CSP Magazine

Cover Story: Brick, Click, Boom

The disruptive force of e-commerce

Amid talk of Amazon drones, the obsolescence of the U.S. Post Office and the disruptive force of e-commerce, coupled with the relatively new world of mobile-phone use and online shopping, the convenience store industry may be on the verge of ... something we have yet to pinpoint.

No one believes c-stores as we know them will go away. The construct of convenience has built-in bunkers such as the impulse buy, gasoline sales and age-restricted products.

That said, the click vs. brick debate is a compelling one. As an industry investing in the future of the latter, the drive to at least consider the possibilities of what lies in front of us is strong.

That’s what three CSP magazine editors have done. Taking a more personal, introspective approach to a largely subjective and elusive topic, Angel Abcede, Abbey Lewis and Melissa Vonder Haar explored different aspects of the debate—supply chain, cross-channel competitors and c-store evolution—to provide a comprehensive review of the matter, identifying potential threats and looking ahead to what retailers need to do to come out on top.

The Weight of Disruption

By Angel Abcede

Three months ago, a house-flipping pal was helping me organize my kitchen. One of the first things she did was rip the dead phone off the wall, shove the cables back in the hole and spackle over it.

The freedom of today’s mobility is sublime and mind-blowing. At what point do I realize I don’t need my lizard tail? That I don’t have to wait in line for a movie ticket, drive to the drug store for razors or actually walk into a bank—ever?

And that the corner post office with its beautiful Depression-era sculptures of men and women working to rebuild a nation is in danger of being shuttered, like my old wall phone shoved back in a hole and spackled over forever.

OK, stop. The weight of seeing my universe as a box within a box within yet another box is wearing me down, making me feel dated, like a Field Museum fossil.

And in doing so, I consider fixing how I do things in light of today’s technology to save both time and money. A new sun is rising, and I vow to let go of what was and embrace what is.

As a citizen of the New World Order, I regroup. I think, well, I’ll never buy another bookcase—or book, for that matter. The bank is screwed; I don’t know why they insist on building new branches on every corner. And yes, tell me what else I can do with my phone besides make calls, check emails and text.

There are many reasons to think that e-commerce is a threat to convenience retail. Brands are making clear moves to compile names, track data and build relationships. Amazon.com is getting into groceries. Brick-and-mortar’s purpose in a mobile world has yet to settle out—or, put another way, the clock is ticking for the physical store to prove its relevance.

Don’t get me wrong: Barriers to exit, as it were, at least for c-stores, are formidable. Everyone still has to buy gas, even though fuel-efficient cars and digital opportunities for working at home are chipping away at that stronghold. C-stores sell impulse items: single-serve drinks, taquitos, coffee, grab-and-go stuff to satisfy the here and now. Beer, cigarettes and lottery tickets are all age-restricted products. And, of course, there’s the social piece.

But think now on the things mobility and e-commerce can affect:

 ▶ Less driving, less fuel sales. Even if it’s driving less to the grocery store, it’s still fewer trips and less gas.

 ▶ Fewer branded snacks, candy and beverages sold, as manufacturers move to direct relationships and, yes, direct delivery to customers. Think FreshDirect and monthly snack services such as NatureBox.

 ▶ Fewer or no trade fees. A secondary and possibly more harmful result of manufacturers relating directly with consumers is a dramatic shift in how they spend their marketing dollars.

But there are upsides, too:

 ▶ Fewer credit-card fees. Mobility may mean more secure, convenient ways to pay that can circumvent the credit-card companies.

 ▶ Entry into the vast billions sold via coupons, something that the industry—with the exception of tobacco—has essentially opted out of for years.

 ▶ C-stores as an increasingly important way for manufacturers to deliver goods. With retailers being today’s resource for who’s buying what, they potentially could better position themselves in the supply chain by aiding manufacturers in their desire to build their databases.

