Research


A Short History of the Convenience Store Industry

Convenience stores evolved from a variety of sources early in the twentieth century. They drew upon characteristics of many types of retail establishments in existence at the time: the "mom-and-pop" neighborhood grocery store, the "ice-house" (from pre-refrigerator days), the dairy store, the supermarket and the delicatessen.

The Southland Ice Company is credited with the birth of the convenience store in May 1927 on the corner of 12th and Edgefield Streets in the Oak Cliff section of Dallas, Texas. "Uncle Johnny" Jefferson Green, who ran the Southland Ice Dock in Oak Cliff, realized that customers sometimes needed to buy things such as bread, milk and eggs after the local grocery stores were closed. Unlike the local grocery stores, his store was already open 16 hours a day, seven days a week; so, he decided to stock a few of those staple items. The idea turned out to be very convenient for customers.

Joseph C. Thompson, one of the founders and later president and chairman of The Southland Corporation, recognized the potential of Uncle Johnny's idea and began selling the product line at the other ice dock locations of The Southland Company. Further, these stores were open from 7 a.m. to 11 p.m., seven days a week.

In addition to convenience store development at The Southland Ice Company, other types of stores were emerging. There were "midget" stores in the 1920s and "motorterias" or mobile convenience stores. "Bantams" and "drive-in" markets were also around in 1929 where motorists never had to get out of their cars. "Delmat" vending machine type of stores were also popular for obtaining milk, eggs, produce and fresh meat. Dairy cooperatives often ran "dairy stores" or "jug stores" as outlets for their operations. Sometimes supermarkets had small outlets in rural areas for people who did not travel to the city enough for eggs, milk, etc.

The pattern of the emerging "convenience" types of stores grew modestly until World War II (although they were not yet called "convenience stores"). The big factor in all of these operations was fast service. The stores were most successful in warmer climates where the open front was a big attraction.

The end of the war and the increased ownership of automobiles sparked the rapid growth of the industry in the 1950s. The automobile helped fuel the growth of suburban living--of families wanting the "American Dream." Americans, with bigger cars and better roads, began flocking to the suburbs where they found plenty of space to live and raise children... but too much space between shopping centers.

The industry grew rapidly along with this consumer need for convenient shopping and supplanted the neighborhood grocery stores and became established in new suburbs and areas too small to warrant a supermarket. Once again, convenience store companies were opportunistic and innovative, thriving in market niches too small for others to operate profitably.

Additional forces continued to drive convenience store growth. The growth of the supermarket industry affected convenience stores. As grocery stores became larger and larger, they became less convenient for the customer who was in a hurry. Convenience stores filled in. Suburban families often had two cars and two incomes; both spouses working meant more discretionary income and less time for using a supermarket. Also, the increase in the number of working women reduced the amount of time available for shopping.

Stores were conveniently located. Customers could park in front of stores and could even leave children in the car and keep an eye on them. With the variety of items available, it was virtually one-stop shopping without waiting in line. Stores were easily franchised since it was getting expensive to start up a new store. They entered the northern regions of the country and continued to grow through merger, acquisition and new building.

Convenience stores continued to evolve from characteristics of the competitors: supermarkets, mom-and-pop grocery stores, specialty food shops, drug and variety stores, vending fast food chains, and gasoline service stations. Convenience stores began offering gasoline when self-serve became popular. The number of gasoline stations declined while the number of convenience stores selling gasoline increased.

Today, the main competitors convenience stores face are those mentioned above as well as chain drug stores, superettes, warehouse stores, general retail stores, home delivery services and, of course, other convenience stores.

Convenience Stores in the Last Twenty Years

In the early 1970s, convenience store operators had to cope with price and wage controls, gasoline and merchandise shortages, record inflation and interest rates, and increased competition due to longer hours and increased discounting by supermarkets. The energy crisis limited the quantity of gasoline convenience stores could sell. During the severe phases of the energy crisis, operators could sell all the gas they could get at the highest prices permissible under the price controls in effect at the time. The major factor limiting gasoline profits was an adequate source of supply.

The industry stood up to all types of competition successfully. As the size of supermarkets continued to increase to the new super store concept of 30,000 to 50,000 square feet, a number of the smaller, existing supermarkets fell by the wayside. The result was that many operators seized upon the pockets of opportunity provided by these openings.

More states began allowing self-service gasoline, so the number of convenience store gasoline outlets grew. More stores were selling gasoline and moving to owning gasoline equipment as opposed to operating on a commission basis (a higher margin per gallon was associated with a store owning its equipment).

