Convenience Stores and the Last 25 Years

July 16, 2014 Erin Rigik : 1 Comment

On our silver anniversary, CSD examines the issues, innovations and leaders that have helped shape the convenience store industry.

By Erin Rigik, Senior Editor.

The notion that convenience stores have come a long way since 1990 is an understatement.

Twenty-five years ago, the upscale, large format c-stores offering fresh prepared foods and grab-and-go lunches weren’t even a twinkle in the eye of most owners and operators.
The industry has undergone a major transformation in all facets of operation, from overhauling underground storage tanks and the introduction of pay-at-the-pump gasoline to fostering new recruiting and training programs for their employees and emerging as an employer of choice for the next generation.

“Today, convenience stores are offering a more robust customer experience than ever before,” said Allison Moran, CEO of Atlanta-based RaceTrac, which operates more than 365 convenience store locations in Georgia, Florida, Louisiana and Texas. “Across the board, convenience stores have evolved from simple operations selling fuel, cigarettes, beer and soda to offering a true shopping experience for those consumers who crave more choices when looking for a quick bite to eat. As consumer tastes evolved, a more sophisticated version of the convenience store model entered the equation and gave people a reason to come inside and engage with all that convenience stores have to offer.”

But in 1990, few would have predicted c-stores would move in that direction. Although the industry was already aware that an image change was needed in order to better resonate with local communities, who were often displeased to find a c-store wanted to move into the area.

“Over the past two-and-a-half decades, we increased our footprint and it became something people wanted instead of something people fought. And that is a huge change,” said Bill Weigel, chairman and CEO of Weigel’s in Powell, Tenn. Weigel noted that today he gets calls from states wanting his chain to move there instead of the other way around. “It’s changed because we’ve improved, and we have a better model than we had,” Weigel said. “We’re hiring better people and getting more sophisticated as an industry.”

Convenience stores, Weigel said, were near the bottom rung of the sophistication ladder in 1990. Now the channel is competing with Walgreens, McDonald’s, Panera Bread and other prominent retail chains. This sustained sophistication elevates the entire industry in the customers’ eyes.

“Twenty-five years ago, we were talking a lot about the need to improve our image,” agreed Fran Duskiewicz, senior executive vice president of Nice N Easy Grocery Shoppes, which operates 78 locations in upstate New York. “We were perceived to be old and slow, converted gas stations, dirty, etc. But if you take a look at the industry’s evolution and the quality of the c-stores being built today, everything is more upscale and better designed. We look as good, if not better than, most of the large QSRs around us. The way our Nice N Easy stores look and are perceived by shoppers today has improved ten-fold, which is important because today we’re fighting with drug stores, dollar stores and supermarkets—we’re all after the same shopper today.”

Rutter’s in 1990.

That competition was much less fierce 25 years ago. In 1990, drug stores weren’t selling large quantities of beer, nor had they installed small-format c-stores in the front of their locations. Dollar stores, meanwhile, were few and far between compared to their presence today, and they catered mostly to low-income, discount shoppers. While a few c-store chains were already attempting foodservice, the industry had yet to be perceived as a threat to QSRs.

“In 1990, you paid attention to what the c-store down the street was doing, and now all the channels are selling pretty close to the same things these days and targeting the same shopper dollar,” Duskiewicz said.

The reason for the change in business model is an economic one. “We used to talk about the three legged stool—gas income, cigarette income and coffee income—that sustained the c-store business,” Duskiewicz said. “That three legged stool has been kicked out from under us because c-store retailers can’t rely on cigarettes, gas or coffee income alone anymore. We have to diversify, so we’re developing bigger stores, and more companies are looking to try foodservice because those traditional sources of income are not as reliable as they used to be.”

Rutter’s in 2014.

Carl Bolch, founder of RaceTrac, told CSD that the areas of evolution that had the greatest impact on convenience store revenues and profits over the past 25 years were gasoline and tobacco. “The evolution in both of these categories has put pressure on retailers to create additional sources of income, of which food is a major part,” he said.

ADDING LEGS
Back in the early 90s, the big c-store locations were controlled by big fuel companies—the Exxons, Mobils and CITGOs.