At the center of this what-if scenario is the supply chain. Strip away the gee-whiz nature of shopping online and the true problem every manufacturer, supplier and retailer faces is delivery and logistics. How does a package get shipped from the manufacturer and delivered to the consumer? How does that box move from distribution center to the consumer’s doorstep?

That “last mile” is a question even Amazon has yet to answer. While it has its own distribution system, for many parts of the country, Amazon still partners with established delivery companies such as FedEx and UPS. And for customers wanting two-day home delivery, Amazon still charges a fee via Amazon Prime.

“There’s always a niche market for something, and I see this as a service for an urban, densely populated market,” says Ron Coppel, senior vice president of national accounts for Naperville, Ill.-based c-store wholesale distributor Eby-Brown. “It’s a question of: Will it severely hurt our channel? I don’t think so.”

In addition to pointing out how services such as online grocery and smoke shops have independently had nominal effects on the channel so far, Coppel suggests that the c-store supply chain in place is efficient and something that Amazon would have to replicate to be competitive. “And if it hurts someone in a channel when these alternatives come out, they tend to hurt the weaker ones,” he says.

Here’s where the drones come in. And before you laugh, the fantasy of using drones for direct delivery may sound ludicrous, but consider how many military- originated technologies have made it into the mainstream: GPS (global positioning system), microwaves and duct tape, to name a few.

That said, retailer and loyalty-card provider Pat Lewis says, “Drones could just be hype, something that Amazon put out there to be considered an innovative company.”

The smarter comparison would be to Bentonville, Ark.-based Walmart, says Gray Taylor, executive director of the Alexandria, Va.-based Petroleum Convenience Alliance for Technology Standards (PCATS).

“Walmart has the ability to say, ‘I can deliver product to the consumer today, for no shipping cost,” Taylor says. “The customer still has to come to the store, but [big-box retail] has kicked back on pricing and selection and there’s no shipping costs. It’s the Achilles’ heel for online. I call it the revenge of brick and mortar.”

For c-stores, there’s the opportunity to “optimize the last mile,” Taylor says, particularly with the idea of delivery lockers: “If you live in an apartment building, you don’t want to have the delivery man leave your brand new Mac [computer] in the lobby.”

For Scott Hartman, president and CEO of Rutter’s Farm Stores, York, Pa., age-restricted product is a stronghold. Coincidentally, around the same time I spoke with Scott, the state of New York was accusing FedEx of illegally shipping 80 million cigarettes to New Yorkers, leading to $10 million in uncollected taxes.

The immediate threat of online shopping is with grocery and big-box, Hartman believes: Their large-volume business model may be vulnerable as traffic diminishes. But less driving also hurts our industry, he says.

Taylor fails to see a big threat to the c-store channel: “I’m not going to order a bag of chips on Amazon. If it’s diapers, maybe I’ll get on [an online] diaper-replenishment program. I’m even in the dollar-shave club, where I get razors sent to me. That stuff make sense; it’s a low shipping cost.”

The newer frontier appears to be in the development of brand relationships directly tied to consumers, says Anton Bakker, CEO and founder of Outsite Networks, Norfolk, Va. In addition to developing a loyalty offer for the c-store channel, he has worked directly with coupon distributor Catalina Marketing, St. Petersburg, Fla. He says Catalina’s ability to track movement and understand shopping behavior is a compelling part of the bigger picture.

One company eager to tie its brands to consumers directly is Deerfield, Ill.-based Mondelez International. The company recently launched Betabox, a project that enables brands to target product samples at what it calls “specific consumers by distributing them through reputable e-commerce partners.”

It’s a targeted approach using analytics and customer data, along the lines Bakker implies.

“They’re going to find ways to get the data with or without the retailer,” Bakker says. “To stay in the game, retailers have to give up some of the golden egg, but not the goose. In other words, give enough data for a sales lift and loyalty but not too much to lose your retail customer.”

Bakker offers the example of a buy-one-get-one-free offer. Typically, CPG companies fund such promotions. If a brand decides it can use those marketing dollars more effectively, a retail chain may lose out and may no longer have the ability to offer that promotion, while a competitor might still be able to.

