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Putting the Numbers in Context

By David Bishop

While the past is not often a good predictor of the future, it’s the lessons we learn that help us do things differently the next time around —including how we run our businesses. Seen from this perspec­tive, the numbers found by looking back on last year’s performance in the NACS State of the Industry data help retailers pinpoint how their business can achieve present —and future —growth. 

Total industry sales declined nearly 18 percent in 2009, driven by major de­clines in motor fuels sales (dollars, not gallons), which dropped for the first time since 1986. On the flip side, in-store sales were very robust, growing about 5 per­cent because of increased sales in ciga­rettes and other tobacco products (OTP), according to the NACS State of the Indus­try Report of 2009 Data (released in mid June). Foodservice continued to shine, rising to the top spot in terms of in-store margin dollars and second in in-store revenue dollars.

And, even though these insights rein­force the important role that convenience and petroleum retailers play in the every­day life of today’s consumer, the news isn’t all good. While there are opportuni­ties with fuel, tobacco and foodservice, retailers still face challenges.  

Motor Fuels
Although motor fuels sales help drive traffic to your lots and likely represent the largest portion of your business —68 percent of sales according to State of the Industry data —this category should be put into perspective.  

The good news is that 2009 witnessed a drop of more than 28 percent in the av­erage selling price per gallon versus the prior year, based on same-firm data re­ported by NACS. This not only put more money in the pockets of cash-strapped consumers, but also helped reduce the amount of credit and debit card inter­change fees paid by retailers.  

However, while consumers did pay less for fuel in 2009, retailers made less gross margin dollars on fuel —that’s the bad news. In fact, fuel pool margins de­clined by more than 19 percent in 2009, averaging 13.8 cents per gallon or a drop of 3.3 cents per gallon. (See chart 1.)  

Part of the reason for the precipitous drop in pool margins relates to price vol­atility, or the comparative lack thereof, in 2009.

2008 was by far the most volatile on record. Retailers’ margins tightened for the first half, as prices increased by a dollar a gallon on their march to a re­cord $4.11 in July. Then, the bottom fell out and prices plummeted $2.50 a gallon before bottoming out at $1.61 late in the year. This free fall led to historic margins as retailers simply couldn’t drop prices fast enough to catch up with wholesale drops. Contrast 2008 then to 2009 where prices did their typical spring run-up during the spring transition...but then nothing else.  

So although price volatility —volatil­ity on the downside, specifically —may be a friend of petroleum retailers, it’s a market force that, for the most part, re­tailers cannot control. Therefore, it’s im­perative that retailers learn to survive on lower pool margins during periods of greater price stability. Unfortunately, for some retailers, this margin level will not be enough to simply break even, as bot­tom quartile retailers need about 14.4 cents per gallon to break even, based on NACS data.  

Tobacco
"Tobacco is back" was a key theme ex­pressed at the NACS State of the Indus­try Summit this April in Chicago, and it’s really quite appropriate given the per­formance of both cigarettes and OTP in 2009.  

Cigarettes: The good news is that sales not only grew, but grew at the fast­est rate in the last 10 years. Specifically, cigarette sales grew 14.6 percent in 2009 due in large part to price increases asso­ciated with the higher federal excise tax (FET), which took effect in April, as well as the usual spate of state tobacco tax hikes. (See chart 2.) As a result, ciga­rettes’ share of in-store sales increased nearly 3 percentage points to 35.8 per­cent. The last time retailers experienced this type of dramatic share change with cigarettes was in 1999 when retail prices jumped more than 30 percent year-over-­year in connection with the Master Set­tlement Agreement.  

The better news is that retailers made even more money in 2009 with ciga­rettes, which represented 17.5 percent of in-store gross profit dollars. In fact, gross margin dollars grew at a faster rate, surg­ing 18.8 percent due to stronger margin percents that expanded about a half per­centage point to 15.7 percent. Part of the stronger margin performance related to retailers raising retail prices nearly a full month prior to the April FET increase as a result of manufacturer price increases.  

All this represents mixed news going forward. It will be very difficult for retail­ers to match those sales and profit growth rates in 2010, but not impossible. The Prevent All Cigarette Trafficking Act (PACT Act) should shift volume from the Internet back to physical stores.  

OTP: What affectionately has been referred to as "the little train that could" isn’t so little anymore. Ten years ago, OTP contributed around 1.2 percent of in-store sales. However, since then its contribution has nearly tripled, representing 3.5 percent of in-store sales in 2009.  

Even better is that unlike cigarettes, which are facing continual declines in industry volume, OTP’s largest subcategories are enjoying increasing consum­er demand. With a unit sales growth of 4.8 percent, smokeless continues to ben­efit from gradual shifts occurring in to­bacco use, as smoking restrictions con­tinue to expand across the country and smokers search for alternatives. Sup­porting this growth is a bevy of still rela­tively new segments that consumers perceive as more socially acceptable: dissolvable, pouches or dry smokeless products.  

