they go to eat -- not just for snacks, but meals too. Of the roughly 62 billion commercial foodservice meals and snacks consumed in a year, 7 percent are purchased at convenience stores, according to research by The NPD Group in Chicago.

To be successful though, c-store operators must work within their strengths and weaknesses, and be realistic about what they can execute, said industry consultant Bill Reilly, who's worked for leading convenience chains Sheetz and The Spinx Co.

"Time and time again, the homework isn't being done. Retailers keep reading about foodservice, but they're not making the upfront investment of time to ask the right questions before getting into it. Each [type of foodservice program] has pros and cons. You have to make the decision that's right for you as a company. A lot of retailers go into it blind; they don't fully understand what it takes," Reilly explained.

He pointed out the companies often cited as paragons of foodservice success have a rich foodservice culture. "It is part of their operating manual, part of their filter in every decision they make," he added. "I believe you have to have that culture to be successful in foodservice. It's an intense business because the reward is so great and the exposure is so great; therefore, you need to have that focus in everything you do."

In this special report, CSNews highlights four convenience retailers of varying sizes and geographies who are walking the foodservice talk in a way that works for them.

Rutter's: All About Choice
At Rutter's Farm Stores, foodservice is a key part of the Pennsylvania chain's strategy, and since the company has sold fresh-made products since the 1960s, Rutter's has enjoyed a headstart in finding out what works and what doesn't.

For the majority of Rutter's 55 convenience stores, what works is a built-to-order foodservice model. Currently, 35 of the chain's stores have an on-premise food program with touch screen kiosks for ordering a variety of sandwiches, salads, fried foods and fresh baked bread. Twelve of these locations also feature Rutter's stir-fry wok program. Additionally, all 55 stores offer breakfast and lunch in a grab-and-go format.

Weiner said the biggest advantage of a built-to-order model is choice. "We're in the decade of choices. Customers want to have it exactly their own way. I've seen people put together combinations at our touch screens that I would never dream of," he said. "I want to give them as many options as possible at every step in the order -- meats, cheeses, breads, condiments, sides, combos, desserts. To me, it's all about choice."

Providing choice also means constantly replacing low-performers on the menu with new items. "People are creatures of habit," said Weiner. "That's a good thing. But interrupting them with a new item is what brings excitement and brings them back into our stores again and again to find out what's new now." But Weiner cautioned it's a balance, because if the chain introduces too many new items at once, they lose their charm.

Rutter's recently introduced its first-ever dinner menu, along with a selection of $2.99 kids meals. Now available in a dozen stores, the dinner menu builds upon Rutter's stir fry program. Selections include meat loaf or pot roast served over mashed potatoes with gravy; pasta dishes with grilled chicken, spaghetti and meatballs, or chicken parmesan, each with a choice of Alfredo or marinara sauce; and a vegetarian plate with pasta and choice of sauce. Each meal is completed with fresh-baked dinner rolls or garlic bread.

"We've already developed a good reputation for breakfast, lunch and snacking. Dinner is our slowest daypart," Weiner said of the decision to go after this hard-to-get business. "I believe the dinner daypart is the future growth for us. This is when people typically will spend more on their food, so the check average and penny profit is higher."

Rutter's dinner menu is designed to go up against restaurant chains such as T.G.I. Friday's, Chili's and Olive Garden. "We might not be able to provide the ambience, but we can create better value," Weiner said, noting each meal delivers roughly a pound of food for $5.99 or less. "The economy may help us in getting people to try the dinner product, because they're looking for a better deal in terms of portion and value."

The chain introduced the kids meals at the same time as the dinner menu to impact the dinner decision of the whole family, according to Weiner. The kids meals, offered at 36 stores, feature three entree choices -- a grilled cheese sandwich, four-piece chicken nuggets or a regular hot dog. Sides include fries, macaroni and cheese bites or a banana. Beverage choices are a 12-ounce fountain or frozen beverage, or a 16-ounce Rutter's brand iced tea, milk or juice from the cooler.

"My goal is for Rutter's to be on customers' mental lists when they're thinking about where to go for dinner. That's the real win," Weiner said. "To really get to where we want to be could take a year or two. We'll get there in pieces. This is something that will grow and grow. There's a lot of money sitting on the table for whoever can execute dinner."

BP/ampm: Freshness Simplified
BP originally built its foodservice business with the made-to-order Wild Bean Cafe concept, but in 2008 when the retailer decided to become all franchised, all ampm-branded nationwide, the company converted stores to its current convenience food offer.

"When we went to a 100-percent franchise model, we needed to have an offer that could work in 100 percent of our stores. At the same time, we used a lot of internal research to tie the offer back to the customers we had in our stores, and the customers we thought we could build our business on," said Tom Terlecky, senior category manager of foodservice. "Our current offer works everywhere and connects with the convenience customer."