Where Bakker sees a potential threat, Taylor of PCATS sees opportunity. Considering the convenience channel’s scorn toward paper-based coupons, e-commerce puts c-stores back into the mix with regards to the “billions” of dollars going through coupons.

“We ripped out coupon functionality in the ’90s to make way for fuel,” Taylor says. “What’s going to happen is there are more ‘timed’ offers from CPG companies: ‘Hey, you’ve got an hour to go in and cash this coupon.’ If we can take the mobile coupon, it’s the same [as a paper coupon]. I think it’s good news for us.”

So while I shudder at the potential closing of my neighborhood post office, I welcome the vitality that will hopefully take its place.

Change is coming—whether it be a cool new drone or a sunny delivery person.

Coming Next: Moving Beyond Convenience

Beyond Convenience

By Melissa Vonder Haar

Confession: The day I discovered I could hop on my computer at 2 a.m. and order a supreme pizza catered to my whims (no mushrooms, extra cheese and marinara on the side to dip the crust in) was life-changing.

Little did I know that 10 years later, the same delivery sites that helped me stave off college hangovers would help me eat healthier today. I routinely place orders on my smartphone after delayed flights have ruined dinner plans. Instead of a late-night bowl of cereal, I can enjoy a custom-tossed salad that arrives shortly after I walk through the door.

As a member of the oft-discussed millennial generation, living in the urban sprawl of New York, perhaps it is not surprising that online shopping is a way of life for me. It’s not just pure e-commerce sites such as Amazon. I’ve purchased everything from my winter coat to prescription refills and, yes, occasionally groceries.

I’m not alone. Revenues from “pure-play” e-commerce sites grew from $9.3 billion in the fourth quarter of 2001 to more than $69.1 billion in the fourth quarter of 2013, according to the U.S. Census Bureau. Total pure e-commerce sales reached $262.5 billion last year.

Are you shivering in fearful sweats? Don’t worry—at least not yet. That figure, though impressive and rapidly ascending, is only one-third of the $771 billion of fast-moving consumer goods (FMCG) across supermarkets, drug stores, convenience stores, dollar stores, mass merchandisers and club stores (excluding Costco), tracked by Nielsen.

That said, FMCG’s growth pace pales next to e-commerce’s explosion, climbing by just 10% from 2009 to 2013. Todd Hale, Nielsen’s senior vice president of consumer and shopper insights, says increases in 2011 and 2012 were fueled by inflationary pressures.

“Specialty retail channels are most impacted by e-commerce: Within the FMCG space we track, the impact has probably not been as big as many might have expected,” Hale says. Planned purchases such as diapers, vitamins and beauty care are more prone to e-commerce competition. “However, without question, slow FMCG growth across measured channels is in part a reflection of gains made by e-commerce.”

With a focus on fuel and impulse purchases, the c-store channel is less susceptible to these threats. Our grocery, drug and big-box competitors, however, are all starting to feel the e-commerce squeeze.

Fighting Back

Few brick-and-mortar retailers can truly compete with Amazon in terms of robust online selection, but that hasn’t stopped several FMCG operators from striking back. The key, according to Hale, is leveraging the kind of consumer relationships and know-how that can be developed only through in-person interactions to build a rewarding online experience.

“Retailers are fighting back by creating their own e-commerce capabilities, innovating in ways that Amazon can’t,” Hale says, pointing to in-store experiences, “click and collect” offering and strengthened loyalty programs.

Specific examples include:

 ▶ Real-Time Value: Helping their consumers to save both money and time, Wal-Mart is testing a Savings Catcher tool on its website. After shopping at Walmart, consumers can compare prices on every purchase to advertised prices of up to 20 competitors by simply typing their receipt number into the Savings Catcher page. Any price difference is loaded onto a gift card that can be used online or in the store.

