Labor & Delivery

Despite challenges, many retailers are jumping on the delivery train.

Labor & Delivery

April 2020

By: Terri Allan

Attracted to the prospects of a larger customer base and higher basket rings—not to mention serving consumers who may be reluctant to venture out due to health concerns—many convenience store operators are scrambling to offer delivery of prepared foods and merchandise. But for others, there’s still uncertainty about the profitability and long-term viability of delivery.

“C-store delivery has come on so fast,” remarked Joseph Bickham, president of the six-unit Fuel City chain in the Dallas area, which has offered delivery for the past two years. Bickham believes the channel’s quick adoption of on-demand sales stems from the fact that c-stores are competing with QSR operators more than ever, “and that means competing when it comes to delivery,” he said. “In this age of delivery, the burden is now on the retailer to come to customers.”

Elvis Ankeney, co-owner of Ankeney Fine Foods in San Francisco, agreed. “Delivery is a service that is becoming increasingly valuable to many consumers. People don’t want to shop in stores anymore,” he said. And according to the retailer, the time is now for c-stores to jump on board the delivery train. “If we can get in front of this trend, we’ll have a competitive edge,” Ankeney explained.

With increased operating costs, potential impact on in-store visits and concerns that arise from both a food quality and safety perspective that added delivery time brings, customer delivery may not be a realistic offering for all c-stores. “Retailers are definitely exploring the fit of delivery solutions into their offerings,” noted Lori Buss Stillman, vice president of research at NACS. “Ultimately, operators must strike the right balance between product offerings, fulfillment options and how to present the best overall value proposition to consumers. Now is definitely the time to be testing and learning.”

Incremental Sales Incentive

The appeal of customer delivery to retailers is understandable. Incremental sales are a big incentive. “Delivery provides good revenue and good margins,” said Art Sebastian, vice president, digital experience, marketing, loyalty, e-commerce and customer insights and analytics at Casey’s. The Iowa-based chain has been delivering pizza and other items for about five years now, and according to Sebastian, “It’s a growing part of the business.” About 850 of 2,000-plus Casey’s stores offer delivery for $1.99 per order. Store employees handle the deliveries.

Moreover, delivery allows convenience retailers to access potential new customers—those who only want product delivery at a given time, and not a brick-and-mortar experience. In addition, average tickets are higher generally for delivery orders than in-store purchases, even excluding delivery fees, retailers reported. “Our delivery baskets are typically larger than in-store,” said Bickham, “and we’re seeing larger group orders.”

Delivery is a service that is becoming increasingly valuable; people don’t want to shop in stores anymore.

Yet, delivery comes with its share of challenges for retailers. Depending on the model—own or third party—delivery brings added costs to merchants, including labor, vehicles and purveyor fees. Even packaging needs to be figured in. At Fuel City, for example, the compartmental containers used for in-store foodservice orders are replaced with separate containers for each foodservice item ordered for delivery. “Retailers have to ask themselves, ‘What type of packaging is best for off premise?’” noted Mike Fogarty, owner of Choice Markets, with three stores in Denver, all of which offer delivery. “And if you’re a small operator and have to stock different packages and wraps, where do you store it?” Fogarty continued.

Stillman pointed to the “unintended consequences” that the rise in delivery has on retailers, such as “softness in trips, the lost meal occasions and impulse purchases.” Indeed, Bickham conceded that an initial concern at Fuel City was that delivery would cannibalize in-store traffic. “We’re still monitoring that,” he reported.

Perhaps the biggest concerns c-store operators have about delivery relate to the quality of the food and service that the customer experiences. “Food safety is a massive issue,” remarked Stillman. “With delivery, there are the added challenges that come with food handling from store to door.” For that reason, many c-stores limit the items they offer for delivery. “We don’t deliver hot food,” said Dani Cone, owner of Cone & Steiner General, with three locations in Seattle, one of which offers on-demand delivery. “I’m concerned about the quality, so we’ve adjusted our delivery items.”

Even Foxtrot, the Chicago-based chain that was founded as a delivery-only convenience store five years ago, limits the products it delivers. According to Mike LaVitola, co-founder and CEO of the nine-unit-and-growing chain, among the items Foxtrot doesn’t deliver are coffee and avocado toast.

Delivery provider fees can be substantial, reaching up to 30% of the ticket and adversely impacting gross margins.

A few large c-store chains, however, report that they haven’t encountered issues with food quality as part of their delivery programs. According to 7-Eleven, which offers delivery through nearly 1,000 stores, “Our hot food is prepared on demand, and our average delivery times are under 30 minutes. These two factors ensure quality and freshness are maintained throughout the delivery.” Casey’s Sebastian also noted that with the company’s own delivery model, “We’ve had no product degradation.”

