Convenience stores make excellent investments, IF you choose a good location.
They are immune to online marketing, they provide the consumer with instant gratification, and the average driver makes themselves available almost daily, because every driver needs gas and passes by the same convenience stores frequently. Sound interesting?
Well not so fast. You can lose big if you don’t have absolute control over your costs.
It sounds so easy. Identify a high traffic area with excellent ingress and egress, build a store (or buy or lease one), fill it to the brim with tasty goodies and drinks, and then sit back and watch the cash flow in.
Well think again. Lots of feet dancing on your sales floor doesn’t always equate to success. In fact, there are empty convenience stores all over America that started with the same enthusiasm and had the same idea.
Dollar-type stores have the market on cheap prices, but I have heard over 50% of dollar-type store customers don’t have access to automobiles. That’s their market, and they are welcome to it, and who walks through a Walmart parking lot to buy a Coke and a bag if chips? Convenience stores have a unique market, and that gives them an advantage over ever other type of retailer in your neighborhood.
In 2000, 70% of all the convenience stores were owned by companies that had 500+ stores, and the other 30% were owned by smaller chains, all the way down to single store owner Mom & Pops. Over the next 15 years, the ratio had flipped, with 65% now owned by Mom & Pops, and all but the largest chains in the other 30% have evaporated. Why? Because, once you open your eighth store, you can easily lose control, and you’ll have to completely change the way you operate your business just to stay alive. More stores does not necessarily equate to more profits. An operator with 10 stores and one with five stores cannot operate in the same way.
After 40 years of working with customers owning thousands of convenience stores, when I read that the average profit made in the convenience store business is around 2.1% of sales, I keep shaking my head in disbelief. 2.1% is only better if you compare it to keeping your money in a savings account drawing a measly 0.1% interest.
Today’s convenience stores continue to be faced with gradually increasing costs, and steadily declining margins; yet, owners continue to invest in twice the inventory they need to meet customer service level, manned by a virtual army of apathetic, transient employees receiving little of no cooperation from their headquarters or from their suppliers.
It didn’t take me long to understand that the only purpose of most retailers is to serve as a conduit to move manufacturers’ inventories into the hands of consumers. What I am seeing today is hundreds (if not thousands) of suppliers, owning huge warehouses filled with too much stock, shoveling inventory into retailers’ stores like nobody’s business. Suppliers are unintentionally killing their retailers by turning retailers’ stores into auxiliary warehouses.
Convenience stores have become constipated, and the first thing they need is a good dose of castor oil to get things moving again. Everything that goes in doesn’t necessarily come out, and this is a real problem.
Convenience stores suffer because their shelves are crammed full of products that don’t move, and suppliers are no better off, giving them no alternative than to get rid of merchandise through deals and promotions to store owners who have less and less places to cram it.
I swear, if you painted a door on the back wall of your cooler, a drink vendor would stand there until he freezes to death waiting to get in.
What used to be a convenience store problem, is now a supplier/convenience store problem, and most are in an adversarial relationship with each blaming the other for their problems. Consequently, retailers are jumping from one supplier to another more often than they change their underwear.
This all started back in the 1970s when first time convenience store owners went to grocery suppliers and asked them to stock their stores. Owners assumed their grocery suppliers would manage their inventory for them and put the right kinds of inventory into in their stores. Inventory that would result in sales and profit for both. As inventory moved out of their warehouses, suppliers ordered more. Supplier’s salespeople competed for trips to Maui, color TVs, junkets to Las Vegas and trophies.
We are up to our necks in pork skins. The salesman that moves the most this month gets a condo in Belize!
Suppliers didn’t know, well maybe they did, nor did they care, that retailers had no idea what their suppliers were putting in their stores, because inventory was simply dumped onto shelves using planograms.
A planogram is simply a diagram that shows how and where specific retail products should be placed on shelves. These ‘areas’ became known as ‘categories’.
Put the horse shoes over there by the saddles, will you?
“Category keys” on cash registers were punched by clerks when a sale was made—groceries, beer, cigarettes, forklifts—whatever. So, at the end of the day, month, or even year, the retailer could see his sales by ‘category’, but profits were a complete mystery, because the retailers never knew what they paid for the last item that went through the cash register.
Loosing track of items leads to all kinds of troubles… Who put Kibbles N’ Bits next to the rat poison anyway?
DEAD ITEMS
Our research tells us that 10-15% of the items in categories are dead. Not just dead. They are dead-dead. The chances of breathing life back into these losers is like waiting for angels to fly out of your nose. Yet, if you go into any convenience store in America, you likely find items that no one knows how they got there or where they came from.
As many as 1.5 of every 10 items on the shelves will not be sold for any price. Overall, if a retailer has $100,000 dollars-worth of inventory (at retail) in his/her stores, as much as $15,000 of that stock would be more profitable buried in a hole behind the store. Why? Because it’s contributing to the clutter, preventing more profitable items from occupying its space, and making an unsightly mess on shelves.
Once I told my customer he needed to get rid of the junk that wasn’t selling, because it just contributed to an unsightly mess. “What can I put there to fill up the hole,” he asked. I told him to put a box of rocks in that spot. Rocks don’t have an expiration date. There were 10 of whatever it was (I can’t remember), if he sold them for a penny a piece, his Income Statement would go up a dime.