 ▶ Real-Time Needs: Sure, Amazon sells cheap umbrellas in fun styles, but that doesn’t help a consumer caught off guard by a monsoon. Drug-store kingpin Duane Reade (which is owned by Walgreens) is using technology to target such real-time needs, testing a partnership with personalized weather-forecast provider Poncho. After taking a survey about their commute, morning and evening routines and weather-related allergies, subscribers receive twice-a-day weather updates (via text or email) that include Duane Reade coupons catered to the day’s weather. For example, a seasonal-allergy subscriber would get a warning on high-pollen days as well as a discount on Duane Reade’s allergy-relief products.

 ▶ Real-Time Payment: In another example of Walmart catering to its base, the big-box behemoth now offers a pay-with-cash option. The program allows consumers who do not have a credit or debit card (or who would prefer not to enter that information online) to order products off the website and pay with cash at the nearest Walmart location. Clearly there’s a market: More than half of Walmart’s online sales are pay-with-cash purchases. As an extra bonus, the service tends to increase the overall basket size, because customers often end up buying impulse items when they pick up their online order.

 ▶ Customized Coupons: CVS Caremark pumps out tens of millions of circulars each week. Though the mass push continues, the company more recently launched a digitized circular in which more than 30 million customers receive unique promotions based on their shopping habits. And some channels can enter the e-commerce world more seamlessly than others, just as some channels are feeling more e-commerce competition than others. Though its impulse services seemingly insulate the c-store channel from this battle, it’s important to watch how competing channels are facing this challenge.

Grocery: A Sensory Advantage?

Groceries aren’t exactly an impulse purchase, but the fact is, most Americans don’t plan their grocery trips in advance. This—combined with the facts that groceries tend to be low-margin to begin with (eliminating an online price advantage) and consumers have been leery of purchasing perishables sight unseen—has led to an uphill battle for companies looking to break into the online grocery business.

“Web-enabled grocery delivery is now in at least generation three, and still appears to be floundering,” says Michelle Barry, president and CEO of Centric Brand Anthropology, Seattle. “Some folks are doing cool things but don’t appear to be profitable.”

That said, some powerful players aren’t giving up. With groceries accounting for more than 50% of Walmart’s in-store sales, the retailer recently tested a Denver expansion of its online grocery business (in which consumers order online and pick up at local stores). Ninety percent of customers gave the service an average-to-outstanding rating, which could lead to further expansion. Other grocery giants, including Whole Foods, HyVee and ShopRite, have also begun offering online ordering in dense urban markets.

Perhaps more important for c-store retailers is the fact that, as more consumers look to purchase nonperishable products through online retailers such as Amazon, Hale predicts brick-and-mortar grocers will have to shift focus to other areas to make up that loss.

“I can see a day when supermarkets are going to see their center store shrink even more because more people are going to buy those products online,” he says, predicting grocery stores will counter by further expanding foodservice. “That’s going to be competition for c-stores, long term.”

Drug: Succeeding in All Spaces

Similarly, many drug store retailers have invested in fresh-food offerings in recent years. However, with its core business in nonperishable items, the drug channel has also looked to compete with pure-play e-commerce sites.

Besides building out their own robust online stores, some retailers have looked elsewhere to grow their Web business: Walgreens made a $409 million commitment to e-commerce with its 2011 acquisition of the online pharmacy Drugstore.com.

And then there’s the low-hanging fruit: Walgreens, CVS, Rite Aid and other leaders give customers the option of refilling prescriptions online and getting text alerts once said prescriptions are ready for pickup.

Going After Convenience

The appeal of big-box (or hypermarket) stores such as Sam’s Club, Costco or Walmart has been the perception of a one-stop shopping trip. Online retailers have one-upped that convenience by giving customers that one-stop shopping trip without budging from their couch.

Is it any wonder that big-box retailers aren’t just going after the susceptible grocery business, but also the c-store’s small-format impulse-driven model? In an interesting turn, the biggest e-commerce threat to the c-store channel might not come from sites such as Amazon but from how hypermarkets are responding.