Another challenge to delivery cited by several convenience retailers is the customer-service experience. Orders that are never delivered, delayed deliveries, poor quality food and rude delivery personnel all reflect negatively on the store, and that impact can be magnified via online commentary.

New Customer Draw

Convenience retailers are generally employing two different models when it comes to delivery—third-party providers or in-house delivery—and they each come with their own share of advantages and challenges. Among the on-demand providers c-stores have partnered with are DoorDash, Grubhub, Postmates and Uber Eats. “It’s a good funnel, especially for a new business,” said Choice Markets’ Fogarty, who has partnered with all of the major delivery apps and reported that delivery now accounts for 30% of his sales. “Getting on their platform can be helpful in getting you to grow your business. It provides visibility and can pave the way for first-time customers to become repeat customers.”

Ankeney and Bickham pointed to lower overhead costs associated with using a third-party versus a store’s own delivery program. “We don’t have to pay an employee a minimum of $15.50 an hour, and we don’t incur vehicle charges,” the San Francisco retailer said, noting that delivery now comprises between 10% and 20% of the store’s sales.

At Fuel City—where delivery accounts for less than 2% of the chain’s business—by working with third-party delivery providers, “we haven’t had to adjust our labor,” Bickham said. “While we’re seeing added sales with margins that are lower than in-store sales, we’ve had no higher labor costs.”

As Bickham and other retailers point out, delivery provider fees can be substantial, reaching up to 30% of the ticket and adversely impacting gross margins. Other challenges of the third-party model include POS integration and the need for separate terminals for every provider. “When you only have four feet of counter space to begin with, your selling space can be compromised,” Stillman of NACS said.

One of the biggest downsides to partnering with delivery providers is that typically retailers don’t have access to customer data. “We don’t even know the ZIP codes of where the orders are going to,” remarked Bickham. “Access to that information could help us with marketing initiatives and help us to determine where we build new stores.”

Due to the challenges, “some retailers are getting fed up with third-party delivery,” Fogarty reported. Indeed, the Denver retailer is launching its own seamless platform in the second quarter, including a new app, website, loyalty program and delivery via its own electronic vehicles. “We want to own the entire experience,” Fogarty said. While 7-Eleven works with DoorDash and Postmates, the chain presumably has access to customer data as orders are placed via its 7NOW app. The app serves nearly 400 cities and more than 30 million households, 7-Eleven said, and carries a flat $3.99 delivery fee.

With delivery, there’s the added challenges that come with food handling from store to door.

A Volume Game

Retailers such as Casey’s and Foxtrot that rely on in-house delivery programs prefer the ability to hire their own personnel despite the added labor and vehicle costs. Foxtrot’s LaVitola reported that while the company has experimented with outside providers, they’ve opted for their own as “we feel we can attract better carriers.” Sales at Foxtrot—which charges customers a flat $5 fee per order—are split 50/50 between in-store and e-commerce, LaVitola said. Delivery orders average $50, while in-store tickets average $15.

Cone, meanwhile, tried a third-party provider for a few months, but orders didn’t meet her expectations, so she’s taken delivery in-house. “I wonder if third-party delivery is ideal for all c-stores,” the Seattle retailer remarked. “With fees that can range between 20% and 30% of the ticket price, it’s a volume game. A successful delivery program comes down to who your customer is. We operate urban c-stores, so we’re more for the customer who finds us along the way.” Cone estimated that delivery orders account for between 5% and 7% of Cone & Steiner’s sales.

Earlier this year, Casey’s began tweaking its delivery model and testing a hybrid program that combines the company’s own delivery with that of third-party providers, including DoorDash. According to Sebastian, the new system will allow the c-store chain to expand its delivery offerings and frequency.

While many c-stores are investing heavily in delivery programs—whether their own or through another provider—questions remain about the future of the service and the channel’s role. “The delivery value proposition continues to evolve,” remarked Stillman. “It will be a service the industry will need to figure out how to provide.” Still, she noted, whatever path retailers take, the goal must be on serving the consumer.

“Any growth opportunity must center on consumers,” remarked Sebastian. “If they’re in the store, that must be the focus. If they’re looking for delivery, that must be the focus. Retailers today must meet consumers where they want to be met.”

Terri Allan

Terri Allan

Terri Allan is a New Jersey-based freelance writer. She can be reached at terri4beer@aol.com and on Twitter at @terriallan.

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