Never lose sight of the fact that the convenience store business is a penny-nickel-dime business, and it takes a bunch of sales to make a dollar.
Example 1: Once I found three, rusty cans of octopus’s soup in the grocery category—covered with dirt. I asked the manager to give me ‘the story on that soup’. Miraculously, she remembered that three years ago a customer walked in the store and asked for a can of octopus’s soup. Her supplier had a limit on breaking a case, and that limit was a minimum of four items. The customer came back and got his one can of soup, but that’s the last she ever saw him. And that’s why the manager has three cans of octopus’s soup still rusting in her store.
Example 2: My favorite category is Automobile Accessories. Everything from fuses to log books. The majority of these items will sit there for years, and you can almost date them by the thickness of grime on the packaging.
Example 3: One day when I was auditing a store, I saw the manager open the doors underneath the cigarette counter and shove a box of something in there. Curious as I am, I opened the doors and found 25 cases of Orbit Wintergreen Chewing Gum. “Why are these here,” I asked. “The supplier keeps sending them, but I don’t have room for them on the sales floor,” she replied. In one store I found 1,100 days (that’s over three years ) of Laffy Taffy Grape Candy on the shelves. When I added up the extra inventory being stored in that store, it was enough money to take a cruise to the Caribbean.
I don’t care which department you pick, from ‘household goods’ to ‘cigarettes’. Every department in a convenience store has thousands of dollars-worth of garbage that you wouldn’t want even if it were free.
MARGINAL/NEGATIVE PROFIT ITEMS
If we stay with our $100,000 figure for the amount of inventory in a store where the profit potential is negative or marginal at best, 55-60%, (as much as $60,000) is either costing you money or its profit performance is ambiguous. Oftentimes, the cost of the item has increased, but the retail has not changed in a year or more. Stuff retailers bought that was making a reasonable profit in January, is selling at a loss in December.
Example: One day, I was buying gas at a well-known chain, and when I went in to pay, a young cashier had taken over the only booth in the store. There was a pile of Snicker candy bars that were as high as her neck. (She was up to her neck in Snickers). The scene was hilarious. She had price labels in her hair, price labels glued to the tables, price labels down the front of her smock, and price labels all over the floor. Amused, I asked the rhetorical question, “Are you raising prices?” She laughed—at least she had a good humor—and she told me it was an exercise that had to be done annually. It was a period in which some supplier prices had increased by 50%, and it didn’t take me long to come to the conclusion that more than likely, every sale they had made for the past three month, was for less than the product cost the store when they got it.
Five or six of every 10 items in a store, are not making enough profit to pay their rent.
PROFITABLE ITEMS
That leaves 30% of the stock ($30,000 at retail) to account for ALL of the profits in the average store. If you think about it, it makes perfect sense that after you deduct salaries and payroll taxes, maintenance, insurance, depreciation, and all of the hundreds of other little expenses that come out of the store’s profits, I wonder if a net profit percentage of 2.1% is even possible.
But, for how many dollars did it cost you to get that profitable stock?
In most cases the clerks have to count cigarettes every day, because cigarettes are considered “high risk”. That’s not true. Most cigarettes you are required to stock to meet your one-sided contracts are so unpopular even your clerks won’t steal them.
SOLVING THE PROBLEM
When you look at the current situation, you have to come to the conclusion that the complete lack of inventory control in convenience stores is responsible for most stores’ problems. If convenience store retailers would start paying attention to what items are selling, and stop worrying about how many customers run through their doors, every store has the potential of a 40% sales increase. Eliminating the dead items, fixing or removing the questionable items, and eliminating the over-stock of even the most profitable items, it should be easy to double the profits in every store with only a minimal increase in cost… mainly, a small investment in tools needed to allow retailers to track turns of individual items, manage pricing, and most important, stop the flow of unneeded stock coming into their stores. Then, doubling the profits should come automatically.
OTHER BENEFITS
Our studies show that removing the stock that’s not making you money will reduce you use of working capital by 60.3%. That means, if you have 10 stores having a total of $660,000 of inventory at cost, over a 90-day period, you can put $400,000 back into your pocket. In the same 90-day period, cleaning up your stores by eliminating junk that is not selling at a profit would result in an increase of 40% in sales and can add as much as $105,000 to your bottom line.
YOU DON’T HAVE TO DO THIS ALONE
You need to find a company that will help you integrate with your suppliers to solve these problems. If you don’t want to listen to me, go and find someone who will listen to you. This IS the 21st Century, and convenience stores need to move ahead like every other business. Only automation can turn these stores around. That is, if they want to be profitable.
Your supplier’s greatest fear is losing you as a customer. By creating seamless integration with your suppliers, both parties will benefit enormously. Talk to your suppliers about this. If you want, have them contact me and I will explain how it should be done.
This window of opportunity won’t last forever for you or your supplier. If we can change the way you manage your inventory you will always have in stock, no more inventory than what your customers will purchase in your store, increase your product lines, and reorganize your stores to give your customers a superior shopping experience. Your goal should be to order, and sell, no more that can be sold before the invoice becomes due. If you do that, you’ll never have use your hard earned cash to buy stock again.
Bill Scott is the author or two retail books, a c-store retailing consultant and speaker and the president at StoreReport LLC.