It’s been a tough, long slog, but the U.S. economy is finally moving reliably in the right direction. That’s the word from David Nelson, founder of Finance & Resources Management Consultants Inc. and professor of economics at Western Washington University, who presented his annual economic outlook at the 2014 NACS State of the Industry Summit.
Nelson pointed to several factors, including falling unemployment rates, growth in household income, higher housing starts and vehicle sales, as well as a projected increase in the growth rate of gross domestic product, as positive signs. “There are a lot of green lights for refreshing change as we look at the economy,” he said.
Perhaps one of the clearest signs? The Federal Reserve is finally indicating that it will raise interest rates in the not-too-distant future. Fed chair Janet Yellen has said that the increase may begin as soon as early 2015, surprising many economists who anticipated a timeline of fourth-quarter 2015 or early 2016.
“Rates are going to be going up; it’s just a matter of timing,” said Nelson. According to projections shared by Bloomberg from the FOMC Summary of Economic Projections, the federal funds rate—or the interest rate banks charge each other to borrow money—is expected to stay at 0.25% for the rest of 2014. In 2015, it is projected to bump up to 1.00%, and then 2.25% in 2016.
“If the economy is as strong as we’re projecting it to be in 2016, that’s a very low interest rate for a healthy economy,” said Nelson. “Longer-term rates have to go back up.”
For the longer term, Bank of America, Merrill Lynch and Comerica Bank are projecting 10-year treasury rates to rise from 2.35% in 2013 to an average of 2.9% for 2014, and up to 3.35% in 2015. “If you’re thinking of doing projects, of locking in money, don’t wait another year, don’t wait two years. This is the time to do it,” Nelson said.
Back to Full Power
The Fed is attempting to keep inflation at a low, stable level—right now it sits under its target of 2%—while moving the unemployment rate from its current 6.7% to around 5.5%, which is considered “fully employed.”
Over the past two years, unemployment has continued to steadily, slowly inch lower, by every measure. From February 2012 to February 2013, the official unemployment rate fell one full point. Even the rates for the long-term unemployed, discouraged and marginally attached workers decreased from the year prior. “The higher the unemployment base … the bigger the drop,” said Nelson. “There’s no doubt about it that the economy is recovering, is continuing to recover, and we’re getting closer to that point where we’re going to say we’re back at a full employment level for the economy.”
Uncertainty about economic policy has also dropped to the lowest level since before the financial crisis of 2008, Nelson pointed out. Excess capacity is down to nearly normal levels, household net worth hit a record high in 2013, and the ratio of debt to income has narrowed. Meanwhile, household equity, the middle class’ biggest piece of wealth, has risen from 38% to nearly 52% of real-estate values. New housing starts have doubled from their low point in 2009 but are still modest.
“When the construction sector gets going, this is great news for your industry,” said Nelson. “These construction people are wonderful c-store customers, shopping multiple times a day.”
In the end, the overall rate of growth should quicken. According to Bank of America Merrill Lynch and Comerica Bank, real economic growth, as measured by gross domestic product, should grow in the range of 2.5% to 2.8% in 2014, and 3.2% to 3.3% in 2015.
But there are some yellow lights. Despite overall low inflation, costs are up for consumers in a few important areas. For one, the employed are paying more toward their health care. Regulatory changes via the Affordable Care Act—such as children’s ability to stay on their parents’ policy until the age of 26, and the removal of a lifetime cap—have increased costs for insurers, which are trickling down to covered employees. Figures from Bank of America Merrill Lynch and the Kaiser Family Foundation show that the percentage of covered workers at small firms with a $1,000 or greater annual deductible for single coverage has grown from about 16% in 2006 to nearly 60% in 2013.
Meanwhile, food commodity costs are on the upswing, with a projected increase of 2.5% to 3.5% in 2014. This will affect everything from coffee to oats, cocoa, hogs and wheat, as well as cattle. “Look at your coffee costs—you might have to adjust pricing to maintain margins,” Nelson said.
He also highlighted one concerning area in the spate of recent economic gains: the fact that more of the newly created wealth is going to a smaller percentage of the population. Young families led by those who are 40 or younger recovered only one-third of the wealth they lost in the recession and are still struggling with low home equity and small (if not nonexistent) stock portfolios. And despite the fact that worker productivity grew more than 80% from 1973 to 2011, hourly compensation—including benefits—rose only 10%.
Meanwhile, the top 1% of the population captured two-thirds of the economic gains from 2002 to 2007. “This is not good in terms of healthy, long-term growth of the economy and spending by the middle class, including those in your stores,” Nelson said.
Ignore at Your Own Peril
Of course, this economic story includes some red lights—or what Nelson referred to as “Three Hard Trends You Dare Not Ignore at Your Peril.”
“If you ignore these trends, you may not be in business 10 years from now,” he said. They include:
▶ Demographic shifts: Fewer, older, less employed, more diverse: That sums up the trend for the overall U.S. population over the coming decades.
For one, the population growth rate is slowing to a pace not seen since the 1930s. Since 2012, the annual percentage change in population has been growing at 0.84% a year. In the years ahead, this rate will drop to 0.5%. This means fewer new customers coming online and less economic growth, Nelson said.
The population is becoming older, as more baby boomers age into the 65-andolder bracket.
The effect of this goes beyond the age group. Nelson brought up the dependency ratio, which measures the proportion of dependent young (those under age 18) and old (those 65 and older) vs. those of working age. “The remarkable thing about this is in 2010, the ratio was 59%,” said Nelson. “In the next 20 years it will go to 75%. What that means is far less worker bees dealing with the young and old in the U.S.”