Costs continued to go up with energy taking a sharp jump; severe competition held back margins; high interest rates affected bottom lines; more regulations were imposed by federal, state and local governments; and there was, in general, an increased cost of doing business. Store labor costs were increasing due to increases in the minimum wage and more fringe benefits as well as many other factors such as adding service items like gasoline, deli and prepared foods. The operators needed to attract and hold customers on a daily basis; Sunday openings were increasing. Marginal stores and marginal items were rooted out.

By 1976, stores selling gasoline were profitable and the numbers were growing. There was a competitive battle in gasoline as seen by the number of stores offering gasoline--the average margin dropped while the average gallons went up. As the major oil companies withdrew from certain locations, convenience stores were becoming a more and more significant source of petroleum product sales.

As the number of convenience stores increased, the average number of households served by an individual store dropped. The higher level of saturation and increased competition led to fewer customers per store; therefore, stores remodeled and refixtured to attract more customers rather than building new stores. Utility costs were high, but most stores continued to stay open 24 hours more often than not.

As the rate of inflation accelerated in the late 1970s, significant sales increases were necessary to maintain the trend of real growth in the industry. The growth in the number of customer visits outpaced the growth in number of stores. This trend reflected the frequency of fast food sales including sandwiches, coffee, and frozen novelties.

The convenience store industry continued to grow; but the impact of increased competition, higher energy costs, new store expenses, and higher labor expenses reduced profits as a percentage of sales. The increase in labor as a percentage of sales absorbed the improved gross margin and emphasized the continued need for employee productivity both in the store and at the staff level.

By the end of the 1970s, sales gains were realized due to inflation, gasoline, new stores and increased real volume per store. Store closings were attributed to older physical plants, changing location patterns, and higher breakeven points due to the rise in new store investment and the increasing capital requirements in areas such as fast food equipment.

Over 80 percent of the stores constructed were equipped with the ability to sell gasoline. The increasing volume per store, coupled with the growing number of stores with gasoline, increased the importance of convenience stores as a marketer of petroleum products. The smaller chains reported having significantly higher sales per customer which would be expected since several were superette operations, located in smaller towns with less customer traffic and, often as not, heavily promoting fast food and coffee sales. The larger chains were volume oriented. The two patterns presented opportunities for different merchandising strategies since the large chains were merchandising for increased transaction value while the smaller chains sought to increase the number of transactions.

Operators were making the stores more capital and labor intensive with the addition of microwaves, fountain drinks, and fryers as they expanded into higher margin product lines. The increased gross margin dollars generated by these products were weighed carefully against the associated incremental capital and labor costs. The trend toward 24-hour operation reflected the need to maximize utilization of the facility. As the industry moved into more fast foods, the equipment required a high level of maintenance and servicing. Servicing and cleaning equipment can result in a third-shift person whether the store is open or not.

   In 1980, the slowdown in the number of new stores was inflation related. There was less money available, interest rates remained high and stores required increased capital investment. Faced with a slowing economy, higher breakeven points made it even more difficult to justify opening new units. Instead, many operators invested in remodeling existing locations to take advantage of lower rental rates.

Higher rental rates for new convenience stores reflected the increased dollar investment in both land and building. These higher land and building investments reflected the high interest rates and inflation premium demanded by investors. Bargain rents on existing stores contributed a sizable portion of the industry’s profit.

In 1981, economic recession and high interest rates dampened growth. High interest rates, high rental costs, heavy initial capital requirements and the general sluggishness of the economy all resulted in higher breakeven points and a continuing trend toward remodeling existing convenience store locations rather than committing funds to the opening of new outlets.

By mid-1982, the economy was experiencing the worst recession since World War II. Oil supplies were in excess of demand and reduced prices and profits resulted throughout the oil/gasoline industry.

In food retailing, super warehouse stores doing over $1,000,000 per week in sales were shaking up the grocery industry. Retail gasoline, grocery, and fast food chains were seeing increased activity in mergers and acquisitions and redeployment of assets.

As economic recovery progressed, gasoline usage increased but remained below the levels of the 1970s. Sales in gasoline service stations fell due to falling prices and demand that had not kept up with supply in recent years.

Food retailers continued to struggle with the influx of new store formats––super warehouse stores, gourmet stores, super convenience stores, hyper­markets, fast food restaurants inside convenience stores, gasoline pumpers with small convenience stores and more.

The convenience store industry was getting into new technology related to gasoline, checkout and banking. Industry attention moved to improve operations, margins and cost control. Merchandising became the key ingredient for the successful operation of convenience stores. Merchandising programs had the two-fold objective of increasing store traffic and increasing the average sale per customer.

