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Private label is an opportunity area for convenience stores that are willing to make a commitment to executing the right strategy.
It’s no secret that oil prices are on the rise. And those rising prices are forcing consumers to cut back on purchases at convenience stores. To help drive fuelers into the store, convenience stores have been ramping up their foodservice efforts, a method that’s been paying off.
Industry consultants Technomic, found that average unit volumes for c-stores offering prepared food and dispensed beverages (“true foodservice”) jumped to more than $136,000 in 2011, up from $123,000 in 2007. The better-than-10-percent growth rates were based on roughly the same number of stores offering foodservice, indicating that operators are becoming better at foodservice expansion and execution.
Overall, c-store foodservice grew to $11.5 billion in 2011 (from $10.2 billion in 2007), based largely on the expansion of foodservice items, additional stores adding foodservice and more foodservice experience, according to the Outlook and Opportunities in Convenience Store Foodservice report. The number of stores with dedicated foodservice personnel nearly doubled over the same four-year period, from 17 to 33 percent, reflecting operators’ commitment towards developing successful foodservice programs.
“Convenience store foodservice has made tremendous inroads in terms of experience, consumer choices and execution,” says Tim Powell, director of c-store programs at Technomic. “We expect several key trends, such as snacking and demand for various beverages and breakfast to be pivotal components of future growth.”
Powell says that Technomic expects annual c-store foodservice growth to reach 3.4 percent nominally through 2014, compared to 2.8 percent over the past four years. This exceeds expected growth for the entire foodservice industry, which is forecast at a nominal 2.5 percent annually through 2014.
Something like foodservice as a way to drive traffic apart from the gasoline purchase occasion is a very attractive strategy for convenience retailers, according to David Portalatin, executive director, industry analyst, at The NPD Group. “Especially if that foodservice offering offers a value proposition that is relevant to those consumers who are being squeezed in their wallets. We see retailers in the convenience store space who are executing a foodservice strategy that delivers quality and value as winning in the marketplace. By and large, those are foodservice operations that are private branded, as opposed to being partnered with an established chain or franchise. We see a lot of success in convenience retailers who are doing their own proprietary foodservice.”
And while many in the c-store channel are trying to elevate their foodservice and fresh offerings, it is not easy to do, says Paul Weitzel, managing partner with Barrington, Ill.-based consulting firm Willard Bishop. “It requires a great deal of commitment and it can be a challenge to make money in foodservice,” he says. “With that said, it is a point of differentiation and a key way for a store/chain to create loyalty. I think retailers such as Sheetz are definitely committed to foodservice and fresh and it’s the cornerstone of their overall value equation."
PL Opportunity Knocks
Private label is definitely an opportunity area for c-store operators that have the critical mass and the capital to invest in those offerings, according to Benjamin Brownlow, an analyst with Memphis-based Morgan Keegan. “They are higher gross margin, they bring more gross profit dollars into the bottom line and they increase customer loyalty.”
The c-store industry basically has expanded their dollar sales from essentially 1-2 percent five years ago, up to 5 percent, explains Brownlow. “So there has been a significant growth in private label dollar sales within the industry. But, relative to other industries: supermarkets are north of 20 percent in dollar sales with private label, drug stores are in the high teens, a huge opportunity remains.”
There are three obvious reasons that you’d look at private label as a convenience store, says Jeff Lenard, vice president, communications, for the National Association of Convenience Stores (NACS).
“First, you might be able to offer it at a price that’s very competitive,” he says. “Secondly, if it’s a quality that’s superior to anything on the market, consumers will have to go to your store, instead of any other store for that product. And finally you tend to put a little pressure on those that are already your supplier to compete on price.”
While private label presents a significant opportunity for c-stores, operators need to figure out the categories that make the most sense to get into, analysts agree.
“To the degree that private label is fresh food, prepared food, maybe even traditional private label categories like dairy, bakery and those areas, I think that makes plenty of sense for them,” says Ben Ball, senior vice president for Deerfield, Ill.-base Dechert Hampe. “Do they need a private label breakfast cereal or a private label tuna fish? No, they don’t”
Agrees Willard Bishop’s Weitzel, “In some categories I think private label makes sense. Private brand quality continues to increase. But, many consumers walk into a c-store looking for the brands they trust and if the retailer doesn’t provide those trusted brands, consumers won’t leave with a positive experience. Building loyalty is more important than ever, even in the c-store channel.”
Leaders of the Pack
When it comes to private label and c-stores, there are some retailers that stand out in the crowd.
