With gas retailing below $3 a gallon nationwide, and having dipped earlier this year below $2 in many markets, retailers are drooling over the potential to grab some of that loose change in America’s purses and pockets—up to an estimated $140 billion, according to fuel analyst OPIS.
And while numerous reports show consumer confidence inching upward, the true breadth of this economic rebound—be it ripple or surge—has yet to reveal itself. So while guardedly optimistic, most retailers are working to reap all they can from what could be a strong summer, some devising ways to capture more impulse sales. Others are focused inward, raising mounds of capital, building new and larger formats and reinventing themselves as food-first retailers.
After writing about the plunging economy in 2008, CSP editors have revisited the topic, exploring today’s resurgence and how best to ride a wave that shows consumer confidence up, unemployment down, and new home-building and general retailing rebounding.
Table of Contents
The Potential Wave and a Store’s Core Beneficiaries
The panoply of economic good news has bolstered in-store sales.
“If a consumer has $20 to get gas, in the past they’ve had to spend that all on fuel. Now they can buy a pack of cigarettes, a soda, whatever they want inside,” says Andrea Myers, president of Seymour, Ind.-based Kocolene Marketing LLC.
Data specialists Management Science Associates (MSA) recently looked at two years’ worth of sales data from three regional chains. The correlation was self-evident: Cheaper gas means increased in-store sales. While a 1% increase in fuel cost caused inside sales to slip by 0.3%, a 3.7% decrease in fuel price meant a 1.1% boost in inside sales, according to Don Burke, senior vice president of Pittsburgh-based MSA.
Described more dramatically, RBC Capital Markets analyst Nik Modi projected “tens of billions of dollars” of incremental consumer spending in the fourth quarter of last year, which translates to an average increase of 7% in merchandise sales per store.
For convenience chains to capture some of this financial gush, calculate the percentage of fuel customers who go into your store per fillup, says David Bishop, managing partner of Barrington, Ill.-based sales and marketing firm Balvor LLC. It’s a number that varies considerably from one chain to the next—from the teens into the 30s.
“That means … between 1% and up to 4% growth on the table for in-store business,” Bishop says. “Regionally, there will be differences with employment and fuel prices.”
Rather than overhaul retail strategies in pursuit of an uncertain gain, operators by and large are sticking to their core while tweaking some categories and offers to capture higher rings.
While in-store sales are up across the board, research shows certain categories are benefiting most from the economic recovery.
A category in chronic demise, tobacco has benefited perhaps like no other. The combination of lower gas and a growing economy has created a boom for c-store tobacco sales. Nielsen shows dollar and unit sales up a respective 4.5% and 1.3% in the 12-week period ending Feb. 14.
“Our same-store cigarette sales are up compared to last year, which is unbelievable,” says Myers.
Anne Flint, senior category manager for Framingham, Mass.-based Cumberland Farms, agreed that “cigarettes continue to be the main beneficiary of this phenomenon” at the pump.
Retailer reaction is reinforced by Wall Street. Vivien Azer, analyst for New York-based Cowen and Co., says, “Both Altria and Reynolds American have acknowledged that their core consumer base is doing a little bit better because of the falling gas prices.”
Admittedly, tobacco’s rise may be the result of more than just falling fuel prices. Analyst Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, New York, conjectures a possible “halo effect” from drug-store chain CVS’ decision to exit the cigarette business in 2014.
Like tobacco, Nielsen showed a lift in c-store beer sales across the board. In that same 12-week period, beer dollar sales jumped an impressive 4.7% and unit sales grew by 2%.
Consumers are also treating themselves to more premium offerings, specifically in the higher-ring craft and import categories.
“A consumer is purchasing the same quantity of product—like a six-pack of beer,” Herzog says. “But they are able to upgrade to a higher-priced, premium product.”