There was a continued reduction in the opening of new stores and an increase in the investment required for a new store. Acquisitions continued as a way to increase store growth. The increase in the cost of land for the new rural store reflected the saturation of the urban market. Nevertheless, companies continued to look to the rural market for store growth, as land and building costs were less costly compared to those in urban locations. The increases in the cost of both land and store construction reflected the competitiveness for prime locations. Annual sales for new stores needed to exceed the averages for existing stores by a sizable amount to ensure the recovery of the investment.

Operating costs continued to rise even faster than selling prices. Corporate acquisitions and mergers reached the highest level of activity in over 50 years. Sky-high insurance costs, underground storage tank liabilities and consumer group pressures regarding alcoholic beverages and adult magazines became important factors. Increased competition, the changing labor force and the uncertainty of the opportunities presented by new technology all affected the industry.

Labor became the largest operating expense component and was a large factor in the reduction of pretax profitability. Regional differences in labor markets became especially acute as the convenience store industry increased services offered and stayed open for extended hours. Some stores turned to increased automation––Electronic Funds Transfer, Automated Teller Machines and Scanning.

In the 1990s, several factors, such as the Gulf War, a weak economic climate and increased awareness of the environment, affected the industry. New Environmental Protection Agency underground storage tank regulations made it more costly to operate a convenience store. In addition, industry concerns, such as inventory shrinkage, employee shortages and turnover, operating regulations and an aging population, made it important to reexamine the concept of convenience and the strategies for operating in an increasingly competitive environment.

Responding to the more difficult economic environment in 1992, companies began to lower general and administrative expenses and close marginal stores. Lower interest costs, higher gasoline volumes, higher gasoline margins, increased merchandise sales per store and a strong customer focus combined to explode industry profits to a record $2.2 billion in profits in 1993. Industry profits continued to grow in 1994 and 1995, reaching $3.2 billion, respectively, for both years. Although profits dropped in 1996, they still were at a high level ($2.4 billion) compared to the early 1990s. Industry pretax profits increased only slightly in 1997 to $2.5 billion but jumped to $3.4 billion in 1998 and $4.8 billion in 1999.  For 2000, total industry pretax profits fell slightly to $4.6 billion on sales of $269.4 billion.  The economic recession and the events of September 11^th during 2001 slowed sales growth to $283.0 billion and lowered industry profitability by 24.6 percent to $3.453 billion.  The slow recovery from the recession and the buildup in preparation for the war further lowered industry pretax profits in 2002 as they fell by 24.3 percent to $2.615 billion.  Total sales for the convenience store industry rose by 2.7 percent to $290.6 billion in 2002.  For 2003, the emerging economic rebound clearly affected results for the convenience store industry as industry sales increased 16 percent to $337.0 billion and industry pretax profits increased by 55 percent to $4.044 billion.  The economic recovery continued during 2004; industry sales increased 17.1% to $394.7 billion as both in-store and motor fuel sales enjoyed double-digit growth from 2003.  Industry pretax profits during 2004 rose 23.4% to $4.989 billion from 2003.  In 2005, Hurricane Katrina wreaked havoc with the petroleum refining industry in the and, coupled with significantly increased energy demand from and , pushed motor fuel prices up during the latter third of the year.  Industry sales increased 25.5% to $495.3 billion in 2005.  Once again, in-store and motor fuel sales realized double-digit growth from 2004. Industry pretax profits rose 18.2% from 2004 to $5.895 billion in 2005. For 2006, the convenience store industry once again enjoyed increased sales as retailers had revenue of $569.4 billion, an increase of 15.0% over 2005.  Industry pretax profits in 2006 were $4.767 billion, a drop of 19.1% from 2005.  Lower motor fuel margins led to the decline.  

