For the past few years, the evolution of convenience retail was a story of a shift from “gas, Cokes and smokes” into something more relevant for modern consumers. Shoppers had higher expectations, channels were blurred, and visits were lost as e-commerce reduced trips to brick-and-mortar stores. Many retailers found new and innovative ways to stand out, while others were forced to evolve or risk being left behind.

“There was already a suspected trip decline looming over the horizon. In effect, the pandemic was a dress rehearsal,” said Brandon Lawrence, a retail fuels consultant and data scientist. “It revealed whose business models had yet to adjust. Unfortunately, many [retailers] have ignored this lesson as crude oil’s crash allowed them to weather the storm with historically high margins. But that was pure luck. Now is the time to ask what would have happened without that lifeline.”

Thriving amid low fuel demand requires a strong in-store offer. Unfortunately for many retailers, 2019 NACS State of the Industry data reveal that only the top-quartile of retailers would have remained profitable pre-pandemic without fuel. That raises questions about how prepared the industry was for this test run.

This article is the second in a three-part series examining COVID-19’s impact on 10 weak signals—trends that had the potential to become game changers. Part 1 examined how the pandemic accelerated some trends (last mile, cashless payments) but stymied others (single-use plastics), and Part 2 reviews four challenges retailers face at the forecourt and inside the store.

Dollar Stores

Few businesses were better prepared for the economic downturn than dollar stores. With a budget-sensitive offer and close proximity to many Americans, the channel found much success amid COVID-19. For the second quarter of Dollar General’s fiscal year 2020—which ended July 31—net sales increased 24.4% year over year. Same-store sales increased 18.8%.

“We continue to operate from a position of strength and are excited to announce the acceleration of several key strategic initiatives including the rollout of DG Pickup, DG Fresh and our Non-Consumables initiative,” said Todd Vasos, Dollar General’s chief executive officer, in a press release. These initiatives should be of particular interest to retailers as Dollar General aims to expand its offer beyond the boxed and frozen. DG Fresh was launched in 2019 to build a robust self-distribution system for perishables. At the time, Vasos described it as a way to “control our own destiny in
fresh foods.”

You might not want EV chargers now, but you should make it possible to add them five years later if you decide it’s time.

On August 5, Dollar General announced that it would build three new DG Fresh cold storage facilities in California, Kentucky and Oklahoma. Each warehouse will house frozen goods, milk, cheese and deli meats and bring self-distribution to an additional 1,500 locations on top of the 9,000 locations that already have access. With three-quarters of Americans living within five miles of a Dollar General, this should raise concerns—especially since the company targets areas that many ignore.

“The thing about dollar stores—and Dollar General, in particular—is they have a deliberate strategy of opening stores where there isn’t much competition,” said Neil Saunders, managing director of GlobalData Retail. “Although they have more than 10,000 stores, there are still many rural locations where they don’t exist … They’re spreading like wildfire.”

“Retailers should be thankful that Dollar General doesn’t sell fuel,” added Steve Montgomery, president of B2B Solutions. According to Montgomery, few retailers outside of those in rural markets initially saw dollar stores as a threat. The no-frills “treasure hunt” nature of their early offer created a stigma. While some convenience retailers abandoned the center- store offer, dollar stores held their ground and were positioned to thrive during the pandemic without having to pivot.

But customer experience remains a weak spot. As a recent Google Maps reviewer said of a Dollar General in Wisconsin: “Dirty, unorganized store. But it’s still way cheaper than the local grocery store in River Falls.”

“Dollar stores need to put more emphasis on in-store experience,” added Lori Buss Stillman, vice president of research at NACS. “Their lack of focus on merchandising and the overcrowded shelves do not lend to a great shopping trip for many they are trying to reach; their narrow aisles and general clutter can be overwhelming.”

While convenience retailers may have “trimmed the tail too long on groceries,” according to Stillman, there’s a lesson from the dollar channel’s insistence on packing their stores so full: It’s not wise to add more center-store products without first deciding what to remove. Otherwise the store becomes difficult to shop, and retailers lose the appearance of ease and flexibility.

Still, there’s no denying that dollar stores thrive even amid this blind spot. Dollar General expects to open 1,000 new stores during fiscal year 2020 in addition to completing 1,670 remodels—up from the 1,500 remodels previously announced.

