Thanks to an increasingly busy lifestyle, today’s c-store customers regard food prepared away from home as a necessity, and the industry’s top-quartile retailers have benefited handsomely from meeting the growing demand for fresh foods.
By David Bishop, Managing Partner, Balvor LLC
Convenience store retailers are battling even harder for their share of the retail foodservice pie. The stakes are high as operators grow ever more reliant on profitable growth driven by this area of the retail business.
Competition among operators for the food-away-from-home dollar is getting more challenging as consumers have a broader range of options as to where to satisfy their on-the-go needs.
The 2013 CSD/Balvor Foodservice Survey is the sixth annual assessment of how convenience store retailers are managing various aspects of the foodservice business today and provides extensive insights into what retailers expect from the category in the coming year. Data from this year’s survey is based directly on the survey responses from 119 convenience chains from all points of the country and representing collectively more than 19,000 stores.
According to participating retailers, total foodservice sales for 2012 averaged $24,765 a month per store.
From a company size perspective, small chains (less than five stores) appear to have their work cut out for them as their foodservice sales performance trails the average by 26%, driving monthly sales of $18,321 for their store. The lack of scale, fewer internal resources, and the inability to leverage digital and social platforms the same way as larger chains presents a variety of challenges that this operator segment needs to overcome in order to grow.
Larger retailers are performing much better, but which segment is doing the best depends on the unit of measure.
Chains operating 501 or more stores recorded the largest slice of the foodservice pie on an absolute basis due in large part to their larger store base. These chains averaged $29,874 in foodservice sales per store per month. On the other hand, retailers with between 201-500 stores are enjoying the largest slice on a relative basis as they generate $40,780 in monthly sales per store.
As large chains find success with food sales, the industry’s bottom-quartile retailers are fighting over the crumbs as their stores generate only $5,872 per month in sales from this important area of the store. At the opposite end, top-performing retailers are devouring the pie. These retailers are selling $54,834 a month in foodservice products per store, which is 2.2 times higher than the survey average.
The competitive advantage in foodservice understandably goes to the larger chains. The implication is that these companies can harness the tremendous value generated from this economic engine to fuel investments in future growth prospects as well as the strategic value created to strengthen its competitive position within the marketplace.
Convenience retailers anticipated that foodservice will grow at mid-single digits in 2013, averaging 5.5% versus last year.
Larger retailers appear positioned to grow market share as retailers with 51 or more stores are targeting sales growth of 7% as compared to a 4.8% forecast from retailers operating 50 or fewer stores (CHART 2).
Scale is a significant advantage as it affords the larger chains the opportunity to more efficiently reach a broader consumer base off-site using traditional media elements like billboard and radio advertising. Additionally, larger organizations are also much more likely to integrate social media platforms like Facebook, Twitter and Foursquare, as well as to leverage digital platforms like text messaging into its food marketing activities.
Driving the top-line growth rate are the two largest foodservice categories: food prepared onsite and hot dispensed beverages.
Retailers said they expect food prepared onsite to gain 5.8% in this upcoming year as many more companies are investing in this category in order to enhance and strengthen their overall offering. Hot dispensed beverage sales are still percolating as respondents forecasted the category to grow 5.1% year over year, which is key to building the morning drive-time period.
Hot Dispensed Beverages
Retailers realize that hot dispensed beverages are a “must-win” category as it’s the cornerstone of the foodservice program. Excelling at this category enables retailers to more effectively grow the food side of foodservice. As a result, average cups sold per store per day is a good barometer for the strength of a store’s base offering. According to the survey, retailers reported a daily average of 148 cups sold per store.
Top-performing coffee retailers are steaming forward with cup sales that are more than double the average; whereas, the bottom-performers’ cup is only one-fifth full compared to the average.
Although more convenience retailers are utilizing a proprietary branded coffee program, there are good reasons and advantages to other options that retailers need to consider as they manage this category. For instance, control brands generally offer a turnkey solution that helps a retailer establish an offering, which explains why it’s the most dominant approach for third and fourth quartile operators.
