The good news for conveniencestore owners is that industry foodservice sales continued climbingin 2006 and the forecast for theupcoming year is just as strong. The badnews, however, is that other retail channelsare keying in on food sales and are keenlyfocused on diverting your customers totheir coffee bars, quick-service restaurants(QSRs) and supermarkets.
Predicting just how long food sales willcontinue to provide sustenance to an industry beleaguered by weak fuel margins andrising credit card fees will depend precisely on how well marketers defend theirturf against the competition.
“For the longest time, conveniencestores were way ahead of the game inmorning and afternoon meal occasions,but what has happened over time is thatother parts of the quick-service channelcaught up,” said Warren Solochek, vicepresident of client development for NPD Foodworld, a division of The NPD Group,which has been tracking consumer behavior across many vertical markets for morethan 35 years. “People thought of c-storesas the place to get a quick coffee and abakery item, andit was a great meal. Butwith more traditional restaurants gettinginvolved in morning sales and offering asuperior product, they are drawing moretraffic and it is coming at the expense ofthe convenience industry.”
The real danger here is that the momentum other retail channels are gaining in themorning is spurring consumer migrationacross all three dayparts. C-stores mustdevise a defense and modify what they doin the a.m. to focus on their strengths: convenience, service and a quality offering.
“I do believe convenience store ownershave gotten the message, but right now theretailers that can compete with Starbucksand Dunkin’ Donuts, such as Wawa,Sheetz and QuikTrip, are more the exception than the rule,” Solochek said.
The Stakes Are High
TheNationalAssociationofConvenience Stores’ 2007 State of theIndustry (SOI) report helped quantify theindustry’s strength as a leading foodservice purveyor. Foodservice sales soared5% last year to $18.8 billion, making it thefourth biggest in-store category accountingfor 12.8% of the industry’s overall in-storesales. The average convenience store soldapproximately $11,000 in foodservice itemsin 2006, a modest 2.3% jump from 2005.
Food held serve as the top category foroverall gross margins at 49.8%, outpacingcandy (45%), alternative snacks (38.8%) andpackaged sweet snacks (34.8%). In terms ofgross margin contributions, when factoring in hot and cold dispensed beverages,foodservice (18.9%) ranks only behind cigarettes (21.1%). The SOI also found grossmargin performance soared in 2006 to $10.4 billion, a strong 15.6% jump over2005’s $9 billion.
But maintaining these strong salesnumbers requires a combination of greatfood and skilled marketing. C-store chainscan’t simply rely on brewed coffee and agood corner location.
“Everyone has brewed coffee and agood location these days. The bar has beenraised by the likes of Dunkin’ Donuts andStarbucks. C-store owners must have anenhanced program that provides customers with lattes, cappuccinos and multipleflavors. That’s what people are used to,”Solochek said. “Consumer expectationsare changing and if you don’t have thatexpanded offering, you’re not going to getthat business.”
Another area c-stores are vulnerableis the overall breakfast meal solution. Asconsumers have become more health conscious, doughnuts and pastries aren’t theirtop choice.
“When you look at how chains likeMcDonald’s and Dunkin’ Donuts arerefining their morning offering centeredon a gourmet coffee program, you’ll findthat sandwiches have become the top-selling breakfast item,” Solochek said. “Thisis a direct attempt to take business awayfrom convenience stores. They saw whatthe industry was doing, and said, ‘We aregoing to do it better, faster and cheaper,’and they are certainly having an impact.”
While Starbucks is gaining a lot ofmomentum and Tesco prepares for itsmuch-ballyhooed entry into the U.S. market, Dunkin’ Donuts has quietly built animpressive portfolio. The Massachusetts-based company operates 5,400 stores primarily in the Northeast with only about60 west of the Mississippi. It is planning anaggressive roll out in growing markets likeTexas later this year. The new stores willhave a fuller menu and will not be pairedwith sister chains like Togo’s Eateries orBaskin-Robbins ice cream parlors.
Interestingly, the company viewsStarbucks and McDonald’s, because of itsbreakfast business and new premium coffee, as its primary competition, said GrantBenson, vice president of franchise sales.Convenience stores were not mentioned.
The convenience industry can stillcount on its core 18- to-35-year-old demographic since that crowd is not “the typicalStarbucks user,” Solochek said. “But backing yourself into a corner where youservice only this demographic and letyour competition steal away customerswith more upscale tastes, and far more disposable income, is a risky move that quite frankly I don’t see ever paying off.”
While price is a consideration in morning sales, NPD’s research found that despitethe higher cost of goods at Starbucks, customers remain undeterred.
“There may be some pricepoint wherepeople will begin hesitating buying breakfast products at coffee houses. Clearlythe products sold at Starbucks are muchhigher, but it’s not detracting from theirsales,” Solochek said. “It is my belief thatthe No. 1 reason people go to c-stores isthe convenient location. Convenience willalways be a driver especially in the morning when people are in a hurry to get fromhome to work, and that’s what they shouldbuild their program around.”