“Twenty-five years ago, major oil companies were the most significant retail players in the fuel and convenience store business, providing the largest source of investment and revenue in the industry,” Bolch said. “Today, oil companies are mostly wholesalers of gasoline rather than the primary player in the combined fuel/convenience store business. Additionally, as a result of vehicles becoming more efficient, total liquid fuel sales are declining.”
As the major gas brands have pulled back, that has spelled change for operators, many of whom are relying on their own c-store banner to pull customers or even turning to unbranded and featuring their store brand.

“There has been this transition where many of us in the industry are controlling our own fate now more than ever when it comes to fuel and that is a significant difference from 25 years ago. Even the big gas companies have spun off. They are all trying to figure out what is going to happen with energy in the future and they don’t want to run stores—stores are too hard,” Duskiewicz said.

Gasoline itself has changed dramatically. Ethanol wasn’t even a consideration in 1990, Weigel said. “We never considered what type of fuel we might be selling because we knew it was going to be gasoline. We sold all regular gas and now that is considered an oddity and it’s a premium priced product.”

However, fuel demand has begun to drop, and stores are competing for the same gas customer, Weigel said.

Cigarettes are also not what they were in the 1990s. “Thirty years ago, we were earning 30% on cigarette sales and now most places are in the low teens, here in New York State the state minimum is 8.6%, but you have a sales base and margins eroding along with it. When you look at how money is earned within our stores, cigarettes have fallen way down the list from where they were 25 years ago,” Duskiewicz said.

As cigarette sales have declined, c-store retailers have begun stocking larger quantities of smokeless tobacco, which customers began gravitating toward as regulations kept them from smoking in restaurants and other public places. Then e-cigarettes arrived on the scene, followed by e-liquids. As the category continues to grow, it has kept c-store retailers on their toes, especially as present-day regulatory issues arise.

As margins on gas and cigarettes have declined over the past 25 years, c-store retailers have been left scrambling to find alternative sources of revenue. As a result, convenience stores began flocking to foodservice, which has also impacted the coffee business at c-stores. Flavors, and ethnic varieties, high quality beans and proper brewing strategies served at state-of-the-art coffee bars with condiment sections featuring syrups, sugars and creamers is key today in becoming a destination for coffee, which is a must for any store considering foodservice.

“Today, guests are stopping in for our ‘crazy, good’ coffee and, most importantly, they are coming to connect with the RaceTrac team member who has become a part of their everyday and is a significant part of our brand experience,” Moran said.

FOODSERVICE FOLLOWING
While many chains are just diving into foodservice for the first time in 2014, unique challenges drove some c-stores to foodservice as early the 1990s. For example, in Pennsylvania—where Sheetz, Wawa and Rutter’s Farm Stores are all renowned for their superior foodservice offerings—convenience stores cannot sell beer, which pushed them toward foodservice faster than other areas of the country. Nice N Easy, meanwhile, faced competition from Native American reservations offering lower prices on cigarettes and other merchandise. Those challenges inspired Nice N Easy to foray into foodservice 20 years ago.

“We started developing our own pizza program. But it’s such an evolutionary thing and I think that’s why people who try to start up foodservice and do it overnight have problems because you can’t do it that way. We’ve built our program over 20 years. It’s been very evolutionary and you have to develop people, programs and mindset,” Duskiewicz said.

Rutter’s has always been involved in some aspect of foodservice, but its offering has evolved light years since the early 90s. “Twenty five years ago, you would come into one of our stores and see a fairly large deli case and we would slice meats and cheeses in the store and make fresh sandwiches. So we’ve always made customer-made sandwiches, but in those days it was more a cross between a little grocerette-type of c-store with a deli. Today, all our meats and everything all come precooked, pre-sliced and pre-weighted,” said Scott Hartman, president and CEO of the 59-store chain, based in York, Pa.

Rutter’s still makes its sandwiches fresh onsite at its stores versus a commissary model, but has upped its game with individual frying, and numerous food options, including stir fry, a complete breakfast program, and the addition of confection ovens.

“We went from cold sandwiches and a crock pot offering to the array of restaurant items we serve today,” Hartman added.

