Convenience store operator Randy Morton has found a way to compete successfully with Walmart. Rather than going head-to-head with the big-box giant on beer pricing, “We devote a whole section of our cooler to craft beer,” the owner of Morton’s in Hallettsville, Texas, said. “We have the largest craft beer selection in the area.” As a result, the store has become a destination for craft brew lovers in search of the latest hot beer. “If I can’t pronounce it, I stock it,” the retailer joked about the plethora of crafts now available, some with quirky names. Still, Morton’s commitment to the high-end beer category is paying off. “Instead of 20% to 25% margins on domestic beer, I’m getting 35% to 40% margins on craft.”
Indeed, Morton joins a growing number of c-store operators who report a movement toward more upscale beers, as well as wine, liquor and packaged beverages among their customers. “Premiumization is not new or unique to beer,” explained Paul Hetterich, president of Constellation Brands’ beer division. “Since 2008, the trend has gained steam in even the most everyday [consumer product goods] categories, from soap to chocolate.” In c-stores, trading up is visible in a range of categories, the beer executive continued, including packaged beverages and fresh offerings, such as sushi and salad. “This trade-up is fueled by economic factors, to be sure, but consumers are better informed about what they’re purchasing too,” Hetterich added.
Joseph Beckham, president of Fuel City, with four stores in the Fort Worth, Texas, area, and another under construction, correlates the movement toward higher-end beverages in c-stores with the increased focus on foodservice in the channel. One Fuel City, for example, recently added a fast-casual space, and the retailer obtained a mixed beverages license, allowing it to serve drinks such as margaritas on its outdoor patio. “We see opportunity to offer our customers good value for packaged beverages and to create a fast-casual experience,” Beckham said. One of the benefits of the new dining space—which the c-store operator said likely will be added to other Fuel City locations, as well as to new stores—is that “we’re drawing in customers who stay longer,” he said.
Instead of 20% to 25% margins on domestic beer, I’m getting 35% to 40% margins on craft.
Coveted Consumers
Morton concurs that customers at his South Central Texas store are trading up across the board when it comes to beverages, and that some of these customers are millennials. Constellation Brands’ Hetterich emphasized how much the c-store shopper has changed over the course of the last 10-plus years, noting the younger age and greater diversity of today’s consumers.
C-store purchasers of above-premium packaged and alcoholic beverages often are focused on healthy food and beverage consumption, retailers say. While Beckham describes Fuel City’s customers in general as a “melting pot,” when it comes to upscale drinks, “it’s those who want healthier products. They tend to be younger and more open to variety,” he explained, and “not the typical construction worker.” Morton added that suppliers of the high-end brands have been successful in marketing them as better for you than lower-priced drinks. Within the bottled water segment, the Texas retailer said millennial females who “work out a lot” often purchase upscale brands.
High-end beverage shoppers are a coveted lot, c-store operators agreed. Beckham and Morton report that they tend to spend more time in the store than typical c-store shoppers, often reading labels. This provides opportunity for retailers to strategically merchandise other products. “Purchasers of high-end beverages often purchase premium food items,” Morton said, pointing to snacks such as nuts and seeds.
CSDs: Running Hot and Cold
As with beer, craft carbonated soft drinks (CSDs) are making inroads. “We saw an opportunity to offer consumers high-end, well-crafted soft drinks, much like what was happening with craft beer,” said Bill Daker, owner of Cool Mountain Beverages, a gourmet soda line, about the company’s launch some 20 years ago. Today, the company offers seven flavors of sodas, caffeine-free and made with pure cane sugar. The drinks are packaged in clear, 12-ounce glass bottles and are sold as singles in c-stores. Daker counts 7-Eleven, as well as independent c-stores, among the company’s retail partners. Demand for craft soda “ebbs and flows with the economy,” he said, and this demand is reflected in c-stores.
Retailers report a mixed response to craft soft drinks. Sales are strong at Morton’s. “I devote a whole door to craft sodas,” said Randy Morton, whose store’s selection includes locally made brands from the likes of Boots Beverages and Dublin Bottling Works. The drinks have been popular with both locals and visitors who “want to take a piece of Texas with them,” the retailer said. But Jim Sidhu, co-owner of Stop & Shop Market & Liquors in Sacramento, California, said the segment hasn’t fared as well at his store. “We tried craft sodas, but they didn’t do well,” he said. Fuel City’s Beckham said CSD consumers today are more likely to trade up to healthier packaged beverages such as sparkling water than purchase craft sodas, likely because of concerns about sugar content. “People are more aware of ingredients and are moving toward healthier and more transparent beverages,” he said. “Traditional soft drinks in general have not been performing well. At our stores, they’re flat to slightly declining.”
