Charles Darwin’s theory of evolution suggests that an organism evolves over time and continues to change. And through natural selection, the organism adapts to its environment and survives, or it perishes. Given the proclamations that brick-and-mortar retail is dead or dying a slow death, Darwin’s theory can come into play for the nonanimate world of convenience retail.

For more than 90 years, adapting to change has been paramount to the convenience and fuel retailing industry’s survival, which today represents 34% of all brick-and-mortar retail in the United States. Ironically, however, most stores sell the same products they sold decades ago: gas, Cokes and smokes. In today’s quickly evolving digital and technologically driven retail environment, growth of e-commerce and retail disruption, how will the industry continue to adapt?

For many in the industry, change has come at a price—some are surviving and thriving, some are not. However, convenience retail in general has proved to be adaptable to change.

In 2009, more than $3 billion in annual sales came from three categories: publications (maps, magazines and newspapers), video/audio tapes, and film. As smartphones became more common, sales of these categories were obliterated. This continued disruption, paired with weak fuel margins and an emerging health trend, seemed to spell certain doom. However, 10 years later, the industry didn’t just survive—it evolved to overall record in-store sales of $654.3 billion in 2018.

Industry consolidation, new profit centers, competing channels, turnover and direct store operating expenses have served as the focus for NACS State of the Industry Summit content for several years, and attendees are well-versed in these themes. At this year’s event, with even more headwinds facing the industry today, Billy Milam, chief operating officer of Atlanta, Georgia-based RaceTrac Petroleum Inc. and NACS Research Committee member, offered perspectives on how the industry can continue to evolve and create a new industry paradigm.

Brick-and-Mortar Retail Universe

1. Current versus Future Strategies

“Our industry is only as good as our weakest link,” Milam said, noting that while some retailers are excelling at innovating and changing their business model and driving retail overall, many are continuing to rely on a “stale” business model.

Looking at store count, last year the industry dipped 1.1% to 153,237 stores, per the NACS/Nielsen TDLinx Census. “There’s a crack in the foundation,” he said, noting that over the past 18 years single-store operators continued to grow—until now—suggesting that these businesses are likely being acquired by other companies. Meanwhile, most of the growth is coming from the top 16 chains with 500-plus stores, increasing by 2,634 net stores year over year.

Eleven years ago, 2,006 companies owned four or more stores. In 2018, there were 1,442, marking a 28% decrease—with 19% of that decline taking place in just the past four years. “Think about the remarkable decline in the number of chains,” said Milam, noting that consolidation continues to play a major role in the industry’s makeup. When looking at the top 20 firms of 2015, 10 of the companies have either bought or been sold to another in the past three years (2015-18).

If you look outside the c-store industry, the retail channel that continues to grow is dollar, which is dominated by two firms with a combined 30,000-plus stores: Dollar Tree and Dollar General. “Other retail channels have made a bigger move toward consolidation,” he said, adding that the c-store industry has not—yet.

Today, 7-Eleven operates 6% of all U.S. convenience stores, and in three years GPM Investments has grown from 463 stores to nearly 1,400. “The big [firms] are getting bigger,” Milam said, adding that this “weak signal” suggests that the industry is becoming more top heavy thanks to the consolidation.

Shifting gears to deliver a sense of what the industry’s near-future could look like, Milam presented six industry paradigms:

Complete industry trends, insights and benchmarking data are available in the NACS State of the Industry Report of 2018 Data, available for purchase at www.convenience.org/SOIReport (shipping will begin in late June).

Today

1. Fuel provider: A decades-long and successful business of providing fuel.
2. Commodity-driven business: The same products found at c-stores are found at competing retail channels.
3. Limited interaction with customers: “I love you—but only for four minutes.”
4. Offers and promotions: One-size fits all approach through door clings, pump toppers, etc.
5. Limited assortment.
6. Traditional buying channels: “We are very much a transactional type of business.”