RaceTrac also had a hand in foodservice as far back as the 1990s. In 1986, the company first tested a Pizza Street concept in its stores. “At that time in our history, consumers weren’t expecting to come into a convenience store and eat pizza—but we were willing to try it. The pizza concept didn’t take off, but that didn’t stop us,” Moran said. “In 2011, we tested frozen yogurt in one of our Atlanta area stores. Ten flavors of frozen yogurt with fresh toppings, including fruits, candy and hot fudge—again, not what shoppers expected to see when they walked into a convenience store, but in 2011, shoppers were ready to experience something different during their convenience store visit. Because our offerings evolved with our guests’ preferences, the Swirl World concept took off.”

Today, Swirl World is available at more than 60 RaceTrac locations across Georgia, Florida, Louisiana and Texas.

BIRTH OF RETAIL TECHNOLOGY
Perhaps the most extensive changes have come from the evolution of technology and how c-stores have transitioned from manually recording information to complete automation.
“Twenty-five years ago, less than 5% of the industry, maybe only 2% of the industry, was actually scanning. And 2-5% might have had a computer in their stores. There were no Websites. There were a lot of calculators. There was a lot of pencil and paperwork going on,” said Hartman, who vividly remembers Rutter’s old corporate computer running off of card decks 25 years ago. “When you put that in perspective to today with stores scanning iPhones for electronic payments, 25 years seems like an eternity when you look at all the things that have happened. It’s fascinating how quickly things change.”

Sonja Hubbard, CEO at E-Z Mart Stores Inc. and former chair of the National Association of Convenience Stores (NACS), agreed that compared to the 90s, “technology now impacts our business from every facet. We market electronically through social media, digitally with pricing and can virtually tour stores from our phones,” she said.

SIZE MATTERS
The size of the store is another big change. “A really big store 25 years ago was around 3,000 square feet, and today, they’re exceeding 6,000 square feet so they’re more than doubling the size of the physical store,” Hartman said.

The forecourt has grown as well. In the 1990s most stores featured about two gas pumps. “Today chains are building 6-10 MPD per store, so the whole volume equation has changed dramatically from the old days, as far as what you put through a small box to what we call a small box today,” Hartman added.

As stores grow, so too does the price tag, Weigel said. “The cost of a store has gone from $800,000 or $900,000 to more than one million dollars, and these new bigger stores are even more than that. The costs are so much higher, which impacts overall profitability.”

As big box stores moved in and pushed out neighborhood supermarkets, c-stores, such as Nice N Easy became a destination for small fill in grocery trips. “It’s easier for us to take what we do and expand it, than it is for bigger guys to scale down,” Duskiewicz said.

E-Z Mart these days finds that it spends much more money on its locations than it did in the 90s. “We spend more to upgrade or remodel a location today than we spent on an entire facility in the late 80s. We invest significant dollars remodeling restrooms, which aren’t a quantifiable profit center; because we know, in reality, they do generate sales and loyalty,” Hubbard said.

SURPRISING CHANGES
While some of the changes to the industry were easy to predict, many have taken the industry by surprise.

One thing Duskiewicz never anticipated 25 years ago is that Nice N Easy would hire chefs. “I never would have believed that we would have chefs, or that we would become this involved in food.”

“I didn’t have the vision of the cell phones, and we’re using cell phones for redeeming coupons, for instant customer feedback, and we’re displaying gas prices to the Internet,” said Hartman. “We didn’t know what the Internet was 25 years ago. We still had manual gas price signs back then. Technology has just made things quicker and easier for operations and we couldn’t have imagined how that would change business 25 years ago; it’s hard to believe there wasn’t a cell phone anywhere around,” he added.

Moran noted that the way her chain’s strategy has evolved would have been hard to predict 25 years ago. “Today, we are tracking consumer behavior and watching trends around meals on the go, snacking dayparts and developing habits in a fast-paced environment. This is a far cry from our previous traffic driving strategy of having big yellow signs that screamed lowest price,” she said.

ONLY THE STRONG REMAIN
Not only have the box and forecourt evolved, but the very landscape of the convenience store industry has changed dramatically over the past 25 years. As margins eroded and the cost of running a c-store skyrocketed, many chains have been squeezed out of the business or bought out by larger conglomerates.

“Having grown up in the c-store business, I have seen it evolve for 40 years,” said Robert Buhler president & CEO of Open Pantry Food Marts of Wisconsin. “My direct involvement has been over the past 16 years, as I was in the investment banking industry prior to buying my family business.”

