The U.S. convenience and fuel retailing industry entered the coronavirus pandemic coming off another year of measured growth. For 2019, pretax profits reached a record $11.9 billion, driven in part by strong fuel margins but also because of in-store merchandise sales and foodservice, according to NACS State of the Industry data for 2019. Declining fuel sales and rising operating expenses, including labor costs and credit card swipe fees, continued to be headwinds even before the COVID-19 storm.
“Overall it was a solid sales year inside and not a bad one on the forecourt either,” said Charlie McIlvaine, chairman and CEO of Cohen Oil Co. and member of the NACS Research & Technology Committee, who shared Key Operational and Financial Lessons from 2019 as part of the NACS State of the Industry Virtual Experience. The virtual event, which opened in April, took the place of the in-person NACS State of the Industry Summit. The coronavirus pandemic forced event cancellations nationwide as state governors issued stay-at-home orders, including in Chicago, longtime home to the SOI Summit.
As of May 1, more than 1,700 attendees have participated in the on-demand virtual experience, which includes 12 sessions on topics such as analyzing 2019 industry performance, trends and economic forces, as well as forward-looking topics such as how COVID-19 is changing consumers’ shopping behavior in ways that could shape long-term buying patterns.
In 2019, in-store sales increased 4.4% to $251.9 billion, up from $242.2 billion in 2018, while total transactions edged up just 0.2% over 2018. Total industry sales, which include $395.9 billion in total fuel sales, fell 1% ($647.8 billion in 2019 vs. $654.3 billion in 2018), largely because of a 4.7% slide in the price of fuel. Overall, total convenience store sales last year comprised 3.1% of the U.S. gross domestic product of $21.4 trillion.
Fuel sales at convenience stores, which sell about 80% of the fuel purchased in the United States, declined 3.9% to $395.9 billion in 2019, compared with $412.1 billion the year earlier, according to NACS State of the Industry data. In 2019, gas prices averaged $2.59 per gallon, compared with $2.70 for the year prior.
Fuel sales accounted for 61.1% of total convenience store revenue and 36.2% of gross profit in 2019. Fuel margins saw another record year (26.3 cents per gallon in 2019 vs. 24.2 cents per gallon in 2018). Of the 152,720 convenience stores operating in the United States, per the 2020 NACS/Nielsen Convenience Industry Store Count, 121,998 stores sell fuel.
The top-performing c-stores sold 3.7 times as many motor fuels gallons as bottom-quartile stores, accounting for nearly 31% of their gross profit dollars. Exclude fuel sales, though, and only the top-quartile stores would remain profitable. “The SOI speakers I think over the past years have been talking about how we need to evolve to a new model, and fuel is undependable as a source of gross profit dollars in the future for a whole number of reasons,” McIlvaine said.
Last year’s fuel sales performance signaled eroding fuel demand in 2020 ahead of the novel coronavirus pandemic. Even with a lower price per gallon at the pump in 2019, consumers said they weren’t making as many stops to refuel, which translates to fewer trips per week to a convenience store. A January 2020 NACS consumer survey echoed a similar finding: More than half of American drivers (59%) were driving the same amount as they did in 2018, while 20% were driving less and 22% drove more. And then in mid-March, fuel demand collapsed as social isolation practices and stay-at-home orders curtailed commuter and highway traffic. Many areas of the country saw the price of gasoline sink to below a $1 a gallon.
Increases in direct store operating expenses (DSOE) continued to create challenges for convenience retailers, with new business investments contributing to a higher DSOE, which increased 6.9% in 2019, compared with a 5.1% rise in 2018. Credit and debit card fees increased 6.3% to a record $11.8 billion, as more consumers paid by plastic—74.6% of all c-store sales were made with a credit or debit card. “This is a really important issue for us as an industry, and we find ourselves in a predicament—all the work that we do to generate pretax profits is almost equivalent to the credit card fees,” McIlvaine said.
Overall, wage and benefit expenses increased 7.5%, and hourly wages for full-time employees reached $11.75 per hour and $10.83 per hour for part-time staff. These figures are expected to increase even further in 2020 as many convenience retailers announced temporary hourly wage increases and bonus pay for frontline hourly and part-time employees amid the coronavirus crisis. Employee turnover surpassed 110%, up nearly 18% since 2015.
“I hope that one of the key things coming out of this crisis is that we can make more of a career in our industry for our team members and have that progression occur over time, versus having the disruptions of turnover,” McIlvaine said.
