It was a year of gold stars and red flags. The industry netted its 15th straight year of record in-store sales in 2017, but traffic decreased by one trip per person per week from 2014 to 2017.
It was the fourth straight year of more than $10 billion in pretax profits, yet credit-card fees had a painful leap of 5.8%.
But there’s even an upside to the downsides: They sure are motivating.
Much of the tone of this year’s NACS State of the Industry (SOI) Summit was inspired by the ongoing bifurcation not only in the c-store industry but also in retail as a whole and, increasingly, among American consumers. Looking at the total picture is crucial in maintaining the industry’s profit momentum, driving traffic back up and addressing the disruption at c-stores’ doorstep.
Despite what some analysts will have us believe, we really aren’t witnessing a retail “apocalypse.” On the contrary, retailers on either end of the spectrum—premium players and price-driven brands—are doing well. Premium retailers have seen revenues grow an incredible 81% over the past five years, while price-based retailers have seen their revenues steadily increase by 37%, according to a recent study by Deloitte. Meanwhile, the revenue of balanced retailers—those who play to both ends of the spectrum—has increased only 2%.
Another misleading indicator used in the retail-apocalypse narrative is store closures. While balanced retailers experienced more net store closings than openings from 2015 to 2017, price-based and premium retailers both saw strong gains in store counts. Of the total brick-and-mortar universe, c-stores and dollar stores—two channels squarely in the price-based cohort—were among just three channels to increase store counts last year (the third being wholesale clubs).
But price-based value can no longer be the only game convenience retailers play. Lower-income consumers are hurting. Households with annual incomes of less than $50,000 have seen no increase to their discretionary spend since 2007, and yet their essential expenses such as housing and healthcare have increased by 22%, according to Deloitte. Compare that to high-income households, which have seen a 101% increase in discretionary spending since 2007 and a 4% increase in essential expenses.
Given the growth in wealth for upper-income consumers and the revenue gains of premium retailers, this change really is a renaissance—one driven by economics and fueled by technology. The winners will be retailers that can capitalize on the needs of consumers on either end of the spectrum.
Price-based value can no longer be the only game retailers play.
Get Ready for Change
So what does this mean to the convenience-store industry of 2018? Everything. And this year’s SOI numbers indicate three key places to start strategizing.
E-commerce. While digital players are still trying to crack the code of bringing immediate consumption into the e-commerce model, we can’t think that e-commerce doesn’t affect c-stores. If consumers aren’t going to malls or supermarkets as frequently as they once did, that diminishes their opportunities to swing into a c-store on the way. How will the definition of convenience change as consumers decrease their brick-and-mortar trips, and how can the industry evolve with that changing definition?
Foodservice. Foodservice continues to be a key driver of gross-profit dollars for the industry. But retailers need to stay hyperfocused on restaurants, which have experienced their own traffic woes in recent years and have responded aggressively—especially among quick-service restaurants, who fall squarely into the price-based cohort.
Expenses. Gross profits increased 6.1% in 2017, but total expenses increased 7.7% per store per month, according to CSX. This was driven by an 8.1% increase in wages and benefits per store per month, a 9.5% rise in facility expenses and a 12% increase in credit-card fees. The fact that our industry saw a greater leap in credit-card fees than wages and benefits is a compelling statistic to take to legislators.
Resilience is the cornerstone of the industry, but we are not oblivious to the disruption at the door. So expand your customer base, let technology collide with service, and build a business model that’s ready for the renaissance.
Michael Wood is president and CEO of Winsight LLC. Reach him at [email protected].
Henry Armour is president and CEO of NACS. Reach him at [email protected].