Foodservice is "critically important" to ampm's overall business strategy both in its Western ARCO-branded markets and newer Eastern BP-branded markets, according to Jon Bratta, director of proprietary brands for BP America. Each of the chain's roughly 1,250 stores -- spanning five Western states and six Eastern states -- features an extensive menu of hot and cold grab-and-go foods. Core items, such as hot dogs, hamburgers, cheeseburgers, chicken sandwiches, barbeque rib sandwiches and corn dogs, are sold at every location. Franchisees can also choose to offer in-and-out optional items.

"We focus on meeting the needs of our customers -- when they want it, when they need it, whether it's a hot breakfast sandwich or a hot dog for lunch," Bratta said.

Equally important is that the offering is simple for store personnel to execute, yet delivers high quality. Terlecky noted 100 percent of the hot prepared foods are delivered to the stores pre-cooked and roughly 85 percent of the bakery items are delivered frozen and ready to be heated in the store's oven. Cold sandwiches in its BP markets are assembled at each store, adding fresh produce from local distributors.

According to Bratta, this type of program works better for BP than a commissary or direct-store-delivery (DSD) program, because the stores are not captive to what was ordered the previous afternoon. "If you're out of chocolate chip cookies at 10 a.m., with a commissary or DSD program, you're out of them the whole day until your next delivery," he explained. "If we run out of something, our stores have the availability to be back in business inside of 20 minutes."

The visibility of making sandwiches and baking on site also sends a strong message to customers, and projects a high level of credibility onto the products, he added.

Like Rutter's, ampm believes there must be newness in the foodservice category to keep customers excited. And so, the retailer recently launched six burrito varieties for breakfast, lunch and dinner; stores in the chain's BP markets feature a new breakfast offering that's a step up from what is now offered in the West; and the company will soon upgrade its breakfast program in the West with similar products.

In addition, during the fourth quarter of this year, ampm will introduce a selection of new bakery items and hot foods to connect with its Hispanic consumers.

"We're not 100 percent where we want to be, but we're getting there," Terlecky said. "In our BP markets, the bakery program is extremely successful, while hot prepared foods are stronger in our ARCO markets than in our BP markets, so we're taking our learnings from the one market and applying them to the other."

Through its varied experiences, BP has learned a quality foodservice program can be assembled in numerous ways. In Bratta's view, it really boils down to how well each store is executing on behalf of the customer. "We have stores that do fantastic and we have some stores we are working with to improve. You can find hits and misses, successes and failures, across the whole spectrum of [foodservice] programs," he said. "And from that, we try to make ourselves better."

Dash In: Right Products, Right Prices
For some convenience retailers, including Dash In Food Stores, a winning foodservice recipe is one that mixes a little of this and a little of that. Dash In, which is part of The Wills Group, the largest Shell distributor in the United States, boasts 28 franchise stores and six corporate-owned locations in Delaware, Maryland and Virginia.

Like BP's ampm, all 34 Dash In c-stores have a proprietary branded hot foods offering. Sandwiches, pizza, breakfast items and more are prepared on site using a Turbo Chef oven (14 of these stores also have a fried chicken program). However, for its cold grab-and-go food offering, Dash In chose to go through its wholesaler, McLane Co.

Larger retailers can afford the intense labor required for a made-to-order program, or have the logistical prowess to deliver fresh to stores daily, but a small chain of 30 stores can't do that, said Bullis, who worked 20 years for 7-Eleven and played a part in developing that retailer's fresh food program before coming to Dash In. "The McLane program is the next-best option for an operator of our size," he added.

Temple, Texas-based McLane launched the "FRESH on the GO" program nationwide in February, aiming to give retailers the option to stock a wide variety of fresh foods at competitive prices. To ensure the products are fresh, orders made through the program arrive at McLane's warehouse just before the trucks leave for their regular deliveries. In addition, product selection includes small case packs and/or single-sell solutions when practical.

Dash In implemented the McLane program in May, converting from a regional program that delivered product to its stores three times a week. The old program provided "a good quality product, but because we're spread out through three states and there's quite a distance between our stores, it made it a high-cost program, and we had to have higher-than-market prices. Our retails before were not as competitive as we desired," Bullis said.

"The McLane program works great for us because we already have the trucks going to our stores. We felt we could provide the same quality product for a better cost. It made sense for us," he explained.

McLane delivers fresh product twice a week. Sandwiches are thaw and serve, but Bullis said they are of a very good quality, and a plus is that they are branded Dash In. The salads and fruits, branded Taylor Farms, all have a five-day minimum shelf life.

"Under our old program, we sold a lot and could compete, but it was at a time when people weren't as price sensitive as they are these days," said Bullis. "Now, with the state of the economy, people are very conscious of retails, and they might have only $5 to spend on lunch. The old program limited the customer base that could buy."

By switching to the McLane program, Dash In realized a 40-percent reduction in costs, which has enabled the chain to reduce its retails 40 percent. As part of its marketing campaign this summer, the retailer stressed value by offering two varieties of 6-inch subs at two for $4; salads retail for $4.99; and fruits range from $2 to $3.

