It’s been a slow climb out of the recession, but c-store retailers are finally beginning to see better times ahead. According to CSP’s Outlook Survey 2012, in which 189 retailers participated, nearly 60% of respondents described current business conditions as “good” or “excellent.” Roughly the same percentage expect “some” or “great” improvement in 2013.
Jared Scheeler, director of retail operations for Bobby & Steve’s Auto World, a chain of seven sites based in Eden Prairie, Minn., is one of those seeing “excellent” business conditions, with its strongest growth in 15 years. Scheeler says his company’s model is a little different from the norm—its sites aim to meet every automotive need, from gasoline to car wash to repair—but it still relies on its c-stores to drive traffic to the auto side of the business. He credits the strong economy and low unemployment in the Minneapolis/St. Paul area for part of the success; for the first half of the year, in-store sales were up 11%.
The company also has worked to bring consistency to its model, moving from having separate owner-operators for each store to corporate headquarters assuming control.
“Overall, it’s been fine,” says Edward Marszal, founder and CEO of California Retail Management, Carmichael, Calif., which owns 18 sites in California, one in Nevada, one in Ohio and 10 in Hawaii. The company is a distributor of 76-branded fuel and a Chevron dealer. “I think the economy’s coming back slowly,” he says.
He says his company follows the retail basics for success: “We have two rules: The customer’s always right, and rule No. 2 is if the customer is wrong, refer back to rule No. 1. The other thing: We act or go broke. If you see something wrong, if you walk by an employee doing something that is not right and don’t react, eventually you will go broke. Fix things that are wrong and don’t accept the mediocrities.”
For some retailers, the current state of business is all about perspective. “Last year was so bad, things have stabilized,” says Fran Galle, owner of Neon Deli, a site in Middletown, Conn., that sits across the street from Wesleyan University and is centered on a New York/Philly-style deli offer, in addition to the usual c-store fare. He rated conditions as “good.”
“Last month, we were over our 2010 levels,” he says. “With the end of October, we’re maybe $2,000 below 2010 levels.” Meanwhile, he has had success with growing foodservice sales to make up for shrinking cigarette sales. “Margins are way up because cigarette sales are way down. If the average cigarette sale is less than $9, and if I convert it to a fast-food sale, I went from an 18% to 50% margin. So that makes a big difference.”
Jim Garrett, president of Volta Oil, Plymouth, Mass., says the industry has proven to be recession-resistant. His company has seen a slight increase in sales from last year. He’s optimistic and ready to hire more employees for his Boston stores if it warrants in the coming months, although this depends on the continued improvement in local unemployment and underemployment.
Despite the slowly improving national unemployment rate and other economic indicators, many retailers still had to deal with tough local economies. Scott Hartman, president and CEO of the 57-site Rutter’s Farm Stores, York, Pa., says 2012 was a “flat” year—agreeing with 36% of Outlook Survey participants. His expectations for 2013 are for more of the same.
“In central Pennsylvania, a lot of the economy is based off manufacturing; we have a lot of heavy manufacturers around the area and skilled machine shops,” says Hartman. While these highly skilled jobs have showed resilience when the economy softens, they have eroded as the auto and defense industries have weakened.
“When I look at the numbers, there’s just not what I would call anything new happening—no new manufacturers arriving, no warehouses going up,” says Hartman. While his area is a strong transportation hub, he says he’s not seeing as much activity among trucking companies.
Meanwhile, a small percentage (5.2%) of retailers described conditions as “poor.” While this is the lowest percentage in the history of the Outlook Survey, it is all too real to the retailers who are struggling. A one-store retailer in the St. Louis City, Mo., area, who requested anonymity, is under assault from a variety of factors, including local high unemployment, a depressed economy, a financially stressed customer base and new competition. Inside sales are off 15% in 2012.
“I do business in an area with a lot of high-end restaurants,” he says. “It’s still an OK place to live and work for a city location, but for most of the independent restaurateurs, their business is down 20% to 35% from their peak in 2007 and 2008, so they’re struggling.” Many of his customers work in these restaurants. “If they don’t have money in their pocket, they’re not going to stop and spend it with me.”