Cigars grew unit sales 8.1 percent according to The Nielsen Company, as the subcategory offered affordability and a variety no longer found in ciga­rettes. Flavored cigars have benefited as well since nearly all flavors, exclud­ing menthol, have been extinguished in the cigarette category, shifting some volume between the two product seg­ments.  

Although "tobacco is back" was ap­propriate for 2009, the catch phrase go­ing forward may be something like "where’s tobacco going?" It’s a question filled with much uncertainty as tobacco continues to face challenges on many different fronts, largely due to FDA regu­lation. However, what is certain is that retailers committed to responsible to­bacco retailing will continue to fuel their economic engine.  

Foodservice
Foodservice performed quite well in convenience retail last year, represent­ing more than 17 percent of sales and nearly 30 percent of gross profits.

Eventhougha2.8percentgaininsales may not sound like something to cele­brate, consider that McDonald’s compa­rable store sales grew 2.6 percent in the United States during 2009. (See chart 3.) And, during that time, convenience store foodservice gross margins increased by more than 350 basis points —McDon­ald’s margins improved by less than 25 basis points. So, from this perspective, convenience retailers did a nice job of growing both sals and gross profits. But examining trends in the two larg­est foodservice categories in conve­nience retail reveals the challenges and opportunities still facing the business. (See chart 4.)

Prepared Foods: The good news is that consumers are buying more pre­pared foods at convenience stores —sales grew 7.6 percent in 2009 versus 2008. repared Foods: The good news is that consumers are buying more pre­pared foods at convenience stores —sales grew 7.6 percent in 2009 versus 2008.

Even better news is that gross mar­gins in the category expanded by ap­proximately 6.5 points to 54.4 percent in 2009. This expansion helped to increase margin dollars by 8.2 percent versus 2008, which aided in absorbing some of the higher labor requirements necessary to manage this category.

Hot Dispensed Beverages: In a cate­gory so critically linked to the morning daypart, it’s difficult not to view a sales decline of 1.4 percent in 2009 as anything but bad. However, the decline could have been worse —retailers had to combat both increasingly higher unemployment and continually tougher competition from other foodservice operators.  

Unfortunately, the intensified price competition affected convenience re­tailers beyond a drop in sales. Average gross margin percents were 55.8 percent in 2009 —more than 9 percentage points lower than 2008. This margin compression consequently caused profit dollars to dramatically drop by more than 15 percent. What’s clear is that competition is in­creasing in core categories, such as hot beverages, as even more operators enter and invest in building their morning business. (See "Breakfast Brawl" on page 30.) Convenience retailers have the op­portunity to strengthen their competi­tive position by re-evaluating how they manage and market their coffee programs to consumers. Ultimately, it’s about finding the pro­grams and strategies that fit best, en­abling stores to successfully execute ev­ery day, and providing acceptable margin dollars after accounting for la­bor, product waste and other direct op­erating expenses.

The news is less positive for mer­chandise sales (excluding cigarettes), which was down 0.8 percent in 2009 versus 2008. However, when flat is con­sidered the new up, then maybe it’s not really so bad —especially if results are still better when compared to other con­venience retailers of the same size.

And this observation reinforces the value of benchmarking your perfor­mance against your convenience peers to better understand where opportunity gaps exist. NACS State of the Industry data and its affiliation with the CSX database allow convenience retailers to do just that.

CSX is the engine that drives the an­nual State of the Industry Report. It’s the industry’s largest purpose-built, online database of financial and operating data. The CSX data analysis engine allows for the quick and accurate creation of in­sightful reports on almost any cut of in­dustry data, so CSX subscribers have the option of customizing their view of vir­tually any data element from the State of the Industry. (If you’re interested in learning more about CSX and its capa­bilities go to csxllc.com, or contact Chris Rapanick at (703) 879-2316.)

Going Forward
Consumers are searching for value as they either trade down to lower cost al­ternatives, which may be occurring across beer price segments, or trade up in pack sizes, which may be the case with candy as consumers perceive bigger pack sizes as more bang for their buck.

Retailers are also searching for value as they evaluate everyday and promo­tional pricing strategies, as well as refine assortment to reduce unnecessary in­ventory, improve in-stock conditions and make room for new products.

Being able to find more ways to offer value to the consumer today will help position retailers to come out of this economic downturn stronger tomorrow.

Looking at 2009 NACS State of the Industry data provides ample lessons re­tailers can learn, including how to manage the business today and how it may need to change down the road.

What’s clear is that NACS data helps the convenience and petroleum retail­ing industry put the past into context so that we can be better prepared for whatever the future may hold.

David Bishop specializes in convenience retail and is the managing partner at Balvor LLC, a sales and marketing firm located in Barrington, Illinois. He can be reached at davidbishop@balvor.com.