The pandemic will weigh on DSOE in 2020 as retailers adopt more frequent deep cleaning and sanitation procedures and new safety measures such as installing plexiglass guards and social distancing cues and outfitting employees with personal protective equipment. However, it’s possible reductions in other expenses could help offset increased spending in other unplanned areas, such as less energy usage at stores closing during nighttime hours and for some foodservice equipment due to reduced use of self-serve options (roller grill, coffee, fountain), as well as less waste generated both inside the store and at the pump.
In 2019, foodservice sales rose 4.4% and represented 25.4% of inside sales—up from 22.6% in 2018. Foodservice also drove overall success at stores: Top-quartile-performing companies sold 7.7 times more foodservice than bottom-quartile performers. For the top performers, foodservice accounted for more than 30% of their gross profit dollars in 2019.
In 2014, the average foodservice contribution was 14.3%, and “now after years of focusing on food, we’re averaging around 19% in foodservice margin contribution, which I think is an excellent evolution,” McIlvaine said. The top-performing stores are running “more promotions on prepared food, made-to-order coffee, smoothies and merchandise offers that stress value and not just price. I think that is a distinctive marketing difference,” he said.
Considered “essential businesses” by the U.S. government during the pandemic, convenience stores are often the only and/or closest location for much-needed fuel and food and grocery items, particularly in smaller towns, where eight in 10 rural Americans (86%) said in a 2018 NACS consumer survey that a convenience store was within 10 minutes of their homes.
An April 2020 NACS Retailer Member survey found that overall foodservice sales had decreased, while 52% said that grocery sales had increased during the pandemic. Foodservice sales so far this year have been affected by the extra precautions retailers have taken to decrease the risk of potential contamination by removing self-service options for roller grills, bakery cases and cold, frozen and hot dispensed beverages. For some retailers, that meant moving self-serve foods and coffee behind the counter so that an employee could serve the customer. For others with extended prepared foodservice programs, this meant shutting down seating areas or continuing foodservice menus and barista services via touchscreen ordering.
Chuck Maggelet, Maverik Inc.’s chief adventure guide, shared insights in part two of the numbers presentation: Understanding Categories and the Need States That Drive Growth.
In 2019, the main categories as a percentage of overall in-store merchandise sales included:
- Tobacco: Cigarettes: 27.1%;
other tobacco products: 7.3%
- Foodservice: 25%
- Packaged beverages: 15%
- Center store (salty snacks, candy, packaged sweet snacks, alternative snacks): 10%
- Beer: 8%
- Other: 8%
Tobacco continues to lead in sales at a 34% total contribution, but packaged beverages still contribute the highest amount of gross profit when excluding foodservice. For the first time, OTP eclipsed beer as the No. 3 gross profit dollar contributor in 2019.
The convenience channel is seeing share erosion in four of the six top categories: beer, packaged beverages, salty snacks and candy, while grocery stores are expanding their share of these key categories. “We still clearly dominate cigarettes and OTP, selling more than 90% of tobacco unit volume,” Maggelet said. “But we’ve lost share of units in the remaining four.”
In late December, the Trump Administration raised the minimum age to purchase tobacco products to 21, and the Food and Drug Administration in January published guidance banning the sale of most fruit and mint-flavored e-cigarettes but allowed use of flavors in open vaping systems and in single-use disposable products. The shift to tobacco 21 and the flavor ban is projected to erode sales by 7% to 9% in 2020.
In addition, “We are clearly competing hard with QSRs for food occasions and driving traffic with hopes of building profitable baskets,” Maggelet noted. “I think the bigger picture here is the four out of five foodservice categories that reflect healthy growth in GP dollars.” Convenience stores “need more profitable food operations” to counter rising wages and operating expenses, he said.
The Look Ahead
“The extent to which the global coronavirus pandemic will ultimately affect the convenience industry throughout 2020 and into 2021 is unknown—there is no precedence in modern history that can provide context or modeling for this level of economic uncertainty. Factors such as temporary or permanent store closures, government regulations, the length of stay-at-home restrictions, the spread of the virus and finding a cure all influence both short-term and long-term economic impacts,” NACS Vice Chairman of Research Andy Jones (Sprint Food Stores Inc., based in Augusta, Georgia) said ahead of the Summit.
“Even with these considerable challenges, the convenience industry has shown, over decades of its existence, that it is resilient to economic depressions, natural and man-made disasters and yes, even pandemics,” he said.