CSP Magazine

Cover Story: Strategies for Reaping Big $

Shoppers are hungry for value

Click here to read Part 1 of this story.

Winning in the post-recession market is not a given: The financial crisis is all too fresh in the minds of many consumers, regardless of the price at the pump.

“The drop in gas prices did not have an immediate effect on [our] overall merchandise sales,” says Frank White, director of retail operations for Tri-State Petroleum, Wheeling, W.Va. “I believe the drop in fuel was not perceived as permanent, so customers were still cautious with their spend.”

It’s entirely likely that consumers are even more concerned about the value of their dollar, still cognizant of the days when they might not have had that dollar to spend. Though, as David Bishop of Balvor points out, that concept of value may have shifted.

“Consumers are searching for value in any number of ways,” he says. “It’s not necessarily defined as having the lowest price or about having the most unique atmosphere like some of the coffeehouses; it’s somewhere in between.”

In the modern marketplace, it would seem as though this hunger for value falls into two categories: the traditional concept of value through price and the relatively new phenomenon of value through quality.

More Bang for Your Buck

Everyone likes a good deal, especially one they can actually take advantage of. “Bundling works well for us,” says Andrea Myers, president of convenience-store retailer Kocolene Marketing LLC. “The theory is that if people have the extra money, they might buy an extra can of snuff or bottle of soda. During the recession, they couldn’t afford it.”

Don Burke, senior vice president of data specialists Management Science Associates (MSA), is another supporter of bundling, though he encourages retailers to be smart about what kinds of deals they offer and what kinds of products they feature. For example, MSA’s data shows purchasers of alcohol, frozen foods, cigarettes, edible grocery and e-cigs tend to have the highest overall market baskets. It makes these segments excellent candidates for a promotion.

“Being able to feature any of those categories really does enable retailers to provide value to the consumers … and themselves,” he says.

Another winning bundling proposition can come from looking across different categories. Wells Fargo analyst Herzog sees a prime opportunity to leverage an area that’s been growing (foodservice) to promote a segment that’s been struggling (carbonated soft drinks). A well-placed sign at the foodservice counter could encourage shoppers to swing by the cold vault for a good deal.

“In the take-home channel, they encourage a lot of the tie-ins with food and beverage,” she says. “It could be a great fit for the c-store industry.”

When all else fails, Myers says, attract price-driven shoppers with the right lingo.

“People love the word ‘free,’ ” she says, pointing out that even the savviest shoppers don’t know the individual price in a “two-for-$1” deal. “Unless it’s spelled out, I don’t know that the customer is always educated enough about the product to do the math. Everyone associates ‘free’ with a good deal.”

More Buzz for Your Buck

Not everyone is looking for value in simple terms of dollars and cents. What else could explain the growth in superpremium products, from high-end cigarettes to craft beer?

“We’ve seen a lot of buy-ups in premium beers, candy and fountain,” says Alon Brands president and CEO Kyle McKeen. “At a lower fuel price, people are spending a portion of that savings on upgrades [and] treating themselves.”

Cowen and Co. analyst Vivien Azer—who describes this phenomenon as “more buzz for your buck”—says this trend was occurring in beer long before gas prices dropped. Overall beer has been losing share to wines and spirits for the past decade and, more recently, domestic premium brands have been losing share to high-alcohol craft offers.

“You’re maybe spending more per bottle of beer, but the alcohol content is a little bit higher,” she says. “There’s value in that.”

It’s similar to the rise of energy drinks (products that RBC Capital analyst Mik Modi dubs “basically craft sodas”) and energy shots: Consumers are spending more than they might on sodas or coffee, but they're getting more caffeine than in traditional products.

The value isn’t just in the “buzz” but in the overall quality of the products. That’s true of organic dairy, locally made snacks and even tobacco. White says that “there’s definitely been some upgrade” in his tobacco section, both in premium smokeless and superpremium cigarette brands.

“There is an affordable-luxury component to it,” Azer says. “When these consumers have a little bit of extra cash, they can treat themselves to one of the more premium items.”

That concept of affordable luxury might seem explicitly tied to a better economic forecast. Modi, however, is adamant that this is no flash-in-the-pan trend.

“This is sustainable,” he says. “If you really think about it, we’ve been seeing it for quite some time, even with gas prices higher and the economy in much worse shape.”

CONTINUED: Tobacco Strategies

Tobacco Strategies: Stay the Course

Tobacco may be one of the categories benefiting most from a sunnier economy—but it’s also one of the categories most susceptible to outside factors. What good are extra pennies at the pump if the federal excise tax suddenly doubles (as President Obama has proposed in the 2015 budget)?

Here are ways tobacco retailers and analysts suggest capitalizing on today’s market while remaining adaptable for tomorrow:

Capitalize on Pump Messages

“Anything you can do to communicate to those at the pump that you have the specific categories and products that draw people into the store,” says MSA’s Burke, “especially if you can communicate some kind of deal.”

Capitalize on Extra Income

As with many categories, the consumer's need for value is strong. White of Tri-State Petroleum has addressed this (and extra money in consumers’ pockets) by employing a multipack strategy for cigarettes, even leveraging some new contracts to get manufacturers to co-fund multipack pricing.