Tomorrow

1. Energy provider: Whether it’s refueling electric vehicles or internal combustion engines, “this is what we need to become.”
2. Service-driven business: Evolve from selling just goods to goods and services.
3. Best-in-class customer experience: “There’s a different expectation from the customer of what convenience is.”
4. Tailored and personalized experiences and services: Segmenting customers and providing different shopping experiences based on the motivations and needs of each customer.
5. Hyperlocalized, differentiated assortment.
6. Frictionless: “It’s a big word, and it’s over-used, but how do we impart less friction on our customers?”

Store-Level Turnover

It's a big word, and it's over-used, but how do we impart less friction on our customers?

2. Our People

Retailers are often asked, “What keeps you up at night?” Responses vary, “but most of the time you hear ‘labor,’” said Milam, adding that finding and keeping employees continues to pose a challenge.

In 2018, store associate turnover was 118%, down from 121% in 2017. (See "Store-Level Turnover" chart.) However, “every 10 months, we’re turning that entire group over,” Milam said, adding that 72% of associate turnover was voluntary. “In most cases, the associate is walking out on us.” Store manager turnover, meanwhile, rose from 18% to 22%. “One in five are walking out or being asked to walk out,” he said. The convenience store industry’s turnover is exactly double the total retail baseline (59%).

So, the question becomes, “Why are they leaving us?” especially when average store associate wages are up 19% since 2014 to $10.74 per hour in 2018. Although top employers in other retail channels such as Aldi and Costco are paying more on average, $12 and $13 per hour, respectively, convenience is not at the bottom of the pay scale; QSRs and dollar stores average $8 per hour, according to Glassdoor.com.

Milam advised that retailers track 30-, 60- and 90-day turnover, sharing an example based on NACS State of the Industry Compensation Report of 2018 Data that shows how a company with 100 new hourly store associates on day 1 will retain 74 employees after 30 days, 52 after 60 days, and just 34 after 90 days—“two of every three store associates didn’t make it to day 90,” he said. For manager/assistant managers, only 8.3 out of 10 are still with the company after 90 days.

“Finding the people isn’t as hard; we can find qualified people,” Milam said, noting that retaining valuable employees is often the crux.

Where People Shop Depends on Income...

3. Where Did Transactions Go?

Industrywide, transactions were down 5.8% year-over-year (2017-18). “Where are our customers going, and more importantly, why are they choosing someone else” to meet their needs for convenience, Milam asked, noting that where people shop largely depends on income. For example, 40% of households with an annual income of $29,000 or less shop convenience stores, but slightly more also prefer dollar stores (43%). (See "Where People Shop Depends on Income..." chart.)

“Who is our real competition? Right in the bullseye is the dollar stores,” said Milam, noting that 35% of dollar store growth in the U.S. has occurred in the past seven years from just two companies (Dollar General and Family Dollar), and most dollar stores are popping up in smaller markets throughout the Southeastern states—similar markets with high concentrations of convenience stores.

Seven years ago, Dollar General and Family Dollar didn’t sell beer, wine and tobacco products. “They do now—they looked at us and said if they can sell beer, tobacco and wine, maybe we can too.”

Amazon, meanwhile, has aggressive growth plans with its Amazon Go convenience format to open 3,000 new stores across the U.S. by 2021. The company’s smaller Amazon Go format—at 450 square feet—targets densely populated and high-rent metro areas.

“You might say, ‘I don’t compete with those guys,’ but they compete with many of our competitors located in suburban markets (i.e., Dunkin’ Donuts, 7-Eleven), and they’re redefining the definition of convenience,” said Milam.

Core Direct Store Operating Expenses

4. Industry Fundamentals on Shaky Ground

Although 2018 posted record in-store sales, “if you peel back the layers there’s some underlying fundamentals that aren’t as healthy as we need them to be,” Milam said.

Per store, per month sales for foodservice rose 2.6% from 2017-18. Compared with QSRs, many of which were either flat or down, convenience stores faired well in this space. However, transactions during the same time period were down 5.8%. “We’re selling more to fewer people,” said Milam.