Extreme price volatility in the motor fuel segment and solid growth in the merchandise sector characterized the convenience store industry performance during 1998.  During 1999 and 2000, motor fuel sales grew rapidly, rising 34.7 percent and 23.2 percent, respectively.   The entire rise in motor fuel revenue during 2000 resulted from higher prices as gallon sales actually declined by 1.6 percent. However, industry motor fuel sales growth slowed dramatically during 2001 to a rise of 3.4 percent as retail prices actually fell by 3.6 percent.  For 2002, there was continued volatility in the motor fuel market, however, sales of motor fuel rose by 6 percent while the price per gallon rose by 1.4 percent.  For 2003, motor fuel prices increased by almost 11 percent as worldwide demand for motor fuel rose significantly.  Industry sales of motor fuel rose by 16.7 percent while motor fuel margins went up by a penny per gallon to 13.7 cents. During 2004, motor fuel sales rose 18.9% to a record $262.6 billion as prices for gasoline rose 18.2%.  Competition, as usual, came from all corners, but the last five years saw heightened inroads from new motor fuel competition in the form of supermarkets, mass merchandisers, and hypermarts. These new competitors traumatized traditional motor fuel marketing networks.  In addition, chain drug stores accelerated their campaign to attract consumers with products normally associated with convenience stores and enjoyed great success.  For 2005, industry motor fuel sales were up 31.1% to set another record of $344.2 billion.  Prices temporarily rose above the $3.00 per gallon mark in the aftermath of Hurricane Katrina. In spite of the higher prices, motor fuel gallon sales for the convenience store industry still rose but at a modest 1.6% rate for the year.  During 2006, industry motor fuel sales rose 17.9% to $405.8 billion as motor fuel prices rose to an average of $2.54 per gallon for the year.

Looking to the future, many challenges remain for retailers. High motor fuel prices seem here to stay, given the worldwide demand for petroleum products and the precarious state of world affairs.  There are no easy answers but retailers must continue the search. Looking backwards, the 1995 NACS Future Study recommended two paths to enhance future opportunities for convenience store operators: removing barriers to shopping at convenience stores and creating new value for the customer.  The addition of branded or proprietary foodservice programs is one approach for creating new value for the customer.   These offer the consumer a recognized name, a consistent product, convenience and a better value.  The goal is to utilize the foodservice offer to attract new customers and make the convenience store a destination shopping experience. 

As the industry adjusted to twenty-first century realities, findings from The Outlook for the Convenience Store Industry Through 2005, Beyond 2005, the most recent future study conducted by NACS, guided retailers forward.  The findings indicate that the retail market place is consolidating rapidly, conventional growth strategies are topping out, the core offers of the convenience store industry are under attack, more price competition is occurring, more convenience competition exists from other formats, and online shopping presents new opportunities and threats.

What particular shopping format succeeds in the future will be a function of who can add the most value for the customer.  There is, and will be in the future, stiff competition from other channel competitors for our industry’s customers.  The line between formats is blurring as each tries to erode the other’s market share by encroaching on each other’s customer base and shopping occasion.   For example, convenience stores added foodservice, the mass merchandisers and supermarkets began to add motor fuel, and the supermarkets looked to home meal replacement strategies to replace lost share of the stomach.   Retention of customers is an important issue, and research and development efforts by NACS have as their goal a better understanding of customer satisfaction drivers and metrics.  The objective is to provide NACS members with tools and benchmarks that assist them in measuring customer satisfaction. 

A major opportunity to effect positive change for the convenience store industry exists in the area of technology.  In past years, NACS focused efforts to adopt and promote the utilization of technology standards germane to the convenience store industry.   NACS established several committees and workgroups made up of industry participants to drive the process.  These efforts, ranging from Device Integration to Payment Systems, have the potential to change the way our industry competes over the long term. For some participants, these will be radical changes.  The cooperation between suppliers and retailers during this effort led to advances in several areas including XML, EDI, POS/Back Office, payment system message formats, and interoperability between disparate devices in the store.  As retailers implement technology in their operations, new generations of technology equipment now incorporate many of the advances and improvements reflecting these industry standards.  An important side benefit to the investments made by NACS and the supplier community has been more awareness of the importance of technology to the convenience store industry.  The investments made by NACS, retailers, and suppliers have been so successful that the entire scope of the technology standards effort has been spun off into an independent organization called PCATS (Petroleum Convenience Alliance Technology Standards).  NACS will continue to be involved in technology issues but the primary work of the standards effort is now centered in the new organization.

Although labor and technology will be key focuses internally, the industry must take into account the rapid changes in the external retailing environment.  This is evident by the emergence of new and aggressive motor fuel competitors who are willing to forego short-term profits for long-term gain.  The business model for the convenience store industry is changing.  Those companies that are able to understand today’s market trends, interpret those trends and quickly apply that knowledge via technology to serve customer needs will be the successful firms of the future.  Hank Armour, NACS 2001 Chairman of the Board, in his address at the 2001 NACS Show, quoted Jack Welch, retired CEO of General Electric, saying “If the change outside your business is greater than the change inside your business, you’re going out of business!”  That quote is even truer today.  Hank further elaborated that retailers must change their business model by adding new categories, new services and new shopping occasions.  New profit centers are critically important to future success.  In addition, he maintained that by being innovative, expanding the core categories and driving costs out of the system, retailers would succeed.