Manufacturer and franchise or licensed brands leverage more recognized and trusted consumer brands, which is why it’s the preferred approach for the second quartile looking to grow the base business. Proprietary brands help to create a unique offer that can become a destination leading more than half of the top-performing retailers to use this approach.
Beyond branding, cup sets help a retailer remain competitive on pricing while offering a range that satisfies the consumers’ preferences. Most convenience retailers (56%) are offering three cup sizes. The 12/16/20-ounce sizes are the most popular cup set configuration, used by approximately 34% while the 16/20/24 set is in use by another 13% of the retailers.
There continues to be a trend of introducing new blends or flavors as a way to appeal to a broader base of coffee drinkers. So, beyond the top-two offerings that include house blends and decaf, 66% of retailers are offering a dark roast and 52% are carrying a 100% Colombian brew. Whatever flavors are carried, retailers offer, on average, four choices. Top-performers, given the higher volume sold, carry over five options today; whereas, the bottom performers maintain a more limited selection of three.
Food Prepared Onsite
Although the focus and service model may differ, the prepared segment remains the backbone of the foodservice category for most operators.
In terms of availability, bakery, sandwiches/wraps, pizza and roller grill products are the four most common types of products found in convenience stores. These subcategories are available at 90%, 86%, 90% and 73% respectively of the operators participating in the survey.
As far as branding, 60% of the larger chains (51+ stores) prefer to use a proprietary brand for bakery items. The dominant approach for smaller operators (1 – 50 stores), however, is a manufacturer brand, which 42% of these companies use.
Reflecting either a strong pipeline of new products, a stronger consumer demand or a combination of the two, more retailers (44%) are planning to expand sandwich and wrap assortment in 2013. Closely behind is bakery where 39% of the retailers indicated they expect to increase SKU counts this year.
Roller grill rounds out the top three with 34% of respondents reporting that they are anticipating a broader product range this year. This subcategory also had the highest number of retailers (14%) reporting that they would buck the trend and reduce product range in 2013.
Commissary and Packaged Products
Consumers can find a wider array of fresher, better-for-you products in more convenience stores as compared to a just a few years ago. While yogurt cups have been in many stores for some time, the same cannot be said about fresh fruit.
Improved supply chain systems, driven by wholesaler investments have largely helped to improve product quality at retail of shorter-code products like fresh fruits and vegetables. Now, three-quarters of the c-store retailers polled offer bananas in some or all their stores and apples aren’t that far behind. Other items, like cut fruit and vegetables are available, although at fewer stores as retailers test and learn what consumers will actually buy from them.
Interestingly, chains with 51 or more stores are 1.7 times more likely to carry various types of fresh fruit and more than 2.2 times to offer cut fruit and vegetables in all their stores as compared to retailers with 50 or fewer stores. When analyzed based on total foodservice sales, top-quartile retailers are even more likely to stock in all stores by a factor of 1.8 and three times for fresh fruit and cut fruit and vegetables respectively.
When it comes to branding approaches, a lot depends on the subcategory. In sandwiches, proprietary branding is dominant with 53% of all the retailers following this approach. It’s even greater with larger retailers. For example, 64% of retailers with 200 or more stores reported that they currently operate a proprietary sandwich brand.
A similar trend occurs in salads and side dishes with 56% of the mid-sized retailers and 64% of larger retailers following this proprietary branding approach.
On the other hand, more retailers are inclined to leverage a manufacturer brand with thaw- and heat-and-eat products (57%), which includes items like burritos and pizza as well as with the meals ready-to-eat (41%) subcategory.
The CSD/Balvor Foodservice Survey revealed that foodservice favors the larger chains for a variety of reasons. That doesn’t imply that foodservice sales will spoil over time for smaller operators, but rather they have structural challenges to overcome in order to compete more effectively in the crowded and competitive space called retail foodservice.
The cost of failing to execute consistently can be costly very quickly. However, the risk of not investing to enhance and expand one’s program can be even greater over the longer term. Foodservice is reshaping convenience retail in ways that allow operators to select their path forward in terms of how they want to grow in relevance and profits.