Retail Outlook: Cautiously Optimistic

Balvor survey highlights the foodservice concerns, focus and sentiments held by convenience store operators heading into 2011.

By David Bishop, Contributing Editor.

Cautious because a number of external factors, ranging from continued high unemployment, constrained consumer spending, and weak construction and housing markets are creating especially stiff headwinds for their core shopper base.

Optimistic as over the last couple of years convenience retailers have demonstrated an ability to thrive when other retailers have struggled, leading some to describe convenience retail as being recession resistant.

To better understand what 2011 may have in store for the convenience retail industry as it relates to the in-store business, Balvor with the assistance of Convenience Store Decisions conducted on online survey with retailers. A total of 113 convenience retailers shared their views in November 2010 on a variety of topics, including competitive threats, likely business activities, and outlook for the coming year.

Competitive Threats
Fuel discounts top the list of concerns that retailers have about competitive threat in 2011—whether it’s other convenience stores offering their own discounts or partnerships with grocery chains in the market. This is understandable given the critical role that fuel plays at driving site traffic and sensitivity that consumers have relative to fuel pricing.

Increased competition for the morning foodservice business is not far behind with over 60% expressing concern about this growing threat. Larger store operators are more concerned possibly given their broader market coverage and likelihood that they’re located in closer proximity to these competitors.

Business Activities
What activities are convenience retailers most likely to focus resources on in 2011? Out of 20 areas that cross foodservice and merchandise, here are the top five we’re likely to see the most activity across the industry this year:

• Coffee. Increasing commodity costs are creating pressure to raise prices while fierce competition is forcing a thoughtful response so as to protect volume. So, it’s not surprising that while 52% of the retailers indicate that they’ll likely raise retails in 2011 only a quarter of these are extremely certain prices will go up. Other retailers may not be considering an increase—11% according to the survey—already executed price increases during 2010.

• New Categories. Finding new items that are a good fit for the store as long been a goal of many retailers. While these products may not satisfy the industry’s definition of a category, they create new usage occasions and attract more consumers, leading to stronger foot traffic. Although this strategy involves additional risk the reward is motivating 45% of the retailers to possibly test and/or implement new segments not previously available in their stores in 2010.

• Multi-Vendor Displays. Convenience store retailers continue focus on improving space productivities and cleaning up the store by consolidating manufacturer product lines in one display to better serve the hurried shopper. Growing awareness of the benefits of such programs—whether in refrigerated fresh foods, candy or snacks—is leading 45% of the retailers surveyed to likely install in 2011.

• Roller Grill. Food prepared onsite is the largest category in foodservice and the roller grill plays an integral role in this area. As such, 41% of the retailers are likely to evaluate adding new items that extend the utility of the grill across the various day-parts as well as appeal to more shoppers in the store.

• Coffee Equipment. Starting in 2010, many leading chains had upgraded their delivery systems and Balvor found that 16% of the retailers surveyed may have already done so as well. Given the importance of this category to the morning daypart, another 40% of the retailers are likely to make the investment upgrades in 2011.

What are top performers—based on reported year-to-date sales growth in 2010—going to focus on in 2011 across these areas? They’re 34% more likely to upgrade the coffee equipment and 19% more likely to install multi-vendor displays in the store. However, they are 18 percent less likely to raise their prices on hot coffee this year.

Business Sentiment
The strength and resiliency of convenience retailers is evident in their outlook for their business in 2011 even though the same can’t be said for the broader economy. For instance, although only 28% of the retailers are optimistic about the U.S. economy in the coming 12 months, 72% share a positive view for the convenience industry and even more—84%—are optimistic about their own prospects.

Some convenience retailers don’t share this positive sentiment. Interestingly, nearly all of the retailers that are pessimistic about their company’s prospects in 2011 also indicate that year-to-date sales trends in 2010 were down versus the previous year. What’s also intriguing is that all of these retailers are single-store operators, underscoring the challenges of surviving in this industry with just one location.

Now, comparing the current results to those captured in January 2010—the last time Balvor surveyed retailers on these indicators—shows that retailer sentiment is moving in different directions depending on the level of the question.

Optimism for the overall economy is down 3 percentage points; whereas, it’s up six points relative to the retailer’s own prospects. Also, the degree of optimism is much stronger for the retailer’s business today as 44% of the retailers are extremely optimistic versus just 25% approximately a year ago.

Sales Forecast
Continued growth is expected in 2011 with more than 90% of the retailers anticipating stronger in-store dollar sales versus the prior year in both the foodservice and merchandise businesses.

Most retailers also believe that foodservice will grow at a faster rate than merchandise this year. This view may be in part be due to an increased level of investment in foodservice as well as the absence of any major, planned events—like the federal excise tax increase that occurred in 2009 with tobacco—that would potentially accelerate top-line dollar sales.

In terms of the forecast range, foodservice is expected to increase between 2.6% and 5.9% while merchandise is anticipated to grow between 2% and 5% in 2011. It’s clear that larger retailers believe that they’ll enjoy even more robust growth this year as compared to smaller companies.

Lessons Learned
Convenience retailers are well aware of the threats that their traditional business models face. Many are making the necessary investments to enhance customer services, expand product offering, and engage consumers in more relevant ways that will improve their competitive position in 2011.

These findings reveal that more convenience retailers are becoming pessimistic about the broader economy while at the same time recognizing that they can take advantage of many opportunities that are created during challenging times.

The outlook is promising especially considering the state of the economy. And, it appears that retailers who have successfully grown during the recession to-date are well prepared to win even more market share in the coming year.

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