WE ARE WHERE AMERICA SHOPS," said 2006-07 NACS Chairman Sam Turner kicking off the 2007 NACS State of the Industry Summit in partnership with CSP. And he had the numbers to back up his claim: The 145,000-plus U.S. convenience stores conduct an average of 1,100 transactions per store per day, a cumulative 159 million transactions daily. Given that the mobile (ages 5 to 85) U.S. population is 275 million, "It takes 40.8 hours for us to serve the equivalent of everyone in America," said Turner, president of Calfee Company of Dalton (Georgia).

Data from the U.S. Department of Commerce reinforce Turner's argument. While overall retail sales climbed only 5 percent in 2006, convenience stores saw a robust 15 percent increase. Even when looking only at in-store sales, the solid growth for the industry — 8.3 percent — was still ahead of every other competing channel except for warehouse clubs/superstores, which grew 10.3 percent. All other channels saw slower growth, including restaurants (8.0 percent), drug stores (7.9 percent), grocery stores (4.1 percent) and discount department stores (0.5 percent).

And why wouldn't consumers shop convenience stores, given their abundance? Add up all the store totals in competing channels — drug stores (38,686 stores), supermarkets (30,656 stores), dollar stores (19,358 stores), mass merchandisers (6,502 stores), supercenters (2,758 stores) and warehouse clubs (1,119 stores) and the total is 99,079 stores, nearly 50,000 less than the number of convenience stores in the country, based on data from Nielsen Trade Dimensions.

Sales Hit New Highs
Convenience store industry sales surged 15 percent to reach $569.4 billion in 2006, continuing a four-year run of extraordinary growth, with industry sales almost double the 2002 total of $290.6 billion, according to NACS data released at the April 10 to 12 Summit in New Orleans. Approximately 400 top convenience and petroleum retailing executives, suppliers and analysts attended the Summit to examine the industry's operational and financial performance based on data representing more than 22,000 stores.

The $74.1 billion increase in industry sales was the largest yearly increase ever recorded, fueled by a 17.9 percent surge in motor fuels sales, which rose to $405.8 billion. The industry's motor fuels sales growth outpaced the 13.0 percent increase in motor fuels prices reported by the U.S. Department
of Commerce, meaning that the convenience store industry continued to grow motor fuels market
share, which is estimated to now be 82 percent.

In-store sales in 2006 reached $163.6 billion, more than double the total as recent as 1997. In-store merchandise sales rose 8.7 percent, while foodservice sales rose 5 percent.

"As an industry, we're quite strong and continue to grow," said NACS Vice Chairman of Research and Technology Greg Parker, president of The Parker Companies (Savannah, Georgia).

Profits Fall
Despite sales topping the half-trillion-dollar mark for the first time ever, overall profits decreased 23.5 percent, falling to $4.8 billion, as continued motor fuels price volatility and consumer price sensitivity forced retailers to squeeze margins on fuel to attract customers. Motor fuels gross margins fell 1.7 cents to 14.7 cents per gallon. On a percentage basis, motor fuels gross margins dropped to 5.7 percent, the lowest level since 1983. Factoring in credit card fees that averaged 4.2 cents per gallon across all transactions, motor fuels gross margins dipped to 10.5 cents per gallon before including all other operating expenses. While motor fuels now account for 71.3 percent of total convenience store industry sales, it accounts for only 33.7 percent of industry profits.

Escalating credit card fees had an enormous impact on the drop in industry profits. Credit card fees surged 22 percent, rising $1.2 billion to reach
$6.6 billion in 2006, and for the first time ever top overall industry profits. Credit card fees are now the industry's second largest expense, accounting for
8.3 percent of industry gross margin dollars, second only to total labor expenses (33.5 percent).

Examining pretax profits, Parker said that the $4.8 billion in profits on $569.4 billion in sales means that the industry generated profits of 0.8 percent as a percentage of sales. Put another way, for each $100 worth of goods and services sold, convenience stores saw only 80 cents in pretax profit.