While he expects improvement in 2013, he says it will be a “false sense of prosperity” from inflation, whether through state increases in cigarettes taxes or commodity prices. This, he fears, will create a negative, spiraling effect on profits. “Commodity prices will start pushing prices up, especially in foodservice,” he says. “Employees will want and demand more money, margins will get squeezed because of commodity prices, and a couple of years from now, gross margins will get squeezed another point and a half. That’s my fear.”
But even the St. Louis City retailer refuses to surrender to these hardships. For example, he is banding together with other local businesses to rebrand his neighborhood and make it more of a destination. He also shows tremendous faith in the strength of the c-store model.
“I’m chronically optimistic,” he says. “What it gets down to in convenience retailing: It’s a happy smiling face, taking care of a customer, and it’s only a 15-second transaction. We can make a difference in people’s lives.
“Convenience retailing—unlike any other retail out there—is actively engaged and knowledgeable about people we serve. We know their families when there is tragedy and joy. A good retailer doesn’t abuse that privilege but uses that to keep folks coming back.”
Wealth, Health Challenges
The high cost of swipe fees continues to rank as c-store retailers’ biggest challenge, with more than 60% of Outlook Survey participants selecting it as one of their top three business challenges. Retailers report modest relief from The Durbin Amendment on debit-card fees, but they see more work ahead on the issue.
“[The Durbin Amendment] gave us a little bit of an immediate relief on our merchant processing fees, but it’s still a major issue; it’s still the No. 2 line item as far as expenses on our P&L after payroll,” says Scheeler of Bobby & Steve’s Auto World.
The Affordable Care Act (ACA) ranked third, cited by 37% of respondents, including Hartman of Rutter’s, who says his chain has been redesigning its health insurance benefits to match up to the ACA’s standards for an affordable health-care plan. “We’re also looking very hard in the next year about how the average hours will impact who is eligible and who’s not,” he says, because any employee working more than 30 hours will become eligible for insurance.
Competitive Pressures
For the Outlook Survey 2012, CSP asked participants to rank the biggest competitive threats beyond other c-store retailers. Dollar is clearly on retailers’ minds, with nearly 54% choosing dollar stores, followed by drug and grocery.
“The real ones to worry about is dollar stores,” says the St. Louis-area retailer. “I think they have the infrastructure, distribution, wherewithal and people in their stores to display merchandise and sell our traditional products.”
Change Afoot
A bout two-thirds of CSP Outlook Survey respondents plan to make a change to their business model in 2013, about the same amount as in previous years. For most, remodeling and refreshing stores was the top activity, while the next-largest group plans to focus on inside sales and adding new profit centers.
For Rutter’s, 2013 will be the continuation of a remodeling cycle. “We go through these cycles where we’re pushing new stores really strong because it’s the nature of where we want to go and how we want to grow,” says Hartman. “Then we’ll back that number down and start pumping into major remodels. So we’re entering the next year or two with a good conservative deployment of capital to put it back into existing stores and get bang for your buck.”
Growth by acquisition was in the plan for more than 27% of respondents, while more than 36% of retailers plan to build new stores. California Retail Management is adding four new Chevron sites in December and January, and it opened a new site in Oahu, Hawaii, in November. It is also in talks to purchase three more locations. Despite a general tightness in lending, Marszal has not had issues finding funding. “Years ago it was so much more difficult for me,” he says, pointing out that the company’s strong business record over the past three decades has worked in its favor.
Meanwhile, Bobby & Steve’s Auto World is working on a couple of acquisitions, as well as developing some land. Regarding financing, Scheeler says it “has been a challenge.”
“It’s still pretty tight, especially compared to the lending markets when the company first started in the late ’90s, when money was easy to come by,” he says. “Most of our company’s assets are tied up in land and property, not so much in cash. That puts us in a more challenging position when it comes to wanting to build or acquire.” Regardless, the retailer is feeling aggressive and optimistic about growth in 2013.
Food in Focus
Nearly 40% of Outlook Survey respondents plan to expand foodservice in 2013, with the coffee bar, fountain and proprietary foodservice programs likely to see the most activity.
California Retail Management is highlighting its foodservice program, placing the roller grill in front of customers as they walk in the store, and upgrading its fountain program in sites with older equipment. “We’re keeping it fresh; eight nozzles on a fountain is not enough anymore,” says manager Annie Marszal. “There are a lot of opportunities for incremental business there. The more appealing it looks, the better it will be.”
