General Merchandise

SOI 2020: Before and After

C-stores hope to use 2019’s successes to thrive post-pandemic
Photograph courtesy of Circle K

ALEXANDRIA, Va. — The convenience-store industry made progress in 2019.

In-store sales rose nearly 5%, according to preliminary NACS State of the Industry data. Fuel gallons rose 1.1% despite a long-term flattening of demand. And fuel pool margin rose nearly 5% to hit a record 25.82 cents per gallon (CPG), “better than many of us expected,” said Charles McIlvaine, chairman and CEO of Coen Markets Inc., Canonsburg, Pa., and presenter of the 2019 industry figures at the NACS State of the Industry Summit Virtual Experience. All this helped total industry pretax profits hit a record $11.9 billion in 2019, up 8.5% from the year prior.

“I’d say, all in all, a pretty good year,” McIlvaine said.

The usual headwinds—higher labor costs and credit card fees, the widening gap between the best and weakest c-store operators—didn’t let up. (More on that to come.) But c-store retailers made another few steps in their evolutionary journey toward a more sustainable business model.

Regardless, by the time of the SOI Summit in mid-April, what could have been a year to celebrate was already being undone by a devastating 2020. Consider it two steps forward, one step back. The COVID-19 pandemic’s effect on store sales, fuel demand and the industry’s millions of customers and front-line workers has been profound. C-stores have had to rethink how to deliver convenience when everything is inconvenient for the consumer: restaurant closures, out-of-stock grocery stores and income pressures because of job furloughs and layoffs.

The convenience-store industry—often described as “recession-resistant”—will test this reputation in 2020. But as Andy Jones, NACS’ research committee chairman, pointed out at last year’s NACS State of the Industry Summit, c-stores survived the challenges of the Great Recession—economic malaise, historically low fuel margins, high gasoline prices and consumers who were hungry for healthy food, a weak spot of the convenience industry—and emerged stronger.

“Over the past decade, we didn’t just survive—we prospered because we found new product categories and were able to evolve our offer,” said Jones, president and CEO of Sprint Food Stores, Augusta, Ga. “Retailers found a foothold with promising products such as energy drinks and by prioritizing foodservice. And they embraced technology such as smartphones and touchscreens to help them deliver convenience as it was being redefined.”

This example of industry survival through reinvention is helpful as the United States heads into a period of economic uncertainty that could rival the Great Recession and the Great Depression.

“We will be strong, we will be different, but it will end,” said Chuck Maggelet, chief adventure guide for Maverik Inc., Salt Lake City, and a presenter at the 2020 NACS State of the Industry Virtual Summit. “Those of us leading teams that are most adaptable will enjoy a rewarding future.”

Industry Sales

Lower fuel sales in 2019—due to lower fuel prices—kept total industry sales in 2019 from topping 2018 figures.

Source: NACS; preliminary data. Final data to appear in the NACS State of the Industry Report of 2019 Data.

Evolution in Action

To shape a future after the pandemic, retailers need to size up the past. Based on year-end 2019 figures, the c-store industry has a strong jumping-off point.

Despite enjoying record-breaking fuel margins, retailers continued to make progress in relying less on the forecourt for growth. Fuel’s share of gross profit dollars fell nearly 4 points from 2014 to 2019, while foodservice’s slice grew by nearly 5 points.

In 2019, nearly one-fifth of gross profit dollars were generated by selling food, where the margins are consistently more generous. McIlvaine credited this rebalancing to top-quartile retailers, who are going all-in on foodservice. These operators generated foodservice sales of more than $102,000 per store per month, nearly eight times that of the bottom-quartile operators.

“That’s a really big movement and an important step toward evolution,” McIlvaine said.

While total industry sales slipped 1% in 2019 to $647.8 billion, it was due to lower retail gasoline prices. In-store sales, meanwhile, hit a 25-year high of $251.9 billion. The inside share of total transactions also rose for the first time in three years even as total transactions flattened, down 0.2% in 2019. In-store gross profit dollars per store per month increased 6.6%, thanks to growth from both foodservice and merchandise.

“I hope one of the key things [to come] out of this crisis is that we can make, as an industry, more of a career for our team members.”

In unveiling 2019’s category sales trends, Maggelet said eight of the top 10 sales categories—which combined provided 80% of in-store sales dollars—saw growth. In fact, the top six grew sales despite a decline in unit sales in 2019. Tobacco contributed 34% of in-store sales, followed by foodservice (25%) and packaged beverages (15%).

Within tobacco, other tobacco products (OTP) was a driving force, with a more than 21% jump in dollar sales, according to NACS figures. Packaged beverages, alternative snacks and candy were other top movers.

Foodservice supplied 39% of in-store gross profit dollars in 2019, followed by packaged beverages (18%) and tobacco (17%). Six of the top 10 categories increased gross profit dollars on a percentage basis, led by OTP, candy, packaged beverages, general merchandise and alternative snacks. While four of the top six categories increased margins, “price inflation is not a sustainable method for growth,” Maggelet said.

