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5 C-Store Competitive Threats

Format is no guarantee of success as digital disrupts the brick-and-mortar world
Photograph by Francisco Gonzalez

CHICAGO —  E-commerce has grown rapidly, reaching nearly $513 billion in 2018 and adding $376.7 billion in sales since 2007. Nevertheless, c-store retailers should feel confident about the resilience of the convenience channel and its ability to withstand digital disruption, according to Todd Hale, principal of Todd Hale LLC, Cincinnati.

While e-commerce is becoming more mainstream, it is having a greater impact in nonedible categories. Retail formats that have suffered because of online growth include consumer electronics, apparel, department stores, toys, books and specialty retailers.

“As we look to the future, the likelihood of dollar, convenience stores, drug or liquor to be impacted as greatly by e-commerce is a lot less, so feel good about that,” said Hale, former senior vice president of consumer and shopper insights for Nielsen, at the 2019 NACS State of the Industry Summit.

“But retail format is no guarantee of success,” he said.

Shifting Currents

“What’s the vulnerability scale of the retail industry in terms of further e-commerce growth?” he said. In answer, he offered an overview of the 2018 retail landscape and encouraged retailers to find opportunities among the threats.

Within their respective retail channels, Costco (club), CVS (drug), Home Depot (home improvement), Target (mass), Dollar General (value) and Publix, Sprouts and Ahold Delhaize (grocery) are driving the strongest growth, Hale said, but performance by competitors in their respective channels is not always at the same level.

Small formats and value players are winning in the marketplace, evident in increased store count, he said. Since December 2005, most store expansion has come from smaller-format retailers—convenience, drug and value—but supercenter and club have experienced good growth too.

Since December 2017, store counts have fallen for all but dollar stores and supercenters, according to Nielsen TDLinx data. Expansion stalled in 2018 across most retail channels, the first time since 2008 that there was a decline in overall retail-channel store count, Hale said.

“There have been a lot of conversations over the years about how we’re ‘overstored,’ but clearly e-commerce is having an impact here,” he said. “If you’re not actively managing store closings as much as you’re managing store remodels or new-store openings, you’re missing out on opportunities to invest in your business. How do you fuel investments into locations that really can drive significantly greater results for you than some of those weaker locations?”

The consumer tailwinds of low unemployment, lower federal taxes, rising wages and high consumer confidence will counter the headwinds of an aging population, low population growth and higher gas prices.

“But this will not lead to meaningful growth in all fast-moving consumer goods retailers and categories,” Hale said. “Companies just can’t sit on the sidelines and wait for growth; they need to invest in growth.”

Change the Channel

Hale highlighted some recent initiatives by retailers in other channels for c-store retailers to follow and learn from:

Grocery: Many grocers are experimenting with small formats. Hy-Vee’s 10,000-square-foot Fast & Fresh c-store concept features made-to-order meals, meal kits, pizza, sushi, produce, meat, dairy and bakery products. It includes a Starbucks, has 14 gas pumps and offers grocery pickup.

Other grocers, such as Whole Foods and Kroger, are adding craft beer and wine bars. “Almost every Saturday afternoon, they’ve got 40 or 50 boomers drinking wine and beer with live music playing,” Hale said of the grocery chains. “It has created a lot of excitement.”

The proliferation of craft-beer locations has to be affecting c-store beer sales, he said.

“Is there something you can learn about what brands you carry in your stores, or can you sell growlers? Is there an opportunity for you to create a different atmosphere?” he said.

“If you’re not actively managing store closings as much as you’re managing store remodels or new-store openings, you’re missing out on opportunities to invest in your business.”

Mass merchandisers: Target has opened 100 urban-focused small-format stores—a hybrid of a c-store, drugstore and mass merchandiser—that gives the chain access to younger populations.

Dollar stores: Hale was surprised to find how slow Dollar General has been in rolling out its compact DGX format, which he thinks “is the closest thing to a convenience store there is.” The chain has only three, but it is planning to add another 10 by the end of 2019, “so they must have figured out that this is a format that they can invest in and drive growth,” he said. Dollar General is working to become a bigger seller of food as well, Hale said [CSP—Feb. ’19, p. 53].

