Cover Story: Strategies for Reaping Big $

Shoppers are hungry for value

Angel Abcede, Senior Editor/Tobacco, CSP

Melissa Vonder Haar, Freelance Writer

Erik J. Martin, CSP Correspondent

Illustrations by Mark Matcho

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