Showing Signs Of Life

By the Convenience Store News Staff

Although the recession is officially over, consumers in the United States remain "mad as hell" and "frustrated" at the slow pace of recovery, according to Maureen Maguire, economist and founder of ThinkResearch and presenter of the annual Convenience Store News Industry Forecast Study.

Sponsored by General Mills and McLane Co., this year's Industry Forecast Council meeting in New York included representatives from seven prominent convenience store chains, along with presentations from The Nielsen Co. and General Mills.

Maguire's economic forecast was not nearly as pessimistic as a year ago, when she declared, "we are in uncharted waters … we have never experienced anything like this before," referring to what some have called The Great Recession, or the biggest economic decline in the U.S. since the 1930s.

While last year's CSNews Industry Forecast predicted per-store unit volume declines in most key convenience store product categories, this year's Forecast is more of a mixed bag. Slight per-store unit volume declines are forecast for cigarettes (down 0.4 percent) and packaged beverages (down 1.2 percent) in 2011. A 0.3 percent increase is projected for the candy, gum and mints category, and OTP (Other Tobacco Products) is expected to have another strong year, growing by nearly 20 percent in 2011.

Nevertheless, the former chief economist for Montgomery Securities in San Francisco pointed to a number of negatives that will impact both retailers and consumers even though the U.S. recession officially ended in June 2009, according to the National Bureau of Economic Research. Maguire, who also served as global director of research for PricewaterhouseCoopers, noted 14 million Americans remain unemployed and another 14 million are underemployed, i.e., working part time or in lower-paying jobs that require less skill or training.

"We don't know where the jobs are going to come from," said Maguire. "It will take a decade just to get back to the employment level we were at prior to the recession."

The housing market is "painfully and slowly" turning up, but economists are worried about the number of foreclosures and the commercial real estate market remains very weak, according to Maguire. "There's still too much existing inventory on the market for new home sales to rise," she noted. Add in the fear of rising gasoline prices, as one retailer on the Council pointed out, and 2011 "feels like more of 2010."

James Russo, vice president of marketing for The Nielsen Co., agreed with Maguire that a stubbornly weak labor market is weighing down consumer confidence. As recently as the third quarter of 2010, the Consumer Confidence Index remained at recessionary levels.

"The best we can say so far the labor market is not anywhere near as bad as in the days when we were losing over 500,000 jobs a month; but we need to be creating 200,000 to 250,000 jobs a month to take a solid bite out of the ranks of the unemployed," said Russo.

"Throughout the recession, the consumer's focus has been on repairing the balance sheet at home," said Russo, who noted whatever discretionary spending consumers did have focused on technology products, like smartphones.

Russo described consumers as standing at the crossroads of recession and recovery. They've moved from a mindset that said, "I'll trade down even if it means sacrificing what I really want," to "I will weigh the costs/benefits of my spending." Seventy percent of consumers continue to "only buy when on sale" and another 60 percent say they use coupons, according to Nielsen research.

Russo closed by noting the convenience channel is well-positioned to capitalize on larger demographic trends in the nation. The nation is becoming older, with fewer households having children. Population growth is among multicultural households. More Americans are living in cities, the income gap is widening between the richest and poorest households, and women are becoming an even greater factor in the U.S. economy, both in employment and spending, something c-stores should capitalize on, he noted.

Convenience stores are currently capturing a larger share of multicultural consumers than other retail channels. They also attract a larger share of customers from smaller household sizes, and tend to garner more dollars from consumers at the extreme ends of the income spectrum.

CIGARETTES

The largest in-store sales category, cigarettes, is expected to experience continued flat or declining volume this year as the cost per carton continues to skyrocket from manufacturer price increases and federal, state and local tax hikes. Barring additional tax increases, the average price for a carton of cigarettes will rise from $52.46 in 2010 to $53.46 in 2011.

This year's forecast is for a national decline from 1.32 billion to 1.31 billion cartons sold, while per-store c-store volume declines by 0.4 percent. "The number of smokers is declining every year," said McLane Co.'s David Elkins, but he pointed out in the past, major brands didn't see as much of an impact as the price value brands. However, pricing strategies on the latter over the past year is shifting some volume to price value, he noted.

In addition, Elkins pointed out supermarkets and mass retailers are pushing customers to c-stores, due to tighter in-store controls to purchase.

