Preliminary Data from NACS State of the Industry Summit
Though enduring a sluggish second half of 2012, c-store retailers overall enjoyed a record-breaking year for both sales and margins, with category successes in packaged beverages, beer, snacks and foodservice.
At the annual NACS State of the Industry (SOI) Summit, presenters reviewed overall numbers, analyzed categories and pointed out areas of success and challenge. With declining demanding core categories of cigarettes and fuel, Kevin Smartt, conference presenter and CEO of Kwik Chek Food Stores Inc., Bonham, Texas, announced areas where the industry “knocked it out of the park,” calling for retailers to examine tobacco-pricing and cold-vault strategies to better stand their ground and exploit upward trends.
Overall, the industry broke the $700 billion threshold in sales for 2012, with numbers up 2.7 % to $700.3 billion from $681.9 billion in 2011. Pretax profits continued their growth trend, rising 3% to $7.2 billion, having hit $7 billion the previous year.
The victories were tempered, however. Facing falling demand, core categories of fuel and cigarettes did manage to remain stable for retailers taking part in the SOI study. Fuel gallons rose 0.1% to 135,121 per store per month, whilecigarette sales fell less than a percentage point (0.9%) to an average of $51,863 per store per month.
Pointing out how sales flattened out in the second half of the year, Glenn Plumby, SOI presenter and vice president of operations for Speedway LLC, Enon, Ohio, said multiple factors—the jobless recovery, more fuel-efficient cars, even Hurricane Sandy—may have had an effect.
Drawing Tobacco Lines
The positive news about tobacco came with the surge in sales of electronic cigarettes, along with the promising growth of other tobacco products (OTP) in general. Using numbers provided by Nielsen Syndicated—Convenience Tracking (total United States), NACS researchers aside-cigarettes accounted for a mere 2.6% of OTP sales last year but experienced 100% growth year over year. The impressive increase prompted NACS to create a new subcategory for e-cigarettes to better track the trend in the coming years.
Though OTP contributed only 4.4% to the average c-store’s annual sales (cigarettes contributed 36.3%) in 2012, its growth trend is robust and continues to show promise. Smartt compared the total merchandise sales and margin growth to OTP, showing how OTP did better on both fronts. Growth percentages indexed back to January 2010 show merchandise sales in general rose 9%, as did margins, while OTP rose 20% in sales and 16% in margins. Cigarettes, on the other hand, showed a 3% increase in sales and a 4% decrease in margins. Though Smartt could not deny the declines, he told retailers to stand their ground. His industry study group of noncompeting-store retailers advised him to review his tobacco selling and merchandising strategies. Prior to the review, his sales numbers mimicked the downward trend she’d been seeing at the SOI conferences.“I needed to work on our total retail cigarette strategy and think about how aggressive I wanted to be,” Smartt said.“It’s a total focus. We put speed racks under the counter for top-moving items. We invested money in buying racks and expanding our presence of category, but price was the predominant [strategy we enhanced].”
The result was a reversal of trend lines.“In 2012, things started to turn up, and they’re still ascending,” he said.
When identifying standout categories, Smartt showed attendees a ranking of topgrowthcategories in terms of sales and in-store margin dollars. Three of the top five growth areas were in the snacking category: alternative, sweet and salty snacks, with liquor and cold dispensed beverage stopping the list for sales, and milk and cold dispensed in the top five for margins.
Sales growth since January 2010 has documented the snacking trend. Alternative snacks (including meat snacks)grew sales 33%, compared to the base 9% increase for the total merchandise segment. Sweet snacks were up 25%, salty% and candy 17%.
“We’re back at the plate, swinging and connecting,” Smartt said. Root drivers for these trends, he said, included healthier eating, more “bridging “between meals and meal replacement. He also congratulated manufacturers for rising to the occasion and addressing ingredient combinations, calorie counts and portion size
.“There’s no doubt snacking is hot,” he said. “And if you’re supplier, it’s a great story to tell retailers.”
Drinking Up Beverages
Calling packaged beverages the industry’s “golden category,”Smartt cited a 20% sales increase for the category over the past 36 months. Energy drinks, sports drinks and water “continue to surge forward with 20% increases in sales and 19% in margin. We’re back at the plate; we’ve hit a home run.”
