State of the Industry
C-stores break $700 billion in sales but stumble to finish in 2012
Despite recessionary setbacks in2009 and 2010, the convenienceretailing channel reboundedover the past two years to surpass $700billion in sales for 2012, resuming a breakneckpace that began as early as 2004,according to numbers released at thisyear’s NACS State of the Industry (SOI)Summit.
Though c-store CEOs and CFOs weremore focused on 2012 benchmarks at thisyear’s conference, it was hard to overlookthe achievement of the channel at large,including a 21.2% recovery from the 2009-2010 recession and a 44% improvementover 10 years ago, when sales as an industrybegan increasing exponentially.
“We’ve crossed the $700 billion mark,”said Glenn Plumby, SOI presenter andvice president of operations for SpeedwayLLC, Enon, Ohio. “And profi tability morethan doubled. That’s quite a testament towhat we do on a daily basis to take care ofcustomers.”
Investments in capital, foodservice anda higher-quality labor force drove bothsales and profi tability for c-store operators,even in the face of increasing competitionfrom drug and dollar stores, lingering joblessnessand declines in gasoline consumptionand cigarette sales.
Still, despite big-picture success, themicro view of 2012 was one of “stumblingto the fi nish line,” Plumby said. Fuel salesand volumes, cigarette sales and pumptransactions were all up in the fi rst half ofthe year but dropped dramatically in thelatter. “It was the tale of two halves.”
Drawing a comparison with this year’sSuper Bowl and the Superdome lightsgoing out mid-game, Plumby said, “TheRavens had all the momentum. Then thelights went out and the game changed. SanFrancisco got hot and Baltimore limpedto the fi nish line. We limped from a salesperspective.”
As an industry, total sales grew 2.7%to $700.3 billion from $681.9 billion in2011, with inside sales up 2.2% and fuelup 2.9%. Pretax profi ts rose to $7.2 billionlast year, up 3% from $7 billion theyear prior.
Held in partnership with CSP BusinessMedia in the Chicago suburb ofRosemont, Ill., the 10th annual SOI conferencedrew nearly 400 c-store executivesand suppliers ready to reconnectwith trends and benchmark their ownnumbers.
Continuing patterns included the growing disparity between top- andbottom-quartile companies, the expansionof foodservice as a replacement forthreatened categories and the ongoingincursion—albeit slightly abated in2012—of credit-card fees into industryprofi ts.
Presenters revisited numbers with newlenses this year, making direct comparisonsto foodservice and other competingretail channels, as well as singling outareas where the industry as a whole madeground. Some highlights:
Cross-channel competition from drug and dollar stores is heating up asmajor chains break into categories suchas beer and tobacco.
Foodservice potential has yet tobe realized, because industry averagesbarely touch per-store earnings frombranded quick-service restaurants (QSRs).To the industry’s credit, c-store foodservicenumbers are growing faster than those ofQSRs.
Store size means little becausetop-performing chains average about thesame fl oor space as bottom-quartile stores.
Higher labor costs follow top performers,though higher wages typicallytranslate into higher per-store profits.Fortunately, overall industry expenses aregrowing slower than infl ation.
Credit-card expenses have sloweddue to effects from legislative victories.
“For 2012, some in our industry hadpersonal bests, but some struggled,”Plumby said, pointing out that withthe exception of upcoming changes inhealth-insurance regulation, “you canlook at 2013 with a lot of optimism.”
Overall, Plumby said the industry is ina good position to do better in 2013, butcautioned SOI attendees of factors theyshould take into account.
First, the industry must rationalize itsasset base. The growing divide betweentop performers and bottom puts to questionthe industry’s lower-end properties.“Can those assets sustain?” he said.
Second, it must grow foodservice ata faster pace. The channel’s per-monthaverages are lower than that of the lowestQSRs. With c-stores having higher numbersof transactions overall, “we can getthere through a better conversion rate,”Plumby said.
Finally, he suggested improvingcenter-store sales by employing strongermerchandising and assortment strategiescould help operators take advantage oftheir store count and overall market share.
“When you look at new competitors,drug and dollar stores, we need to workharder inside to offset [that threat],”Plumby said.
Measuring Up
Top performers outpace industry despite averaging same square footage
Maybe no one’s head turns when they hear the industry’stop-performing companies outpaced the bottomby six times profit and EBITDA. But to knowthat they do it in about the same amount of space may makethose same heads spin.
As NACS State of the Industry (SOI) quartile comparisonsget more consistent year over year, the trends that recur fall backto foodservice and people, two elements that make the parity insquare footage plausible.
“You’d think ‘build bigger and they will come,’ but it doesn’tseem average square footage makes a difference,” said GlennPlumby, SOI presenter and vice president of operations forSpeedway LLC, Enon, Ohio. “What’s impressive is foodservice.”As a whole, the industry managed a positive increase of 2.7%in total sales, with profitability up a solid 3%. But it’s the topperformers taking the lion’s share.