OTHER TOBACCO

OTP, or Other Tobacco Products, will once again be the fastest-growing product category in the convenience store. OTP unit volume per store will skyrocket by 20 percent this year as punishing taxes and anti-smoking regulations drive more smokers to cigars (particularly cigarillos) and the smokeless varieties of tobacco.

The 2011 Forecast calls for a per store dollar gain of 9.5 percent for cigars, on a 3.1 percent unit increase. Convenience store sales of cigars and OTP also continue to gain in market share against food and drug retail outlets. C-store share of cigar sales increased from 92.5 percent in August 2007 to more than 94 percent in July 2010. C-store's share of OTP sales increased from 91 percent in August 2007 to 93.5 percent in July 2010.

MOTOR FUEL

The average retail price per gallon of gasoline will break the $3 barrier in 2011, according to Maguire. "The price of gas is increasing slightly now based on the global recovery, and 2010 will be higher than 2009," she said in November 2010. Following that pattern, 2011 will be even higher.

For 2010, the average retail price per gallon was $2.87 ($2.82 for gasoline and $2.98 for diesel), and for 2011, the price per gallon for gasoline is forecasted to increase to an average of $3.04, while diesel is forecasted to reach an average of $3.22.

National sales of gasoline will increase from $523.0 billion to $570.3 in 2011, and for c-stores the increase will be from $424.1 to $462.5, according to the forecast.

"We saw national sales of $636.1 billion in 2008 because the average price of gasoline was $3.45," Maguire explained.

Additionally, Maguire does not believe breaking the $3 mark in gasoline will have an effect on the driving habits of consumers, so 2011 should not see a decline in gasoline usage.

"When gas starts to bump up to $4 per gallon, that is when we see a significant decline in traveling," she noted. "However, when it is $2 or $3 there really isn't a change in driving behavior."

PACKAGED BEVERAGES

As a whole, the packaged beverage category saw a decline in c-stores during 2009, but has rebounded in 2010. While 2009 saw a 4.7 percent decrease in unit volume per store and a 2.7 percent decrease in sales per store (3.6 percent sales decrease industry wide), 2010 is expected to see this reverse to a 2.4 percent increase in unit volume per store and a 3.2 percent increase in sales per store for the entire packaged beverage category.

In 2011, unit volume is expected to decrease 1.2 percent per store, but sales per store and overall industry sales are forecasted to increase 1.6 percent and 1.8 percent, respectively. When it comes to market share, supermarkets are still leading the way in terms of sales, although the grocery channel posted a 1.7 percent decline in sales versus a year ago, according to The Nielsen Co. data during the 52 weeks ending Oct. 2, 2010.

Breaking down the subcategories within packaged beverages, carbonated beverages remains the weak link, although there may be a slight increase this year, Maguire explained. In terms of unit volume, the carbonated segment is expected to end 2010 with a 1.4 percent decline, slightly less than the 2.8 percent decline seen in 2009. Also, sales per store are expected to fall 0.9 percent compared to a 1.4 percent decline in 2009. In 2011, volume per store is expected to drop 2.8 percent, but per store sales are forecasted to see a 0.1 percent increase, with a 0.3 percent increase industry-wide.

While the bottled water segment had "a weak 2009 on the heels of a weak 2008, the category was strong before that and is expected to grow by the end of 2010 and into 2011," Maguire noted. The 2011 forecast shows unit volume per store up 3.3 percent and sales per store up 2.8 percent.

The trend of alternative drinks, especially energy drinks, continues to be "explosive in its growth," Maguire noted. "There is a huge increase of unit volume versus sales numbers, showing kids are out there buying drinks and consuming them more rapidly."

After a 4.5 percent decline in volume per store in 2009, the alternative beverage category is expected to post a 24.7 percent increase in volume for 2010 and a 35.3 percent increase in 2011. Matt Paduano of Nice N Easy Grocery Shoppes in New York attributes the bump to supplier marketing.

"Whatever the WWE guy is wearing on the back of his shirt is what they buy," agreed John Call of CF Capital Assets which operates the Convenient Food Mart chain based in Cleveland.

Sales per store in the alternative beverage category will rise 7.7 percent in 2010 and is forecast for a 1.5 percent sales gain in 2011.