Industry Consolidation

In Couche-Tard’s most recent earnings call, CEO Brian Hannasch described industry deal flow as “relatively quiet.” People are just focused on dealing with COVID-19. Nonetheless, consolidation shows few signs of slowing down in comparison to recent years.

In July, GPM Investments revealed its intent to enter a tie-up pact with Haymaker Acquisition Corp.—a special purpose acquisition company. In early September, the deal moved forward. The publicly traded firm called Arko Corp. will be listed on Nasdaq. A July investor presentation from GPM Investments identifies continued acquisition as one of the company’s three pillars of growth. With 72% of the U.S. convenience store market consisting of chains with 50 or fewer locations, there is “ample opportunity to continue to consolidate.” 

The real issue raised by consolidation is what it means for the rest of the industry. While a particular segment has rushed forward with best-in-class customer experiences and foodservice that rivals QSRs, the rest of the industry continues to operate a more traditional conception of convenience retail. Consolidators generally do the same—except with the benefits of scale. 

“Many small chains and single stores put forth the same value proposition as consolidators, but they don’t share the same cost structure,” said Lawrence. “Not only are these retailers unable to compete with merchant canopies on fuel price or foodservice-forward chains inside the store, but they lose to the consolidators on both fronts. They just don’t have the room in their margins.”

Lawrence argues that fuel demand forecasts raise additional concerns about the ability to grow volume post-pandemic. Rather than increasing demand organically, it’s more likely that retailers will have to steal market share from their competitors. In this, consolidators will enjoy additional advantages.

“The acquisition of Speedway by 7-Eleven is instructive,” said Lawrence. “It gave them significant advantages in economies of scale related to fuel supply and pricing. Not only did they box Couche-Tard out of the Midwest, but I imagine that they will leverage their substantial volume for significantly advantaged supply arrangements.”

This further raises the importance of differentiation. More than a catchphrase, it may be a survival strategy for some—especially in a post-pandemic marketplace.

“In many cases, convenience stores were places that people went by and not to—coffee on the way to work, a gallon of milk on the way back,” said Montgomery. “If customers are working from home, they’re not going by those locations. Unless you’re a destination driver, you’re going to lose some traffic permanently.”

Electric Vehicles

The pandemic produced an unanticipated side effect in March and April: clear skies.

With the interstates suddenly free of gas-guzzling vehicles, the smog surrounding many cities disappeared. Many readers will remember the crystal clear pictures of Los Angeles. Even in New Delhi, the world’s most polluted city, monuments were visible against blue skies for the first time in many years. New York City’s emissions and carbon monoxide levels dropped more than 50% in a single week in March.

“EV skeptics will sometimes argue that charging cars with grid electricity merely moves the pollution somewhere else, aka, the long tailpipe argument,” wrote Wall Street Journal auto columnist Dan Neil in April. “But location matters, particularly for megacities with geographies that tend to trap airborne pollutants, such as Beijing, L.A. and Mexico City.”

While it remains to be seen what impact this might have on consumer preferences for electric vehicles, the category has had a good year relative to the rest of the auto market.

In Europe, EVs grew rapidly while sales of conventional cars collapsed. According to the International Energy Agency, EV sales were up 90% year-over-year in April for France, Germany, Italy and the U.K.—the region’s four largest EV markets. In China, February’s 60% year-over-year sales decrease had rebounded to 80% by April. The U.S., in comparison, saw EV sales roughly halved in April.

One reason for this difference is that government subsidies in many countries are more generous than what consumers find in the U.S. This contributes to price parity. In Norway—the global leader in EV adoption—the lack of import tax, emission fees and a 25% value-added tax make it possible to buy a Volkswagen e-Golf for less than the regular Volkswagen Golf.

But it may be incorrect to assume that a rapid transition will arrive in the U.S. in the near future. As a new report from the Fuels Institute points out, the impetus for a dramatic change may not exist at the moment. Nor do consumers seem poised to force a revolution. “Consumers like to buy what’s around them,” said John Eichberger, executive director of the Fuels Institute. “EVs are common in some areas of the country, like California, but they’re not common elsewhere. Go to a dealership in many other states, and you’ll have a hard time finding an EV. The salespeople aren’t pushing them.”

Eichberger suggests that price remains the most significant barrier. Although the total lifetime cost is often lower, the sticker shock is high. Many consumers won’t make that calculation, and EV tax credits are now gone for Tesla and GM models.

