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CSP Magazine

Outlook Survey 2016: Good to Grow

Even as labor woes, EMV upgrades, a hurricane and a presidential election pressure business conditions, c-store retailers find reasons to smile in 2016

How’s business?

It depends on whom you ask.

For 25% of convenience-store retailers who participated in CSP’s exclusive 2016 Outlook Survey, business is “excellent.”

This is the largest percentage in the 10-year history of the survey, which gauges retailer sentiment for the current year and the one ahead. An additional 48% described business conditions as “good,” meaning nearly three in four respondents were primed to have a truly decent year.

“Sales are up at the pumps and in the store,” said one retailer, who reported consistent, annual growth of 8% over multiple years.

And while c-store sales overall have been strong—with low gas prices and a revived economy providing the engine—for some retailers, growth has depended on factors outside of their control.

Here is a look at the results of our survey for the c-store industry overall and its largest product categories.


Table of Contents

Where We Stand Today

Challenges: Dodging Ball Old and New

Fuel: Looking Beyond Low Prices

Foodservice: The Great Growth Hope

Tobacco: Is Premium’s Luster Fading?

Beverage: Getting Crafty in the Cooler

WHERE WE STAND TODAY

At Alon Brands, business depends partly on the price of crude.

Jonathan Ketchum, senior vice president of retail, admits his Dallas-based chain is “a little bit of an outlier” to the industry average because most of its more than 300 sites are in the West Texas oil patch, which has been hit hard by prolonged low crude prices.

“A year or so ago was when the exodus started,” says Ketchum of the out-of-a-job oil workers, a sizable customer base for Alon. “We may have seen a little pickup in the rig count, but our sales are double-digit down.”

As of press time, oil prices had stabilized around $50 a barrel as the Organization for Petroleum Exporting Countries (OPEC) appeared to coalesce around a production slowdown. It’d be even better if prices rose up to about $60 a barrel, says Ketchum, the level where drilling activity and the local economy should start to pick up.

For retailers in the Southeast, business has been dictated by supply crunches. One retailer who spoke to CSP on condition of anonymity rode a wave of panic buying in September after the Colonial Pipeline shut down. The result: a few “crazy days” of record fuel sales followed by none at all after supply ran out. Then Hurricane Matthew created torrential rains, wind and a strained supply. Amazingly, fuel sales ended up slightly positive.

For Midwest retailer Federation Cooperative, Black River Falls, Wis., business at its six c-stores has been flat in 2016. Nineteen percent of retailers in the Outlook Survey saw similar conditions.

CEO Keith Holm says that the farmers who make up a big portion of his customers are having a tough year.

“Corn is so cheap, soybeans are so cheap that at the end of the day, [farmers] are not going to show a profit this year, even though turning in record yields will help them,” says Holm. “When farmers don’t make money, it hurts the whole economy around here.”

Inevitably, the art in retail is how well you can exercise control. Holm says Federation Cooperative will still end up profitable because it has been watching labor costs.

“It takes a little bit of adversity to shake off the cobwebs and become a better operator,” says Ketchum. “It’s never any fun to have sales declines, but there’s probably a silver lining to it as well.”

Continued: Challenges: Dodging Balls Old and New

CHALLENGES: DODGING BALLS OLD AND NEW

With the unemployment rate down to 5%, the industry is seeing big wage pressure in 2016, whether from local efforts to increase the minimum wage or through competition with other retail channels for workers.

The top challenge in 2016 per Outlook Survey respondents is employee turnover, followed by minimum-wage increases. This is after several years in which credit-card fees, regulatory pressures and the Affordable Care Act have taken top billing in the survey.

All of the c-store retailers CSP interviewed cited the minimum-overtime rule, which raises the salary threshold for employees who qualify for overtime pay from $23,660 to $47,476. It is poised to go into effect this month.

“In the Southeast, that number is quite a bit higher than what our average manager makes,” says the Southeast retailer. “So we’re going to be converting them to hourly.”

“That could be a $1 million impact to our bottom line,” says Ketchum of Alon Brands. “The bulk of our employees are below the new minimum, so we’ve got to [decide]: raise them to the minimum, or go to an hourly rate.”

