The definition of frustration: doing all you can to grow your business but seeing your efforts blunted by forces seemingly out of your control.
Based on the results of CSP’s 2013 Outlook Survey of c-store business optimism and expectations for the coming year, many operators seem to be swimming upstream in an atmosphere of heavy regulation and low consumer enthusiasm. More than 40% described business conditions as “poor” or “flat,” with the greatest percentage rating it as “good.”
Barb Mathias, co-owner of Outback Run Thru, a drive-thru convenience/liquor store near Bremen, Ohio, is one of those retailers who calls current conditions “good,” although she attributes part of her business’ growth to the fact that it opened only a few years ago, and that she is operating it more consistently than the previous owner, who fell ill.
“I’d definitely contribute a 15% [increase in sales] to just that fact,” says Mathias. “Also, we support a lot of community activities, and the old owners didn’t do that so much.”
That said, her expectations for 2014 are low.
“I don’t have a whole lot of faith in the economy at all,” she says, citing political gridlock and the implementation of the Affordable Care Act (ACA). “This health-care thing, people are paranoid—at least out here. … So many people are finding they are going to be spending more than planned. Any extra money will be going toward that.
“We’re building a good reputation, have a good business, we’re clean, people like coming here, we’re friendly—we make it our top priority. We treat people how we want to be treated,” she concludes. “But people only have so much money. And you’re expendable out of their budget.”
The second and third quarters of 2013 showed steady improvement, according to a retailer from a large chain who considers business conditions “flat” overall.
“The year started out poorly and we have never fully recovered,” he says via e-mail, requesting anonymity. “The January 2013 fiscal uncertainty affected our customers, mainly through the 2% reduction in their take-home pay. They had to make choices. They learned to make do with less.”
Transaction counts are down—partly because of unusually cold, wet weather—while any sales increases had been fueled by price increases. “In real dollars, we are behind last year,” he says.
However, this same retailer anticipates “some improvement” in 2014.
“All of the above has ‘forced’ us to become better retailers,” he says. “We are refining our pricing and promotional activity. We are concentrating on our point of difference: foodservice.”
Indeed, while the retailers who participated in CSP’s 2013 Outlook Survey face incredible challenges to growth in the coming year, they are not folding. Instead, they are doubling down.
“I see many opportunities as changes occur with customer shopping habits, trip planning, use of smart devices, demographic shifts, and shifts in how customers use legacy retail channels and apps,” says one retailer who rated current business conditions as “poor.” “However, I also see weak demand as an overall theme, so that retailers can still grow same-store sales, but it must come from fast alignment of assortments to changing needs and shopping habits.”
John Zikias, COO of Holmes Oil Co., Chapel Hill, N.C., which has more than 20 Cruizers c-stores in the state, rates conditions as “flat.”
“From our standpoint, the biggest issue is the economy,” says Zikias. While some of Holmes Oil’s markets are strong—Durham, for example—others are weaker, such as Henderson, which is more rural and has higher unemployment. “We’re trying to figure out, in a tough environment, what do we do to improve sales and profits in those areas? We’ve never been one to sit around and wait things out. How do we do the best we can in those environments?”
His expectations for business in 2014 are “somewhat improved” because of efforts in store to improve plan-o-grams and reconfigure gondolas. “Based on other areas of the store where we did this, we are seeing strong improvement and think we have some runway to help next year,” says Zikias. “It may sound simple, but a lot is in fixing range, what’s selling and not, getting new items in quicker.”
Steve Keane, formerly with Temple, Texas-based CEFCO and now a franchisee of two 7-Eleven stores in the Dallas-Ft. Worth area, considers business conditions “good” and has seen a modest increase in same-store sales, thanks to a slowly improving construction industry and the benefits of operating in a high-income county with an average household income of $100,000.
“One of my bigger challenges is: How do we serve that specific consumer, and have them think of us as a place for a great beverage or food item?” he says. “How do we tap into the buying power of affluent consumers?”
Allen Marsh, CEO of Sapp Bros Inc., Omaha, Neb., which owns and operates 16 truckstops from Utah to Pennsylvania and distributes fuel, was among the less than 7% of Outlook Survey participants to describe business conditions as “excellent.” But he has good reason. For one, recent troubles at Pilot/Flying J have directed business his way. For another, Sapp Bros. has very low turnover compared to the industry average, and committed employees. But perhaps even a greater reason is the retailer’s own operational discipline.
Marsh cites one of Walmart founder Sam Walton’s “10 Rules for Building a Business”: “You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient.”
For Sapp Bros., that has meant replacing managers who are not performing well, maximizing the hauling capacity of its transportation division, and keeping each travel center’s management team up to date on how it is performing by key metrics, including overtime hours, cost per gallon to staff, and cost per gallon per dollar store sales.
Read on for more c-store retailers’ assessment of the year that was, and their hopes for the year ahead, in the results of the 2013 CSP Outlook Survey.
