10 Takeaways on the State of C-Stores

ALEXANDRIA, Va. — As convenience retailers deal with unprecedented disruption during the coronavirus pandemic, it can be tough to remember what the state and trajectory of the business was just the year before. But the growth opportunities and impediments that existed before the crisis won’t disappear.

NACS State of the Industry Virtual Summit speakers Charlie McIlvaine, chairman and CEO of Coen Oil Co. LLC, Washington, Pa., and Chuck Maggelet, chief adventure guide for Maverik Inc., Salt Lake City, reviewed many of those longer-term hallmarks during their review of 2019 industry numbers.

In 2014, fuel generated more than 40% of gross profit dollars. By 2019, that share had slipped to just more than 36%. “You can see the needle is slowly moving toward redefining or re-evolving the product mix inside the store,” McIlvaine said.

Continuing this trend is critical to the long-term stability of the c-store business, because fuel in “undependable” as a source of gross-profit dollars, he said. Foodservice’s contribution, meanwhile, rose from 14.3% to 19% within the past four years.

“That’s a really big movement and an important step toward evolution,” he said.

In 2019, the average fuel margin was 26.3 cents per gallon (CPG), up from 24.2 CPG in 2018. Over the last two years, McIlvaine said, CPG fuel margin has risen 25%—“which is a remarkable statistic.” This is as fuel prices have remained relatively stable. However, fuel is not a reliable profit producer, he said, and he urged retailers to wisely leverage higher margins to continue to shift their business toward the box.

“In times when we have these high fuel margins, we should use those profits to transform the business toward those higher income-generating opportunities inside the store,” he said.

Just as fuel margins have increased over the past couple of years, so have the costs of doing business. Total direct store operating expenses rose nearly 7% in 2019, driven by wages and benefits.

“That’s about $2,600 per store per month higher,” McIlvaine said. “The question is, what are we getting for this added expense? Over the past five years, our wages have grown 26.6% to current levels. We’re worrying about retaining and recruiting good employees, and we should, but we also need to be worrying about paying competitive wages.”

Fees that the c-store industry paid to process credit card transactions hit $11.8 billion in 2019, up more than 6% from the year prior. About three-quarters of c-store transactions were made using plastic.

“The trend of going cashless won’t reverse itself anytime soon; I would suspect usage of credit cards will increase,” McIlvaine said. “So this is a really important issue for us as an industry. We find ourselves in a predicament.”

With more than 152,000 locations, the c-store industry has tremendous potential to force change—if retailers stick together. McIlvaine pointed to a few opportunities to leverage the industry’s size:

• Tackle growing credit card fees.
• Revisit outdoor EMV requirements, which McIlvaine said were mandated by the “duopoly” of Mastercard and Visa. “Is there a better way?” he asked.
• Consider how state and federal unemployment policies compete with the industry’s hiring efforts.
• Challenge tobacco-21 legislation, including regulations that target vaping products. “What’s right, fair and the balanced thing to do that [provides] a level playing field?” McIlvaine said.
• Fight for fair access to small-business loans through the CARES Act. Only some operators have been able to tap these loans, and NACS is pushing to get operators of all sizes an opportunity to leverage them during the pandemic.

Maggelet of Maverik highlighted areas where operators can continue to evolve the in-store offer.

Despite major transitioning occurring in tobacco use, both cigarettes and other tobacco products continue to stand out as significant product segments for convenience stores.

In a side-by-side comparison with other channels of retail, Maggelet said c-stores continue to own the cigarette and OTP categories, both growing in share of the market in 2019. The industry’s share of cigarette sales grew to 92.4% and OTP to 90.4%.

Tobacco also leads in terms of store sales at 34% total contribution but provides only 17% of gross profit dollars.

“OTP has been a bright spot for a few years, delivering double-digit sales and gross profit dollars growth,” Maggelet said. “OTP actually eclipsed beer as the No. 3 gross profit dollar contributor in 2019.”

Despite tobacco’s strong showing in 2019, the category faces some significant challenges this year, Maggelet said.

1. At the end of 2019, the federal minimum age to purchase tobacco became 21 vs. 18 years old. As a result, NACS estimates “the overall tobacco 21 sales decline … at 5%, absent the effect of COVID-19,” Maggelet said.
2. Also, with a majority of flavored e-cigarettes banned in January, it creates another challenge to retailers. “The overall e-cigarette decline is estimated at 35% in the first half of 2020, absent the effect of COVID 19,” Maggelet said. “The overall impact to tobacco—cigarettes and OTP—is estimated to be a 7%-9% decline in sales volume.”

For the first time in the State of the Industry data collection, NACS broke out the gross profit dollars and gross margin percent for each of the five segments of foodservice.

With gross margin percentages ranging from 30% to 67%, “Foodservice margins really drove store gross profit dollars,” Maggelet said. “We are clearly competing hard with QSRs for fountain occasions and driving traffic with hopes of building profitable baskets.”

Foodservice Category Sales

Per store/per month

Source: Preliminary NACS State of the Industry data

A comparison of the top performing 25% of retailers in NACS’ SOI survey with the bottom quartile shows foodservice is a key differentiating factor, particularly with hot dispensed beverages. Top-quartile retailers, according to the data, have a 23-point advantage in margin percentage (69% vs. 46%).

Maggelet said this suggests a willingness to invest in an upscale program is paying off.

“Top-quartile margin on coffee is one-third higher than the bottom [quartile], underscoring the decision to differentiate with a premium coffee offer and collect the commensurate higher margin percent,” he said.  “If you’re going to drive sales, why not do that in the categories where margin is approaching 60%?”

While convenience stores own a healthy share of beer sales, the segment’s sales share saw another year of small decline.

“We dominate [the beer category] at more than 69% share of units,” Maggelet said, citing Nielsen data. But c-stores “gave up unit volume to grocery and mass merchandisers.” Grocery’s share of the beer market grew to 27.2% in 2019.

Part of the reason is the ongoing redefining of the beer category.

“The beer category is being transformed by innovation and changing consumer preferences,” Maggelet said. “We’ve seen the growth of hard seltzers and canned wine. Both are small [segments] but appeal to a growing segment of shoppers.

“Younger shoppers are opting for spirit drinks, and buying occasions are moving toward multipacks.”