After hitting a four-decade high of 9.1% in June 2022, inflation has slipped each month over the past year. Despite the downward trend, inflation’s ripple effects will be felt for months and even years to come. But the convenience store industry is strong and fluid, having adapted to a changing consumer, and some industry experts see a light at the end of the inflation tunnel.

Soaring Food Prices

Foodservice sales at convenience stores grew in 2022 over the previous year, with sales now representing 25.6% of average in-store sales and 36.1% of in-store gross margin, according to the NACS State of the Industry Report of 2022 Data. However, the foodservice consumer price index increased 9.7% last year, a large obstacle to overcome.

Michelle Weckstein, director of food and beverage brands, SunStop, saw the pinch of food inflation firsthand throughout the retailer’s 79 locations. SunStop’s foodservice program features made-from-scratch Southern comfort food. The chain is known for its chicken, potato logs and mac and cheese. A couple years ago, the company’s margins began to suffer because costs were rising and SunStop hadn’t raised its prices. 

“We didn’t want to turn off the customers, because they were just starting to come out of the house after COVID,” Weckstein said. “So we made incremental increases in our pricing.”

SunStop customers let the retailer know they were not happy with paying more for their favorite foods.

“Every time we would raise our prices, the customers certainly vocalized their opinion,” she said. “A lot of it was right at the counter where they would, let’s just say, be very expressive to some of our employees, unfortunately.”

On top of raising prices, SunStop added another tool to its inflationary defense. It found a new broadline distributor that has a partnership with a group purchasing order (GPO), and it’s given the company “significant” savings on food prices.

“We are getting phenomenal buying power because we’re part of this GPO,” said Weckstein. “We can, of course, share the [savings] with our customers.”

SunStop is also sticking to its core food items, the “things we do best,” Weckstein said. These foods require simple preparation, meaning the company can spend less on labor.

We wanted to use our private label as a way to drive awareness of who CEFCO is.”

“We’re really just focusing on consistency of availability and quality products and making sure things are convenient,” she said. “If we can really master those things as an industry, I think we can remain competitive.”

Tough Times for High-Priced Cigarettes

Another in-store category hit particularly hard by inflation is tobacco. While consumers are not leaving the cigarette and other tobacco products categories completely, they are trading down within categories and out of certain subcategories. According to Bill McCloskey, chief operations officer, RMarts, which has 13 stores in the Chicagoland area, cigarette sales are plummeting because they are the most expensive tobacco option by far. A pack of cigarettes in the chain’s operating region can range in price from $11-$14, while a can of moist smokeless tobacco is $7-$8 on average. But moist smokeless prices have been hit by inflation, too—up around $2 on average over the past couple years, says McCloskey—so many consumers are moving to a newer tobacco subcategory, modern oral.

“The modern oral [sub]category is benefiting from both cigarette and snuff users because that price point is still around $4 or $5,” said McCloskey. “What you have is cigarette smokers moving into that category.”

According to McCloskey, RMarts has seen 85%-90% sales growth in the company’s modern oral subcategory over the past two years, while moist smokeless tobacco sales have declined by 3%-4%, and cigarettes are down 6%-8% in the same time period.

McCloskey says RMarts is using SKU rationalization to manage any declining subcategories. The company’s category managers watch the movement of their brands closely so RMarts doesn’t hold onto SKUs that are no longer selling.

“If we normally carry nine or 10 [flavors of moist smokeless], maybe we’re only carrying five or six now,” he said. “But on the other hand, in the [brands] … that are growing, we’re making sure that we have all the SKUs … because that customer is looking for something, and we don’t want to miss an opportunity to sell it to them.”

Tools in the Toolbox

Feeling the sting of inflation, consumers have been more open to brand swapping, and private label has become a go-to for consumers. In fact, private-label food sales have increased 16% over the last two years, according to NIQ data. In April 2023, private label captured 19.1% of consumer spending in the CPG market.

Capitalizing on this consumer trend is Texas-based CEFCO, which is overhauling its private-label line, formerly known as CEFCO Premium. According to Rachel Puepke, vice president, marketing and category management, CEFCO, the company’s private-label line was incohesive, with different branding across its products.

“We did a whole brand strategy for CEFCO to find who we are, who we want to be,” said Puepke. “We wanted to use our private label as a way to drive awareness of who CEFCO is.”

CEFCO came up with Y’ALL, a tie to CEFCO’s Southern roots and a way to show that CEFCO gives back. A portion of Y’ALL product sales is donated to the Fikes Foundation, a nonprofit started by CEFCO’s founders. The company debuted its new private-label branding strategy with an alkaline-enhanced water. 

“Water is a great product for any company to start with,” said Puepke. “It was a quick way for us to drive that instant recognition of our new brand.”

The water retails for $2.79 for one liter, but CEFCO is running a promotion on the water—two bottles for $4—to drive more volume and increase the value perception.

“We purposefully positioned and priced our products to be a better value to the national brands or to the major brands. Value doesn’t always necessarily mean price point,” she said. “However, we are slightly under or cheaper from a price point perspective when you look at national brands.”

According to Nielsen, promotional sales play a crucial role in driving sales growth. Promotions accounted for 13% of sales in April 2023.

“People are looking for value, and they are watching their pennies,” said McCloskey. “We have to address that and come up with more value proposition promotions.”

RMarts is also using water to add value for customers and drive foot traffic. The company prices a gallon of water at $1.79.

Every time we would raise our prices, the customers certainly vocalized their opinion.”

“Water is the new driver,” he said. “We’re finding more people picking up cases … and gallons of water than ever before. And then obviously that gets them into the store and hopefully they buy something else to go with the water.”

According to Kelley Gutierrez, senior category manager, candy and snacks, MAPCO, inflation has impacted in-store categories, forcing the company to raise prices. To not deter customers, Gutierrez says the company is getting creative with promotions.

“People are taking a second look at everything that they’re spending on,” she said. “Even people in higher income brackets can be easily turned off by the price of an item that has the same margin it had a year ago, but it just happens to be a dollar higher because of cost increases.”

It’s about adjusting the perception of that good and the value of it, she says. “That’s where I really think that smart promotions are going to come into play.”

Loyalty is another way convenience retailers are adding value for their customers. CEFCO’s loyalty program, CEFCO Rewards, offers its members free products when they sign up, as well as exclusive promotions like BOGOs.

“That’s keeping our consumers coming back to us,” she said. “They will spend on that candy bar because they can buy two drinks for the price of one.”

SunStop also offers discounts to loyalty program members. “If you are a loyalty member, you get treated special,” said Weckstein.

Seeing the Light

Although inflation is still historically high, convenience retailers are seeing a light at the end of the inflationary tunnel.

“I do believe c-stores are still holding strong on transactions,” said Puepke. “From a total sales perspective, we’re doing a great job of offsetting any trade down or any loss of categories in the basket. So even though basket sizes are smaller, we’re not necessarily seeing a significant drop in our transaction spends.”

I think it’s going to be a good summer.”

According to Weckstein, c-stores have other ways to draw in customers on top of quality foodservice, whereas QSRs just have food and drink.

“We need to really capitalize on everything that we have within our four walls,” she said. “If we can do that with consistency of availability and still make it convenient, I think we’ll win.”

According to McCloskey, there’s definitely cause for optimism. He’s seen the best volumes all year in the past two weeks.

“I’m encouraged,” he said. “I think it’s going to be a good summer.”