Scaling The Heights

The convenience industry achieved new sales peaks last year, but many pitfalls made the climb difficult

While the convenience store industry set several sales records last year, growth of — the most profit-a c-store's business percent. This marks the lowest percentage sales gain since the Great Recession of 2008, according to the just-released 2012 Convenience Store News Industry Report, the longest-running report on industry sales and performance. The CSNews Industry Report has been published annually for the past 37 years.

In addition, high gas prices last year fueled revenue gains in low-margin motor fuel sales, but fuel volume was down. Consumers also appear to have spent less per visit on in-store merchandise as their pocketbooks were stressed by how much they had to spend on fuel.

On a more positive note, though, the industry had strong sales growth overall and stronger pretax profit growth last year. At its current annualized compound growth rate of nearly 11 percent, the U.S. convenience industry will reach nearly $1 trillion in sales by 2015, projects Nielsen, the industry research firm that provides much of the supporting data for the CSNews Industry Report.

Total convenience industry sales grew by 20 percent in 2011, to a record $689.2 billion. Much of that increase was driven by the high fuel prices, which resulted in a 28-percent increase in motor fuel sales. Meanwhile, the in-store sales gain of 3 percent was slightly slower than the previous two years, but better than during the 2008 recession. Last year's $184.1 billion of in-store sales is still a record high for the industry.

The sales growth appears more impressive, though, considering that store count was relatively flat (just a 1.2-percent increase, or 1,785 net additional units added). Store count growth has held steady at 1.2 percent for each of the past two years, posting declines in 2008 and 2009. And single-store owners still represent more than 62 percent of total stores in the industry.

In store count, convenience stores dwarf all other competitive channels. For example, there are now more than 40 c-stores for every supermarket in the United States, and drugstores trail c-stores by about 110,000 units in store count.

Despite the efforts of many retailers to wean themselves off their dependence on motor fuel sales, the share of in-store sales fell by 4.4 percentage points last year, illustrating that the industry continues to generate a higher percentage of its sales from one of its lowest-margin product categories — fuel.

Higher fuel prices contributed to an increase in the percentage of retailers' motor fuel gross profit dollars, but profits from in-store categories were still almost twice as much as fuel profits as a percentage of total gross dollars.

For the future, fuel consumption is expected to continue to decline from its mid-2007 peak as more fuel-efficient vehicles are added to the nation's auto fleet and as more alternative fuels (ethanol, biodiesel, natural gas, electricity, etc.) become available in the energy supply.

Overall, industry gross profit grew 6.2 percent to almost $76 billion last year. More than $3 billion of the increase in gross profit dollars came from motor fuel, which was up 14 percent in gross profits. In-store gross profit dollars rose 2.4 percent to $49 billion.

Due to rising expenses (particularly labor, health care and credit/ debit card costs), pretax profit rose at a slightly lower percentage than gross profits. Convenience industry pretax profit was up 5.6 percent last year, to $6.45 billion. On a per-store basis, pretax profits were $44,511 per store in 2011, an increase from $42,666 the previous year.

Inside the store, foodservice continued to be the focus of operators' attention (and growth) to replace soft volume and declining margins on cigarettes. Foodservice results were driven by increases in sales of prepared food. Cold dispensed beverages also performed well, but hot dispensed beverages suffered due to rising commodity prices and intense competition from fast-food and coffee-shop chains.

Last year was a very strong year for packaged beverages, which generated a 6-percent increase in industry sales and a 6.3-percent gain in gross margin. Candy and salty snacks also grew very well in 2011.

Outside of the top 10 product categories, two stood out: health and beauty care (HBC), driven by energy shots, was up 5.5 percent industry-wide and alternative snacks, driven by meat snacks and protein bars, was up 13.4 percent.

To purchase an extended version of the 2012 Convenience Store News Industry Report, go to www.csnews.com/catalog.html.

Inside the store, foodservice continued to be the focus of operators' attention and growth to replace soft volume and declining margins on cigarettes.