In the past 16 years, Buhler has noticed two significant industry changes: The consolidators consolidating and the major gas brands fleeing retail. “Consolidators like 7 Eleven, Couche-Tard (Circle K), The Pantry, and smaller ones (Sun Capital, various Israeli buyers, etc.) have bought out many small chains, and some not so small,” he said.

“This has been mostly good, but has dramatically changed how the industry has done business,” Buhler said. “With major oil selling essentially all of their sites nationally (Shell, BP, ExxonMobil), smaller operators were able to get many of these sites. Unfortunately, they are burdened by having to buy from the majors at a high price versus what unbranded fuel is now being offered for on the wholesale market.”

Buhler’s background in investment banking gives him a unique perspective on the financial mistakes that have lead some chains to go under, and the strong fiscal decisions that have allowed others to thrive and grow amid changing industry conditions.

“Over time companies, including c-stores began to rely more on ‘cheap and abundant money’ from banks, as opposed to working hard to improve operating and merchandising excellence, to accrete value,” Buhler said. “The net result is growth by ‘over-leveraging’ (borrowing too much money) and buying sites, without actually improving the sites operations and merchandising value.”

Meanwhile, the chains that have thrived over the last two-and-a-half decades have worked to build programs rather than just acquire physical sites.

The lesson of the past 25 years to c-stores has been: “Never buy sites to just add sites, even if the money is abundant and cheap.” Buhler said. “Buy sites you can genuinely improve operationally and merchandise with real enhancement for added margin.”

Weigel agreed. “If you look at the consolidation of the last three years together it would probably beat the last 20 years,” he said. “Family-owned companies are disappearing. And the conglomerates that are being put together by investment banking firms are not designed to run—running them doesn’t seem to be a big important factor to them.”

NEXT QUARTER CENTURY
Retail experts agree that the changes to the c-store industry are sure to be even more rapid and extreme going forward, as technology, especially, matures at a fast pace.
“I think the possibilities are limitless for the convenience store industry,” RaceTrac’s Moran said. “As alternative fuels, made-to-order concepts and fresh or ‘better for you’ options become more common in convenience stores, the sky is the limit as to how much we will evolve in the next quarter century.”

“In 25 years, I would say, we will be serving dinner,” Weigel said. “We’ll be a place where you can buy prepared foods that are probably delivered to us as a distribution point—cooking will be gone and heating up meals will be the way it is. We’ll continue to be a corner store and we’ll be offering something convenient. And I think prepared foods and fresh foods, fruit, have opportunities for us. We might even see small butcher shops in c-stores, for people who want fresh meat quickly.”

Nice N Easy’s Duskiewicz predicted we’ll see a change to vehicles in terms of the way they are fueled. “It could be that there is just a broader variety of how people fuel their vehicle because it doesn’t appear at present that the industry is embracing any one particular new energy although that could change, but what will happen is we’ll have to figure out a way to power people’s vehicles—whether it’s refueled or recharged—and we will need to be in the middle of that.”

He also anticipates that channel blurring will continue—possibly even with drug stores selling fuel and c-stores featuring pharmacies, blurring the lines even more.

“A c-store could become a large drug store with a dollar store section that sells food,” Duskiewicz said, pointing to the recent Walgreens and Duane Reed superstores that have entered the marketplace. “Shopper research is indicating people want a number of things right where they stop, and as long as everyone is listening to what the shopper is saying, we’re all going to wind up doing the same thing.”

Technology alone is expected to revolutionize the c-store industry, and with it, the ability to individualize and customize the shopping experience for customers. “Technology is changing at such warped speed that anything I can imagine now will be obsolete in 25 years,” Weigel said.

E-Z Mart’s Hubbard said she expects even more mobile technology dependency through expanding communications, applications and payments. “Cash may not even be used as we’ll make digital payments for products and services with our electronic devices, whether that means phones, watches, glasses or maybe an improbable to lose chip in your finger,” Hubbard said. “Specific products will come and go in popularity, but I would anticipate the staples remain relatively constant, just as they have for some time.”