Meanwhile, the population of those 65 and older, measured as a percentage of the population ages 20 to 64, will move from 20% today to more than 35% in the next two decades and beyond. The effect on c-stores? As people move into the oldest age bracket, they drive less—or one-half the average miles per year of those ages 20 to 54. “Less driving, less fuel sales, less other sales,” Nelson said.
Finally, the labor force has become smaller because of these same demographic trends. More than 75% of those leaving the workforce in 2013 were older than 55. The labor force participation rate peaked at 67.3% in 2000 and now rests at 62.8%, the lowest level since 1978. Demographics will push this rate down even further in the next 15 years.
“If people aren’t in the labor force and aren’t working, they aren’t driving by your stores twice a day,” said Nelson, who also pointed out that the U.S. vehicle mile average has not recovered since the end of the recession nearly five years ago, and it likely will continue to fall. “How do you adjust your business when people are driving less miles?”
Meanwhile, the population is also growing increasingly diverse. Today there are more minority births in the United States than any other. By 2018, minorities will represent the majority of those 18 and younger. And by 2043, the minority population will become the numerical majority. “How are you designing your offer to reflect the wishes and demands of different populations that may not be the traditional c-store customer that you’ve built your business on?” Nelson said.
▶ Technology shapes shopping habits: While online sales today make up only 5.6% of retail sales, they are growing at twice the rate of sales at brick-and-mortar stores, the U.S. Census Bureau reports. Also, retailers in 2013 saw only one-half of the holiday shopping traffic they did in 2010, according to Shopper Track.
“In the old days, if someone thought of buying something, they would visit different stores to comparison shop,” said Nelson. “They’re not doing that today— they’re doing the comparison shop and sometimes actually buying online.”
Less shopping in stores means less driving, Nelson said, and technology has also reduced millennials’ desire or need to drive. In 1983, 46% of 16-yearolds had a driver’s license. In 2010, this figure dropped to 28%.
Meanwhile, as competition from alternative fuels intensifies, new forms of transportation are developing, such as alternative-fuel vehicles, Google’s driverless cars or, potentially in the future, Amazon’s delivery drones. “You’ll have to figure out how technology can cause you to succeed and not put you out of business,” Nelson said.
▶ Regulatory expansion: Government regulations are hitting c-stores’ biggest money generators. The increasing fuel efficiency of the vehicle fleet took a nearly 17% bite out of fuel demand from 2010 to 2013, representing 100 gallons per driver per year, Nelson said. Expect demand to continue its long-term decline with fuel-efficiency standards set to double by 2025. According to CSX LLC study group data that indexes gas sales per c-store, gallons have fallen about 2% since 2010.
As for tobacco, smoking rates have fallen from 42% of the population in 1965 to 18% today, with the federal government targeting a 12% rate by 2020.
And the Obama administration’s push to increase the minimum wage to $10.10 per hour, coupled with state-level efforts, could benefit workers who are employed but make it harder for the long-term unemployed to find work, Nelson said.
“We are seeing increasing pressure for increasing the minimum wage,” he said, pointing out that Washington and Oregon have the highest minimum wages in the country, while Connecticut recently voted to increase to $10.10 by 2017.
In this same area, the president’s plan to sign an executive order to increase the number of salaried workers eligible for overtime pay could also affect c-stores if the current eligibility guideline is raised. “What’s your business plan to deal with demographic change, technological change, regulatory change?” Nelson said.
Unemployment Measures
The official unemployment rate was down one full point from February 2013 to February 2014, and other unemployment measures have also seen consistent decreases.
| Measure | February 2013 | February 2014 | Change |
| U-1 (unemployed 15 weeks or longer) | 4.2% | 3.5% | -0.7% |
| U-3 (official rate) | 7.7% | 6.7% | -1.0% |
| U-4 (incl. discouraged workers) | 8.3% | 7.2% | -1.1% |
| U-5 (incl. marginally attached) | 9.3% | 8.1% | -1.2% |
| U-6 (incl. part‐time for economic reasons) | 14.3% | 12.6% | -1.7% |
Source: U.S. Department of Labor, Bureau of Labor Statistics
Average Miles Driven by Age and Gender
As baby boomers age into the 65-years-and-older bracket, the trend has implications for fuel and ultimately in-store sales. Average miles driven for those 65 and older are one-half that of 20- to 54-year-olds.
| Age | Male | Female | Total |
| 16-19 | 8,206 | 6,873 | 7,624 |
| 20-34 | 17,976 | 12,004 | 15,098 |
| 35-54 | 18,858 | 11,464 | 15,291 |
| 55-64 | 15,859 | 7,780 | 11,972 |
| 65+ | 10,304 | 4,785 | 7,646 |
| Average | 16,550 | 10,142 | 13,476 |
Source: U.S. Department of Transportation, Federal Highway Administration, April 2011
Models for Change
In his review of economic opportunities, David Nelson suggested a few business models for retailers who own c-store real estate. They include:
▶ Move to a dealer model and collect rent while supplying fuel. However, this arrangement works only as long as the economics work for the dealers, and dealer sales are falling at a rate of 4% to 6% per year.
▶ Move to a commission model, wherein you control the fuel but do not operate the stores.
▶ Redeploy capital to invest in facilities that can compete. “You might have a smaller chain, but maybe it can go the distance,” he said.
▶ Change the offer by focusing on growth areas, such as foodservice.
▶ Grow through acquisitions, but only if you are building off an already strong, high-quality base.
▶Get out of the business. “Sell while the multiples are high,”said Nelson, pointing out that this is an “extraordinary time” to sell c-store assets, with very high demand.
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