Outlook Overview
More than 53% of participants in the 2013 Outlook Survey described current business conditions as “good” or “excellent,” compared to more than 62% in 2012. About 51% expect “some” or “great improvement” in the coming year, little change from the 2012 survey.
While the percentages cannot be directly compared—participation in the survey varies from year to year—it does suggest a certain mood of disappointed resignation. And based on comments by participants, one of the biggest factors is the government—whether it be manufactured crises such as the debt-ceiling squabble and government shutdown, the FDA’s still-pending regulatory decisions on tobacco, or the effect of the Affordable Care Act (ACA).
While Holmes Oil does not have a huge base of government workers among its employees, its stores near the state capital do, and the company is concerned about another crisis such as the one that hit this past fall. “If we have another debt ceiling [crisis], the uncertainty is troubling; we don’t know what will happen in January,” says Zikias. “Will there be a grand budget deal to ensure long-term viability?”
Retailers are also grappling with the turbulent rollout of the ACA. “We are trying to understand what we can and can’t offer,” says Zikias, pointing out that the company has hired a firm to navigate through its choices. “We have concerns because the system for signing up is not working correctly. What impact will that have on our team? Our view: [It will impact] those at the front and those at the tail end. There are just a lot of moving parts keeping us up at night.”
One area where retailers do not expect any help: the government. “I don’t feel our government, at any level, seriously takes care of small businesses,” says Mathias of Outback Run Thru. “When they’re gone, there’s going to be a price to pay for that.”
Challenges
More than 53% of participants cited the ACA as one of their top three business challenges, compared to 37% of participants in the 2012 survey.
One of the concerned operators: Marsh of Sapp Bros., who believes the ACA is directly responsible for increases in health-insurance costs.
“We’re up 40% in cost of our plan this year, over what we projected,” says Marsh. “Those are huge dollars. The ACA is driving this.” His company offers health insurance to all employees working 30 hours or more and covers two-thirds of the benefit costs. “We are covering that 40% increase,” he says. “Right now we are probably paying closer to 85% and the employee 15%.”
The second biggest challenge cited by c-store retailers? That old standard, credit-card fees, chosen by nearly 50% of Outlook Survey participants. “The price of fuel is down this year vs. last, but credit-card fees are a big expense for us,” says Zikias of Holmes Oil. “We have an above-average number of transactions paid for by credit cards.” He also questions how the legal wrangling over the swipe-fee settlement will resolve itself.
Competitive Pressure
Nearly one-third of Outlook Survey participants cited increased competition from nontraditional retailers as one of their top three challenges. But hypermarkets’ reign as the biggest nemesis is officially over. More than one-half of survey participants said dollar stores were the biggest nontraditional threat, with supermarkets and drug stores ranked second and third, respectively.
Mathias of Outback Run Thru is one of those feeling threatened by the dollar channel. A dollar store opened just down the street from her site, and its aggressive pricing on packaged beverages—carbonated soft drinks in particular—has proven tough to match, let alone beat.
“They can sell 12-packs there at three for $10, four for $11,” she says. “They’re selling it for cheaper than I can pull it off the truck.” The dollar store is also now selling propane, cigarettes and beer, although Mathias believes her store can compete because the beer is sold only in warm packs and rounded up from the state minimum.
The retailer quoted anonymously echoes Mathias’ frustration. “With the advent of Dollar General exploring fuel, that can only further put a crimp in our customer count,” he says.
Profit Centers
More than 65% of Outlook Survey participants are planning to change their business model in 2014—about the same compared to previous years. The most popular move: remodeling and refreshing the c-store, followed by adding or expanding profit centers.
Fewer than one-third plan to grow by acquisition. That said, “The current environment is good to both buy and sell,” says the anonymous retailer. “It has become increasingly difficult for the midsize chain to make the economies of scale work in their favor,” especially for family-owned businesses. His company is looking for the right fit, but is also “long overdue” for its own rationalization, he says. About 14% of participants in the survey plan to sell some stores.
“We need to cull the bottom percentage of our sites,” he says, with the top candidates facing changing customer demographics, land constraints, increasing market value for a new lease or being better suited for another use.
For added profit centers, foodservice again takes the top slot, although alcohol beverages rank second. “What I had success with is getting into a better-quality assortment of wine, craft beer and e-cigarettes,” says 7-Eleven franchisee Keane. “It’s all incremental sales for me.”
Foodservice
Nearly 35% of Outlook Survey participants plan to add to their foodservice offer in 2014, with expanding the coffee bar and fountain the most popular moves. The retailer requesting anonymity says his chain has moved from glass pots to urns, and stores now have dedicated coffee islands. The chain is also upgrading its fountain to 24 heads.