Alternative drinks are experiencing rapid growth trend of 16.8% and accounting for 23.1% of category sales; however, carbonated soft drinks (CSDs)accounted for 36% of the category but grew at only a 3.9% pace, according to Nielsen Syndicated numbers. Smart predicted that in the next three years, alternatives may pass CSDs.
Product innovation accounts for much of the growth, Smartt said. Beverage “functionality,” or drinks having ingredients or formulations specifically addressing a need state, has been influential.“Probiotic juices, protein milks, therapeutic beverages for post-exercise—consumers are looking for it,” he said.“And retailers must be willing and quick to accommodate those sets and change.”
He challenged retailers to review their cooler door counts and potentially add doors, as his company has done.
“Look at your competitors,” he said.“This is a category that will grow for us. What will you have to do?”
New Thirst for Beer
Another segment picking back up for the industry is beer. A national average that includes stores that don’t sell beer puts sales increases at 7.6%, but for those selling beer, 2012 saw a 13% jump in sales, Smartt said. The industry experienced a similar increase in margins.
Though cross-channel competitors are entering beer sales, Smartt suggested knowing the competitor and the target demographic. Premiums continue to account for half the category sales, but microbrews saw a 76.2% increase in sales in 2012, while super premiums and flavored malt beverages saw double-digit increases, according to Nielsen Syndicated data.
From his perspective, Smartt said manufacturers are targeting millennials, who are driving demand for sweeter products with higher alcohol content.
Another area to watch is specialty imports. Smartt’s Texas-based chain sees a lot of movement in beers from Mexico. Overall, it’s a subcategory in which “space is premium and where [retailers] need to demand movement,” he said.
At 15.8% sales contribution, foodservice continues to drive new revenue to the industry, with standouts in the category including frozen dispensed and cold dispensed beverages, and commissary items. Trends show gross profit dollars outpacing sales by about 4%, according to NACSCSX numbers over the past three years.
Foodservice as a whole maintained high margins, with prepared foods at 52.4%, frozen dispensed beverages at 52.5% and hot dispensed beverages at 60.5%. Average sales were $16,308 for prepared food, $899 for frozen dispensed and $5,869 for hot dispensed.
“Here’s the hard part about food,”Smartt said. “It’s not like … we’re all selling the same pack of cigarettes. For foodservice, someone’s selling chicken, someone has a franchise or is doing a proprietary program, so it’s difficult for us to get an in-depth look at foodservice.”
He suggested retailers review numbers from quick-service restaurants (QSR) to evaluate the potential of their own foodservice offers. “If you sell pizza, look at a Pizza Hut,” he said. “That’s who we need to be benchmarking against. That’s how we’ll raise the bar on foodservice.”
And while foodservice accounted for about 16% of inside sales, top performers are clearly embracing the category as a way to thrive as other core categories flounder. Top-quartile companies did almost triple that of second-quartile companies in prepared foods and almost double in hot dispensed beverages.
SOI numbers also indicated potential trends—some logical, some dubious. For instance, top performers made more on foodservice but less on cigarettes, possibly using cigarettes as a traffic c driver. At the same time, bottom performers sold a lot of foodservice but barely made money at it.“Clearly we have an ongoing debate,”Smartt said. “Retailers need to understand what they’re making.”
In looking back at his observations, Smartt said SOI numbers for 2012 told both category-specific c stories and those of a broader scope:
- OTP remains strong, with the growth of smokeless and e-cigarettes helping address falling demand for cigarettes.
- Snacking is sizzling. Manufacturers are meeting a demand for healthier alternatives, with calorie-controlled packaging and healthier ingredients.
- Packaged beverages are a homerun category but, Smartt said, “Don’t get sleepy because we’ve had success. Examine your cooler size and reinvest.”
- Beer innovation is chasing demand, hitting a chord with millennial, who prefer sweeter options with higher alcohol content. It means space is at a premium, with high turns a prerequisite for all products.
- Foodservice trends continue upward, but Smartt advised benchmarkingagainst QSR chains with equivalent menu selections as a way to motivategrowth. Lastly, Smartt asked retailers to get involved with the legislative process.“Look at how many of our categories are facing punitive [mandates]: cigarette taxation, menu labeling, anti-caffeine and anti-sugar [efforts],” he said. “Our voice needs to be heard.”