Foodservice has been one of the big winners in the new economy for Jeff Miller, proprietor of the 29-store Miller’s Neighborhood Markets in Norfolk, Va., though he acknowledges the category is not a new focal point.
“We’ve been banging away at those things for a couple of years,” he says.
Miller’s is far from the only chain seeing foodservice sales grow. The top three c-stores in the Parker Cos. chain with delis average $100,000 in sales per month from its “Southern comfort” foodservice program, according to Greg Parker, president and CEO of the Savannah, Ga.-based chain. And that’s not including beverages.
Even retailers such as Kocolene that aren’t “big” in the foodservice business are enjoying a lift. “People have a few extra bucks to buy a sandwich,” Myers said during an interview in February. “A month ago, it was going all toward gas.”
When MSA looked at categories most likely affected by gas prices, lottery came in at a surprising No. 2.
“They’re taking a chance,” says Burke. “You’ve got a couple extra bucks; why not take a chance on a lottery?”
Perhaps more telling is what a booming lottery business suggests about consumer confidence. Burke points out that lottery sales typically grow the most when the economy is at its worst.
“When consumers are feeling a little more desperate, they look for that bit of hope,” he says. “The fact that lottery is still up may suggest that consumers are still very conscious of the fact that they’ve been impacted very recently by the economy.”
CONTINUED: Impulse, Indulgence Seize the Day
Impulse, Indulgence Seize the Day
While categories such as cigarettes or coffee might take a hit when gas prices soar, consumers ultimately consider such products more of a need than a luxury. So it makes sense that in times of economic strife, indulgent and impulse items tend to see the biggest declines.
“However, when fuel prices are lower, these [categories] are probably seeing the largest impact in sales growth,” says Bishop of Balvor.
Kit Dietz, principal of Huron, Ohio-based Dietz Consulting LLC, believes the concept of affordable luxury plays a part in candy’s strong rebound. Indeed, Chicago-based research firm IRI shows candy and snack dollar sales all grew in 2014. Chocolate was up 3.2%, non-chocolate increased 4.37% and salty snacks grew by 6.12% year over year.
“The beauty of candy and snacks is they’re very indulgent, so consumers will make that small spend for a treat,” Dietz says.
Snacks, candy and beverages also offer the option of immediate availability and consumption, as opposed to waiting for a
clerk to make a sandwich. Kyle McKeen, president and CEO of Alon Brands Inc., Dallas, the country’s largest 7-Eleven licensee, has seen immediate consumables score big lifts in recent months.
And while gas prices started to sneak up in late February into early March, Dietz expects snacking purchases will continue to grow for the rest of 2015 and beyond. “I’m hoping that with this incremental opportunity for consumers to spend today, we’ll see some moderate lifts in candy and snack sales over the next 12 to 24 months.”
Unemployment: Closing the Gap
In December, official U.S. unemployment figures fell to 5.6%. President Obama in his State of the Union called this rate “lower than it was before the financial crisis.”
Perhaps. The figure was based off what the U.S. Bureau of Labor Statistics classifies as the U3 number, or total unemployment as a percentage of the civilian labor force. But the U6 number might provide a more accurate picture for c-store operators, because it includes those working part time due to a lack of full-time positions. The difference is fairly drastic: In December, the U6 unemployment rate stood at 11.2%—double the widely publicized 5.6% U3 number.
Both measurements are trending down, but, says Bishop of Balvor, “The gap between those two has widened over the last several years. This indicates that there’s a shift in employees forced to work part-time positions because they can’t find a full-time job.”
A sizable wedge is particularly problematic for c-store retailers, because positions included in the still-high U6 figure tend to fall in industries where employees are predisposed to shop convenience stores.
Now the good news: Modi and RBC Capital Markets have been looking at the unemployment rates for the core c-store shoppers—and the numbers look promising.
While the U.S. construction, manufacturing and hospitality unemployment rate rose to more than 17% in early 2010, the Bureau of Labor Statistics shows it was down to about 7% in September 2014.
