NEW YORK — A new report, "What Convenience Stores Should Know — and Do — in 2017," from consulting firm AlixPartners identifies winning strategies for retailers to succeed in today’s environment.
"The competitive landscape is growing more complex, presenting both challenges and opportunities for some c-store chains," according to the report from the New York-based firm. "C-stores are well-positioned to operate effectively in this landscape. After all, many have prime real estate locations, and their offerings cover multiple dayparts as well as other major categories such as fuel, which can add value even as a potential loss leader. But to succeed in the future, they’ll have to build on those advantages and adapt to the trends shaping their industry."
Findings from the AlixPartners study point to the need for convenience stores to master four imperatives to succeed in this space:
1. Enhancing the execution of foodservice programs;
2. Improving the customer experience;
3. Building scale; and
4. Supercharging enterprise performance to boost productivity and profitability.
The report notes that "c-stores began competing against players in other foodservice segments, including QSRs [quick-service restaurants] and grocery stores, which have started fighting back." For instance, the report points out that QSRs are seeking to offer the same level of convenience and pricing that c-stores have offered, and grocery stores are expanding their ready-to-go food offerings.
"The on-demand world we live in requires retailers to focus on convenience, higher quality, health and wellness, and on-the-go strategies," said Eric Dzwonczyk, co-head of AlixPartners' restaurant, hospitality and leisure practice, and a managing director of the firm.
Because of the increased focus on driving foodservice, foodservice sales now represent 15 percent of the industry’s total in-store revenue. And because of the category’s hefty margin, growth in foodservice profit dollars will likely outpace growth in merchandise profit dollars, the report states. Even though merchandise contributes about 85 percent of in-store sales, the average gross margin on merchandise is only 23.8 percent vs. foodservice’s 43.7 percent.
Fuel Price & Volatility
Dzwonczyk pointed to fuel market developments over the past 24 months as one reason for the heightened focus on foodservice. "C-stores are uniquely positioned compared to restaurants," he told Convenience Store News. "They know how to appeal to consumers at different times of the day and can make food as it is ordered." Many convenience stores also have a superior coffee platform to build upon, he added.
Fuel prices are expected to start edging back up during 2017, given demand-and-supply dynamics, according to the report. "What this likely means for c-store operators is a potential recovery of fuel revenues but a decline — or at least a leveling off — in the number of fuel gallons sold," says the report. "Profit percentages could also tighten as rising prices and a cost-plus pricing model compress margins. High-fuel-price volatility could provide an opportunity to offset some of that margin compression, but this is difficult to predict. In short, operators should be prepared for incrementally higher fuel revenues but tighter margins. Finally, a decline in the number of gallons sold could also negatively affect in-store sales if consumers make fewer trips to the gas pumps."
According to the AlixPartners report, cigarettes remain an important category for convenience stores, but the category in the long term could shrink in size as more states and localities increase the minimum legal purchase age for tobacco products to 21 — as California and Hawaii already have done — and if federal, state and local legislation push taxes on cigarettes higher.
On the other hand, several trends could exert a positive impact on c-stores’ cigarettes category. Examples include retailers exiting the tobacco market — similar to CVS’ move — and a reembracing of traditional cigarettes by consumers dissatisfied with electronic cigarettes and vaping products.
Enhancing Foodservice Execution
Competition for the on-the-go, value-driven foodservice consumer is intense and increasing.
C-stores need to improve value products and increase the quality and number of food options offered, especially for the breakfast and lunch dayparts, according to Dzwonczyk.
Innovation will drive differentiation and competitive advantage in the increasingly complex foodservice space, according to the report, which cites numerous examples both inside and outside of the convenience store industry.
In addition to c-store retailers like QuikTrip that are continuing to invest in foodservice, grocery retailers are expanding upon convenience and prepared food offerings. Walmart has expanded online grocery ordering and curbside pickup. Kroger is featuring prepared foods from popular local restaurants — for example, Tiger Dumplings in Cincinnati. And Florida-based Winn-Dixie is remodeling stores to emphasize prepared foods, in addition to local and organic items.
All this competition doesn’t even include potential new entrants with new business models, such as Amazon.com, which is planning to open brick-and-mortar c-stores that sell produce, meat, milk and perishables, as well as expanding grocery home delivery and drive-thru grocery pickup.
E-commerce entrants such as Plated, Hello Fresh, and Blue Apron are also capitalizing on the growing demand for convenience by offering meal-kit home delivery, inclusive of pre-measured ingredients.
Dzwonczyk additionally described Starbucks as "an innovation machine" and listed Starbucks, Panera Bread, Shake Shack and Sweet Greens as among the top restaurant companies that c-stores might want to watch closely, for a variety of reasons.
In Part 2 of this special four-part series, we’ll look at AlixPartners’ advice on how convenience stores can improve the customer experience.
To view the full AlixPartners convenience store study, click here.