Drugstores: Drug chains are all struggling to drive front-of-store sales, which is a big opportunity for c-stores, Hale said. CVS is testing a clinic format—HealthHub—that doesn’t have a front end at all and will focus on selling medical equipment and supplies.

“If you’re close to a CVS that’s trying to do this, I would urge you to think about how you can take that front-end business away from them,” he said.

Walgreens and Kroger, meanwhile, are “strange bedfellows,” said Hale, in an experiment in Kentucky. In 13 Walgreens stores, Kroger has added a 4,000-square-foot Kroger Express grocery section. “Is Walgreens going to get more trips because now they have a small grocery store inside of the store, or is Kroger going to benefit by having this additional assortment out in the marketplace?” he said. “It’s an attempt to figure out how they’re going to drive growth, how they can collaborate in a unique way to drive traffic for both of them.”

And after CVS stopped selling cigarettes in 2014, Walgreens may also be getting out of the category. It is testing stores without tobacco in Gainesville, Fla. Hale advised c-store retailers in that market to see if there’s an opportunity to grab tobacco sales in Walgreens’ absence.

Delivery: Another area of concern to c-store retailers is food ordering online, said Hale. Grubhub has partnered with more than 105,000 restaurants in more than 2,000 U.S. cities. Active diners grew by 22% year over year to 17.7 million. And DoorDash has surpassed Grubhub in overall delivery share. Hale estimated online food ordering sales at $8 billion.

Third-party online delivery services such as Shipt and Instacart can reach 80 million households quickly, Hale said. “They’ve got a lot of connections with national, regional and local retailers,” he said, suggesting that it might be an opportunity for c-store retailers to partner with these types of services.

Pizza Hut has robot “on-the-go” trucks in partnership with Toyota, said Hale. The truck has robot arms that take a pizza out of the onboard refrigerator, put it in the onboard oven, slice it and box it while en route to a delivery.

Domino’s says that by the end of 2019, millions of cars will be equipped with touchscreen ordering technology for pizza pickup or delivery through a partnership with Xevo, a connected-car technology provider.

“[Unmanned delivery is] not something you need to do, but what is it going to do to your business?”

FedEx has partnered with Walmart, Walgreens, Target, Pizza Hut and others on robot technology for same-day delivery. Other retailers such as Stop & Shop and Kroger are testing unmanned delivery. “It’s not something you need to do, but what is it going to do to your business?” Hale said.

Amazon has been experimenting with the ability to deliver products to the trunk of a car. And Walmart wants to go a step further: to get inside of customers’ homes and fill up their refrigerators and freezers.

Hale also cited voice-activated buying with Amazon Echo, Google Home or Apple HomePod devices as an opportunity. Google just announced a deal with Walmart to enable voice-activation ordering through Google Home.

“What impact is that going to have on your business?” he said.

Who Is the Next E-Commerce Victim?

Difference in open store count (2018 vs. 2007) Since 2007, the dollar channel opened nearly double the number of stores that convenience has, while consumer electronics stores closed the most locations.

ChannelStore count change
Dollar12,535
Convenience/gas6,943
Drug4,296
Liquor3,710
Discount department3,666
Pet2,786
Auto2,665
Supermarkets1,966
Home improvement1,340
Supercenters1,309
Sporting goods671
Club186
Home/bed/bath(620)
Office(965)
Mass(1,024)
Books(1,127)
Toy(1,131)
Department stores(1,159)
Apparel(4,630)
Consumer electronics(6,507)

Source: Nielsen TDLinx

The Store-Count Decline

Since December 2017, store counts have fallen for all but dollar stores and supercenters.

No. of Stores

Channel200520172018
Convenience stores140,655154,958153,237
Drugstores38,51343,16941,833
Supermarkets31,59034,17833,895
Dollar stores18,57930,87332,159
Supercenters2,4624,3934,412
Mass merchandisers4,5783,2543,090
Warehouse clubs1,0671,3871,338

Source: Nielsen TDLinx

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