Energy shots also saw "pretty amazing growth," said Maguire. In 2009, the segment posted a 102.2 percent increase in volume per store, with sales per store up 90.0 percent. In 2010, energy shots will see a 50.7 percent volume per store increase and a 51.5-percent sales per store gain. This growth is expected to continue into 2011, with volume forecasted to grow another 28.4 percent and on a sales gain of 44.3 percent per store.

MALT BEVERAGES

The malt beverages category includes beer, malternatives and other malt beverages, excluding wine coolers. In 2010, the category recovered from a lackluster 2009 in terms of volume, but sales dollars will drop again in 2010, said Maguire.

After a total category volume decline of 2.8 percent in 2009, malt beverages volume is forecasted to be up 1.1 percent in 2010. Volume for 2011 is expected to grow slightly by 0.4 percent.

"People are trading up in the size of packages which is why volume goes up," explained Paduano.

While overall sales in 2009 were up 0.6 percent, they fell 1.9 percent in 2010. Dollar sales are forecast to rebound by 3.7 percent in 2011 due to price increases expected in the category, according to Maguire. Additionally, while c-stores still lead in market share when compared to drug stores and supermarkets, that lead is declining, she noted.

"Beer is going up in drug stores and that has been a steady trend since October/November 2009," she said, while Call pointed out the same is true for wine. Walgreens has been introducing alcohol into its stores since 2009 in response to customer demand and taking up 12 feet of aisle space for wine and two cooler doors for beer on average.

The convenience store segment accounts for $15.2 billion in sales of malt beverages compared to $8.7 billion in the supermarket segment and only $1.2 billion in drug stores, according to The Nielsen Co. data for the 52 weeks ending Oct. 2, 2010. And dollar stores are another channel breaking into beer sales, said Bubba Kirkland of Texarkana, Texas-based E-Z Mart.

"Dollar stores in our area just started selling it," he noted.

CANDY

Sales in the confectionery category in 2011 will look much as they did the year before. With manufacturers scaling back new introductions and line extensions, opting instead to focus on their core offerings, the candy category is forecasted to see modest growth again this year.

According to the CSNews Forecast, dollar sales in candy, gum and mints will increase 2.0 percent on a per-store basis in 2011, which is the same as in 2010. Meanwhile, unit sales per store are projected to increase 0.3 percent in 2011, compared to a 1.6-percent volume decrease in 2010.

Looking at the four individual segments that make up the category, chocolate is expected to be the star performer in 2011, with a 5.0-percent increase in dollar sales and a 0.9-percent increase in unit volume projected on a per-store basis. That's an improvement over the prior year when per-store dollar sales increased 3.6 percent, and per-store unit volume increased 0.1 percent.

Aside from the chocolate subcategory, the outlook for the other segments is not overly bright.

Gum is forecasted to post the second-highest growth in the category in 2011, with a 0.5-percent increase in dollar sales and a 1.8-percent increase in unit volume per store. While the segment's unit volume is showing improvement from a 2010 decline of 2.3 percent, the dollar sales figure is not as strong as last year when sales increased 1.0 percent per location.

Like gum, the non-chocolate segment also is expected to see growth in dollar sales this year, but not at the level seen in 2010. Dollar sales per store are projected to increase 0.2 percent, compared to a 2.6-percent boost last year. Unit volume per store is once again expected to drop this year, by 1.9 percent, compared to a decline of 1.1 percent the year before.

Worst off is the mints segment, which is forecasted to see a third year of declines. The picture for 2011 is not as bleak as the previous year, though. In 2011, dollar sales of mints are projected to decrease 2.9 percent per store, while unit volume will be up 0.2 percent. By comparison, per-store dollar sales in 2010 decreased 6.3 percent, while unit volume dropped 9.4 percent.

SNACKS

The 2011 forecast for salty snacks signals price increases are likely in the category.

Last year, growth in per-store dollar sales and unit volume was relatively even. However, this year's CSNews forecast shows dollar sales of salty snacks will be up 2.7 percent on a per-store basis, with unit volume up only 0.8 percent per location.

While Frito-Lay continues to dominate the salty snacks category, Forecast Council participants said they're turning more to warehouse-delivered snacks. Driving this is the reduction in routes by DSD (direct-store delivery) vendors, including the category captain.

The snack cakes segment is suffering from reduced DSD service as well. "It doesn't help when you walk in stores and they don't have product on the shelves," noted E-Z Mart's Bubba Kirkland.

Unfortunately, retailers expect reduced DSD routes to continue through 2011. To contend, they said they will look even more to warehouse delivery, and/or reduce space given to the items.

