TROUBLING TRENDS

FOR C-STORES?

MORE TESTS OF OUR INDUSTRY'S RESILIENCE

It's likely that 1996 will show strong profits for the third consecutive year when NACS publishes its State of the Industry Report this May. So, why do so many c-store marketers seem nervous? We might discover the solutions to their concerns-- and maybe even a few profit opportunities-- by reviewing our industry's history in the light of more recent trends certain to impact its future. This is an exercise I go through continually with my supplier and retailer clients and, at the encouragement of CSP, I welcomed the opportunity to share a variety of perspectives with you in this and future follow-up articles.

The current environment. The elections are now over and we can take some comfort in the fact that the combination of a Republican Congress and a Democratic President ensures some controls on government spending. The minimum wage increase is now reality, increasing labor costs at a time when retailers are already struggling to find qualified help.

We're ending 1996 having witnessed what I believe is the start of another wave of industry merger activity. This time, major oil is the pursuer, motivated by a need to protect outlets for their fuel. As a result, dramatic changes in distribution are inevitable, with a few manufacturers focused on increasing consumer consumption with what some industry analysts perceive as a total disregard for traditional delivery channels.

At the same time, one large wholesaler filed Chapter 11 last month, with an epitaph that could probably have read "too dependent on tobacco and inept at strategic planning."

Branding up, pricing down! The dynamics of gasoline marketing, naturally, weigh heavily on our minds. Concerns about supply just induced a 70-year-old independent petroleum marketer to "brand up" to a major oil company flag in most of its 60 locations, in an attempt to assure its ability to get product down the line. At NACS' Annual Meeting in October, other marketers were espousing the need to sell branded product out of fear about fewer suppliers and, therefore, fewer buying options. What will this do to gas margins? And how aggressively will "the majors" pursue gasoline market share at their own stations, once the refinery EPA capital requirements are behind them? These are mega-questions.

Another is 'How will tobacco-only outlets impact the c-store business?'. In the July 1996 issue of CSP Magazine, Paul Reuter and Jim Hood exposed many of the hidden, "don't ask" elements of that relatively new challenge, and the ensuing dialogue took on the necessary dimensions. Five months later, the problem hasn't gone away and I suggest that it won't! As I embark on my 20th year in this fantastic industry, I can't recall any trend which has had or will have such a dramatic and permanent impact on the way we market our stores.

In this article, we'll be probing the issue of cigarettes' future profitability for c-stores, and we'll begin by looking at the industry "big picture."

A two-decade view. Through my work with a major fast food client, I've been paying close attention to the trends that have been impacting the c-store business over the past three years. As you know, foodservice became the second largest c-store merchandise category in 1995, usurping beer's previously unchallenged dominance of that slot. And most retailers are betting that growth in foodservice will continue, primarily because it attacts new traffic to their locations.

In the chart on page 40 we see that, in two decades, customer counts grew only 45% (line 6), but our capital investment rocketed 410% (line 9)-- from $225,000 to $1.1 million. The average sale per customer increased 120% (line 5), but inflation triggered most of that rise. Labor dollars spent per store climbed 385% (line 10) and, partly as a result, profits per store went up only a paltry $20,000 (line 11). Much of this increase in profit can probably be attributed to disproportionately favorable gas margins. In fact, 1995's 13.4-cents-per-gallon profit margin on gasoline was an industry record.

The bottom line is that retailers are in the fight of their lives to get more traffic into their stores and there's no limit to their resourcefulness in achieving that goal. For example, not too long ago we became the number-one distribution channel for lottery tickets, and c-stores are now second only to the post office in sales of money orders. But one of our biggest accomplishments has been proving to the fast feeders, who want to be where customers are, that c-stores are an economical, "non-traditional" location that can yield the cost benefits of a shared-use facility.

In still other efforts to lure traffic, many operators have begun providing financial services--adding ATMs, installing check cashing services and even opening banks in their stores. The largest c-store chain plans to add color copiers to its 6,900 locations, obviously hoping to kick Kinko's a little. (Kinda makes you wonder if Kinko's will add Slurpees to their product line!) All of these imaginative ideas are designed to draw new foot traffic intoc-stores, but the cigarette pricing of many retailers may, in fact, be driving existing customers out of their stores.

Cigarettes' dominance. Our industry is fighting two battles on the tobacco front and both deserve constant Executive Committee attention in 1997.

First, if the proposed Food and Drug Adminstration regulations-- a ban on self-service displays and limitations on exterior signage and interior advertising-- are implemented next August 28, our ability to market cigarettes effectively will be seriously hampered.

