NEW YORK -- The competitive landscape is growing more complex for convenience stores. C-stores have prime real-estate locations, and their offerings cover multiple dayparts and major consumer categories, including food and fuel. But they also must deal with the challenges of cross-channel competition, higher operating costs and fuel-price trends.
To succeed, c-stores will have to build on the advantages and adapt to the trends and challenges shaping the industry. To win in this business environment, c-stores will have to excel across multiple dimensions of their business.
Findings from AlixPartners’ 2016 consumer study, What Convenience Stores Should Know—and Do—in 2017, point to the need for c-stores to master four imperatives to succeed in this channel: enhancing the execution of foodservice programs, improving the customer experience, building scale and launching comprehensive enterprise-improvement programs.
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Several trends could threaten c-stores’ sales and profitability, according to AlixPartners, New York:
Fuel price and volatility. Fuel prices are expected to start edging back up during 2017. Operators should be prepared for incrementally higher fuel revenues but tighter margins. A decline in the number of gallons sold could also negatively affect in-store sales if consumers make fewer trips.
Tobacco regulations. Cigarettes remain an important category for c-stores, but the category could shrink compared with other tobacco products (OTP), especially if more states and localities increase the minimum legal sale age and if cigarette taxes increase.
Healthcare and labor costs. Increases in healthcare and labor costs have translated into rising operating expenses for c-stores. Minimum-wage legislation and new overtime pay laws would worsen the cost picture, said the report, but uncertainty about the Affordable Care Act makes predicting the cost picture difficult.
Meanwhile, consumers’ c-store preferences further point to operators’ need to step up their in-store sales game if they are going to expand their profitability and market share.
Location remains the top factor in customers’ choice of c-stores, AlixPartners’ study found. But product value and price, merchandise selection, promotions and overall value also influence customers’ decisions, it said. Because brand loyalty is generally low, operators can win market share by competing on value and merchandise selection, said the report.
1. Enhancing the execution of foodservice programs
The c-store channel’s aggressive expansion of foodservice has triggered an equally aggressive response from more traditional foodservice players such as quick-service restaurants (QSRs) and grocery stores. The expansion has also attracted other foodservice competitors such as mass merchants, dollar stores and online retailers, according to the report.
QSRs are seeking to offer the same level of convenience that c-stores have offered, and grocery stores are expanding their grab-and-go food offerings.
Fuel is still a primary c-store purchase, according to 45% of survey respondents. But food-related items were the top secondary purchase options among those fuel consumers. For 77.5% of survey participants, buying food or beverage products is either a primary or secondary reason for stopping at a c-store.
“In this industry, fuel is clearly not a differentiator,” AlixPartners said. “Rather, it’s an easily copied me-too strategy. The path to success, therefore, lies in foodservice excellence, including providing offerings that span dayparts.”
Consumers are moving away from frequenting traditional restaurants, said the report. Since 2012, the frequency of buying food at c-stores and grocery stores has increased, while flattening or declining in restaurants. The study findings suggest consumers view c-stores as better than restaurants in several respects, including speed of service and price.
To grow foodservice sales and positively influence consumers’ perceptions of c-stores as great places to get breakfast, lunch or dinner, operators must strengthen their foodservice offerings so they can better cater to those dayparts. To do so, they should focus on food price, quality and variety.
To outmaneuver rivals, some operators are venturing into alternative distribution channels, the report said. Sheetz recently announced a partnership with restaurant food delivery service OrderUp and has plans to pilot delivery at two stores for Sheetz’s signature, made-to-order products. 7-Eleven has partnered with Flirtey to test drone delivery of food products. And QuikTrip opened a drive-thru test location to evaluate the viability of a broader rollout.
2. Improving the customer experience
Offering unparalleled convenience and ease of delivery goes a long way toward enhancing customers’ experiences with food products and in-store merchandise, said AlixPartners. Capitalizing on digital technologies such as mobile loyalty programs and mobile payments can further help operators attract and retain c-store customers.
Study participants named mobile loyalty programs as the most important technology offerings that c-stores can provide, said the report.
Mobile loyalty programs shape consumers’ decisions about which c-stores to patronize. RaceTrac recently launched a 100% in-app loyalty program. The program comprises several tiers, and as customers move up the tiers, the list of items for which they can redeem rewards expands, as does the number of free items available to them. The app scored 250,000 downloads in just four weeks following its launch.
And some chains use beacon technology to push notifications to customers’ mobile devices as they fuel up.
Mobile payments using near-field communication (NFC) have continued to gain traction, said the report. Many millennial and Gen X respondents in the study said they had used a mobile device to pay for products at a c-store in the previous 12 months. C-stores are also focusing on the costly effort of converting their systems for Europay, MasterCard and Visa (EMV) chip-card compliance.
3. Building scale
Consolidation may be the watchword for the North American c-store industry, which is highly fragmented and oversaturated. Given rising healthcare and labor costs, it is difficult for independents to compete, AlixPartners said.
To drive growth and achieve cost efficiencies, operators must build scale. The continued favorability of capital markets and the low cost of capital may provide tailwinds for those efforts.
Some operators have scaled by inking mergers and acquisitions deals, with an eye toward achieving revenue and cost synergies. Given the saturated domestic market, operators may also look to acquisitions in international markets for new growth opportunities. Asia Pacific—particularly Japan and South Korea—represents attractive markets for such deals, said the report.
To boost productivity and profitability, c-store operators should consider executing comprehensive enterprise-improvement strategies aimed at offsetting increases in operating expenses and protecting profitability. They have several levers available for meeting these objectives, said AlixPartners.
To control costs, enhancing labor productivity and garnering procurement synergies would likely prove vital, along with optimizing general and administrative expenses.
Cost-management strategies should take into account not only direct-cost categories such as foodservice, merchandise and fuel but also indirect categories such as facilities, construction and equipment, and consumables. As for stimulating fresh growth, c-stores can differentiate themselves through savvier marketing and more-effective product mixes such as expanding their foodservice offerings to increase in-store customer counts and average check size.
Plunge in oil prices sets the stage for record margins and boost in in-store sales. Also In This Issue: Profitability skyrockets for top performers! Other channels seek to redefine convenience! The economy enters a new stage. The growing health-and-wellness trend. Fuel demand; oil's slide; multicultural momentum; and data, data, data!