Five of Bobby & Steve’s Auto World sites have full, made-to-order kitchens, which churn out a proprietary program. The company plans to bring consistency to all seven sites, either refining the offer or running a franchise out of the kitchens. It is also looking at the potential of installing a commissary for breakfast and deli sandwiches at one of its sites to add a greater degree of consistency and labor efficiency.
A greater percentage of Outlook Survey 2012 participants said they sell fresh and healthful items compared to those who took the 2011 survey—or more than 73%. Sandwiches and wraps, fresh fruit, and cereal and granola bars are the most popular items, with 83% saying demand is growing for such items.
Bobby & Steve’s has created a big presence for fresh deli sandwiches, salads and wraps, and increased its offer of fresh fruit, yogurt parfaits, veggie bowls and pasta salads. On the retail side, it has integrated natural food products onto the shelves and highlighted gluten-free, natural and healthful items with color-coded signage.
Fueling Frustration
Unlikein previous CSP Outlook Surveys, in which the percentage of retailers seeing higher, lower or the same margins roughly broke out into equal thirds, fewer participants of the 2012 survey—or less than 16%—saw higher margins this year. About 40% saw margins stay the same, while more than 38% made less money. The main issue: The large price spike this summer blunted the relatively profitable first half of the year.
Mickey Jamal, president and CEO of Chestnut Petroleum Distributors Inc., New Paltz, N.Y., says gasoline volume was down 3% to 10% over last year, but merchandise sales were up thanks largely to an acquisition. He finds it very difficult to guess about 2013 conditions because of gasoline’s volatility.
Scheeler of Bobby & Steve’s Auto World reports that fuel margins and sales were “pretty good” in the upper Midwest for the first half of the year, but stiff price increases in July put the brakes on the double-digit growth. This has had its effects inside the store as well. “The last three months have been a little more challenging, but we’re still up nonetheless,” he says, citing a 5% increase in in-store sales.
In California, where the average price for a gallon of gas went through a record spike in October, retailers faced an incredible amount of margin pressure.
“Prices skyrocketed,” says Edward Marszal. “People started to think more about going to Costco or [value] brands like Arco. So we got hit with that.” But instead of trying to play the price game on fuel, the company has emphasized customer relationships, which determines “whether they will decide to fill up that day with you or Costco,” he says.
For example, one customer told Marszal that he visits the company’s Carmichael, Calif., Chevron site specifically because of one employee. Another drives his grandmother to that same location to fuel up even though she lives 20 minutes away, because she loves the employees.
“The base keeps us in business, and then when you have good times, or when the price of gas goes down, you’re able to make a little more margin than when they’re going up,” he says.
Fuel Attitudes
Nearly 90% of survey respondents say they plan no changes to their fuel offer in 2013, a higher percentage than in previous years. Among those who do expect change, the most popular options were upgrading fuel equipment, changing fuel brands and adding compressed natural gas (CNG). In fact, nearly 32% of retailers planning a change chose adding CNG, compared to only 7.4% in 2012, showing the nation’s natural-gas boom is catching on in the c-store industry.
Category Close-Ups
Nearly 40% of 2012 survey participants said they would keep their tobacco set the same, with nearly 33% planning to grow some product categories and shrink others. Electronic cigarettes was by far the most popular area to grow, selected by nearly 80% of retailers with plans to expand the tobacco set, followed by single cigars (43%) and moist smokeless (40.5%). Most popular to cut: premium and branded-discount cigarettes.
While Bobby & Steve’s Auto World is shrinking the size of its cigarette backbars, it is transitioning to more OTP. “Smokeless and cigars have been a big area of growth for us,” says Scheeler. The retailer has seen an increased interest in e-cigarettes, although it has not yet settled on a final offer for its stores.
Packages Beverages
More than 51% of CSP Outlook Survey respondents expect to keep their packaged-beverage offer the same in 2013, roughly similar to previous years’ surveys. The most popular areas of growth among retailers are energy drinks, beer and enhanced/flavored water, while areas to trim were led by multipacks, soft drinks and enhanced/flavored water.
The St. Louis-area retailer has high expectations for new items from the major beverage manufacturers— Coca-Cola, PepsiCo and Dr Pepper Snapple Group—to take the lead from energy drinks. “Energy is under assault. Frankly, I think it’s long overdue,” he says. “It will still be a strong, key category, but I think there will be shakeout.”
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