The most well-known both locally and globally is probably going to be 7-Eleven, says Brownlow. “Some others that have had the capital to invest and successfully expand their private label offerings include Delek, which has the Mapco stores in the southeast. They’ve done a superb job the past five years with introducing private label items from salty snacks to teas and from energy drinks to juices. Another operator that has had long-standing success and is much more foodservice oriented would be the Susser company that has the Stripes branded c-stores in Texas and the surrounding region. Another big operator I would say would be Casey’s, which is in the Midwest. They are extremely well-known for their Casey’s pizza. It is a top 10 retailer of pizza and doughnuts in the nation."
Kwik Trip in La Crosse, Wis. is similar to Casey’s, says David Bishop, managing partner, Balvor, LLC. “That is they are extremely superb at executing, they deliver consistent value and they’re very strong and growing in their marketplaces.”
Salt Lake City, Utah-based Maverik has a fair amount of proprietary products and an amazing marketing push, says Lenard. “Their tagline is Adventure’s First Stop and everything in their stores is centered around adventure. They have signage in the store, displays of kayakers, a waterfall that’s a soda fountain painted on the wall. At a recent meeting, the team from Maverik showed us these videos that their guerilla marketing team put together to promote some various products. One of them that got everybody’s attention was film of a guy white water rafting with his raft made up of a bunch of private label potato chips lashed together. I thought that was a very clever way for them to get their brand out there.”
Quincy, Mass.-based Tedeschi Food Shops is another retailer that frequently comes up.
In 2011, the retailer expanded its Select private label line by adding new salty snacks, including cheese puffs, crunchy cheese sticks, snack mix, potato chips, ripple chips and kettle chips. Tedeschi’s private label program began with two-liter carbonated beverages.
In addition to dealing with rising gas prices, c-stores are also dealing with competition from other channels.
Lenard referred to a 2009 report that was published in the American Journal of Public Health that said the “sale of high-calorie snack foods has moved far beyond grocery stores to hit most segments of the retail market. Snack foods were found in nearly all pharmacies (96 percent), most gas stations (94 percent), more than a fifth (22 percent) of furniture stores, 16 percent of clothing stores and 29 to 65 percent of other non-food stores.”
“C-stores are competing with anyone that is a convenient retailer and that is to say, everyone,” says Lenard. In the years since that study, the trend has just accelerated and everyone wants to be on that convenient corner, too, so it’s just accelerated everything.”
Dollar and drug stores have always been a threat to the c-store industry, but the industry in general has been expanding into a number of new categories such as foodservice to help combat that, adds Brownlow. “Convenience is always a key advantage for the industry and something that dollar and drug stores have relative to the mass channel, but the convenience stores are always that, the convenient stores.”
Agrees Ball, “You’ve got dollar stores starting to pull in their own private label and obviously the drug stores are huge on private label, plus throw in small-format grocery stores that are all gunning at the area of business that c-stores have traditionally wanted to play in and that is the quick trip customer. C-stores have got to be feeling like everybody and their brother is breathing down their neck for their customer, and they are.”
The key for c-stores to wow customers is to provide them with more quality offerings with price points that are below major brands, across a variety of categories such as beverages, snacks, even milk, says Brownlow. “There needs to be an emphasis on the quality and not just the price. Quality is important to everything, from presentation to packaging, even innovation with new tastes, etc. As long as the value proposition is there with price versus quality; that really is what wows the customer. The industry, traditionally has not been well-known for private label quality offerings. So it doesn’t take a lot for some of these locations to wow the customer."
A possible future opportunity for c-stores is so-called localization, says Ball. “In addition to having a clean, bright, upscale environment for everybody, they could tailor their offerings to their neighborhood so they become the neighborhood c-store the way that Walgreens is trying to do for drug stores or in other markets the way Dollar General is trying to do with its DG Markets,” he says. “There are people doing this in one form or another and it seems to me like the c-stores that are really getting the wow factor right now, they’re not doing Snickers, Ho-Ho’s and hot dogs better than they did before. What they’re doing is they are putting some offerings in there that appeal to the people who primarily have just stopped for gas in the past and those are the same type of shoppers that are being attracted by the Walgreens next door. The retailers that are doing a good job with it, have been for a while, by picking their markets and their locations that appeal to this approach.”
With prices at the pump not expected to go down anytime soon, it will be important for c-stores to focus on offering higher quality foodservice, better prices, better daypart strategies and winning destination trips such as beer.