“The unemployment rate has come down pretty significantly,” Modi says. “In fact, it’s come down more for the core [c-store] consumer than it has for the rest of the nation.”
Azer of Cowen and Co. also cites an improving picture, buoyed by modestly higher minimum wages adopted across state and local levels, and companies such as Walmart voluntarily committing to wage increases for lower-earning employees.
CONTINUED: Fuel: Low Prices, Big Margins
Fuel: Low Prices, Big Margins
For an industry that posts its fuel prices on the street, retailers are less inclined to talk margins—especially if they’re good. But last fall’s significant margin spike was too obvious for anyone to deny. Tom Kloza, chief oil analyst for OPIS/GasBuddy, Wall, N.J., sums it up this way: “C-stores had their best year ever in 2014 in terms of the No. 1 category: fuel margins.”
Kloza recently chatted with CSP about the state of fuels:
Q: What type of lift inside the store do you see as gas prices fall?
A: It’s still difficult to determine whether some of the increase in disposable income—Americans had about $11 billion more to spend in December 2014—is resulting in any lift inside the station. But OPIS anticipates that consumers will have about $115 billion to $140 billion more money to spend in 2015, thanks to cheaper gas. So job No. 1 ... is to find a way to access some of that money.
Q: How long do you see the situation continuing?
A: Consumer confidence has been on the rise, but it may get dented slightly as spring gas prices rise to about $2.50 to $2.70 per gallon. Low interest rates appear part of the national fabric for [now], but they only impact the prices paid for c-store sites, which have soared relative to 2008-2009 levels. I believe that everyone in the c-store space recognizes, however, that ... buying habits are fragile.
Q: So what happens if or when gas prices spike again?
A: A NACS survey implied that consumers would cut back on driving if prices moved back to $3.50 a gallon. We exceeded that in most states for various months in 2011, 2012, 2013 and 2014. As much as I believe that we won’t approach or exceed that number this year, I suspect that familiarity with $2- to $2.70-a-gallon gasoline … might make $3 per gallon a magic number for pain again.
Q: What do lower prices mean for the industry?
A: Many working families, with both spouses in the labor force, feel more and more time-starved thanks to the demand of jobs, connectivity, things like that. This probably bodes well for the larger c-stores that represent a nice compromise between the dinky old c-store with few purchase options and the supermarkets or superstores, which are clearly inconvenient for weekday travel.
CONTINUED: Housing & Gatorade
Housing & Gatorade
If Gatorade sales are growing, there’s a good chance housing construction is booming.
“In studies that we’ve done ... those consumers who shop the c-store in the morning are often people who have outdoor, construction-type jobs,” says Burke of MSA. “They buy not only breakfast items, but we’re seeing a lot of lunch-type items selling through the morning hours as well.”
Cowen analyst Azer takes this theory a step further. “Gatorade became increasingly dependent on that consumer, who wasn’t necessarily a core consumer,” she says. “When they lost their jobs, you saw that reduced consumption hurting the category.”
So although sports drinks typically target athletes, the beverages attract outdoor workers who need to rehydrate during the day.
And that attraction is proving to be true. The U.S. Census Bureau has shown that new construction starts have been on a positive trajectory since summer 2011, with more than 1 million starts in October 2014—more than double the amount of housing starts during the low point of the recession. And despite the challenges of particularly volatile weather patterns, housing grew by approximately 12% last year.
“Housing got us into this mess, and I believe housing will get us out of it,” says Modi of RBC. “We’re certainly seeing that now.”
What does housing have to do with c-store sales? Quite a lot. More builds means more jobs for a high-spending, core c-store consumer: the construction worker.
Continued growth in new builds, combined with lower gas prices, has led to a reacceleration in c-store sports-drinks sales over the past two months, Azer reports.
Burke concurs: “A higher level of construction and construction-type jobs will definitely impact c-store sales.”