"We're offering retail prices very competitive to the marketplace now," Bullis said. "Our unit sales are up. Retail sales are down just on sandwiches and salads because of the lower retails, but our profitability is much better because there are fewer write-offs."

Overall, Dash In's total foodservice sales are up 41 percent in dollar sales and 32 percent in gross profit dollars for the year. Aside from the new cold grab-and-go program, Bullis said these positive results can be attributed to a more focused product assortment.

"We were competing with our own self inside the store. We have since selected what we feel is a good menu. Instead of 20 sandwiches, we've pared down the assortment to the top sellers. And each time we add a new variety, we drop the slowest seller," he said.

"Take our chicken sandwich -- we were selling two per store per day last year when we were at a $2.99 retail and carrying a 50 percent gross margin. Now, we're doing two for $4 at a 35 percent margin, and we're selling 30 chicken sandwiches per store per day. We're writing off very few. It's more profitable for us, and we're satisfying customers."

Going forward, Bullis said those thriving in foodservice in the convenience store industry will be the retailers who have the right product mix, the right quality and the right price.

Dash In intends to be one of them.

Classic Corner: Branded, But Unique
As more convenience retailers develop proprietary foodservice programs to differentiate themselves in the marketplace, Classic Corner, an independent c-store in Madison, S.D., is proving a branded program can be made distinctive as well.

Foodservice has been an integral part of the mix at Classic Corner since owner Beth Miller, a registered nurse and former stay-at-home mom, took over in 2003. She decided to keep the store's existing partnership with Hot Stuff Foods because of the name recognition, but Miller and her foodservice manager, Kim Rumbolz, have since put their own unique spin on the branded program.

The store's Hot Stuff Foods offering covers all of the key dayparts. For breakfast, customers have their choice of a breakfast burrito, breakfast pizza, breakfast sandwiches and an array of bakery items. At lunchtime, the menu features pizza, breadsticks, burgers, deli sandwiches and fried foods such as chicken tenders, popcorn chicken and mozzarella sticks. Dinner options include burgers and pizza.

Every day of the week is a "special" day for foodservice at Classic Corner:

-- Deli Day (Monday): sub sandwiches sell for $2.99 instead of $3.99
-- Taquito Tuesday: two taquitos for $3.99, each is regularly $2.39
-- Burger Day (Wednesday): all burgers are priced $3.49 vs. $4.29 regularly
-- Pizza Day (Thursday): all six-inch pizzas sell for $2.99; regularly $3.69 to $3.89
-- Fajita Chicken Burrito Day (Friday): this menu item is only available on Fridays

"We've been doing the specials for a couple of years now. Customers know they're getting a good deal, and they've come to expect it," Rumbolz said, noting she often sees the same customers come in on certain days to purchase their favorite special.

In addition to these promotions, Classic Corner's everyday slogan is "Anytime is Pizza Time," and not surprisingly, pizza is the single store's biggest foodservice seller. The motto was created roughly two years ago as a way to set the store apart. Classic Corner is the only outlet in the town of Madison open 24 hours a day, seven days a week.

The slogan resonates especially well with its college-aged customers. The store is just a mile away from Dakota State University, where the student population exceeds 2,500.

With its 24/7 offerings, creative slogans and a variety of promotions, Classic Corner drives customer traffic and positions itself as a destination for foodservice.

Most importantly, though, Miller said the foodservice program is so successful because the retailer listens and responds to what consumers want. "The whole store is successful because of our customer service," she added. "We're always trying to do what's best for the customer, and give them the best product we can."

Industrywide Impact
It's clear from these four retailers -- Rutter's, ampm, Dash In Food Stores and Classic Corner -- there is no one-size-fits-all approach to foodservice in convenience stores. That's what makes this category so exciting -- yet at the same time, challenging.

Because foodservice can go incredibly well or terribly wrong, retailers and industry experts hold mixed opinions on whether all c-store operators getting into foodservice is a good or bad thing for the convenience industry as a whole.

On one hand, it only takes one bad apple to spoil it for the rest, Reilly said. "If one operator makes somebody sick, if one operator gets a bad label, it can really damage the whole industry. In restaurants, each individual brand is so powerful that if something happens, it's just that one brand affected. In convenience stores, it would be an industrywide stigma," he said.

On the other hand, Bratta said U.S. convenience stores could benefit from strength in foodservice as c-stores in other countries do. "In other parts of the world -- Asia and Europe -- they've made foodservice the forefront of their business and there's more readiness on the part of the population to utilize convenience stores for food," he said. "I go with the theory of all ships rise with the tide. As our industry gets better, it's better for everyone."

Or perhaps, it's a little of both. Weiner, for one, sees both possibilities.

"It's good if retailers do their homework and the industry gets recognized for foodservice. It's bad if they don't do their homework and customers have a bad experience. Then you get into that perception of, 'if it's food in a convenience store, then it must not be good,'" he said. "We went through that in the '70s and '80s, we don't need to go back there."