CHICAGO, Ill. -- Credit-card fees took center stage at the 2006 National Association of Convenience Stores State of the Industry (SOI) Summit in partnership with CSP yesterday morning as more than 450 top convenience and petroleum retailing executives, suppliers and advisors examined the industry's operational and financial performance at the Westin O'Hare in Chicago.
MasterCard and Visa made almost as much money as we did, and they don't own a single gas station, said Richard Oneslager, president of Balmar Petroleum and NACS vice chair for research [image-nocss] and technology, referring to the $5.3 billion the industry paid in credit-card fees in 2005. To put that amount in perspective, Oneslager compared it to another industry record, the more than $5.8 billion in industrywide profits.
Strong sales growth led to the strong increase in profits before taxes for the industry; overall industry profits jumped 17.1% to $5.84 billion, the third straight annual increase in pretax profits. Overall, the industry's pretax profit as a percent of sales was 1.2%. In-store gross margins were 29.9% and motor fuels gross margins were 7.2%.
All of that added up to bottom-line success for the industry, according to Greg Parker, president of The Parker Cos. and chairman of the summit. We're selling more items and at a slightly higher gross profit, but putting it into the bottom line, he said.
Regarding credit-card fees, just as overall industry profits showed a strong increase of $0.84 billion in 2005, credit-card fees increased to an even greater extent. Overall, credit-card fees in 2005 cost the industry $5.3 billion, a staggering 39.5% increase over the $3.8 billion in fees in 2004.
In 2005, credit-card fees accounted for 7.8% of all gross margin dollars, up from 6.1% in 2004 and 5.8% in 2003. Only labor costs and rent exceeded credit-card fees in 2005, but the gap between rent and credit-card fees narrowed from 3.9 percentage points to 2.1 percentage points.
In examining the impact on motor fuels, credit-card fees contributed an estimated 3.7 cents per gallon sold in 2005, including those paid for with cash. And, as wholesale gasoline prices have remained at elevated levels, the problem of increasing credit-card fees is expected to be significantly worse in 2006, since total fees increase as prices rise, while at the same time more customers use plastic to pay for the higher cost of fuel.
Convenience store sales overall climbed 20.2% to reach a record $474.3 billion in 2005, the third straight year of revenue growth of at least 16%, according to the SOI data released yesteday morning. The industry's numbers are based on a survey of convenience and petroleum retailers that cumulatively represent more than 21,000 U.S. retail locations.
A 26.2% increase in gasoline prices led to a 25.5% increase in motor fuels revenues to $329.5 billion in 2005. In-store revenues also showed strong growth growing an overall 9.6% to $144.8 billion, with merchandise revenues rising 9.7% to reach $127.6 billion and foodservice revenues growing 8.8% to $17.2 billion. On a per-store basis, combined in-store sales topped $1 million per store for the first time in history, reaching $1.036 million per store.
The nearly $80 billion increase in sales dollars over the $394.7 billion reported in 2004 continues three strong years of industry sales growth. In 2002, industry sales stood at $290.6 billion, and industry motor-fuels sales were $181.3 billion as gasoline prices averaged $1.40 per gallon. In 2005, gasoline prices averaged $2.31, according to NACS data.
What is impressive is that the industry grew in-store sales by a strong 9.6% to reach $144.8 billion. Even after factoring in a 1.8% increase in the number of convenience stores and an overall increase of the consumer price index of 3.4%, the convenience store industry's in-store sales clearly demonstrated real growth for the third straight year.
Moreover, the 9.6% increase in in-store sales surpassed that of virtually every other competing channel, according to U.S. Department of Commerce data. The only channel that saw growth surpass that of the convenience store industry was warehouse clubs/superstores, which grew 12.2%. Overall retail sales climbed 7.2%, and other competing channels didn't match that level, including restaurants (7.2% increase), drug stores (6.0% increase), grocery stores (4.1% increase) and discount department stores (0.1% decrease).
The industry's motor fuels sales jumped 25.5% to reach $329.5 billion. While motor fuels sales accounted for more than two-thirds of sales dollars (69.4%) in 2005, motor fuels accounted for just over one third (35.5%) of stores' gross margin dollars. Gasoline sales accounted for 94.0% of all motor fuels sales; diesel accounted for 5.9% of sales and kerosene accounted for the remaining 0.1%.
Customers continue to purchase the vast majority of their fuel at convenience stores, which sell an estimated three-quarters of all the fuel purchased in the United States, but there are substantial shifts in how that fuel is bought. As motor-fuels prices rose to record levels in 2005, customers continued the trend of trading down octane levels. Sales of regular grade fuel accounted for 83.5% of all gasoline sales in 2005, an increase from 81.4% in 2004. Premium sales dropped from 7.7% to 7.6% of overall gasoline sales, and mid-grade sales dropped from 10.9% to 8.9% of overall gasoline sales between 2004 and 2005. Price volatility has contributed to the continued erosion of higher grade sales over the past seven years. The combined 16.5% of gasoline sales that were either mid-grade or premium are approximately half of the 30.2% of overall gasoline sales that were those grades in 1998.
Once again, cigarettes dominated in-store sales, accounting for more than one in every three dollars spent in stores. The top 10 categories in terms of percent of in-store sales were:
Cigarettes (34.4% of in-store sales) Packaged beverages (13.3%) Foodservice* (11.9%) Beer (11.7% - but 14.3% when only considering stores selling beer) Other tobacco products (3.8%) Candy (3.6%) Salty snacks (3.2%) General merchandise (2.3%) Fluid milk (2.2%) Packaged sweet snacks (1.9%)* includes food prepared on site, commissary/packaged sandwiches and hot, cold and frozen dispensed beverages
Cumulatively, the top 10 categories accounted for more than 88% of all in-store sales. Of the top 10, packaged beverages, other tobacco products, general merchandise and packaged sweet snacks all gained in terms of percentage of overall sales.
In looking at top contributors to in-store gross margin dollars, cigarettes also topped the list, but with a far smaller percentage contribution: 18.5%. Also ranking in the top 10 were packaged beverages (13.4%), foodservice prepared onsite (9.5%), beer (7.4%), hot dispensed beverages (7.3%), candy (4.7%), cold dispensed beverages (3.7%), lottery and lotto commissions (3.6%), ATM income (3.4%) and salty snacks (3.0%). Cumulatively, items included in the foodservice category grew 30.4% to reach $10.3 billion, 23.7% of all in-store gross margin dollars.
Among the subcategories that showed the strongest sales growth were automotive products (85.7% increase), prepaid cards (68.5%), alternative snacks (49.2% increase) and a number of beverages, including alternative beverages (36.5% increase), bottled water (13.5%increase) and sports drinks (13.3%).
Despite the overall good news offered by the SOI data, there was a tone of caution from the stage. Scott Hartman, president of CHR Corp. (dba Rutter's Farm Stores) and NACS chairman of the board, noted that in a mature industry such as convenience stores, retailers have to keep their eye on consumers and be willing to evolve.
Our industry has changed, he said, and we must continue to change.
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