<i>Too</i> Interesting Times

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<i>Too</i> Interesting Times

By Don Longo, Convenience Store News - 10/03/2008
I'm sure you've heard the ancient Chinese proverb, "May you live in interesting times." Meant as a curse and not a blessing, the saying wishes much upheaval and trouble upon the receiver. The accursed supposedly would be unable to find the peace and tranquility of "uninteresting times."

Well, these are certainly very "interesting times" for the convenience store industry.

Almost everywhere you look, you'll find upheaval and trouble. Old industry business models are falling apart, and the shape of new ones are still uncertain. (For a more in-depth analysis of how current economic trends are transforming the industry, see cover story, page 34.)

While retailers we've spoken with said they are showing some decent sales increases, a good share of those gains are the result of inflation. The cost of goods for all products is climbing. Rising credit card transaction fees continue to cut into historically slim fuel margins, and this fall's hurricanes and tropical storms -- not to mention this summer's floods in the Midwest -- have caused major regional business disruptions. Very interesting, indeed!

Some retailers are cash-strapped for inventories of both merchandise and fuel. Our cover story package includes an article about several c-stores that have gone out of business because they couldn't afford to refill their fuel tanks (see page 59). Consolidation and fragmentation are occurring in the industry simultaneously. Lower multiples for c-stores are making many of these struggling companies acquisition prey for larger retailers with better cash flow.

At the same time, the major oil companies are moving toward franchising, or exiting the retail business entirely, such as ConocoPhillips' sale of its remaining retail assets to a division of PetroSun (see Checking In, page 27). One ramification of this is the growing impact of single-store operators/franchisees, already representing 62 percent of the industry's store count. And since wholesalers and manufacturers will be doing more business with small chains and single stores, more retailers will try to go to a cost per piece delivered, rather than the current cost-plus pricing method on products or categories, in order to take the inflationary part of cost of goods out of the scenario.

Top-performing companies, though, such as Wawa, Sheetz and QuikTrip (see 50th anniversary story, page 89) will continue to grow. They will be more vertically integrated, adding daily warehouse and commissary deliveries to keep inventory lower, reduce out-of-stocks and keep perishables, such as dairy, produce and deli products fresh, while reducing in-store labor needed to make sandwiches and entrees for at-home meal replacement. Indeed, the tax incentive on increased depreciation passed this year as part of the Bush economic stimulus plan is likely to be used by retailers for food equipment, fountain, coffee and vertical integration projects, such as construction of new commissaries.

Retailers, including the industry's biggest -- 7-Eleven -- also will add more private label merchandise to provide a better price point for the consumer and better margin for them.

You've heard a lot of this before, but when it's all put together, it does appear that a new industry landscape is emerging. Interesting enough for you?