2017 SOI: Trend Lines and Good Times
Plenty of trend lines indicate the good times are here to stay:
- Upbeat key economic indicators, including employment figures, consumer confidence and low gasoline prices.
- The ongoing consumer propensity to snack and dine out.
- Gains against the major credit-card companies, with the Durbin Amendment of 2010 showing continued relief for retailers and additional income for consumers.
- C-store retailers’ aggressive response to foodservice, healthier options and customization.
On the other hand, several trends do not bode well for continued prosperity:
- Tightening fuel margins.
- A growing gap between high-performing chains and bottom-quartile retailers.
- Increasing operating costs, including labor, utilities and capital expenditures.
- The threat of online retail in the form of direct-to-consumer disruption from the likes of Amazon, Wal-Mart, other companies and digital startups.
“We’ve had three years in a row of significant profit increase,” Milam said. “Were they outlier years?”
Glass Half Full
Despite the 3.8% decrease in profit from 2015 to 2016, Milam pointed out the factors leading to what was still a strong year for convenience retailing. The first and most important was profitability. In 2014, the bottom fell out of oil prices, leading to record fuel margins and an extremely profitable October through the end of that year. The subsequent drop in prices at the pump yielded an average $700 extra in people’s wallets in 2015.
Some of that extra income went to more premium spending in the c-store, be it higher grades of fuel or premium cigarettes, but also increased spending on foodservice, snacks and beverages.
The 46.5% surge in c-store profits from 2013 to 2014 grew even stronger in 2015, with profits rising another 1.6% to an astounding $10.6 billion. Last year’s decrease of 3.8% to $10.2 billion still maintained a healthy new level, considering profits in 2013—just less than $7 billion—hit a record high.
Overall sales decreased 4.3% from $574.8 billion in 2015 to $549.9 billion in 2016, mostly coming from a 9.2% decrease in fuel sales. More fuel-efficient vehicles and continuing low gas prices contributed to the decline to $316.8 billion in fuel sales in 2016.
But the store itself won big in 2016: Inside sales grew 3.2% to $233 billion, a record high for the industry.
Inside sales averaged $167,797 per store per month, with foodservice growing at 5.6% and other merchandise 2.5%. Profit followed a similar pattern, with overall instore profits rising 4.8% to $54,561 per store per month. Foodservice profits rose 7% and other merchandise was up 3.5%.
While fuel sales fell 9.2% to $317,393 per store per month, gallons rose by 2.6%. Profits on fuel were up 1.6%.
Both lower sales figures and higher gallons sold are due in part to lower gas prices, Milam said. Pump prices the past two years have been less than $2.50 per gallon on average vs. more than $3 in 2014 and above $3.50 in 2012 and 2013. At the same time, the total number of transactions has been high, with 2016 tracking slightly higher than 2015.
All of that has helped the store. “Fuel prices are lower than we’ve seen,” Milam said. “[And] the more gallons we [move], the more inside sales [we make].”
A More Complex Picture
Last year, Milam and the NACS research team attributed record profits to three core drivers: cheap gas, job growth and easy credit. Since then, the scenario has grown more complex. Retail gasoline postings
may still be relatively low, but margins are shrinking. The low unemployment rate is forcing retailers to offer higher salaries and better benefits, and rising interest rates are making borrowing money and expanding retailers’ businesses more difficult.
Factors such as the growing challenge of corporate taxes and inflation concerns are also posing threats, Milam said. The industry’s continued profitability will hinge upon how all these factors play out this year.
Milam also discussed the labor situation and its entwined effects on the c-store retailer. Unemployment sits at 4.7%, the lowest since a peak in 2011 at 10.0%. At the same time, hourly wages have inched up since a 2009 low. According to NACS data on industry compensation, average hourly wages are up 17% to $9.99.
Strong employment numbers seem to translate to spending, with consumption up 20% since the Great Recession.
Of course, consumer spending and confidence in the economy is good news for convenience stores, but falling unemployment can also translate into higher operating costs. The cost for wages and benefits rose 7.2% for c-store operators in 2016 to $28,303 per store per month, according to SOI numbers. Overall direct-store operating expenses rose 6.2%, with utilities and supplies rising 1.7% each.
Competition for talent has stepped up as well, with employee turnover jumping significantly. Store-associate turnover jumped from 95% in 2015 to 133% in 2016. Store-manager turnover, which is typically low, jumped from 10% in 2015 to 27% in 2016.
The cost to hire, train and equip a store manager can be almost triple that of an associate, Milam said, and retailers must remain competitive as the war for talent wages on.
The Future of Disruption
Beyond the challenge of labor, Milam said the disruptive force of online retail may be of even greater consequence.
Online leader Amazon has begun expanding its one-hour delivery service, as well as testing Amazon Go, its “no lines, no checkout” small format. It ranks No. 8 among top retailers by sales and has seen its market value rise as eight other major retailers have seen their values fall.
For its part, Wal-Mart has been highly competitive against Amazon with its own delivery offer and continues to dabble in grocery pickup and convenience concepts.
Also making headway on the technology front, Seattle-based Starbucks has made mobile payment and loyalty a significant part of its marketing strategy, Milam said. It has 12.3 million active members and handles 21% of all its transactions through its mobile app. Starbucks is also testing curbside pickup.
“They are relentlessly pursuing the reduction of friction for the customer,” Milam said. They’re making shopping “easier, simple and faster—all those things that go into what we define as convenience.”