At the Corner Post in Watford City, North Dakota, general manager Shasta Fuller points to the importance of the beverage cooler to her store’s sales. “About 22% of my in-store sales come out of the cooler,” she said of packaged beverages, and lately she’s noticed an upward shift in customers’ brand choices. “Enhanced waters like Bai and coconut waters are doing very well,” the retailer explained, adding, “the benefit is a higher ring per customer.”
Purchasers of high-end beverages often purchase premium food items.
Alcoholic Beverage Boost
The growth of high-end beer in c-stores, however, has been quite impressive. According to Constellation Brands’ Hetterich, “High-end beer has steadily grown both dollars and share in c-stores since 2009, outpacing the low-end trend by an average of 10 points each year. High-end represented just 22% of category dollars in c-stores 10 years ago, and today it’s pushing 42%.” Looking ahead, Constellation Brands projects that beer sales in c-stores will increase some $2 billion in the next three years, with all of that growth coming from high-end beers.
Like Morton, Sidhu from Stop & Shop reported, “Craft beer is way up compared to regular beer.” And within the craft beer segment, locally brewed products are the best performers at the California store. But in Fort Worth, Beckham said craft beer is underperforming expectations, and that a large section of one of Fuel City’s stores dedicated to crafts now stocks cases of more mainstream brews. But “Mexican beers are going gangbusters” and are now placed first in the cooler flow, often supported with in-store displays and local advertising, the retailer said.
Within the wine category, wines priced between $8 and $15 a bottle currently are contributing 35% of the total category dollar growth in c-stores, according to Kevin Cooke, senior vice president and chief sales officer at Constellation Brands’ wine and spirits division, as wine shoppers trade up in their selections. “For sparkling wines, prosecco is growing 37%, with an average price that exceeds $15,” Cooke said. As with craft soda and beer, Morton’s is one c-store that has found a market with locally made wine. “Everyone has California wine,” said the Texas retailer. “We offer wines from three local wineries that carry a 40% margin.”
And premium and craft spirits also are surging. According to L.E.K. Consulting, from 2012 to 2017, overall high-end liquor volume increased between 6% and 7% each year. Craft spirits, meanwhile, are replicating the success of their craft beer brethren. Since 2015, the craft spirits market has grown 19% a year, L.E.K. said. Cooke said that trading up in the liquor category is apparent in c-stores, “driven by the consumer who is increasingly choosing cocktail options made from fresh ingredients and premium spirits.”
By allocating space based on future opportunities, we are anticipating shoppers’ wants and highlighting growth potential.
High Rent
Cooke of Constellation Brands conceded that the biggest challenge the liquor category faces in c-stores is a lack of awareness. He recommends that retailers promote the category, offer premium brands and stock mixers like ginger beer as a “simple way to elevate a cocktail,” and receive a higher ring. Space constraints and the proper selection are other challenges for c-stores when it comes to merchandising high-end beverages, marketers and retailers say.
“With only five doors on average, it can be difficult to balance the variety needs of the customer versus the velocity needed to justify the shelf space,” Hetterich explained. “Each SKU has to pay the rent, and the rent is higher in a small-format cooler.” Beckham said that with the entry of products such as craft brews, “it’s been a rush to figure out what’s hot and what’s not,” and so it’s important to be cautious when adding new products “until they’re proven.”
Constellation Brands’ beer division takes a novel approach to its shelf-set strategy. Rather than allocating space based on prior-year sales, the company relies on projected future sales. “We began testing predictive modeling in c-stores several years ago and have seen very positive results,” Hetterich reports. “By allocating space based on future opportunities, we are anticipating shoppers’ wants and highlighting where growth potential exists.” Overall shelf flow should be organized from high-end to low-end beers, he continued, with high-end brews positioned at eye level.
Marketers of high-end packaged and alcoholic beverages believe the trading-up trend will continue. Mountain Beverages’ Daker sees increased opportunity for craft sodas in c-stores, particularly if operators move toward SKU expansion, as well as potential at the fountain. “Don’t ignore the possibilities,” he advises retailers. Randy Morton is certainly one who adheres to that advice. The Texas retailer expects continued growth for the high-end products. “It’s not a fad,” he said.