The convenience store industry is vast and diverse, but there is one thing many convenience retailers have in common: They believe that foodservice is their future because it’s already a huge part of their present operations. Foodservice accounts for more than one in four sales dollars and one in three profit dollars inside the store. 

Foodservice, done right, can be a cure-all for the fierce competition that convenience stores face at the pump and inside the store.  It can provide high margins and generate excitement through new offers unique to your market. 

But that doesn’t mean there aren’t challenges.

Just as convenience retailers turned the corner from COVID-19 restrictions, they found themselves facing strong headwinds in 2022: a remarkably volatile supply chain, four-decade-high inflation rates and a tough labor market.

Despite this turbulence, convenience retailers saw a 14.3% year-over-year increase in total foodservice sales, based on preliminary data from the 2022 NACS State of the Industry survey. Foodservice, which consists of the categories of prepared food; commissary; and hot, cold and frozen dispensed beverages, was responsible for revenue of $677,897 per store, or 25.6% of total in-store sales. All categories saw a year-over-year increase in sales.

Retailers reaped the benefits from solid foodservice sales. For La Crosse, Wisconsin-based Kwik Trip, 2022 marked the “best year ever,” according to Paul Servais, director of foodservice. “From a hot food standpoint, our fresh fried chicken program really took off,” he said. Servais added that Kwik Trip “had a lot of growth in our bakery program [too] … those two food categories had an explosive year.”

Within foodservice, prepared food was the highest-grossing category at $538,531.
Issues in the supply chain put pressure on retailers who were trying to keep their foodservice offers strong, but Pennsylvania-based Rutter’s embraced the challenge and worked with its manufacturers. “We certainly had some [supply chain] struggles … but we really tried to work with [our suppliers] with what they had available and push innovation that way,” said Chad White, food service category manager at Rutter’s.

Retailers also had to make the tough decision to either accept rising inflation and absorb losses or raise their prices to keep margins level. This created a conundrum for retailers, as foodservice sales historically provide higher gross margins than most merchandise categories.

Retailers that operate a foodservice program have felt the sting of rising food costs and have had to push the boundaries of price inelasticity, making tough decisions on pricing. Servais described keeping up with rising costs as a race against time, recalling that he’s never adjusted pricing strategies as much as he has in his 24 years with Kwik Trip. 

Because of higher costs in 2022, gross profit dollars for foodservice did not increase at the same pace as sales, rising a more modest 8.8% to $354,550 per store in 2022 and accounting for 36.1% of in-store gross profits. Foodservice gross profit margins dropped 2.7 points to 51.73% in 2022. The margin loss was led by frozen dispensed beverages, which dropped 3.3 points to 63.5%, and prepared food, which dropped 2.4 points to 55.4%. Cold and hot dispensed beverages were the only categories spared from decreased margins, instead increasing by 4.0 points and 1.1 points, respectively.

The increase in the consumer price index (CPI) of food items used in foodservice had retailers across the U.S. taking second (or third) looks at their financial statements. In most cases, higher sales numbers compensated for tighter margins. 

Servais noted that Kwik Trip’s percent margins decreased, but sales were high enough to make up for that in the categories. “Margins decreased quite simply due to the fact you couldn’t raise prices fast enough to keep up with the price changes,” he said.

Another challenge was product spoilage, which shot up 33.2% because of the wild swings in demand coming out of the pandemic. Retailers dealt with increased spoilage in different ways. 

Servais saw the trend in increased food waste at Kwik Trips stores, but the retailer does a number of things to control that waste. “The biggest thing we do is donate everything we can to food banks, like Feeding America,” he said. “We try to mitigate the amount of [food waste] going into the landfills.” 

Rutter’s, meanwhile, leaned into menu rationalization, a process that had begun before the pandemic. Rutter’s was able to cut down on food spoilage by honing its menu, ensuring that foodservice offers were not only attractive to customers but versatile in terms of ingredients across dayparts. 

COMMISSARY

For commissary—i.e., ready-to-eat meals; sandwiches and wraps; thaw, heat and eat meals; and sides and salads—the industry saw sales increase by 5.5% to $76,217 and gross profit dollars increase 1.8%. 
However, commissary was not spared the wrath of cost increases and experienced a 1.30 point  decline in margins. 

Ready-to-eat-meals were the star for commissary, with sales increasing 15.3% and gross profit dollars increasing 14.4%. While ready-to-eat meals also saw a decline in terms of margin, the drop was less dramatic than other foodservice categories. 

Margins for ready-to-eat meals declined 0.3 points, while sides and salads (-4.51 points), sandwiches and wraps (-5.4 points), and thaw, heat and eat (-8.2 points) saw more dramatic declines.

Three out of the four commissary subcategories’ gross profit dollars also shrunk. Thaw, heat and eat, the smallest contributor, saw the highest decrease in gross profit dollars—almost triple the loss of sandwiches and wraps. 