“Because consumers have more money in their pocket, they’re increasing their multipack purchases on their trips,” White says.

Capitalize on Trends

Though sales at Miller’s Neighborhood Markets are up across the board, proprietor Jeff Miller has been particularly surprised by the growth in vaping and e-cigs. “It’s a high ring, and we’re doing well with those products,” he says.

White has found that e-cig sales vary throughout the year. “Because we are seeing e-cigarettes as a seasonal offer that increases significantly in the winter, we have used signage and an improved assortment to drive that business,” White says. “We are seeing double digits in the unit movement.”

CONTINUED: Fuel Strategies

Fuel Strategies: Lure the Customer From Pump to Store

Retailers are seeing slight lifts in midgrade and premium ratios, says Kloza of OPIS/GasBuddy. Some motorists look at their vehicles “in an almost anthropomorphic fashion and are ‘treating’ their cars to 89 or 93 octane gas.”

While retailers probably don’t see a major upside to sales of grades other than 87 regular, every bit helps, Kloza says. He believes motorists used to $3.25 to $4 a gallon can easily be swayed to pay a few pennies more if they perceive some added value.

“Branded companies probably recognize this ability to upsell gasoline,” Kloza says. “You’ll see some of the majors spend more money to differentiate their gasoline with more advertising and tweaks to additives."

Converting Fuel-Only Customers

From billboards to in-pump messaging, retailers have any number of ways to communicate to consumers. Pat Lewis, partner in Oasis Stop N’ Go, Twin Falls, Idaho, believes the more targeted, the better.

Here’s his list of communication options from broad to specific in terms of reaching a broad range of consumers and targeting specific individuals or demographic groups.

CONTINUED: Foodservice Strategies

Foodservice: Part of the Bigger Solution

For many retailers, foodservice is part of a larger strategy to redefine the c-store concept and, at the same time, grow a higher-margin category.

McKeen of Alon says the company's stores tend to be smaller but still focus on 7-Eleven’s growing foodservice offer, with roller grills and other heated options. With store cleanliness crucial to foodservice sales, the company emphasizes clean facilities with its Clean Team program and improved shopping environment.

For retailer Greg Parker in Savannah, Ga., the move to foodservice was substantial, going to in-store fryers and a large selection of “Southern comfort foods” for both the breakfast and lunch dayparts.

Menu items include breakfast biscuits, scrambled eggs, grits and tater tots for the morning meal, and fried chicken and meatloaf sandwiches, mac and cheese, fresh vegetables and homemade cornbread at lunch. Parker has been in foodservice for many years, and it shows.

But creating an offer at a value price and integrating it into the store’s overall appeal is just part of the equation, Parker says. Retailers have to keep a close eye on expenses, balancing retail price with profit margin in the store.

“When commodity prices were going up last year, a lot of people did not go up in pricing,” he says. “They were doing a lot of sales and not making money. We made money. It’s all about looking at expenses as a percentage of gross profit.”

CONTINUED: Beer, Fountain & Coffee Strategies

Beer, Fountain & Coffee: Selection and Placement

With categories such as beer, fountain and coffee—which are heavily impulse, trade-up and destination purchases—key factors to consider are selection and positioning.

In terms of beer selection, demographics point to the three fastest-growing categories: Mexican imports, cider and craft, according to Modi of RBC. “There will needs to be rationalization in craft; there’s too many brands in the marketplace and it’s creating too much complexity in the supply chain,” he says. “Yes, you might be offering all this variety, but the odds are you’re not getting a lot of incremental margins out of offering that variety.”

For coffee, Kit Dietz of Dietz Consulting says consumers typically go straight to the coffee bar, with no chance for an impulse sale. But once they’ve fashioned their morning cup, they’re more apt to consider other options. “So always place breakfast snack items and hot breakfast foods after the coffee purchase, on the pathway to checkout,” he says.

One Last Thought: Stay Nimble

The specific lure that will draw in 2015’s potential incremental pennies comes down to a number of ingredients. For many retailers, it’s gut instinct—what’s worked in the past and what, on a hunch, might work in the future.

For Lewis of Oasis Stop N’ Go, the real answer lies in data. Also a provider of loyalty and business-intelligence solutions, Lewis is quick to say that different consumers respond to different offers. For some groups, it’s the offer itself; for others, it’s price.

For those retailers with loyalty systems, they can track purchases and create predictive modeling. Analysis can segment groups of customers who have similar shopping habits, values and triggers that influence behavior.

“For a particular customer group, it may be the right time to deliver that offer; sometimes it’s the right value, like a two-for-one or a discount,” Lewis says. “As far as the product, it could be based on market-basket history or the weather.”

Perhaps it’s promoting analgesics during allergy season, or a post-game special for a local Little League team. “You can leverage those types of occasions,” he says. “Then craft a relevant offer.”

The strategy to consider for this year’s driving season may be one of nimbleness and finesse. Low gas prices have kicked up the summer potential a few notches. Is your current plan designed for an average year or an extraordinary one? If it’s not special, then when those extra pennies roll onto the lot, what’s going to keep them from rolling back off?

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