For the third consecutive year, direct store operating expenses (DSOE) outpaced inside gross profit dollars, a trend that continues to create challenges for convenience retailers. (See "Core Direct Store Operating Expenses" chart.) DSOE includes wages, payroll taxes, health-care insurance, card fees (higher than overall industry pretax profit for the first time since 2014 at $11.1 billion), utilities, repairs/maintenance and supplies, as well as several other categories, including franchise fees and property taxes.

Regionally, “the big story here is the West,” said Milam, noting that total DSOE and facility expenses in that region were up 8.4% in 2018. At the other end of the scale, larger firms in the Midwest reported DSOE and facility expenses at just 1.8%. (See "Brick-and-Mortar Universe" chart.) SOI data suggest that these larger reporting companies have been able to control operating costs because of their scale. In the West, many reporting firms are smaller operators without the same efficiencies.

Money is too cheap, and the propensity and the need to grow is too strong.

5. Cost of Growth

Whether growth is through acquisitions or organic, both methods display pros and cons and tremendous costs.

Three years ago, British retailer EG Group began investing in the U.S. convenience store market and in 2018 acquired Kroger’s portfolio of convenience stores (762 sites) and 225 Minit Mart c-stores from TravelCenters of America. “Now, they’re one of the biggest entrants to our industry,” said Milam.

For organic growth, the average cost of a new store build in urban areas has increased 44.5% over the past four years (2014-18), from $5.4 million to $7.8 million, and increased 2.7% in rural areas, from $5.8 million to $6 million. Milam shared that the cost to build a new site is significantly higher compared with dollar stores, where a new c-store in Bradenton, Florida, could reach nearly $7.7 million, compared with $2.4 million for a Family Dollar store in the Fort Myers market.

“[Dollar stores] can put up a modular building in a couple of months without the permitting challenges and delays” often associated with a complex c-store build with underground storage tanks, fueling equipment, canopies, parking, etc., said Milam.

Meanwhile, remodeling costs per square foot continue to challenge the industry, increasing 31% in four years (2014-18) from $117 to $153 per square foot. “The cost of growth has never been higher” in the c-store industry, said Milam.

Wrapping up, Milam summarized “The Numbers” with a shift toward the industry’s future:

1. Consolidation will continue. “Money is too cheap, and the propensity and the need to grow is too strong,” said Milam, who also questioned whether 2019 will see more single-store operators exit the industry. Also, the traditional c-store business model is done. “You’ve got to continue to innovate,” he said.
2. .Although industry turnover has been on a downward trend, it continues to be a watch-out. “If you’re not doing engagement surveys, do them and gain an understanding of what your people are thinking more so than you have in the past,” he said. “Also, weed out the ones who won’t fit your culture and brand” sooner rather than later.
3. With fuel and cost of crude increasing so far this year, pay attention to transactions, he suggested.
4. Last year was a great profit year thanks to fuel margins, but peel back the onion. “Our underlying fundamentals may not be as healthy as we think they are,” Milam said, adding, “The time to wean off dependency from fuel transactions is absolutely right now.”
5. Growing is expensive and difficult. “When you build, build to the new industry paradigm,” and focus on where the industry is heading, not where it’s been.

Navigating the S-curve

The S-curve is a strategic concept that can help businesses navigate change over time. Data usually take on an S shape, with slower progress at the beginning and end of a cycle or project. Milam explained the S-curve for the convenience industry:

• Inception: Building out the idea for a business.
• Growth: The business is finding purpose and building core competencies.
• Maturity: The business has become profitable.
• Saturation: Business growth slows, and others in the market recognize the business’s success and look for ways to take away profit.

“Have we entered that fourth phase [saturation] that any industry or company tends to go through?” asked Milam, adding that he doesn’t believe so, but there are opportunities to innovate. “Again, you’re only as strong as your weakest link.”