CHICAGO -- A strong 17.1% growth in sales driven largely by higher gasoline prices in 2004 helped the convenience store industry set record revenues of $394.7 billion, while profits shot up 23.5% to reach $4.99 billiondespite a one-cent drop in motor fuels margins and another year of escalating credit card fees, according to data released this morning at the NACS State of the Industry Summit (SOI) in partnership with CSP.
Approximately 400 top convenience and petroleum marketing executives, suppliers and advisorsare examining the industry's operational [image-nocss] and financial performance during the three-day SOI Summit. The meeting kicked off this morning with the release of the 2005 NACS State of the Industry reportthe most comprehensive collection of firm-level, store-level and same-store-level data and trends based on the c-store industry's 2004 performance. The conference also is featuring the latest consumer insights, category metrics and analysis provided by several leading research and data organizations.
The nearly $60-billion increase in sales dollars over the $337 billion reported in 2003 was far and away the largest one-year increase in sales dollars ever reported, and that is not surprising given the 18.1% increase in the price of gasoline (from $1.55 in 2003 to $1.83 in 2004). What is impressive is that the industry also grew in-store sales by a strong 13.7% to reach $132.1 billion. Even after factoring in a 5.7% increase in the number of c-stores and an overall increase of the consumer price index of 2.7%, the c-store industry's in-store sales clearly demonstrated real growth for the second straight year.
Meanwhile, the industry's 23.5% increase in pretax profits marked the second straight year of strong gains following three years of declines. These gains were driven by in-store profits. While motor fuels sales in 2004 accounted for two-thirds of sales dollars in 2004, motor fuels accounted for just over one third of stores' gross margin dollars38.5%. For 2004, pretax profits per store increased to $36,100.
Motor Fuels Sales Continue to Dominate Overall Revenues
The industry's motor fuels sales jumped 18.9% to reach $262.6 billion, 66.5% of total industry sales in 2004. While customers continue to purchase the vast majority of their fuel at convenience stores, which sell an estimated three-quarters of all the fuel purchased in the United States, there are substantial shifts in how that fuel is boughtand sold. As motor fuels prices rose to record levels in 2004 (which have since been surpassed by those in 2005), customers continued the trend of trading down octane levels. Sales of regular-grade fuel accounted for more than four of every five gallons (81.4%) of gasoline sold at c-stores, and 76.1% of all motor fuels sales when factoring diesel fuel and other fuelsup from 71% in 2003. Premium sales dropped from 8.5% of total fuel sales in 2003 to 7.2% in 2004, while midgrade dropped from 10.9% in 2003 to 10.2% in 2004.
Meanwhile, the percentage of large-volume motor fuels retailers continued to grow in 2004. More than one of three (34.4%) of all stores sold 125,000 gallons or more a month in 2004, up from the 24.9% that did in 2003. Every other segment lower than that saw declines in percentages.
The real news in motor fuels in 2004, however, was the sharp drop in motor fuels gross margins, which plummeted nearly one cent13.70 in 2003 to 12.71 in 2004. Taking into account the cost of credit card fees and gasoline theft, gross margins on motor fuels dropped even morefrom an estimated 11.84 cents per gallon in 2003 to 10.46 cents per gallon in 2004. Looking at margins on a percentage basis, overall motor fuels margins dropped from 8.8% in 2003 to 7.2% in 2004their lowest level since 1984.
In-Store Sales See Strong Growth
In 2003, in-store sales experienced a strong 6.3% increase in in-store sales; in 2004, that growth accelerated and the 13.7% in growth more than doubled that of 2003. This growth also surpassed that of virtually every other competing channel, according to U.S. Department of Commerce data. The only channel that saw growth surpass that of the convenience store industry was warehouse clubs/superstores, which grew 13.8%. Overall retail climbed 7.6%, and other competing channels didn't match that level, including drug stores (7.1%), restaurants (6.3% increase), grocery stores (1.8% decrease) and discount department stores (0.3% decrease). Surprisingly, the strong growth in in-store sales was driven by particularly strong merchandise sales, which grew 9.6% per store, as opposed to foodservice (which dropped 1.1%).
Once again, cigarettes dominated in-store sales, accounting for more than one in every three dollars spent in stores. The top 10 categories in terms of percent of in-store sales were:
1. Cigarettes (34.7% of in-store sales)
2. Packaged beverages (12.2%)
3. Foodservice (11.9%)
4. Beer (11.9%but 14.3% of all stores selling beer)
5. Other tobacco (3.5%)
6. Candy (3.4%)
7. Salty Snacks (3.3%)
8. Fluid milk (2.5%)
9. General merchandise (2 %)
10. Edible grocery (1.9%)
Cumulatively, the top 10 categories accounted for more than 87% of all in-store sales. Of the top 10, cigarettes, beer, other tobacco, salty snacks and edible grocery all gained in terms of percent of overall sales.
Profits Strong, But Challenges Loom
While overall industry profits showed a strong increase for the second straight year, there are a number of challenges on the horizon. For one, credit card fees, which continue to be a top concern for retailers. In 2004, credit card fees accounted for 6.1% of all gross margin dollars, up from 5.8% in 2003. Only labor costs and rent exceeded credit card fees in 2004. And, as gasoline prices have continue to reach new levels in 2005, the problem of increasing credit card fees is expected to be significantly worse in 2005, since fees increase as prices rise while at the same time more customers use plastic to pay for the higher cost of fuel.
"The numbers are not surprising," said Paul Reuter, president and editorial director of CSP Information Group. "It's showing what we already nowthat the challenges in front of us are greater, but so is the opportunity. A recipe that will not succeed anymore, however, is one that is exclusively dependent on gasoline and cigarettes. There has to be something more to your offer."
Complete 2005 SOI Can Be Preordered Now
The approximately 80-page NACS 2005 State of the Industry report will feature more than 100 charts and graphs and will provide exclusive analysis on the trends and issues driving the industry's performance in 2004. In addition to a focus on financial performance, store operations, store development and top quartile at the firm level, it will also provide unique cuts of the data at store level, on a same-store basis, and even by quartile to study top performers. To order a copy of the complete report, which will be available in June, contact NACS at (800) 966-NACS or log on to www.nacsonline.com and click on Shop.
CSP Daily News will provide additional coverage from the NACS State of the Industry Summit in partnership with CSP throughout the week.