The Supply Side: Convenience store sector optimistic about 2020 economics

One of the fastest-growing retail segments — convenience stores — reports strong business conditions with a positive outlook for 2020, according to the recent CSP Outlook Survey. The trade group reports 80% of respondents describe their business conditions as “good” or “excellent,” and a majority expect greater improvements next year.

“The c-store industry is doing very well with margins and volumes on motor fuels strong and inside sales and foodservice sales increases outpacing inflation,” according to David Nelson, professor of economics at Western Washington University. He said the record economic expansion is new territory buoyed by strong consumer spending, low-interest rates and modest inflation.

The survey found 38% of respondents reported improved store traffic this year over last. Just 8% cited “significantly higher” foot traffic, with 30% citing “slightly better.” Still, the survey found 38% reported flat customer traffic, and 22% said traffic was “down slightly” from a year ago. About one-third of the respondents said the main reason for the industry’s sluggish traffic growth this year related to consumers’ changing shopping habits. Nearly 20% cited competition from other channels.

With consumers paying mostly for fuel purchases at the pump, convenience stores have to entice them inside. Discounted fountain drinks, coffee bars and ready-to-eat foods have been the way many chains gain foot traffic. Lotto ticket sales, tobacco and vaping products are also traffic drivers for convenience stores.

Operators said they see cannabidiol (CBD) products as a way to drive more traffic and revenue. Nearly 40% name that category as the greatest potential for a c-store in the future. Foodservice also ranks high, as one in three operators said that it provides the greatest potential for sales growth in the next year. In 2019, foodservice is 34% of the total sales across the sector. Other areas operators see as growth opportunities include delivery services (11%), vaping products (13%), E15 fuel (4%) and electric vehicle charging (2%).

LABOR PAINS & CONCERNS
A tight labor market continues to be a concern for the entire retail industry, and convenience store operators say it’s a major roadblock to expansion. Nearly two-thirds of Outlook Survey retailers cited it as their main business challenge.

“It’s not a convenience store problem. It’s an overall economic problem,” according to Bill Conerly, principal with Conerly Consulting LLC, who is cited in the report. “I hear about it in agriculture, in manufacturing, in construction. C-store people are not just competing with other convenience stores. They’re competing with everybody for labor.”

Conerly warns as the working population continues to decline in the next decade, the tight labor issues will worsen for employers. Turnover rates in the industry average about 22%, according to the National Association of Convenience Stores (NACS). The industry says cashier positions have the highest turnover rates despite rising wages for enticement.

The report said tight labor (65%) and employee turnover (36%) are the two biggest challenges store operators face. Regulatory pressures (35%), increased competition (32%) and local economic conditions (30%) round out the top five concerns.

When asked about the biggest roadblocks to expanding store counts, labor ranked the highest at 30%, with rising land prices second at 27%. Uncertain economic conditions, increased building costs and regulatory burdens complete the top five.

Longer-term issues or trends most likely to impact the c-store industry include labor costs, 31%; marijuana legalization, 14%; alternative fuels, 13%; on-demand delivery, 13%; tobacco regulations, 12%; shifting demographics, 11%; additional taxes, autonomous vehicles, 1%; and automation robots, 1%.

FUEL & POLITICS
Fuel provided more than 62% of total sales for convenience stores in 2018 and continues to be the biggest contributor to revenue this year, according to the NACS. Despite efforts for c-stores to grow in-store categories like foodservice, fuel remains incredibly important for the retail segment.

Nearly half (46%) of respondents expect fuel demand to flatten or decline in the long term. Most cite changing consumer preferences for the trend along with the rise in electric vehicles. A majority of respondents expect an increase in fuel demand, based on loosened regulations by President Donald Trump’s administration, according to the report.

Because of a reliance on fuel sales, c-stores closely watch regulatory policy pertaining to the oil and gas industry. This year’s survey also asked respondents about politics. The report found 57% of respondents approved of Trump’s performance, with nearly one-third strongly approving of the job he is doing. The survey was conducted in August and September. More than one-third of respondents (36%) voiced unhappiness with the president’s performance, with 29% strongly disapproving. The report noted 45% of respondents identified as Republican, 33% as independent, and 14% as Democrat.

“The c-store industry has generally fared well under policies of the Trump administration as taxes have been cut and the regulatory burden reduced,” Nelson cited in the report.

SOLID GROWTH
Through three quarters of 2019, 74% of operators report in-store merchandise sales were up compared to the prior-year period. Fuel sales were up for 52% of the respondents. NACS reports 84% of U.S. convenience store operators are optimistic about business prospects for the rest of 2019.

More than half (57%) of operators said beverage sales help to drive in-store traffic, 23% said a food purchase was the top reason for in-store traffic and 18% said consumers came in to purchase something else.

NACS reports there are 153,237 convenience stores operating in the U.S. this year, down about 1.1% from the prior year. This sector accounts for about 34% of the brick-and-mortar retail landscape, according to Nielsen. Last year this sector reported $654.3 billion in sales revenue, up 8.9% from the prior year.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.