Second, if we don't aggressively protect our number-one in-store category, we're likely to forfeit our share of the tobacco market to the burgeoning "category killer"-- tobacco outlets. In fact, it's happening already: In just one year, this segment doubled its share of the total cigarettes market to 12%. And the stage is set for it to double their share again in the next two years. C-stores are bound to sustain the largest loss of market share unless we earn the right to retain this business.

With that in mind, I'd like to encourage every reader to take "cigarettes-dependency pulse" on his or her company using the fax-back form on page 42, courtesy of this Meyer (hold the Mayo) clinician. Many of you are already quite familiar with your own tobacco numbers, but this one-time exercise can help you measure your cigarettes profile against that of the industry.

Look again at the chart below, our industry's history shows that during the last 20 years, cigarettes have (a) grown from 15% to 25% of our total merchandise mix (line 2a) because we've taken market share from supermarkets and drug stores; (b) maintained an overall margin percentage that's been somewhat constant at 25% (line 4a); and (c) increased in gross profit dollars by almost $40,000 (line 4b) in two decades, almost twice the increase in pre-tax profits (line 11). Do you agree that cigarettes are important to our overall profitability?

Marketers like Sheetz, Plaid Pantries, Minit Mart and others do: They've instituted proactive programs to protect and enhance their gross profit dollars from this category. These companies closely monitor their customer traffic because they know they can't afford to forfeit a single customer to another retailer (because they'll also lose gas and peripheral merchandise sales).

I can't say for sure, but these aggressive c-store chains are probably the kind that never close a store during remodeling, for fear that regular customers could permanently change their buying habits.

Cigarettes marketing ideas. After discussing this dilemma recently with about a dozen retailers (courtesy of an education-minded wholesaler), it's clear to me that we'd all be smarter about managing the tobacco category if we could learn more about how other retailers deal with the issue. But this isn't a category (like foodservice) where a "wait and see" attitude costs only less incremental profit. This issue-- the tobacco issue-- requires a heightened sense of urgency (on par, perhaps, with responding to your competitors' gas price changes!)

There are a few marketing policies that seem to have worked well for some savvy retailers whom I respect, so I'm presenting those for your evaluation:

CO-EXISTENCE

Don't drive customers away from your store by favoring the cigarettes displays of one manufacturer over another. Think of the recent Presidential election, in which the majority of citizens didn't vote for the Bill Clinton. Can you afford to offend the majority?

MONITOR TRAFFIC COUNTS

If you're late in taking an aggressive stance on your cigarette pricing, take a long and hard look at the impact of a competitor (c-store or tobacco outlet) who's made a major dent in your customer count. Look beyond your cigarettes sales and do a "before and after" trend analysis of gallons sold and non-tobacco sales. Interpret what your customers are trying to tell you!

RESEARCH, RESEARCH, RESEARCH -

Cull marketing strategy ideas from tobacco manufacturers, wholesalers, non-competing industry peers and the trade press. And look to NACS for leadership on tobacco regulatory issues.

Our industry faces many challenges going forward, and we'll all benefit by aligning with other smart retailers and caring supplier partners.


C-STORES INDUSTRY : A TWO-DECADES VIEW

# STATISTIC 1975 1995 % CHNG
1 Number of c-stores in industry 33,900 93,200 175%
2 Total industry merchandise sales $8.1 billion $69.7 billion 760%
2a Cigarettes % of total merchandise purchases 15.3% 25.3% 65%
2b Total industry cigarette sales $1.2 billion $17.6 billion 1,370%
3 Average yearly merchandise sales - per store $239,000 $748,000 215%
3a Average yearly cigarettes sales - per store (line3 X 2a) $36,600 $189,200 420%
4 Merchandise gross profit % of merchandise sales 29.6% 30.4% 2.7%
4a Cigarettes "going in" gross profit % (excludes RDA allowances) 24% est 25% 4.2%
4b Cigarettes gross prit dollars - per store (line 3a X 4a) $8800 $47,300 440%
5 Average merchandise sales per customer $1.23 $2.69 120%
6 Average merchanise customer count per store per day 532 764 45%
7 Average merchandise sales per week/square foot $1.92 $6.02 215%
8 Average gallos of gas sold per store/year 250,000 972,000 290%
9 Investment per new urban store 1978>> $225,000 $1,150,500 410%
10 Labor dollars per store/year $26,149 $126,731 386%
11 Pre-tax profit per store per year 1980>> $14,400 $34,000 135%

Article orginally appeared in Convenience Store People, vol 7 no.11, November/December, 1996