Commissary’s 5.5% sales increase and 1.8% increase in profit dollars shows that it remains a popular part of a broader foodservice program, and one that can be executed without the same labor costs as prepared foods. 

DISPENSED BEVERAGES

Dispensed beverages accounts for more than one in five foodservice dollars (22.5%) and consists of hot dispensed (9.0% of total foodservice sales), cold dispensed (7.8%) and frozen dispensed beverages (5.8%).

Hot dispensed beverages (coffee, hot tea, hot chocolate, cappuccino and specialty coffee, refills, coffee club mugs) saw a 0.4% decline in year-over-year sales, bringing in $73,758 in in-store sales; gross profit dollars increased a more modest 1.2%.

Retailers have welcomed customers back to the morning daypart, and are beginning to see morning commute sales return. Coffee sales in 2022 were increased by 3.7% compared to 2021.  Gross margins for coffee experienced a decline of 2.3 points. 

While retailers were experiencing shrinking margins, they were still able to find a bright spot in the hot dispensed category: cappuccinos and specialty drinks saw strong 22.1% sales growth. The subcategory brought in a healthy 74.8% margin, which was down 2.2 points compared to 2021.

The industry’s continued focus on quality food and beverages helped propel these sales. Customers increasingly expect something akin to the lattes, cappuccinos and cold coffee concoctions they can get at the cafe down the street. 

White said that these drinks were key to Rutter’s success overall with hot beverages. “We were able to make up [lost hot dispensed sales] margins … with our hand-crafted beverage program. We had a lot higher margin items in frappes and lattes, specialty coffees,” he said.

Hot tea saw sales increase 8.5%, and hot chocolate, which improved sales considerably in 2021, experienced a sharp 21.3% decline in sales. Both subcategories saw a decline in margin. 

Cold dispensed beverages (carbonated, non-carbonated, refills, sports drinks, club mugs, other non-carbonated) saw the strongest year-over-year sales growth at 17.3% and saw an increase of 24.7% in gross profit dollars. Also, it was the only one among the three dispensed beverage categories to increase its gross margin, increasing by 4.0 points. 

Sales of frozen dispensed beverages (frozen - non-carbonated, frozen – carbonated, other) which are iconic to the industry, are often strongest during the warmer months and deliver a hard-to-beat margin. In 2022, frozen dispensed beverage sales increased 11.3% to reach $47,724 and saw the smallest decrease in margin, falling 3.4 points to 63.5%. 

Challenges of Convenience   

According to the NACS Foodservice Growth Drivers Survey, the top three challenges impacting 2022 foodservice programs were staff turnover, supply constraints and inflation. About 58.2% of retailers indicated that staff turnover was impacting foodservice implementation. 

Because foodservice requires more labor than the sales of packaged items, high turnover remains a troubling trend. Turnover numbers from the NACS State of the Industry Compensation Report of 2022 Data for full- and part-time associates came in at 141.2%. This high rate of turnover comes despite wages rising 68.4% over the past decade.

As foodservice offers have become more sophisticated, the complexity of foodservice jobs has also increased. 

Convenience retailers have sought to ease the workload on employees by integrating worker-friendly aspects when redesigning spaces for increased foodservice. Retailers such as Rutter’s kept retention high by maintaining COVID-era wages and benefits, as well as having supportive upper management.

Trending for a Limited-Time Only 

Loyal customers expect their local convenience store to stock the basics, but they also like to be surprised with new offers. More retailers are tapping into consumer preferences to deliver something new and exciting at their stores. 

More than half of retailers (64%) participating in the NACS Foodservice Growth Drivers Survey reported they are constantly implementing new or evolving current foodservice offerings to match the latest consumer trends. Oftentimes these strategies can lead to menu innovation that differentiate a c-store from a QSR. 

Many convenience stores offer a signature foodservice item or a fan favorite. For Kwik Trip, it’s fried chicken. Kwik Trip also recognized the importance of limited time offers (LTOs) in driving traffic to its stores. Constantly rotating LTOs and keeping customers engaged is key: “You’ve got to have pizza, you’ve got to have a bakery item, you’ve got to have coffee. You have to be doing it all.” Kwik Trip “rolled through 105 LTOs,” according to Servais. 

LTOs not only keep customers excited and wanting to come back for more, but they are also trial runs to gauge customer preferences. Rutter’s recently released its Inspired Food Menu, a confident leap into the LTO deep end.  

“[LTOs] allow innovation through a test trial, almost, to see what the customers are looking for. It will allow us to do some unique items that customers aren’t normally seeing out in c-stores and see what kind of traction we get,” said White.

For many retailers, 2023 is going to be a big year full of big flavors, and hopefully big sales. For Rutter’s, this means keeping its eye on the foodservice prize: “Our goal is to keep innovating going forward and keep giving the customer what they want and allow them to be able to build whatever they’re looking for. We’re excited about the future here,” said White.