Top-quartile c-store chains in the SOI study of 2012 figuressell 3.4 times more in foodservice, averaging $33,978 per monthvs. bottom-quartile stores at $10,303. But top-quartile stores stillsell 1.8 times more in both motor fuels and merchandise and sell twice the amount inside the store persquare foot.
The labor cost per hour for top performersis higher, at 1.2 times that of thebottom quartile—but so is profitability.Top chains make $31.03 in gross profitdollars per labor hour vs. $18.89 for thebottom quartile, or 1.6 times the latter.
As noted, square-footage numbersare similar for both quartiles, with topquartilecompanies averaging 2,535 squarefeet and the bottom at 2,532. The floorspace even dips a bit with those at the verytop, with top decile, or the top 10% of bestearningcompanies, averaging 2,062 squarefeet vs. 2,535 for the top quartile.
Equally reflective of this profit-to-spaceratio is a reliance on gasoline sales. Topquartilecompanies need less than half thecents-per-gallon metric to reach breakevenvs. bottom quartile, according to 2012SOI numbers. While top-quartile companiesneeded 7.53 cents to break even,bottom-quartile companies needed 15.54.
Top-Decile Differences
Still, c-store CEOs and CFOs finding internalnumbers well in the top quartile maybe dismayed to find disparities betweenthem and the top decile. Plumby clarifiedthat the top 25% includes the top 10%, sothe comparisons may be skewed towardthe average over the stellar.
With break-even cents per gallon(CPG), for instance, the top decile needed6.65 cents in 2012 vs. the top quartile at7.53. More distinctive differences occurredin store operating profits: The top 10%made $32,771 per store per month vs. thetop 25% at $24,543—a 26% difference.Profit per square foot in this case was$15.89 for top-decile stores vs. $9.68 forthe top quartile.
Still, top-quartile stores are undoubtedlytaking the bulk of the industry profits.Average profit and earnings before interest,taxes, depreciation and amortization(EBITDA) both drop precipitously movingdown the quartiles: Top-quartile storeoperating profit was $24,543; the secondquartile was about half that, at $12,588.Third quartile was $8,451, and the bottomwas almost a third of that, or $3,869.
The difference between top and bottomcertainly is a story about volumes—gasolinethroughput, cigarettes, beer, all thecore c-store staples—but the clear disparityis with foodservice.
Foodservice sales made for $33,978in per store per month sales for the topquartile in 2012. Second quartile did only$12,630. Oddly enough, third-quartileplayers did slightly more ($13,696) thanthe second quartile, while bottom-quartilestores did a third of the business of topquartilecompanies, at $10,030.
The numbers tell two stories for theconvenience channel: one of thriving, andanother of merely surviving. A particularlyrevealing number, Plumby said, was returnon capital employed. Top-quartile companiesprovided a 17.55% return, whilelowest-quartile companies had 2.33%.
“A return on capital employed at justover 2% makes us wonder how thoseoperators can continue to invest [in theirbusinesses],” he said.
Cross-Channel Context
Comparisons frame c-store benchmarks, show potential shortcomings
By c-store standards, top-tierchains ought to be proud, breakinginto new categories such asfoodservice with a growth trajectory thatought to please any investor.
But wait: In terms of foodservice, theindustry’s top-quartile stores don’t makeas much as a typical Pizza Hut.
Comparing apples to oranges? GlennPlumby, SOI presenter and vice presidentof operations for Speedway LLC,Enon, Ohio, doesn’t think so. He believesthe gap represents the potential groundc-stores can gain as they dive further intothe category.
The c-store industry’s top-quartilestores averaged $34,948 in foodservicesales in 2012 vs. an average of $60,307per store per month for a Pizza Hut,according to NACS research.
“A Pizza Hut does twice as well[in foodservice] as our top quartile,”Plumby said. “We know our transactionsare much higher. … If we can getconversion from people fueling, there’san upside.”
But foodservice comparisons wereonly part of the larger channel-blurringpicture, he said, warning that drug anddollar stores are starting to stock coreconvenience items. “They’re beginningto look more and more like us, sellingbeer and cigarettes.”
Plumby started the comparisons withnumbers of stores. Overall, c-stores grewto 149,220 in 2012, up 1,094 stores (or0.7%) from 2011. Drug stores, on theother hand, grew by 5.7% to 40,727locations, while dollar stores did a bitbetter with 5.8% growth and 23,421stores.
Sales growth also showed crosschannelheat, starting with in-store salesgrowth for the convenience channel at2.2% in 2012 vs. 2011. Comparatively,Goodlettsville, Tenn.-based Dollar Generalexperienced 7.1% sales growth, withone rival, Chesapeake, Va.-based DollarTree, not far behind at 6.2%. Drug-storechain CVS, Woonsocket, R.I., reporteda 9.6% growth rate, with Deerfield, Ill.-based Walgreens showing fallibility witha 2.8% loss year over year.
Core categories also came under firefrom cross-channel competition. In hisreview of c-store categories, SOI presenterKevin Smartt, CEO of Kwik Chek FoodStores Inc., Bonham, Texas, said the topthree drug-store chains increased beerlocations by 10.1%, while Dollar Generalwent from testing beer in 2011 to selling itat more than 5,000 stores in 2012.