Building a Winning Program
It’s been said many times by many operators: “Foodservice is not a magic bullet”for slumping margins. Simply adding abranded or proprietary concept with multiple items and varying pricepoints is notenough to save a business or help it staycompetitive. But a sound program, with anemphasis on good food, location, portioncontrol, safety and consumer needs, can bethe springboard for something special.
“Foodservice, while it has proven tobe the perfect solution for a lot of retailers,must be carefully examined, particularlywhether you want to go with proprietaryor QSR,” said Jeff Lenard, NACS’ vice president of communications. “And you haveto examine the customer base to see if yourspecific store will support it. Basically,foodservice can be the magic bullet forsome stores, and has proven to be so, but is not the answer for all stores, even within agiven chain that has success with food.”
When firing on all cylinders, the benefits of foodservice include:
- Higher Margins: Gross margins in branded foodservice can run 60% higher than almost any other convenience store product category. Although the labor percentage for a QSR is far higher than the average c-store, the profit after labor and cost of goods sold runs 30 to 40% versus about 12% percent for c-store concepts.
- Reduced Dependence on Other Categories: Foodservice can reduce reliance on traditional merchandise categories such as alcohol, tobacco and gasoline. Consumers attracted by foodservice may also make other purchases, thereby increasing overall sales.
- Image Enhancement: A well-run foodservice operation enhances an store’s overall image and market position.
- QSR Brand Equity: Co-branding alliances with strong national QSR chains can enhance the c-store’s marketing positioning by transferring the QSR’s brand equity.
This has proved to be especiallyeffective in travel centers andhighly competitive markets.
“Brand recognition and a proven product offering have made a big impact for us,” said Joe Cotton, director of restaurant services Love’s Travel Stops and Country Stores, a 198-store chain based in Oklahoma City, whose co-branded partners include Chester’s Chicken, Subway, Taco Bell and Carl’s
Jr. “In our business, we are competing for truckers and families driving cross-country. A multiple, national brand strategy has proven to be extremely successful.”
Plus, companies like Chester’s help design and implement interstate billboards and signage to drive volume to the travel center. “It’s a much needed boost that we could only get from a strong foodservice partner,” Cotton said.
• Brand Experience: The management tools and techniques developed in the highly competitive, labor-sensitive foodservice industry can be useful to convenience store operators, who often also have to deal with space constraints.
Paul Dirnberger, president of the 26store Rhodes 101 chain in Cape Girardeau, Mo., said he was looking for a brandedconcept that wouldn’t take up too much space in his stores and had strong brand recognition to drive new business. He found it in Hot Stuff Food’s Food Xpress.
“One of the most attractive aspects of the Xpress program is its diversity,” Dirnberger said. “It allows us to offer multiple products at varying price points for all three dayparts that are affordable for customers to eat every day and offer portability for consumers on-the-go.”
Products range from stuffed biscuits, breakfast taquitos and baked goods in the morning to pizza, egg rolls and chicken wings for lunch and dinner. The menu, with prices as low as $1.29, helps Rhodes maintain a consistent customer count.
“I don’t think you can overlook the negative impact high gas prices have had on this industry,” Dirnberger said. “With a quality-driven foodservice program, we have been able to maintain our customer count and even attract new business from price-conscious customers looking for foodservice value.”
While the upside of a successful foodprogram is high, the risk is great. Commonpitfalls include:
•Lack of Managerial Experience: Most frontline employees and managershave little or no significant foodserviceexperience, and some stores have foundit difficult to attract qualified foodservicemanagers. QSRs are complex and may puttoo big a workload on a c-store manager.
• ManagementIntensive : Foodservice requires constant management attention, often on a minute-to-minutebasis. This is a shift in managerial philosophy and very different from the way mostc-store managers traditionally operate.
• Labor Requirements: Foodservicerequires more labor than the typical convenience store, which means recruiting,training and employee retention are highlyimportant. Many stores have had tremendous difficulty adapting to foodservice’slabor management philosophies.
• Foodservice Safety Concerns: Following proper food safety procedures iscritical. Foodservice safety and sanitationrequire continuous managerial attention.The consequences of a system breakdownin which consumers become sick are sosevere they can threaten the very existenceof the company. In addition, foodserviceproducts are extremely perishable, farmore than most typical convenience storeproducts.
• Capital Requirements: Developinga proprietary foodservice programrequires large amounts of capital that maybe needed in other company areas. Thedevelopment of a single unit of a majorbrand can be a million dollar investmentdecision.
% of Sales
Category GM %
Food Prepared Onsite
Hot Dispensed Beverages
Cold Dispensed Beverages
Commissary/Other Packaged Products
Frozen Dispensed Beverages
Source: 2007 NACS State of the Industry Survey powered by CSX
Top 10 In-Store Categories
* (foodservice in stores that sell beer)
Packaged Sweet Snacks
Source: 2007 NACS State of the Industry Survey powered by CSX