The near-term future of beer sales in convenience stores involves flavor, value and craft products geared toward specific age groups.
By Howard Riell, Associate Editor.
The good news about beer for c-stores is that consumers absolutely love it. The bad news is that consumers love lots of different types of beer—and there are more places than ever before that they can go to get it.
Some Americans hit hard by the recession are drinking less, but willing to pay more for microbrews and imports. Others are opting for cheaper brands. Still more are selecting single beers instead of packs and eyeing craft beers, which many view as the next big thing in the category.
Navigating a growing number of consumer trends while fending off traffic from new competitors like dollar stores and drug stores is making the beer category much more challenging.
According to NACS, nearly 80% of convenience stores sell beer. In fact, the association noted, the U.S. convenience store industry sells more than two billion gallons of beer a year—roughly one-third of all the beer purchased in the U.S.
Recent research by Chicago-based Technomic Inc. shows that beer is still the largest segment of the U.S. adult beverage industry, accounting for slightly more than 82% of total alcohol volume. At the same time, however, beer has battled poor economic conditions, which contributed to a 1.3% decline in 2011 sales.
“The beer consumer is really at the heart of the trends shaping the beer market,” said Donna Hood Crecca, senior director of adult beverage resource group at Technomic. “The core consumers for the major domestic brands were among those most impacted by the recession, so their spending habits changed. At the same time, taste preferences evolved, especially among younger consumers, and we saw beer drinkers increasingly seeking different styles and more complex or varied flavor profiles. Both trends affected the powerhouse categories and brands, which resulted in the overall decline.”
For example, Technomic found, domestic light beer accounted for more than half of total beer volume, so its 2.6% volume decline contributed to the industry’s contraction. Regular domestic beer generated one-fifth of total volume; it declined 3.2%. These categories are populated by large-volume but mature brands.
The ice beer and malt liquor categories also contracted. Gains were made by imported and craft beer. Imported beer expanded in 2011 to reach 385 million cases, outperforming domestic beer. Mexican beers dominated and grew, finding favor with both mainstream and Hispanic consumers. Craft beer grew 11.2% in volume to account for 5.5% of total beer volume; the category benefited from consumer interest in artisan and local products featuring unique styles and flavor profiles.
“The beer category has become very fractured,” said Tim Cote, vice president of marketing for Plaid Pantries Inc., operator of 103 stores in Beaverton, Ore. “In order to meet consumer demand the day of building a power set and carrying one brand in five or six different package formats is dead. These things must be sacrificed in favor of increased SKU count, flavor assortment and brand assortment. Full calorie and light beers have been replaced with things like IPAs, pale ales, hefeweizens, seasonals, white beers and stouts.”
International Bitterness Unit (IBU), which is used to gage the bitterness of beers, and Alcohol by volume (ABV) are now as important—or more important—as an advertising campaign, according to Cote. Customer tastes are changing rapidly. “Some SKUs may have a life cycle of less than a year,” he said. “Stores need to be revising assortment on a much more frequent basis than in the past.”
All of these options are driving customers in different directions when it comes to the beer cave. “People are either opting for value brands when cash is a little tighter or when image is less important and choosing the higher end brews when the cash is there or when image is more important,” Cote said. “It has been tough to be in the middle as the customers are changing their buying patterns more than ever.”
What explains this trend? According to Cote, the trend seems to be based on what the brand delivers to customers. “Low-end strongly delivers value. High-end, especially craft, delivers quality, more taste and other value-added benefits. The middle seems to not be delivering much of either, and thereby lacks purpose,” he said.
While Plaid Pantry stores are seeing growth in single-serve beer, it appears more closely related to an effort management is making on how the chain positions its cooler, and less about a consumer trend.
In the markets in which Plaid Pantry competes, Cote added, craft beer is not simply a trend. “It is the dominate part of the cooler, commanding a higher share than premiums, low-end or imports. This dominance is growing every month so we are positioning our offering to ride the wave.”
Dollars and Sense
The entrance by dollar store chains and drug stores into beer retailing means competition is up and margins are coming down.
In Arkansas, for instance, approximately 50 Dollar General stores have garnered beer permits from the state’s Alcoholic Beverage Control Division. The chain had applied for 64 permits and had 14 denied based on written protests by residents, churches, police officials and legislators. So-called ‘sin’ items like cigarettes, wine and beer are known to be great traffic drivers, said Michael Keara, an equity analyst for investment firm Morningstar.
Amer Hawatmeh, president of St. George Oil in St. Louis, operator of six Coast to Coast convenience stores, said the plan with beer depends on the neighborhood, for obvious reasons.
“Even in select urban neighborhoods, I am seeing that the more middle class it is, the more the craft beer demand is rising. That category is growing tremendously.” Powerhouse Budweiser and other domestics, he added, are losing ground. “While the Budweiser family of brands is still anchoring the cooler, I think its share is shrinking in the category because the price points are almost as high as the imports the craft beers.”
The entrance of dollar stores into the equation means—there is no nice way to say it—an abundance of concern. But it also means that convenience store operators need to be quick on their feet to avoid the collision and stay one step ahead of the competition.
One way to handle the competition, said Hawatmeh, is not to compete directly. “I’ve got one store going head-to-head with a dollar store. We didn’t wait to see their strategy. We focused on putting our best foot forward.”
What he did was sidestep the competition, going from three doors of imports and crafts to five. “In this one particular store I used to do about 500 Budweiser 12-packs a week,” Hawatmeh said. “I’m not going to carry and handle all that inventory to lose money. I’ve got enough loss leaders.”
With this powerful new competition taking hold, Hawatmeh is doing the only thing he believes he can do to keep the upper hand. “I just go the other way. I am known on one of my streets for being the import and craft place to go,” he said. “And for right now that gives me a competitive edge. I have to run with that as long as I can to sustain profitability.”