A Balanced Industry Outlook

Strong foodservice numbers counter regulatory challenges, NACS CSX figures show

Samantha Oller, Senior Editor/Fuels, CSP

RANCHO PALOS VERDES, Calif. -- "The state of the industry is pretty good," said Jeff Miller, president of Miller Oil Co. and NACS chairman, at CSP's 2011 Outlook Conference. That's thanks in part to the adaptability of retailers in the face of strong economic headwinds, he said. Miller cited some new figures from the NACS CSX database to back up the assessment.

According to NACS CSX figures comparing January through May 2010 with January through May 2011, total c-store sales rose 22%, with fuel sales providing much of the momentum, up 28.7%. Fuel gallons rose 0.6%, a [image-nocss] noteworthy if modest increase in light of sluggish U.S. demand. In-store sales rose 2.0%, despite a 2.4% drop in cigarette sales. Here, foodservice provided the lift, with a 6.5% increase.

On the profit side, fuel gross profits rose 7.6%, while in-store sales were up 3.7%. Again, this was despite a 4.6% dip in cigarette gross profits and because of a 9.3% jump in foodservice gross profits. In regard to the negative numbers for cigarettes, Miller (pictured) pointed that last year at this time, the category was emerging from the effects of the SCHIP increase. "We're coming back to a normal trend," he said.

Examining some notable increases under expenses, credit-card fees grew 26.6%, repair and maintenance costs rose 11.5%--likely because retailers are trying to extend the life of current equipment as opposed to buying new--and supply costs grew 7.1%, possibly fed by the increase in foodservice sales.

Gross-profit dollars for prepared foods leapt 11.5%. "We're learning how to run this right," Miller said. One area of concern: hot dispensed beverages, which saw sales off 0.5% and gross profit dollars down 2.8%. Miller suggested competition from QSR heavyweights such as McDonald's and Dunkin' Donuts was really starting to have an effect on the channel. As an area for potential growth, he mentioned cold coffee products, which he said generate one-half of Starbucks' sales. However, these products are typically "dressed" with whipped cream, syrup and other toppings, a tough element to duplicate in the self-serve environment of c-stores.

Miller then highlighted a few wider trends for retailers to consider, including:

Impact of the Internet: Whether it's online cigarette sales siphoning business from c-stores or mobile apps that enable consumers to find the cheapest gasoline in town, the Internet's effect on this channel is only beginning to reveal itself. Nutrition and Foodservice: Citing the sponsorship of food aid group Feed My Starving Children by CSP's CARRE Foundation for the 2011 Outlook Conference, Miller said the failure to manage food waste better in the industry's foodservice programs "is not only poor management but socially irresponsible." He also encouraged retailers to make healthy living a part of their company culture, citing that Miller Oil pays a $500 bonus to employees who quit smoking or lose weight. If they accomplish both, they receive a 5% reduction in their health-insurance premiums.

Tobacco Turmoil: As the FDA continues to finalize the details of its regulatory oversight of cigarettes, Miller highlighted the experience of c-store retailers in Canada who contended with not only a big increase in taxes but also the category being forced to go "dark." As a result, 30% of cigarettes sold in Canada today are contraband, Miller said. "Tobacco is a moving target" in the United States, he said. While menthol appears to be in the clear, the fate of graphic warning pictures on packs of cigarettes is not, as a lawsuit by several tobacco manufacturers works its way into courts.
Miller also cited a Department of Justice decision to require cigarette manufacturers to acknowledge they misled consumers on the health qualities of light cigarettes. Retailers would display placards on their counters with statements explaining the manufacturers' mistakes, although the wording is still being finalized.
Debit-Card Aftermath: Retailers "won a hell of a victory on swipe fees," Miller said, pointing to the fact that the Federal Reserve's reset of debit interchange fees will free up approximately $800 million. While the industry didn't get the size of reduction in fees it had hoped for, it still persevered against a heavy lobbying effort by banks.
ADA Update: There are 500 new regulations being added to the Americans with Disabilities Act (ADA), and retailers would be wise to audit their sites to ensure they conform.

Miller said the retail industry used to be able to interrupt "bad legislation" and neutralize it before it hit the books, but this has gotten more difficult as the current administration is attempting more legislation through regulation; that is, if a legislative battle is lost, there is an effort to introduce regulations that will have the same effect. It requires retailers to be especially vocal to their government reps. "If you're not involved, you get lost in the shuffle," Miller said.