Though not necessarily a direct response to e-commerce, big-box retailers are going after those impulse dollars in at least two ways:

 ▶ Fuel: This threat is nothing new. As of July 2012, hypermarkets sold approximately 12.4% of U.S. motor fuels, according to NACS. Selling roughly 275,000 gallons per month, these big-box sites moved more than twice the volume of a traditional c-store retailer. Whether this fuel focus is a direct strategy to recoup sales lost to e-commerce sites or merely a way for hypermarkets to demonstrate pricing value (because fuel prices are broadcast on the street level), Hale anticipates it’s not going away, especially because fuel will always be an in-person purchase.

“Club formats have had fuel in their mix for some time and so has Walmart, so I don’t see this changing,” he says. “Let’s see where the Dollar General gasoline-offering test goes.”

 ▶ Convenience-Sized: A focus on providing consumers what they need—or want—now is perhaps the c-store’s greatest defense against the world of e-commerce. With Walmart and Target expanding their small-format, impulse-driven locations, big-box retailers are perhaps starting to recognize this opportunity. Besides its Express and Neighborhood Market formats, Walmart now has an actual convenience-store location.

“Small box is where the (growth) action is,” Hale says. C-stores and value stores accounted for the vast majority of new retail locations last year. “This is why you see retailers like Walmart jumping in. This is a c-store format with Walmart prices, not something the c-store channel has had to compete with.”

That said, plenty of retailers have not turned their back on larger formats.

“Not all successful retailers have bought into the notion that small formats are the way to win,” says Hale, citing Boise, Idaho-based WinCo Foods and Cincinnati-based Kroger. “WinCo is sticking with the big-box value format, and while Kroger continues to work with a portfolio of formats, bigger formats such as Kroger Marketplace are a greater part of the new store mix today.”

Yet, as e-commerce continues to expand, it’s something retailers big or small will need to keep an eye on. Nielsen forecasts e-commerce to grow at a compounded annual rate of 11.7% per year through 2018, nearly triple the projected industry average of a 3.9% annual growth rate. With this kind of disparity, it’s going to affect all of us one way or another.

“Amazon and others have taught us how easy and convenient it is to shop online,” Hale says. “Broadband speed, as well as enhanced online engagements and devices, are only [further] driving use and acceptance.”

Breaking Pace

E-commerce had a beyond-promising fourth quarter of 2013, with $69 billion in sales (representing nearly 6% of total CPG sales). But the truly impressive stats are the rates at which e-commerce sales are growing, quarter over quarter and year over year compared to total retail sales.

QuarterTotal retail vs.
previous quarter
E-commerce vs.
previous quarter
Total retail vs.
previous quarter
E-commerce vs.
previous year
Q4 20103.0%4.4%6.9%17.5%
Q4 20111.8%6.3%7.0%16.4%
Q4 20121.4%4.6%4.5%15.7%
Q4 20130.6%3.4%3.8%16.0%

Source: Retail Indicators Branch, U.S. Census Bureau

Coming Next: The Evolution of a New Retail Channel

The Evolution

By Abbey Lewis

I’m a mother of two. William and Eleanor, 5 and 6, respectively, will never know a world without instant gratification. Want to rent a movie? Switch the TV over to Netflix and let’s find something to watch. Like that new Beyoncé record? Bring up iTunes on your phone and buy it; listen to the first few songs in the car on the way home. Shoot—we’re out of milk. And it’s raining. And we don’t want to go outside because we have this great new movie and a whole new album to listen to. Let’s just go to Amazon and order some. It’ll be here in time for dinner tonight.

OK, that last part is a bit of a stretch— for now. But as we’ve experienced, and as we’ve hypothesized, is there anything that Amazon, or any of the other e-commerce behemoths and startups, can’t or won’t do?

The greater question is: How will this affect our business? How will the potential of same-day grocery delivery or manufacturer-direct supply make a mark on the convenience industry?

