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SOI 2020: Category Breakdown
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SOI 2020: Category Breakdown

Retailers have many opportunities to build upon in-store successes,

ALEXANDRIA, Va. — Convenience isn’t just a type of brick-and-mortar store, transaction type or consumer need state. During 2020’s COVID-19 pandemic, it’s a government-classified necessity.

“In this particular crisis that we’re experiencing right now, it’s really important to remind ourselves that convenience is essential to the American consuming public,” said Charles McIlvaine, chairman and CEO of Coen Markets, Canonsburg, Pa., in his presentation for the 2020 NACS State of the Industry Summit Virtual Experience. Convenience stores, along with grocery and other comparable retail channels, were deemed essential by the federal government, allowing them to remain open during the health crisis.

The statistics reveal why. Each day, there are 165 million transactions in convenience stores, McIlvaine said. “That means that about every two days on average, almost every American goes into a c-store chain to buy a product or service,” he said.

And, with more than 152,000 locations, this puts 93% of Americans living within 10 minutes of a c-store, which are “remarkable statistics for any retail channel,” he said.

That said, c-stores may be essential, but they have plenty of competition to meet consumers’ needs during and after this crisis.

“Shoppers have more choices than ever, splitting occasions across multiple channels to support increasingly busy lifestyles,” said presenter Chuck Maggelet, chief adventure guide for Maverik Inc., Salt Lake City. This includes dollar stores, which saw their share of trips grow faster than c-stores in 2019, and at a rate second only to online retail, according to IRI.

The past year had already been tough for brick-and-mortar retail even before the pandemic. Across all channels, approximately 9,300 stores closed in 2019, up about 35% year over year.

“Specialty retail in particular took a hit,” McIlvaine said, and convenience stores are not immune, “essential” or not.

“Adaptation for all of us is really important,” he said. “We need to adapt to our changing markets, and if we don’t adapt, we’ll see negative consequences.”

He urged convenience retailers to focus on the business and “evolve it in a forward-thinking way.”

Missed Opportunities

Based on preliminary NACS State of the Industry figures, the convenience-store industry has been making progress.

In 2019, c-stores were winning in foodservice. Sales rose 4.4% to an average of $54,490 per store per month. Foodservice grew to account for 25% of inside sales in 2019. Its share of gross profit dollars totaled 39%.

“Foodservice margins really drove in-store gross profit dollars,” Maggelet said in his review of category results. “The bigger picture here is that 4 out of 5 foodservice categories reflect healthy growth in gross profit dollars.” Prepared food, commissary, hot dispensed beverages and frozen dispensed beverages all experienced gains in gross profit dollars. Only cold dispensed beverages experienced a decline, which was nearly 14%.

That said, many c-store retailers are still leaving money on the table by not properly controlling their foodservice offer. Maggelet cited summer 2019 results from NACS’ Convenience Tracking Program. Shoppers exiting a c-store were asked whether there were items they intended to purchase but did not.

Cigarettes are about 28% of inside sales, but they’re a bit of a melting ice cube.

“The No. 1 missed purchase item that shoppers intended to buy but did not is the same category with the highest margin percent and gross profit dollar contribution: prepared food,” Maggelet said. In 2019, sales of prepared food averaged $42,138 per store per month, and gross profit dollars rose more than 4% to $23,499 per store per month, according to preliminary NACS figures.

Why didn’t prepared food make the sale for these consumers? “Seventy-seven percent of the prepared-food missed purchases were because the shopper could not connect with the product they were seeking,” Maggelet said. “The right size, flavor, brand or variety was out of stock. This is something we can all work on, anticipate and eventually control.”

The results of the foodservice survey could apply to all c-store product categories; Maggelet encouraged retailers to better control the products they stock in parallel with those that sell.

“In a business of any profit, we cannot afford to give away high-margin food purchases,” he said. “We need more profitable foodservice operations in order to counter rising wages and the overall operating expense increases we’ve seen.”

Beverage Battle

C-stores are also not reaching their potential in the cold vault for both alcohol and nonalcohol products.

Beer sales rose 1.6% to an average of $17,366 per store per month in 2019, according to preliminary NACS data.

“The beer category is being transformed by innovation and changing consumer preferences,” Maggelet said. “We’ve seen the growth of hard seltzers and canned wine. Both are small [pieces of the category] but appeal to a growing segment of shoppers.”