Transformative Times

Focusing on sustainable growth after a year when fuel played an overwhelming role in profitability is critical, especially as the industry faces a shifting economic landscape in the months ahead.

McIlvaine pointed to a concerning trend with break-even fuel pool margin, a metric that measures how many cents per gallon a retailer needs to profit on fuel to break even with retail operational expenses. McIlvaine considers it a “yardstick for the health of the inside-store business.”

“High-performing retailers have traditionally maintained a low break-even CPG because inside operations were generating enough gross profits to pay a good portion of the store’s expenses,” he said.

However, from 2013 to 2019, break-even fuel pool margin rose 12 CPG, according to NACS figures. This is due to the historic increase in pool margins, which leapt 25% in the past three years. Even the best operators can see break-even fuel pool margin inch up in these circumstances, McIlvaine said.

“Having a goal to keep break-even pool margin low—under 10 cents—will train us and help focus on fundamentals of inside operations,” he said. “In times when we have these high fuel margins, we should use those profits to transform the business toward those higher, income-generating opportunities inside the store.”

The other issue that knocks the sheen from higher fuel and in-store profit dollars: rising business expenses. Total direct store operating expenses (DSOE) rose nearly 7% in 2019. In fact, while in-store gross profit dollars rose higher on a percentage and dollar basis than DSOE for the first time in three years, it was due only to three especially profitable months: January, April and August 2019.

“If those months were flat, the story would be quite different,” McIlvaine said. “The DSOE trend line looks pretty ominous.”

Credit card fees, the eternal bugaboo of the industry, rose more than 6% in 2019 to reach $9,383 per store per month.

About three-quarters of c-store transactions are made with a credit card. “The trend of going cashless: It’s not going to reverse itself anytime soon. In fact, I would suspect over the time the usage of credit cards will increase,” McIlvaine said. Adding to this: Cleanliness is becoming more critical to consumers who are learning the ropes of social distancing.

“We find ourselves in a predicament: All the work we do to generate pretax profits is almost equivalent to credit card fees,” he said.

Fuel Factor

Margins hit a record 26.3 cents per gallon (CPG) in 2019, even as fuel prices stayed relatively stable from previous years.

Source: NACS; preliminary data. Final data to appear in the NACS State of the Industry Report of 2019 Data.

Labor Pains

The biggest driver of DSOE increases was labor costs. Wages and benefits rose 7.5% in 2019 to reach more than $37,000 per store per month. That equates to about an additional $2,600 per store per month.

“The question is: What are we getting for this added expense?” McIlvaine said. In the past five years, wages have grown more than 26%, he said, citing factors such as competition for workers and the move by many states to increase minimum wages.

During that same time, industry turnover rose more than 17%. For the bottom three quartiles of c-stores based on operating profits, turnover for nonmanagerial positions trended well above 100% in 2019.

Meanwhile, employee productivity has been dropping: Inside sales per labor hour have fallen more than 11% since 2015.

One part of the problem driving turnover in 2019 may have been low unemployment, which was hovering around 3.4% before the economic fallout from the pandemic. Some workers could be choosing unemployment benefits over a minimum wage, McIlvaine said. But with the economic fallout from COVID-19 pushing national unemployment toward 20%, the labor dynamics are quickly shifting.

“I hope one of the key things [to come] out of this crisis is that we can make, as an industry, more of a career for our team members and have that progression occur over time and not have the disruption of turnover,” McIlvaine said.

Chain Contraction

The total convenience-store count fell slightly in 2019 to 152,720 units, according to NACS and Nielsen TDLinx. It marks the second year in a row that the industry store count has retracted after years of growth. The number of c-store chains with four or more stores has fallen 25% in the past decade. In 2019, these chains saw an 8.2% decline from the year prior.

That said, the c-store channel’s number of closures on a percentage basis year over year is low, or only 0.3%, said Charles McIlvaine of Coen Markets. “We’re pretty much three to five times the next guy” in terms of the total number of units, he said. Most U.S. retail channels comparable with c-stores saw declines in store count in 2019 compared with 2018. The dollar channel was the only comparable retail channel to grow site count significantly.

“There has been a lot of continued M&A, but there has also been a lot of organic expansion,” McIlvaine said of the slight loss in c-store count. Chains with more than 200 sites increased unit counts, but single stores and smaller chains experienced unit declines.

McIlvaine cited several reasons for this decrease. One is increased competition from national and superregional chains, as well as from other retail channels that compete with convenience. Some chains have closed or sold their stores or gone out of business.

“There’s a number of these operators at these smaller chains who have reached retirement age and may have decided to monetize their business and move on without any clear succession plans,” he said.

Also, the capital expenditures required to compete in the c-store industry have grown.

“We’ve morphed into more food-centricity of our retail environment,” McIlvaine said. “So consumers are getting more sophisticated and demanding more, to which we in turn, as retailers, need to adapt.”

The 2020 NACS State of the Industry Summit Virtual Experience will be available for on-demand viewing through Sept. 1. Access critical benchmarking data, analysis, emerging trends and executive insights at convenience.org/SOISummit.

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