This year, snack cakes are forecasted to see a 2-percent increase per store in both dollar sales and unit volume. In 2010, dollar sales were up 2.0 percent, while unit volume was flat.

CONSUMER SNACKING STUDY

Despite the snack category's challenges, convenience stores will continue to be a consumer destination for these impulse items. To find out how customers decide to fill their immediate snacking needs, General Mills recently conducted a study dubbed "The Path to Purchase."

During the Forecast Council, General Mills' Consumer Insights Manager Krista Lorio shared some of the company's findings. The research, which included video diaries and field visits, revealed that consumers of immediate consumables can be broken down into four segments:

• Achiever — eats three meals a day with snacks; believes in balance and moderation.
• Striver — eats two meals a day with snacks; tries to be balanced and wins most of the time.
• Struggler — eats few meals, mostly snacks; is time-starved.
• Not Even Trying — eats hardly any meals, mainly snacks; is always in a hurry.

To win with achievers, Lorio said convenience retailers must leverage the craving occasion to educate these consumers that c-stores have healthy snack options. This group also will respond to healthy messaging and a good assortment of bite-sized and shareable snacks.

To win with strivers and smugglers, c-store operators need to help these consumers better navigate their stores, whether it's organizing by daypart or need states (energy, better-for-you). Both groups also like bite-size and shareable snacks, as well as nostalgic brands.

Finally, to win with those in the "Not Even Trying" group, Lorio suggested c-stores prominently display bundled promotions, and showcase new products by the entrance. Offering a wide selection of king-sized snacks is important for these customers too, she noted.

2011 Forecast Study Council

Convenience Store News held its ninth annual Industry Forecast Council in New York City in November 2010. Last year's Forecast Council, sponsored by General Mills and McLane Co., included representatives from seven leading convenience store chains. In the Council meeting. Convenience Store News' partner Maureen Maguire, president of ThinkResearch, presented dollar and unit volume projections in key c-store product categories based on data from various sources, including The Nielsen Co. for category sales history, TDLinx for store counts and government sources for motor fuel volume and pricing data. The data is run through a sophisticated projection model and then presented to c-store retailers for their feedback and input into the final 2011 sales projections presented here in summary form. To purchase the full version of the 2011 Industry Forecast Study, including macro-economic data, and sales and volume information on key categories and subcategories, visit www.csnews.com.

FORECAST COUNCIL MEMBERS:

• Andreea Moyes, BP ampm
• John Call, CF Capital Assets
• Elisa Goria, Circle K
• Bubba Kirkland, E-Z Mart Stores Inc.
• Matt Paduano, Nice N Easy Grocery Shoppes
• Allison Moran, RaceTrac Petroleum
• Dave Henninger, The Pantry Inc.

SPECIAL GUESTS/PRESENTERS:

• Krista Loria, General Mills
• James Russo, Nielsen Co.
• Marge Anzalone, Nielsen Co.
• Kelly Quinn, Nielsen Co.
• Maureen Maguire, ThinkResearch
• Chris Frost, VerticalXchange

SPONSORS:

• John Dalton, General Mills
• David Elkins, McLane Co.

2011 CSNEWS INDUSTRY FORECAST STUDY SPONSORS

FORECAST METHODOLOGY

Once again. Convenience Store News partnered with ThinkResearch to produce the 9* Annual Industry Forecast Study. Data for the Forecast was gathered from a variety of sources. The Nielsen Co. provided sales and unit data for c-stores as well as for total food, drug and mass (excluding Walmart) for in-store categories. Additional category information was provided by McLane Co., Inc. and supplier partners. The Industry Forecast Study is supervised by Convenience Store News Research Director Debra Chanil.

Nielsen TDLinx provided monthly store counts, which were used to forecast the annual average number of stores. The study forecasts an increase of 0.2 percent for 2010; that 0.2 percent increase is expected to be repeated in 2011.

Government data sources include the Department of Energy for gasoline price and volume; Bureau of Economic Analysis, National Income and Product Accounts for data on disposable income and the Bureau of Labor Statistics for unemployment rates and CPI (Consumer Price Index) data.

Forecast models are developed by looking at past monthly sales and unit performance, along with outside economic factors such as disposable income, employment, etc. Final models are selected for each category and are then aggregated to obtain total industry and per-store figures for dollar sales and unit volume.