Convenience retailing – is the future out of our hands?

What does the future hold for convenience retail in troubled economic times?

Answering that question and visiting Insight HQ recently was industry legend and longstanding NACS collaborator Roy Strasburger. Roy is one of the best and most experienced retailers in the world and in this combined feature article written by Roy and video interview recorded in the #ShopTalkLIVE studio, we have a very timely conversation about the challenges the convenience and fuels industry faces and the right strategy and solutions to respond.

Article by Roy Strasburger.

I was talking to my father the other day.  He is in his late 80s and we were discussing the events that he had been witness to. He lived through a world war, saw the introduction of television, experienced the terror of nuclear weapons, gave a sigh of relief at the eradication of polio, was amazed at a man landing on the moon, celebrated the fall of the iron curtain, accepted the invention of the computer, watched the development of the Internet, participated in the proliferation of the smart phone, and is now living through a modern-day plague. That’s quite a lot.

Experience is said to be the great teacher and, obviously, events become clearer when you can look back in hindsight.  But the big question is: what does the future hold?  Even my father. who has lived almost nine decades, cannot reliably predict what is going to happen over the next two to three years. As they say in the TV commercials: past performance is no indication of future performance.

I get that feeling when I think about the convenience and fuel industries. Over the last thirty years, there have been many changes. Self-service fuel has become the norm, convenience stores have become larger, and retailers have started offering healthier food alternatives. Technology has become much more integrated into our businesses with the introduction of online ordering, mobile based loyalty programs, real-time inventories, and delivery apps.

In retrospect, some of the competitive concerns over the last three decades that we thought would wipe out the industry haven’t fully materialized – hyper markets did not destroy the fuel retailing, drugstores and, in the United States, the dollar stores have not run the convenience stores out of business, and fast-food restaurants have not completely captured our food service customers.

Looking back on the past, all I can say is that convenience and fuel retailers have been very resilient and have been fairly successful at adapting to new competitors and market conditions.

What can this tell us about the future of convenience and fuel retailing?  I think the industry is facing an existential crisis that will not just alter the industry as we know it today but will fundamentally change it.  In the next five to ten years, it will be a substantially different industry.    In thirty years, you will not recognize it – if it still exists.

The act of defining “convenience” is being taken out of the hands of the traditional players in the industry. Forces outside the convenience store channel are dictating what “convenience” means and disruptors are looking to change the customer’s perspective.

At the time of this writing, in March 2022, the global disruptor is a combination of Covid, and its after affects, and the recently launched Russian invasion of Ukraine. I think both events will continue to be intense over the next few months, but the real impact on the c-store industry will be the long-term ramifications over the next decade.

Let’s take the Ukrainian situation first.  The Russian actions, which have already disrupted the financial markets, will contribute to the long-term instability of global supply chains. Sanctions will lead to more sanctions – stopping trade from flowing freely.  Economic trading blocs (roughly divided into Russian, Chinese, and “Western” influenced economies plus the non-aligned countries’ economies) will promote trade within their blocks, rather than global trade, in order to protect their national supply interests.  Logistics will continue to be an issue as trade routes are closed because of militarization or national security interests.

Regardless as to how the Russian/Ukraine situation is resolved, Ukraine’s manufacturing and agricultural production is going to be offline for at least the next five years.  The disruption to oil and gas supplies originating in Russia and passing through Ukraine will cause all energy prices to be higher, putting a bigger squeeze on consumer spending, which will affect the purchases of luxury and indulgent items – which are the big profit makers in convenience stores.  And these are just the short-term effects.

If the disruption of the oil supply pushes the price of oil over $130 per barrel, there will be a significant increase in the percentage of electric vehicles ordered compared to internal combustion engine vehicles (when these vehicles will be delivered is another question because of shipping and supply chain issues) in addition to fewer miles driven per car due to the increase in fuel prices.  This is going to accelerate the decline in total fuel consumption as more people turn to alternative fuel vehicles.

More electric vehicles on the road will speed the irrelevance of the corner convenience store as a fuel location.  Most electric vehicles will be charged at home or during other activities (at the office or shopping).  The only electric charging location winners will be highway-based locations that will service long distance drivers.  In thirty-five years, there is not going to be a hydrocarbon fuel retail industry in the developed economies.

The second disruptor, the long-term economic effects of Covid, are still to be played out.  The pandemic has recalibrated many people’s attitude to work.  We are going to continue to see a major shift in the way people work and whether they even want to work. Working from home will remain an available option for those that can do it and for those whose jobs allow them to, which will skew convenience sales away from daily commuter clientele.

Staffing will continue to be an issue as the Millennial and Gen Y contingent continue to evaluate what it means to work and the true price that they are paying to work. There has been a major resetting of the work/life balance and sacrifice/rewards calculations, where people are going to want a better quality of life rather than working just to make money. This will have an impact on sales since making less money leads to less personal consumption.

Work/life calculations will also affect Gen Z members (roughly those born between 1997 – 2012) who either had just entered the work force and had their jobs taken away due to Covid closures or were suddenly schooling from home while watching their parents telecommute every day.  The societal and emotional impact of Covid in the developed world is going to last at least a generation.  And I’m not even going to get into the consequences of long-term Covid that may become a recognized medical disability that will keep people out of full-time employment.