Another common challenge: upgrading fuel pumps to be EMV-compliant by the October 2017 liability deadline. More than one-fifth of Outlook Survey respondents chose it as a top business-affecting issue for 2017.

Alon Brands is about halfway through its EMV upgrades. “It’s been a tremendous capital outlay,” says Ketchum. “It really doesn’t add any sales to the bottom line. Hopefully it prevents fraud.”

“We’re talking cap-ex dollars to accomplish that,” says Holm of Federation Cooperative. “In our situation, it required replacing pumps.”

“The whole EMV situation and the amount of money we’ll have to invest in upgrading our equipment in order to meet it is maddening,” says Tome of Mark Oil Co. His company will spend “in the seven figures” to get its sites compliant. He also questions the payback: “How will [credit-card] fees be affected by that? What benefit will we gain from spending all of this money to allow credit-card companies to reduce their fraud?”

Continued: Fuel: Looking Beyond Low Prices

FUEL: LOOKING BEYOND LOW PRICES

For most of the nearly 90% of Outlook Survey respondents who sell fuel, volumes in 2016 have been the same or higher than in 2015. Margins for most, meanwhile, have been the same or lower.

“We’ve been struggling on the margin side a little bit,” says the Southeast retailer, citing wholesale pricing volatility. “But for most part, volumes are up.”

Longer term—think 10 years into the future—two-thirds of Outlook Survey respondents expect fuel demand to grow slightly or by a lot. And in the short term, few have plans to add any alternatives to gasoline. But Holm of Federation Cooperative is an exception.

The Wisconsin retailer plans to raze and rebuild an interstate location in 2017 and make it into an alternative-fueling destination. It would feature compressed natural gas (CNG), liquefied petroleum gas (LPG) and an electric vehicle (EV) charging station.

“I believe it’s going to happen,” says Holm of the growth in alternative fuels. “The federal dollars are out there right now.”

Holm acknowledges it is “a gamble.” But fuel retailers need to do their part, he believes, to break the chicken-or-egg cycle keeping more choices from customers. “If there are places for people to fuel, then manufacturers will build the vehicles,” he says.

Continued: Foodservice: The Great Growth Hope

FOODSERVICE: THE GREAT GROWTH HOPE

Nearly 60% of Outlook Survey respondents who plan to add or expand a profit center in 2017 have foodservice in their sites. Another 50% have plans for coffee and an additional 25% for fountain. “We’re just like anyone else: We think foodservice is the wave of the future,” says Ketchum of Alon Brands.

The chain recently launched a pilot of Tres Locos, a proprietary street-taco and burrito program, at several sites in the Abilene market, testing a departure from a branded foodservice program.

The relatively small size of Alon’s 7-Eleven branded stores—about 2,400 square feet—has made finding the right foodservice program challenging. That said, the early results “are pretty good,” says Ketchum.

“We were looking for the right concept to put in there so it flowed with the store layout, and the right product that would appeal to the demographic in our area,” he says.

Continued: Tobacco: Is Premium’s Luster Fading?

Continued: Beverage: Getting Crafty in the Cooler

BEVERAGE: GETTING CRAFTY IN THE COOLER

Nearly 60% of Outlook Survey respondents who are expanding their cooler offering plan to do so in the beer category. And that’s no surprise, considering 56% expect the craft-beer segment to keep growing in 2017.

Holm of Federation Cooperative is surprised by the success of craft beer but is happy to expand his stores’ offer.

“I’ve doubled its space in the last 12 months,” he says. “Right now, I’m putting everything out and seeing what sticks.” One Wisconsin brewer that does especially well is New Glarus, especially at Federation Cooperative’s freeway location, where the retailer puts out warm cases for out-of-state travelers who can’t get the local brew.

Retailers are having mixed success with energy drinks. While 67% said it was an area for expansion, 35% said sales were slowing.

Definitely on the decline: carbonated soft drinks (CSDs). Forty-three percent of Outlook Survey respondents planned a cut in this subcategory. Holm is taking his CSD offer from three doors to two.

“Mainly it’s to make room for waters, isotonics—that category tends to be growing,” says Holm. “There are other things I can put in the cooler door that will get greater return.”

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