Driving Season 2015: Greater Road Travel Ahead
In tracking economic indicators as a way to predict store traffic, retailers should focus on location as well as population demographics, according to Jim Fisher, CEO of Houston-based IMST Corp.
Key indicators include household growth, population growth, average household income, length of commute, commercial development activity (both planned and occurring) and other hard-asset analysis.
While specific locations will see more or less benefits, lower gas prices bode well for summer travel in general.
“Lower gas prices could create a major boost for the travel industry this year,” said AAA spokesperson Mark Jenkins in a statement after the Tampa, Fla.-based group released a study on summer travel. “The current state of gas prices can make road trips much more cost-effective, especially for large families who would otherwise likely spend thousands of dollars on airfare alone."
CONTINUED: A Bull Economy?
A Bull Economy?
The economy is in the eye of the beholder. It’s an issue of perception: Does the beholder have a job? And if so, is it only part time? Will that job be there three months from now?
A convenience retailer in Norfolk, Va., says the military base in the area created economic stability, while an operator in El Paso, Texas, says the base there has seen its ups and downs.
The fall in gas prices at the pump could give consumers a $140 billion windfall in 2015—$450 in individual driver savings at the pump, according to New York-based Bankrate.com. At the same time, Texas lost 2,300 oil and gas jobs last fall, according to the Federal Bureau of Labor Statistics, and oil-and-gas companies in key producing states have announced workforce layoffs of 15% to 20%, falling like dominos into supporting sectors of service, travel and housing.
This dichotomous recovery leads some to question the pace and strength of the nation’s growth and prosperity. Are we emerging from the financial tailspin of 2008? Or is it true that only the fringes—those representing the wealthiest and poorest—are seeing gains while those in the middle bear a modicum of uncertainty?
Cautious optimism has roots in many areas. Gross domestic product (GDP) figures have been climbing. Unemployment is declining. Housing, start-up investment and sales in durable goods all are increasing. Despite some economic yin and yang, all empirical benchmarks point to a strengthening economy. And even in markets with doses of decline, that may not be entirely bad.
McKeen of Alon, for instance, sees layoffs in the energy sector as a mixed blessing. While certain communities may face layoffs, the state’s overheated economy was pushing the cost of labor through the roof. “The recent [layoff] news may be bring a dose of reality,” he says. “Our labor costs have not been reduced, but the labor pool has increased in the oil patch.”
While most of Alon’s 7-Eleven stores are in Texas, the markets Alon participates in are not entirely moored to the energy sector.
“We’re cautious, but there’s still truck traffic and fracturing jobs,” he says. “We’re not going to take big risks from a build standpoint, but we’ve seen this before and it’s been more dramatic in the past.”
Houston-based Sunoco LP, with its acquisition of the Corpus Christi, Texas-based Stripes chain, reported similar optimism on its earnings call last winter. (See story, p. 9). Like many public companies, Sunoco reported strong fuel margins and significant increases in gasoline sales and both in-store volumes and sales, due in part to falling pump prices.
Overall, numbers from the U.S. Bureau of Economic Analysis put the Texas job growth rate at 3.7% as of December 2014, solidly above a strong national average of 2.9%.
As one retailer (who declined to be named for this story) puts it, “Texas is still growing at a phenomenal rate—just not as phenomenal as before.”
Items Most Affected by Gas Prices
|Category||Indexed dollar impact|
|Other tobacco products||150|
|Hot dispensed beverages||148|
|Cold dispensed beverages||125|
Source: MSA retail POS data
*Indexed relative to impact for total store, excluding fuel products
Consumer Confidence: Good for Macro, So-So for Micro
While strengthening consumer confidence may affect larger sales of more durable goods such as furniture or cars, Bishop of Balvor says it has little connection with, say, buying a snack at a c-store.
“These are things c-store retailers should celebrate, but they are not going to be what drives sustained growth in the next six to 12 months,” he says.