Opinion: Competing In A Retail Melting Pot

Michael Wood Jr., President and CEO, Winsight

Hank Armour, President and CEO, NACS

Photo by Diane M. Smutny

Cheap gas fueled a record year for our industry in 2015. Thanks to an extra $700 in their pockets, U.S. households spent more on high-ticket purchases, including cars and homes, and on the daily pleasures that convenience stores provide.

So despite a slow-growth economy that has weighed heavily on this year’s presidential elections, industry in-store sales jumped 5.8%, reaching a historic $225.8 billion.

As Andy Jones, president and CEO of Sprint Food Stores, pointed out at the 2016 NACS State of the Industry Summit, “Cheap gas was good for everyone in this room.”

And while we’ll sign up every day for a record year, our narrative is more nuanced than a simple road-paved-with-gold story:

Ownership/leadership: New private-equity interests, including Brookwood Financial Partners LLC and Fortress Investment Group, are plumbing our channel through acquisition and investment. At the same time, a new generation of leadership has the reins of many chains across the country. This injection of talent is ushering in new financial disciplines, new store formats and an increasing comfort with intersecting brick-and-mortar and the digital age.

Heathier-for-you is growing by billions of dollars.

Expanding services: RaceTrac president and summit presenter Billy Milam was spot on in pointing how the the rise of mobile apps, drone technology and GPS-based services are inverting the “build it and they will come” mentality. This is why we applaud bold moves such as 7-Eleven’s launch of home delivery in five markets for a $2.99 fee.

Down with card fees: It has taken 10 years and two outlier fuel-margin years to report some great news: Our industry pretax profit of $10.6 billion outpaced card fees of $10 billion. The slide in fees is, in great part, due to cheap gas, which fell by roughly $1 per gallon. So we know this story may not repeat itself.

But if we have to give less money to give to the banks, the more we can pass on savings to our customers. And we can reinvest in better store designs, higher-quality labor, more robust foodservice offerings and new technology to better serve our consumer.

However, as our operations become increasingly sophisticated, we face headwinds:

Wages: The “fight for $15” movement is real. Many leading retailers, from QSR chains to major mass merchandisers, have voluntarily boosted front-line wages, as have some retailers. But, as policy experts have cautioned, it’s not just about wages. Despite industry efforts to better recruit and retain, we expect the effects of our country’s slow recovery from The Great Recession to play out in the workforce, with reinvigorated efforts by labor to unionize across service sectors, including, potentially, c-stores. And wages represent the front-line battle.

While we know hardworking families need to make an honest living, and we recognize threats to the middle class, we believe dramatic jumps in minimum wage will kill jobs, not create them; and put greater strain on our industry’s ability to remain profitable and make the investments necessary to spur broader growth.

DSOE: Direct-store operating expenses include wages and benefits, health insurance, payroll taxes and the like. While our inside gross-profit dollars did very well in 2015, our expenses grew faster in every month of 2015. If that trajectory continues, c-store operators will need to find a balance between investment and cost controls. Cutting your way to a profitable year is not a sound strategy, nor is unrestricted spending unless aligned with a strong ROI.

Competition/customization: After several years of ceding market share and underperforming, McDonald’s has found a groove with its popular all-day breakfast menu. Other QSRs, such as KFC and Carl’s Jr., are letting customers customize toppings with a variety of spicy options. Winning ideas abound. Don’t be afraid to steal these options or others to spur growth and expand your customer base. We live in an increasingly retail melting pot, where traditional labels such as convenience, drug and dollar mean less to the consumer.

Personal choice: We believe in empowering adult consumers to decide for themselves what they want. That cigarette unit sales and gross-profit dollars are up (largely due to CVS vacating its $2 billion cigarette business) underscores that we should not ignore tobacco. That doesn’t mean we expect cigarettes to remain the lever it has been in our industry. But tobacco products, much like packaged alcohol beverages, are critical staples customers expect to find at their local c-store.

We are also bullish about our channel’s continued expansion into foodservice. Major strides in supply-chain distribution are yielding fresher prepackaged offerings with more frequent deliveries. Healthier-for-you is growing by billions of dollars and is now a legitimate play in our stores. That is coupled with our industry’s embrace of enabling customers to customize made-to-order sandwiches and hot and cold beverages.

In this digital age, in which the customer holds the key, the more you empower your consumer, the more indispensable you become to his or her daily routine.

Inside this issue, you will find fascinating facts, plus strategies and insights to help you thrive. We congratulate you on a record-breaking 2015.

Michael Wood Jr. is president and CEO of Winsight LLC. Reach him at [email protected].

Henry Armour is president and CEO of NACS. Reach him at [email protected].