US convenience industry thrives on the dive

Low fuel prices and an improving economic backdrop are benefiting sales at US convenience retailers. Fiona Briggs reports

If you are looking for insight on the top trends in US convenience retailing, your ‘go-to’ resource has to be NACS.

As well as pulling data from established syndicated sources such as Nielsen, IRI and GasBuddy, NACS has its own proprietary data garnered from the financial statements of 200 convenience firms, representing 18,517 stores. And it’s being doing that for 43 years.

“This is the premier benchmark for the convenience industry,” states Leroy Kelsey, NACS director, industry analytics.

“When you try to raise capital or look at how the industry is performing or you are evaluating when to invest, all of these things are benchmarked against the data.

“The beauty of the database is that you are able to look at same firm performance, so you are comparing apples with apples in order to look at year-over-year change or the longer term trends,” he adds.

Now that data set is going to be enhanced in 2016 with regional breaks, representing the six NACS regions.

It will make the data far more relevant, Kelsey states. “There can be more than 2,000 miles between some of these sites, so there are big differences. Because the US is so geographically diverse, our members and attendees demanded more granularity.”

Excise taxes on tobacco and alcohol vary from state to state, for example, and the appetite for foodservice can be different, depending on the marketplace.

“Each region is very different,” Kelsey says. “In the northern regions, you have the big cities that are more sophisticated and there’s a higher cost of living, particularly in the north east, region 1.

“Region 2, in the south east, has a more favourable environment in terms of taxation with low tobacco and beer taxes. It also has a lower cost of living and more proliferation of fast food.”

Healthy eating is dominant on the west coast, region 6. “The most edgy, innovative trends start on the west coast,” Kelsey says. “That’s why convenience food has suffered on the west coast because the standards for healthier food are higher.”

One key industry commonality in 2015, however, has been the low price of fuel relative to the last five years. Previously, the average price of fuel has been above $3 per gallon but in 2015 it fell to $2.45.

“We have a saying that ‘we thrive on the dive’,” Kelsey says. “As the price of fuel drops quickly, we really tend to make a lot of profit on fuel. That’s because the inventory replacement price is cheaper than the street price, so we make margin as the price on the street catches up to the inventory replacement price,” Kelsey says.

What those lower fuel prices meant in shopper terms was that the average US household benefited to the tune of $700.00.

It may not sound significant but when you consider over a third – 36% – of convenience shopper households make less than $30,000 per annum, then they were getting 3% of their gross income back in terms of fuel savings, Kelsey explains.

And, while pump transactions went down as the gallons per transaction went up, in-store sales increased.

But that was not all. People also started to trade up to more premium products, Kelsey says.

“We saw a lift in premium cigarettes, premium beer and craft beer, healthy and better for you options and organic products. Products that typically have a premium associated to them saw a lift,” says Kelsey. “In addition, that premium trading up was not just inside the store, we actually saw premium fuel move faster than total gas. So people were literally treating their car.”

US consumers also drove more last year with vehicle miles travelled reaching a record high in 2015. Unemployment, a lagging economic indicator, had peaked in 2009, way after recession hit in 2007 and the economy had started to tank.

That hit convenience since one third of total c-store traffic is related to commuting.

“As jobs go, so does the convenience industry in many ways,” says Kelsey, “but as the economy improved and the price of fuel came down, people took advantage.”

Recession had also put the brakes on buying new cars. The average age of a car in US was 11.9 years old in 2014, Kelsey reports. “People stopped buying new cars – no one was willing to make big capex purchases. “But in 2015, with all that pent up demand, we had record sales for cars and the top three models were pick up trucks; big on fuel consumption.”

Conversely, sales of the fuel efficient Toyota Prius went down by 12%.

Fuel margins were maintained in 2015 too, rather than compressed by operator competition and undercutting on price. “That’s not happening any more, it’s as if they [retailers] said “let’s just let this thing ride out”; so margins stayed high last year, which led to record profits for those businesses, which are big in fuel,” says Kelsey.

As a result, NACS’s top quartile of most profitable companies welcomed some new entrants in 2015, based purely on fuel sales.

In the store, meanwhile, total sales were up 5.8% in 2015 with foodservice up 9.6% and cigarette sales, which have been declining for the past five years, up 3.4%

A couple of factors helped reverse this sales trend, says Kelsey. Key was that CVS, one of largest drug store operators in the US, stopped selling tobacco completely in October 2014; walking away from $2bn of business; equivalent to 3% of the convenience industry’s total $58bn tobacco sales.

“All those shoppers did not come to us for tobacco but a lot probably did,” says Kelsey. “Existing smokers, because they had saved money with fuel, also smoked more premium cigarettes and more often – they bought more cartons,” he adds.

In-store sales were healthy too with nine of the top 10 merchandising categories, which account for 70% of overall sales, in positive growth year-on-year. Milk was the only exception to the rule.

Despite all of the positivity, convenience retailers’ direct operating costs are up and what Kelsey terms ‘micro legislation’ is increasingly to blame.

“In the US we are starting to see the emergence of state level, or even city level legislation,” he says.

One example is for the $15 minimum wage, which was initiated in California and has subsequently been adopted by New York.

Another is a soda tax in Philadelphia, Pennsylvania. It began as a sugar tax but has been widened to include diet drinks, which have been sweetened. “There’s more local legislation popping up, which is creating precedents that are threatening our businesses,” Kelsey says.

All of these key convenience retail themes will be dissected and updated at the NACS Show, where Kelsey will present in the Small Operators Track on 18 October: Where is the industry going and what does it mean for the small retailer.