Hartman and Hubbard both echoed Duskiewicz in noting that fuel demand is sure to change. “Fuels will evolve, but I still see a need for gasoline, Hubbard said. “We are moving into a period of more energy independence within the U.S., to more efficiency in our vehicle fleet and expanding and improving alternative fuels. A complete conversion from fossil fuels in 25 years would be very rapid and unlikely though.”

Hartman noted that however fuels evolve, the c-store industry will be there to help customers power or fuel their vehicles. “It will be fun to see where the next 25 years go.”

LESSONS FROM QUIKTRIP
As we Mark our 25th anniversary with this issue, CSD spoke with many industry leaders to learn what makes the convenience store and petroleum channel so special. Chet Cadieux, president and CEO of Tulsa-based QuikTrip, sat down with CSD Editor John Lofstock to discuss the industry’s gradual development.

JL: Convenience retailing remains one of the strongest channels for retail growth, but the industry has certainly paid its dues with some lean years. Now with foodservice, impressive advancements in retail technology and more streamlined distribution, the industry is viewed as a haven for retail innovation, and QT is right there at the head of the pack. What did you see through the years to recognize the potential for the industry to thrive?
CC: It seems that every study points to the fact that consumers increasingly believe that they have less time on their hands. Whether or not consumers truly are busier than they used to be may be open to debate, but their sentiments about it are not. Consumers feel strongly that they don’t have enough time in the day to get everything done. As these feelings have grown more pronounced, it is only natural that convenience stores (emphasis on convenience) would become a more important part of daily life for the average consumer. Of course, due to channel blurring, convenience is no longer the sole purview of c-stores. There are a lot of other channels of retail that are getting very good at delivering convenience.

JL: What is the one thing that has surprised even QT over the past 25 years, such as the growth of fresh foods, being an employer of choice, the rapid growth of social media, etc.?
CC: Actually, I would say that the biggest surprise for me has been the speed of demand destruction in gasoline. Don’t get me wrong, we understood it was coming and had been preparing for it for more than a decade. It’s just that when that demand destruction finally started in 2007, it turned much quicker than I would have thought possible. After an entire lifetime of increasing demand, it is easy to fall into the trap of thinking that demand would just grow forever. I think that, even now, when there are a couple of months of positive demand trends, a lot of people want to believe that the past few years of decreased demand were an anomaly. But when you see the Energy Information Administration 20-year demand forecast continue to get downgraded massively year after year, it should cause everyone to sit up and notice.

JL: Looking forward, what does the industry have to do to elevate its game and prepare to meet customers’ needs for the next 25 years?
CC: I strongly believe that the industry needs to prepare itself for a marketplace that demands 30% fewer gallons per day than it does today. Those are a lot of margin dollars to replace. The customer isn’t going to go away, so we are all going to have to figure out what we are going to sell to them to replace those motor fuel margin dollars. That should keep us all busy for the rest of our careers. Heaven forbid we ever get bored.

A PAGE FROM SHEETZ

Evolution in the convenience store and petroleum industry remains a constant as retailers aim to keep up with consumers’ changing demands. Few companies can match the track record of Sheetz, the Altoona, Pa.-based chain long regarded as an innovator. The company, named Convenience Store Decisions’ Chain of the Year in 1994, also has a longstanding commitment to its customers and employees.

“It has been phenomenal to see how consumer behavior has changed and for us it has been great to see how people have adopted the idea that you can get restaurant quality food at a gas station,” Ryan Sheetz, director of brand development, told CSD.

Being a top quartile operator takes a lot of hard work, and it’s becoming harder by the day as retailers across all channels are suddenly evolving to go after convenience store customers, certainly something few people, if any, predicted 25 years ago.

But if any chain has the retail pedigree to adapt and overcome, it’s Sheetz. “While foodservice is relatively new to many operators, our family started in foodservice way back when our first store opened in 1952,” Sheetz said. “It was a ‘dairyette’ location with food and beverages that, over the years, evolved to included gasoline in the 70s. and we charged into prepared foodservice in the mid-1980s with our MTO [Made-To-Order] line. It’s been terrific to see how customers have adopted the MTO program and the idea that we can provide them great food.”

Over the next 25 years, Sheetz will continue to expand its foodservice business and it vows to expand—and perfect—new areas as customer demand dictates. “Change is constant for this industry and at Sheetz we’re committed to change,” Sheetz said.