After all, the milkman once upon a time was replaced by the dairy down the street that decided to open a store to sell milk, which eventually turned into a chain of multibillion-dollar c-stores and grocers. It only makes sense that we ponder the effects of this retail evolution. It’s just that I don’t believe we need to worry all that much.

There are some things I don’t envision going away. We still need gasoline. We still need a quick cup of coffee and a pastry or breakfast sandwich in the morning. I still need the frozen slushie drinks for my kids and ice cream novelties in the middle of summer when the drive gets too long. My granddad still needs to show proof of age to get his cigars. (OK, he doesn’t.) But certainly the neighbor boy across the street would and should have to show his ID to buy a pack of cigarettes. Sometimes, when you run out of toilet paper, you need to restock immediately. These are things you can’t exactly do on your smartphone.

I talked to Scott Zaremba, owner and operator of Zarco 66, Lawrence, Kan., just before he boarded a plane back home from a trip. I agree with much of what he had to say.

“I think Amazon is going to be a huge competitor,” he says. “But it’s not going to be against us. It’s going to be against all the other big brick-and-mortar: grocers, Walmart, Target.”

I had originally called to get an update on at-the-pump sandwich-ordering technology he’s unveiling at one of his stores. I thought someone with a mind that typically ranges outside the box would have an idea of how best to compete with the most technologically advanced big guys.

Turns out he doesn’t think we have to. Rather, we have to evolve: “We are going to have very defined locations with very defined purposes. We may have to evolve into larger locations. What model is going to work right so we can get everything everyone wants when they want it?”

Ah, yes. Instant gratification. C-stores offer that, too. Our industry may not be available at the touch of a button, but we are in all 535 congressional districts and we support the local Scouts and Little Leagues that make up the fabric of our communities.

And, albeit not our sweet spot, we can get into the e-commerce game, too, hosting drop boxes and payment centers for online orders. There is a population of people that are underbanked and may not be able to pay for items online. We can be their point B. And certainly all those delivery vehicles are going to need to get from point A to point B without running out of gasoline— or diesel. We have fuel. We can evolve.

Of course, the deeper-pocketed big boys—from Walmart to Target to Publix— are also evolving, at times to our peril. So what do we do next?

“It’s the innovator’s dilemma,” says David Bishop, managing partner of Barrington, Ill.-based Balvor LLC. “The big, established incumbents don’t see it as an initial threat, and only respond when they feel the initial impact. And by then it’s too late.”

He’s referring, of course, to the c-store’s response to an indefinite e-commerce threat. Bishop hypothesizes that it’s not just that the c-store will evolve, but that the c-store will have to evolve because the big boys are devolving: “The result [of e-commerce] could be the other way around, with big box going to our model with fuel and foodservice. What will grocery do to convenience?”

As far as Walmart is concerned, Bishop sees the threat in another way. It’s not so much that the 800-pound gorilla is bringing itself down to our size as much as it is about the e-commerce piece. We’ve officially come full circle.

“If we think about Walmart and their To Go store concept, a lot of people think they’re moving into convenience,” Bishop said.

Aren’t they? Let’s put our brains outside that proverbial box again. What if you could order your items at Walmart.com and go to your nearest Walmart store to pick it up? What if it had gas? Who’s winning the instant gratification game now?

“If that [strategy] motivates a consumer to go to a Walmart [To Go] because they want to pick up their order, the consequence is that Walmart could pick up the motor fuel from c-stores, and then c-stores would be in a very disadvantaged position,” Bishop says.

How will we adapt? Over the past decade we have evolved, embracing more sophisticated food offerings, innovative technologies and a lock on the instant-gratification experience.

As Bishop offers, “It’s up to the imaginations of the marketers to determine what’s next.

“We can do that.”



Amazonian Growth

When compared to brick-and-mortar retailers, Amazon is clearly leading the pack in annual sales growth.

Retailer2013 global annual sales ($ billions)Year-over-year change

Sources: U.S. Census Bureau; company reports and websites


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