Expanding foodservice, however, is not as easy. “As our legacy stores are in the 2,400-square-foot range, we cannot expand into freshly prepared foods,” he says, but the chain is looking into dashboard dining options, and increasing its fresh food deliveries.
More than three-quarters of Outlook Survey participants said their stores offer fresh and healthful foods, with sandwiches, wraps and fresh fruit the top-stocked items. More than 81% see demand for such items growing. For Sapp Bros., whole fruit is a big seller. The truckstop chain places bins of oranges, bananas and apples near its cash registers. “A lot of that is impulse,” says Marsh. The company is building a bigger area for fresh-fruit fixtures at a couple of its sites. “Those do well, and it’s good for the consumer too.”
At Holmes Oil’s Cruizers stores, healthful alternative snacks, such as bars from KIND, Clif and PowerBar, are gaining space. “In the past it may have been more general-merchandise items, and now [we] have more of a focus on immediate consumption, food, beverages and snacks,” says Zikias. “We are also looking to get new items in quicker.”
Fuel
According to the Outlook Survey, more than 42% of retailers had fuel margins that were “about the same” as those in 2012. Slightly fewer—38%—saw fuel volumes hold steady. Nearly 34% experienced a drop in margin and less than 16% saw an increase compared to 2012.
At Sapp Bros., gas and diesel volumes have been basically flat compared to 2012. But the travel-center chain still sees opportunity for growth—in alternative fuels. This fall, the retailer is hosting the installation of a compressed natural gas (CNG) fueling site at its Lincoln, Neb., travel center, run by United Farmers Cooperative’s J & J Compression division. The site will operate under the Stirk CNG brand. A second CNG site at Sapp Bros.’ Council Bluffs, Iowa, travel center is planned for next spring.
“We think our diesel volume is going to go down, and we’re not going to pick it all up with CNG,” Marsh says. However, margins are much higher for CNG than diesel, and it could cement customer loyalty. “If we can get these local guys to come into the store, buy knickknacks and pop, we’re going to have the advantage over the competition,” he says.
While more than 81% of Outlook Survey retailers plan to keep their fuel offer the same, a few are planning changes, with upgrading fueling equipment the most popular move. Less than 16% plan to debrand—and that includes Sapp Bros. The chain, which has sold several brands of fuel, is raising its own flag, Sapp Bros., to be rolled out initially at five sites.
“Sapp Bros. has enough brand recognition that we think volumes will hold and margins will be better,” says Marsh.
It will also help the company grow its new E85 business. While no retailers participating in the Outlook Survey said they planned to install E15, more than 23% who are making a change to their fuel offer plan to install E85. At Sapp Bros., new blender pumps and the debranding will enable the chain to blend its own E85, and offer ethanol-free gasoline (E0) as well.
Tobacco
About 65% of Outlook Survey retailers will make a change to tobacco. The product on which most are betting growth is e-cigarettes, with nearly 95% planning to grow this segment.
“E-cigarettes are a strong performer for us—although this is off no base a year ago,” says Zikias of Holmes Oil, which sells blu, NJOY, FIN and Logic brands. He is also anticipating FDA regulation.
“As with anything the government would do, we might not like it, but at least it gives clarity,” he says. “Uncertainty is the enemy.”
7-Eleven franchisee Keane has no serious fears about potential—inevitable?—FDA regulation of e-cigarettes. “I’ve been in the industry for 37 years and don’t remember a time we were selling a tobacco product that was not regulated,” he says. “What probably happens next year is the tobacco companies get inside of it, and it is marketed aggressively.”
In the rest of the tobacco section, most Outlook Survey participants tagged premium cigarettes as a key area to shrink. The retailer quoted anonymously has grown its tobacco section from an average of 7 to 12 feet. “We are looking at cigarette SKU rationalization—eliminating slow movers,” he says. “This is to give more room to the new brand extensions (mainly from Altria and Lorillard).”
Packaged Beverages
Nearly one-half of Outlook Survey participants plan to keep their beverage set the same. For the retailer quoted anonymously, cooler resets happen each year, but he acknowledges they are more of a “minor tweak.”
“This year, we need to add room for craft beer, cut down on our CSDs, eliminate duplication of juice brands, expand on energy and work a flex area into our sets,” he says.
While 7-Eleven franchisee Keane sees the packaged-beverage category expanding its consumer base, he also fears new regulations on energy drinks will stymie future growth. “I’m concerned about regulations over health concerns about the product,” he says. “All of this doesn’t sit well for the future. I’m not necessarily bullish the category will continue to see the growth it’s had over the last five years.”
More than 41% of Outlook Survey participants growing their beverage section will work in more beer. At Outback Run Thru, Mathias sees opportunity for even greater growth in craft beers, and she plans on adding more SKUs and improving visibility with the next reset. It’s a category that has proven surprisingly recession-resistant.
“People will still spend money, no matter how tight it gets,” she says. “They will spend money on alcohol when they are happy and not so happy.”
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