By Debby Garbato
Canadian convenience stores are under siege as the proliferation of contraband tobacco, tobacco display bans, high taxes and retail competition assails traditional categories such as tobacco and grocery. While some large players have managed to replace lost sales with high-margin foodservice programs, many smaller chains have fallen by the wayside.
From 2008 to 2010, the total number of convenience stores in Canada declined from 25,502 to 22,882, according to the Canadian Convenience Stores Association (CCSA). Most lost locations belonged to independents, with small retailers currently comprising 55% of all Canadian c-stores, said Dave Bryans, CEO of the Ontario Convenience Stores Association.
R. David Gould, president of Newmarket, Ontario-based Bald Eagle Consulting Inc., shared that between 2010 and 2011, independents lost 8% of their sites while large c-store chains expanded by 2% to 3%. Because many small companies don€™t sell gas they relied on tobacco sales as their main profit center €" and tobacco has been hit hard. "We€™re talking about hundreds of millions of dollars in lost revenue. The big chains are holding up reasonably well," he said.
Contraband tobacco produced and sold by local Indian tribes has hurt Canada€™s c-store business the most. Annually, the c-store industry loses $2.6 billion to illegal tobacco, which is largely caused by "dark" tobacco at retail and high cigarette taxes that drive customers to cheaper products.
Some c-store retailers hope to recoup lost sales by selling beer and wine. "Stores have been struggling due to their reliance on tobacco and lottery and the lack of alcohol," said Bryans. "There€™s also no money left in petroleum at the pumps. It€™s become harder to have a point of differentiation."
Canada€™s small population makes it difficult for c-stores to differentiate with special assortments or private labels. According to the CIA€™s World Fact Book, Canada€™s population averages 3.4 people per square kilometer versus 31.3 in the United States. This causes suppliers to focus on top-selling SKUs.
The high margin foodservice business is not new to U.S. c-stores. Canadian chains, however, tend to be lagging about five years behind. Major players like Petro-Canada€™s Neighbours stores and Alimentation Couche-Tard are among those that have been developing large-scale proprietary concepts; most have had QSRs for some time.
"A number of c-stores are seeing more opportunity," said Gould. "They are delivering better offerings and choices. To have coffee and muffins in the morning is one thing. To be able to pick up dinner is huge."
But retailers are often having a hard time convincing Canadians that c-stores can be destinations for more than cigarettes, chips and fuel. And just a handful of chains are large enough to implement foodservice on a meaningful scale.
"C-stores are trying food, but it€™s not easy," said Andrew Docherty, director of convenience retailing at Suncor Energy, which operates a network of more than 1,500 retail and wholesale outlets across Canada. "Canadians are not accustomed to purchasing food products in retail fuel sites. We also don€™t have the same population base to draw from as in the United States."
Mike Roellinghoff, consultant and former president of discount chain The Bargain Shop, believes Canadians are also more conservative about spending than Americans, making them less likely to buy prepared food. "Convenience doesn€™t play quite the role it does in the U.S. because Canadians are more likely to count their pennies. They are more conscious of the future. And access to credit is more limited."
Despite the odds, Laval, Quebec-based Couche-Tard has been successful in foodservice. Canada€™s largest c-store chain and the country€™s second biggest retailer, $15.8 billion Couche-Tard operates more than 2,000 Canadian stores under the Couche-Tard and Mac€™s banners.
Couche-Tard€™s annual report notes that foodservice represented 18% of merchandise margins in 2011 and was its sixth largest category. At most locations, foodservice experienced double-digit growth, sometimes exceeding 20%.
Fresh food is marketed under proprietary brands like Fresh to Go Take Away CafÃ© and La Maisonnee. Proprietary beverages include Sunshine Joe Coffee, Sloche and Froster (iced drinks) and Thirst Buster. Foodservice also includes QSR brands such as A&W, Noble Roman€™s, Tuscano€™s Italian Style Subs, CafÃ© Depot, Urban Cravings, Une Patisserie pour Une and Seattle€™s Best.
Couche-Tard attributes its success to de-centralized management, low turnover and a 3,000-square-foot box that holds 4,000 square feet of merchandise. Food is prepared on site. The retailer maximizes space with elevated seating areas. Merchandise is displayed around the perimeters. A convertible food counter can be closed off, allowing stores to go from full- to self-serve. Outside of foodservice, product displays are hydraulically lowered from the roof, allowing them to be alternated. Couche-Tard also works with suppliers to develop short-term exclusives.
Jeff Doucette, principal of Alberta-based consulting firm Sales is Not Simple, credits Couche-Tard€™s success to what it learned from Circle K and its other U.S. stores. "They€™re bringing what€™s working to Canada and are transforming the market a bit."
Petro-Canada entered foodservice five years ago through its Neighbours convenience store concept. Features include touch screen ordering, drive-thrus and seating. Offers range from private-label coffee, home-baked cookies and breakfast items to made-to-order sandwiches, salads, grillers, wraps and burgers. Coffee items include lattes, cappuccinos, espressos and iced cappuccinos.
There are 19 Neighbours stores in the Greater Toronto Area and 45 in Ottawa, Ontario and Alberta; the smaller Alberta and Ottawa stores emphasize breakfast and coffee. Petro-Canada has been using its 20-year-old loyalty card program, Petro Points, to promote Neighbours, says Docherty. Petro Points also helps Suncor learn what customers want.
For smaller chains, foodservice is often harder to implement. The category is labor intensive, requires building a brand from scratch and some leases restrict what can be sold. Nevertheless, some smaller chains are experimenting with food and non-food concepts.
Entering the category two years ago, Big Bee today features foodservice in 10 of its 54 southern Ontario stores. Foodservice occupies about 400 of each store€™s 2,000 square feet, said Rami Reda, owner and director. Offerings include five dinner entrÃ©es at one location and fresh, pre-made sandwiches, salads and fruit cups at others. But Reda is looking at replacing these offerings with QSRs. "Branded foodservice is more turnkey. And brand recognition generates foot traffic."
Toronto-based Kitchen Food Fair implemented a coffee program six years ago to replace a faltering grocery business, but only in 15 of its 60 stores. "Leases prohibit some stores from selling it [coffee] because Star-bucks or Tim Hortons is in the same plaza," said Jimmy Nahm, director of operations.
One Kitchen Food Fair store near a college campus has a successful sushi bar. But Nahm concedes, "It took a while to get the word out." Kitchen Food Fair also developed a gift business in 80% of stores. Displayed in lit, 4-foot glass cases, products include jewelry, bags, hats and some clothing €" items "customers don€™t expect to find in a c-store," said Nahm. While turns are low, margins are high.
Kitchen Food Fair and Big Bee may be exceptions when it comes to smaller chains and new categories. While many small players have lost sales in grocery or tobacco, few are trying anything new to recoup their losses and are in a fight for their lives. "They aren€™t doing a whole lot to innovate," said Doucette. "They€™re in a defensive mode."
Debby Garbato has been covering the retail industry for more than 20 years. The former editor-in-chief of Retail Merchandiser and Cheers, she is a freelance business writer and retail analyst.