However, c-stores’ share of the beer market also fell in 2019 to 69.3%, according to Nielsen. (See chart on previous page.) Competitive-channel data shows that share is being picked up by grocery (27.2% total share of beer) and mass merchandisers (0.6% share). This is as younger shoppers are opting for spirit drinks and buying occasions are moving toward multipacks, Maggelet said.

The grocery channel also is catching up to c-stores in its share of sales of nonalcohol packaged beverages, according to Nielsen. C-stores’ share of the market slipped in 2019 to 47.2%; this compares to 46.2% for grocery stores, which saw an increase last year.

The loss of share is happening as innovation transforms the packaged beverage category.

“The packaged beverage category is blurring, but the overarching theme is function as well as form,” Maggelet said. According to Nielsen, c-store sales of energy drinks rose 8.3% in 2019, with units up more than 4%. Enhanced water, which includes products that contain caffeine, probiotics and vitamins, saw the greatest percentage growth among packaged beverages, with dollar sales up 10.9% and units up 9%.

Maggelet said embracing innovation in packaged beverages is paramount to growing revenue.

“When we put a retail lens on and look at gross-profit dollars, packaged beverages contributes the highest amount of gross profit,” he said. “In fact, it has contributed the highest amount of gross profit dollars for the past seven years consecutively.”

In 2019, sales of packaged beverages averaged $13,726 per store per month, second only to cigarettes, according to preliminary NACS figures. Its gross margin percentage was 43.77%, second only to candy among the top 10 categories.

Smoke Shop

The tobacco category continued to be both a boon and a challenge to c-stores in 2019, and struggles continued into this year.

Tobacco accounted for 34% of inside c-store sales in 2019. Its share of gross profit dollars was 17% in 2019, according to preliminary NACS data.

Total c-store dollar sales for cigarettes were basically flat (up just 0.2%), according to NACS, while gross profit dollars fell 4.8%.

See Also

Meanwhile, other tobacco products (OTP) continued to be “a bright spot” for c-stores, “delivering double-digit sales and gross profit dollar growth,” Maggelet said. “OTP actually eclipsed beer as the No. 3 gross profit dollar contributor in 2019.”

C-store retailers saw an average of $4,898 per store per month in gross profits from OTP in 2019, up 27.1% from the year prior, according to preliminary NACS figures.

Syndicated data from Nielsen shows c-store OTP sales up 13.6% in 2019, thanks to a more than 48% increase in e-cigarette sales. Category units rose only 0.7%; every segment except for e-cigarettes suffered sales declines in 2019.

Maggelet said a slowdown in tobacco sales this year was already developing before the COVID-19 pandemic hit the U.S., and he cited some significant challenges that will serve as a drag in 2020:

  • At the end of 2019, the federal minimum age to purchase tobacco became 21 years old vs. 18. As a result, NACS estimates a 5% decline in overall tobacco sales thanks to the regulatory change. This is absent the effect of COVID-19, Maggelet said.
  • Most flavored e-cigarettes were banned in January. “The overall e-cigarette decline is estimated at 35% in the first half of 2020, absent the effect of COVID-19,” Maggelet said.

“The overall impact to tobacco–cigarettes and OTP–is estimated to be a 7%-9% decline in sales volume,” he said.

With the sales of cigarettes–the largest category outside of foodservice–continuing to decline, retailers should consider cannabis as the next great opportunity for the industry, Maggelet said.

“Cigarettes are about 28% of inside sales, but they’re a bit of a melting ice cube for us,” he said. “In contrast, Nielsen predicts the legal cannabis market will exceed $40 billion in just five short years.

“If you compare that to total sales for c-store cigarettes at $52 billion today and factor in declining stick volume of about 2% to 3% per year, in five years, the two categories could be equal in size,” he said.

Cannabis could one day replace cigarettes near the top of that list of the largest product categories, Maggelet said.

“It’s definitely something that as an industry we must monitor for the future,” he said.

Share of In-Store Sales by Category

More than one-third of in-store sales came from tobacco in 2019, although the category’s contribution fell by nearly 4 percentage points. Foodservice ranked second in share of in-store sales but first in share of gross profits. Elsewhere in the store, OTP, candy and alternative snacks saw strong gains in c-store sales and gross profit dollars, while milk and packaged sweet snacks dipped compared to the previous year.

*** For stores selling beer, beer supplied 10.9% of sales and 6.5% of gross profit dollars.

Click here to download complete Top 10 category data.

The 2020 NACS State of the Industry Summit Virtual Experience will be available for on-demand viewing through Sept. 1. Access critical benchmarking data, analysis, emerging trends and executive insights at convenience.org/SOISummit.

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