Just to recap, fewer things to buy (supply chain shortages) combined with consumers having less disposable income (inflation and work/life balance) means a shrinking market.  Add to it the declining population growth rate (where are all the “Covid babies”?) and the result is that fewer people will be spending less money.

That is my take on the supply and consumer issues.  Let’s look at who our competitors will be.

Technology companies will try to obtain more of the convenience retail sector either through rapid delivery, dark fulfillment centers, or mobile fulfillment centers that roam your neighborhood using predictive algorithms to be near you when you want to order something.  Instant gratification will be more “instant” than ever before and is going to set the consumer expectation for speed of service.

Just to clear – the future convenience, fuel, and grocery competitors are technology companies, not food retailers.  They are the ones now defining “convenience” as having any product that you want delivered to your door within fifteen minutes.  It is all about the user interface, algorithms, logistics, and data analysis.  In the past, the main source of competitive disruption came from other retailers (hypermarkets, drug stores, dollar stores, and QSRs) and the competition was based on pricing, location, and customer service.  Now it is about speed of delivery and frictionless transactions.  It is not a change in the rules of the game, it now a completely different sport.

We will also see the technology companies, who have been in the fulfillment business for a while, such as GoPuff, Instacart, Amazon, and DoorDash, use the data that they’ve collected on their customers to cut the traditional brick and mortar retail outlet completely out of the supply chain in favor of fulfillment centers.

Food retailing, in general, and grocery retailing, specifically, have already lost the data battle because they used third-party delivery services to supply their customers and handed their data to the intermediaries.  Now, companies such as DoorDash and Instacart are creating their own fulfillment centers to cut out the physical stores.  We are starting to see the same thing happening to restaurants and QSRs who have relied on third party delivery companies with the development of ghost and cloud kitchens.

All of this technology will create a development loop that will reduce the number of shopping trips and the size of shopping baskets in stores.  The more online transactions that take place, the more data will be gathered, which means that the algorithms will be improved, which will encourage more online transactions. “Going to the store” will become a conscious lifestyle choice rather than necessity.

At a more micro level, physical retailers are going to have a much harder time keeping up with consumer demands and trends.  Here, the advantage also goes to the online retailers.  Products, fashions, and tastes are changing faster than ever before because of the proliferation of social media.  Trends and fads now only last days and weeks rather than months.  For the physical retail to take advantage of a consumer fad, it will have to have the trendy product in the store before it becomes a trend.  Compare the months it takes a physical retailer to source a product, get it into the warehouse, have it delivered to the store and put it on the shelf with the thirty seconds it takes an online seller to put a link on their website allowing the customer to order directly from the manufacturer who ships it directly to the consumer while the seller earns a fee.  Even I can tell you who will win this race.

Some of the big convenience retailers, companies over, say, twenty stores, are going to disappear.  They will not be able to compete with immediate delivery services and will be too big and standardized to become the localized community store.  They are caught in the no-man’s land of the new convenience battle.

To quote the author William Gibson, “The future is already here.  It is just not evenly spread around.”  Everything that I have mentioned is already happening – somewhere.  Urban areas are going to feel it before the rural areas.  Developed economies before less developed ones.  The affluent before the economically dis-advantaged.  Interestingly, the demise of the traditional grocery and fuel industry will be an aspirational lifestyle – frictionless shopping while making use of self-driving ride share alternative fuel vehicles.

So, what to do? Sell, retire, or change careers.

Just joking.  But the industry is going to change.  To keep it from disappearing, the following needs to happen:

• Every brick-and-mortar retailer needs to immediately start focusing on hyper-local and community-oriented retailing. You need to meet the expectations, aspirations, and desires of your local market.  Ideas to consider: locally sourced products; more fresh produce and food offerings; a coffee bar, sit down area, and Wi-Fi if you cater to remote workers; and staff trained in customer service and knowledgeable about the products that you sell.  From the well-stocked corner, or larger stores (grocery, butcher, produce, and bakery) that are popping up in major urban areas (such as Milestone Rathfriland in Northern Ireland and Nazar Food Center in Woodside Park, England) to the coffee shop with groceries format (such as Choice Markets and Foxtrot Markets in the US) you must be a destination that will entice the customer off the couch. If you are not catering to the community, the community won’t support you.
• The large chains that want to stay in the channel need to buy one of the quick commerce delivery services so that they can compete. A store’s physical location does not matter to the consumer when they are ordering from their couch.
• The future winners of the vehicle driver’s business are those stores located on the highways, truck stops and travel centers, which are going to provide recharging facilities, food, and entertainment for long distance travelers. Electric vehicles are not going to stop at any other convenience retailing locations.
• If you want to stay in business and want to meet your customer’s expectations, create an online presence that allows your customer to order and pay for their items online and do your own delivery. Think about what data you want to collect, analyze it, and use the findings to determine how to meet all of their retail needs.

Let’s put it this way – my father has never ordered groceries online nor used Uber.  His grandchildren, when they think about food, think first about delivery apps, don’t shop at a store unless is sustainably supports the community, and consider a ride share alternative before they drive anywhere.

The bottom line is that you need to find out ways to better service your customers and meet their expectations.  If you don’t do it, some robot will.