Those issues aside, he points out that EV adoption will ultimately be driven by global trends. “We are not the dominant market anymore,” Eichberger said of the U.S. “China is. Europe is also larger than we are in terms of total vehicles sold. They are all aggressively pursuing zero emissions and efficiency. Whether or not the United States slows down is irrelevant, because automakers are building vehicles for all markets. They’re building for those regulations.”

Retailers also should take note that the internal combustion engine has significant room for improvement in fuel economy. The U.S. Energy Information Administration forecasts a 47% improvement in light-duty fleet economy by 2040. The diesel freight fleet is projected to see a 30% improvement in the same period of time.

Paired with projected increases in remote work, this raises questions about the future of fuel demand. According to Eichberger, retailers should expect a drop in demand of 1-in-5 gallons within the next 20 years.

“Globally though, nobody is taking their foot off the accelerator with electric vehicles,” he cautioned. “Our advice is to pay attention to your market and enter the charging market when the time is right, locally. In the meantime, increase your access to electricity if you’re doing a new build or rebuild. You might not want EV chargers now, but you should make it possible to add them five years later if you decide it’s time. Retrofitting will be prohibitively expensive without the infrastructure in place.”

Tobacco and CBD

Although declines in tobacco were expected for 2020, the pandemic threw the category somewhat of a lifeline. “We thought we’d see an 8% to 9% decline in tobacco and other tobacco products this year, but people are buying more,” said Stillman. “That’s because when you’re under stress, you smoke more. Consumption isn’t going down.” (For more on COVID-19’s impact on cigarette sales read, “Bulking Up” in this issue.)

While the pandemic may have temporarily lessened tobacco’s challenges with consumer demand, regulation doesn’t appear to have lost any momentum.

Indeed, Altria revised its previous 2020 estimate of the domestic cigarette industry’s decline. The company’s second-quarter 2020 investor presentation now calls for a lower decline of 2% to 3.5%. Stay-at-home orders also may have contributed to stronger performance. “Fewer social engagements allow for more tobacco-use occasions,” Altria’s CEO, Billy Gifford, told analysts on a recent earnings call.

While the pandemic may have temporarily lessened tobacco’s challenges with consumer demand, the real issue is that regulation doesn’t appear to have lost any momentum. On August 28, California’s governor signed a bill that bans the sale of most flavored tobacco. This included a ban on the retail sale of menthol cigarettes. Similar efforts are being pushed in Chicago, Phoenix and many other cities.

Even vaping has remained a target of regulation. In Florida, a bill was sent to the governor in September that included a ban on many vaping flavors. He eventually vetoed it.

“History repeats itself, especially with regulation,” said Timothy Mackler, tech guru at Summitt Labs, manufacturer of Kore Organic CBD. “One person sees a trend, we decide we need to do something about it, and then it turns into something blown out of proportion. San Francisco made vaping illegal last year. It’s a situation where you can smoke a cigarette, but not vape. What’s the point of that?”

While regulation is a barrier for the tobacco industry, it’s welcome by many in the CBD community. “I’m looking forward to seeing more states move into regulation of CBD products,” he explained. “Not to make it harder for consumers, but to make it safer for consumers. They need to know they’re getting what companies say they’re getting and that everything is dosed correctly. It’s important for consumers to be educated.”

According to Montgomery, tobacco’s regulatory climate only furthers the argument that retailers need to aggressively pursue differentiation. “Will ‘smokes and Cokes’ work for the next few years?” asked Montgomery. “Yes, but in the long term, retailers need to find something else.”

Adds Stillman, “Retailers are trying to win on cigarettes and beer, but the people running foodservice and robust cold and hot dispensed beverage programs are seeing margins of 50 to 60%. Losing a cigarette buyer but gaining a foodservice customer? They’ll take that any day of the week.”

According to Stillman, retailers should ultimately focus on creating a place that consumers want to visit every day. At new Circle K locations in Norway, for example, it’s possible to catch a bus, rent a scooter, shop and work inside the store, and even charge an electric vehicle.

“The question is what do people need to do, and how can you build your offer around that, so they’re convinced to come and dwell?” explained Stillman. “We’ve never been about dwell. How can we get customers to come and stay for a while?”

This article is the second article in a three-part series on how the pandemic is shaping 10 key trends in the convenience and fuel retailing industry.