Similarly with cigarettes, Dollar Generaltested the category in 2011 and beganselling it at 10,500 stores in 2012. Matthews,N.C.-based Family Dollar also wentfrom testing in 2011 to rolling it out to6,000 stores last year.
Still, growth in foodservice withinc-stores was commendable, Plumby said.Comparing same-firm c-store numbers,the industry achieved an 8.7% growthin foodservice sales, while foodservicestalwarts such as Oak Brook, Ill.-basedMcDonald’s and Louisville, Ky.-based KFCwere able to muster only 4.7% and 3.5%growth, respectively.
“No one in the category is up as nicelyas we are,” Plumby said. “It’s encouragingthat we’re growing at a faster pace.”
Year Over Year
While foodservice was a dramatic partof c-store sales growth and profitabilityin 2012, it was just a portion of overallindustry increases. Total sales for theindustry rose 3% to $589,026 per storeper month. Separately, fuel sales rose2.9% from the year before, while in-storesales rose 2.2%.
Though several SOI attendees saidan unseasonably warm March last yearpropelled spring numbers, Plumby saida couple of outside factors slowed growthoverall. The first was falling gasoline consumption.At its 2007 peak, consumptionin the United States was 9.3 million barrelsper day. In 2012, it was 8.7 million.Volumes across the industry were down0.6% in 2012 from the year before and astaggering 7.45% since 2007.The so-called “jobless” economicrecovery was also no help, Plumby said.According to NACS estimates, almost 10million more people were not countedin national unemployment statisticsfrom four years ago.
“What that means is there are 10million less people—people who weretruly key to our business, people whowould go to work and go home, are notcoming into our stores,” Plumby said.“When you take that many people outof the labor force, it will certainly havean impact.”
Almost in spite of those drawbacks,the industry as a whole did show gains.Foodservice sales were up 8.7%, whichPlumby called significant, while merchandisesales were up 1%. Gross profitfor foodservice was up by double digitsat 13.2%, with merchandise profit up2.8%. In all, gross profit for the industrywas up 3.1%.
Gasoline Consumption Falls
No summer driving seasons last year, but 2013 opens with promise
Gasoline as a core c-store contributor to sales and profitability had its upsand downs for 2012, with sales showing some increases but weighed downby lower margins and higher retail prices.What may be most disconcerting to retailers was a documented absence lastyear of the traditional driving season, when motorists take to the roads for summervacation and warm-weather activities.
Diagramming a period from May through August, Glenn Plumby, vice presidentof operations for Speedway LLC, Enon, Ohio, showed how consumption essentially“flattened out.” One of the concerns stemming from last year’s conference was fallingdemand, Plumby said.
“That fear turned out to be reality,” he said. “We just didn’t get a summer drivingseason.”
Two main reasons for the drop, Plumby said, were motorists simply opting todrive less and an increase in fuel-efficient cars. From a peak of total miles driven in2007, Americans drove 5% fewer miles in 2012, he said, citing NACS research. Thatfact and better fuel mileage combined to take a bite out of consumption, as it were.
Fewer miles driven and more fuel-efficient cars also contributed to a continuingtrend in demand destruction for gasoline. Again, after that 2007 peak, Plumby said gasoline consumption was down 7.45%.“That’s very alarming and very concerning,”he said.
An indicator to Plumby of diminishedconsumption was a drop in thenumber of overall transactions in stores,particularly over the second half of 2012.Pump transactions were down as well,SOI numbers revealed.
“When consumers stop walking intostores, it makes it really hard to sell anything,”Plumby said, citing that lengthydiscussions among NACS researchcommittee members have yielded noroot cause. “We have no silver-bullet[reason].”
Further complicating the picture wasa one-two punch from overall marginsand retail prices. Margins fell 0.4% from2011 to 2012, going from 18.2 cents to17.8 cents. At the same time, pumpprices hit $3.60 on average, an all-timehigh for the industry, Plumby said.
“If you look at those figures, and how2012 had [retail prices] approach $4 a gallonthe most [number of times] ever, thosearen’t good factors coming together inour favor as far as pleasing customers anddriving consumption,” he said.
However, Plumby was quick to pointout that the beginning of 2013 has alreadyshown bright spots. Consumption in thefirst few weeks of the year was already1.3% above 2012. The numbers are evenmore stellar in light of the fact that retailgas prices rose at record rates during thattime period. Even better news for retailersis that margins rose 3.6 cents, up to 16.6cents from 13 cents in 2012.
Staving off Credit Fees
Still, for many retailers, selling moreproduct, whether it’s fuel or merchandise,comes at a cost. Credit-card feesgrew at a slower rate than the industry’s pretax profit, a pattern that runs counterto previous years, Plumby said. Unfortunately,the fees still added up to $11.2billion for the industry last year.
Comparing trend lines between pretaxprofit and credit-card fees paid in2012, Plumby said the legislative victorysecured through the Durbin Amendmentsaved retailers and consumers aconsiderable amount. “Credit cards arenever a good thing to talk about,” hesaid, “but that’s encouraging.”
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