Cigarettes Still #1
Once again, cigarettes dominated in-store sales, accounting for more than one in every three dollars spent in stores. The top 10 categories in terms of percentage of in-store sales were:

1. Cigarettes (34.4 percent)
2. Packaged beverages (13.8 percent)
3. Beer (12.2 percent. 16.0 percent for stores selling beer)
4. Foodservice (12.1 percent)
5. Other tobacco (3.8 percent)
6. Candy (3.7 percent)
7. Salty Snacks (3.2 percent)
8. General merchandise (2.0 percent)
9. Fluid milk products (1.9 percent)
10. Packaged sweet snacks (1.5 percent)

In looking at these categories, 2007 State of the Industry Summit Chair Fran Duskiewicz, senior executive vice president with Nice N Easy Grocery Shoppes Inc. (Canastota, New York), noted that cigarettes, the industry's top in-store category, saw its gross margin percentage drop to 18 percent. However, the category grew its gross margin dollars by $1 billion and this growth came with no additional labor costs, he pointed out.

Although foodservice nearly matched cigarettes in generating gross-margin dollars, packaged beverages drew the most accolades among the top 10 categories for its performance and opportunity, Duskiewicz mentioned. The category, which he referred to as the "winner of the year," saw its gross-margin dollar performance rise more than 21 percent in 2006. Its in-store sales growth was driven largely by alternative beverages — including energy drinks, fortified water and specialty juices — which rose more than 5 percentage points in share of category sales.

Motor Fuels Sales Rise, Margins Fall
While motor fuels sales topped the $400 billion mark, margins tightened as price-sensitive drivers shopped around for the best price and traded down octane levels in 2006. Gross margins for motor fuels dropped from 16.4 cents per gallon in 2005 to 14.7 cents per gallon in 2006.

On a percentage basis, motor fuels margins dropped to 5.7 percent, the lowest level since 1983. And the pain of credit cards grew on every gallon as more consumers paid for their fuels purchases by plastic and their fill-ups increased in dollar value. Examining all transactions at the pump — including cash transactions — credit card fees accounted for 4.2 cents per gallon in expenses, dropping gross margins from 14.8 cents per gallon to 10.5 cents per gallon, without factoring in all other store expenses.

Price sensitive customers also continued to trade down octane levels. Regular grade gasoline continued to gain in the overall share of fuels sales, and now accounts for 78.0 percent of all fuels sales. Mid-grade and premium sales both saw double-digit declines and now make up 8.6 percent and 6.1 percent, respectively, of motor fuels sales.

Diesel fuel continued to hold share, growing from 7.1 to 7.2 percent of overall fuels sales. And, noted Tom Kloza, chief oil analyst with the Oil Price Information Service, diesel fuel may provide retailers with an opportunity to grow sales. "Diesel will be the highest growth product through the rest of the decade, both here and abroad," said Kloza.

The continued switch to regular grade had an impact on overall margins, since margins for regular gasoline tend to be much tighter than those for higher octanes.

As the 2007 NACS Consumer Fuels Report  found (see cover story, April 2007 NACS Magazine), consumers are increasingly likely to change their purchasing behavior to save as little as a penny per gallon. Interestingly, observed Ian Thompson, vice president of professional services with KSS Inc., there are considerable variances in this price sensitivity, when examining micro markets. KSS found that drivers who buy premium grade gasolines are less price sensitive, and that each day of the week has different demand patterns. "This is most noticeable when considering weekends versus weekdays," Thompson noted.

Credit Card Fees
The $6.6 billion in credit card costs
to the industry is more than double
the past three years, and for the first time exceeded industry pretax profit. "The only way to get those numbers reduced is if we have active involvement from you guys here," Greg Parker told retailer attendees, and encouraged them to help NACS fight these fees by contributing to the NACS Interchange Action Fund, which funds the industry's fight against outrageous interchange fees.

Credit card fees in 2006 were second only to labor as a direct in-store expense. Looking at the NACS State of the Industry same-store sample, credit card fees rose 28.2 percent, reaching $3,956 per store per month.  "I'm mad as hell," said Parker.