strong leadership begins at the top

CSD: The NACS 2007 State of the Industry report had some mixed results. Sales surged, but industry profits decreased. Is this an area of concern?

Armour: The strong sales growth is validation that the industry is satisfying thegrowing and ubiquitous consumer demandfor convenience. Perhaps the clearest evidence of that is the chart showing ourindustry’s inside sales growth rates vis-À-visother retail channels. The only channel thatgrew faster over the past four years wasclub/warehouse, and even that wasn’t bymuch. We outperformed general retail, drugstores, restaurants and supermarkets. The drop in profits is primarily the resultof the outrageous continuing increase incredit card fees. Industry profits declined by$1.1 billion and credit card fees increasedby $1.2 billion. So industry profits declinedby less than credit card fees increased.

Andremember the profit decline was againstthat of 2005, the most profitable year in ourindustry’s history.

CSD:Did you find any of the SOI data particularly surprising? If so, what areas caughtyour attention and why?

Armour: Few things surprise me, but I thinkthat lottery sales in top-quartile stores arebelow those in the rest of the stores is anindication that some operators have questioned the compatibility of time-consuminglottery transactions with the time-efficientpromise of convenience and have reactedaccordingly.

CSD:With credit card processing costsincreasing to $6.6 billion in the industrylast year, what is NACS doing to put someof that money back in retailers’ pockets?

Armour: This is the subject of two-hour presentations that I make and, believe me, you don’t have the space to print it! Two yearsago, NACS developed a three-prongedstrategy to attack the problem: litigation, legislation and media relations. Verybriefly, NACS has filed a class-action lawsuit against Visa, MasterCard and the largest issuing banks alleging price fixing. Thatcase is moving forward through the courts.We’ve been very active on Capitol Hill educating Congress on the problem.

Last year, there were two congressional hearings, one in the House and onein the Senate, at which we testified. Webelieve there will be even more congressional hearings this year. Finally, along withour coalition partners in the MerchantsPayments Coalition (which includes over 20trade associations whose members conduct more than 65% of all retail transactionin the U.S.), we’ve embarked on a targetedmedia relations campaign underscoring thefact that these fees are paid for by consumers and that this is very much a consumer issue. We’ve always said that this cohesivethree-pronged strategy will take three to fiveyears to play out. We’re a year and a halfinto it and we’re ahead of where we thoughtwe’d be when we started.

CSD:What can retailers do to help themselves reduce these exorbitant credit cardprocessing fees?

Armour: Probably the most important thingthey can do is support NACS’ efforts toreduce these fees by contributing to theNACS Interchange Action Fund. We’re asking our members (and anyone else for thatmatter) to make an annual contribution ofat least $180/store to the fund. Last yearover 190 companies made such contributions from the largest firms in the industryto many single-store operators, most ata much higher level than our per-storerequest.

CSD: NACS offers several educational sessions that highlight the opportunity forconvenience retailers to target the agingpopulation, ethnic population and youngerconsumers. Which demographic do you seeas having the largest impact in the channelmoving forward and why?

Armour: Hispanics (because of theirincreasing proportion of the population),teens (because we have a relevant offerand because they can help replace ouraging baby boomer customer segment) andwomen (because I think we’re beginning tofigure out how to appeal to them).

CSD:What emerging trends are you expecting to have the biggest impact over the nextyear? Over the next three to five years?

Armour: I think that how the biofuels category plays out will be significant. And I thinkthe continued high demand for convenience, and how we respond to it, isand will always be the foundation for our industry.

CSD: Tobacco continues to bethe leading in-store categorydespite some calls by expertsfor retailers to decrease theirdependence on tobacco products. How do you see thetobacco category playing outover the next five years?

Armour: I think high-volume cigarette retailers have begun to harvest the category bytransitioning away from treating it as a traffic-building category. The rate of decline inthe category’s contribution to store grossprofits is indicative of this.So I think thecategory will in general continue to declinein unit sales and retailers will not make theinvestment in the category in the future thatthey have in the past. I think that is alsodriven by manufacturer marketing programshomogenizing the retail offer.

CSD:Fuel prices are expected to remainhigh for the foreseeable future. Should retailers be concerned long-term that higher fuelprices are eating away at the disposableincome customers have to spend in theirstores? What can they do about it?

Armour: As you can see from the data,store sales did not decline in the face ofincreased fuel prices. Other retail channelswere affected more than ours was. If wekeep our eye on fulfilling the convenienceneeds of our customer I think we’ll be OK.

CSD: According to the SOI report, packagedbeverages showed strong gains. Do youfeel that the growth in this area is due toretailers’ ability to capture a new consumerdemographic (teenagers, women, etc.) or are there other factors that are impactingthe growth of this category?

Armour: The industry is the immediaterefreshment destination for all consumers,and that certainly extends to packaged beverages. If you look back over the past fewyears, you see significant year-after-yearsales growth in the packaged beverage category. Gross profit dollars from non-alcoholicbeverage sales, packaged plus dispensed,exceeds that of the cigarette category.

CSD:NACS is continuing to grow its international focus. Why is an understandingof European markets or expansion abroadcritical to the growth of the conveniencecommunity?

Armour: The best ideas and the best practices in convenience and petroleum retailingcome from all the corners of the world.Cutting-edge method of payments systemsare in Asia. Perishable product merchandising and supply-chain best practices reside inthe UK. Progressive store design flourishesin Europe. Dispensed beverage categorydevelopment and motor fuels best-practicesreside in the United States. We learn andwe prosper by having a very wide lens.

CSD:Aside from the SOI report, what issuesis NACS working on that retailers should beaware of?

Armour: Everything that impacts our industry on Capitol Hill: credit card fees, biofuels,labor issues, price-gouging legislation, FDAregulation of tobacco, funding the energycompliance requirement in the energy billpassed in 2005, and all the other thingsthat politicians dream up that affect ourindustry.

We continue to enhance our educationand training products to help our membersimprove their effectiveness.

The convenience store industry reported sales of more than $569 billion in 2006, making it one of the most dominate retail channels in the U.S. But with escalating credit card processing fees and volatile categories, such as gasoline and tobacco, the industry has
grown dependent on the strong leadership and lobbying efforts offered by the National Association of Convenience Stores (NACS).

The NACS leadership team is headed by Hank Armour, a former retailer who took the reigns at the association in 2005 following the retirement of long-time president and CEO Kerley LeBoeuf.

Armour has an impressive resume. He founded West Star Corp. in 1982. In 1993, West Star became the first company to introduce branded foodservice into convenience stores in the Pacific Northwest by adding a Taco Bell Express. The company expanded beyond Taco Bell opening Winchell’s Donut production facilities, Winchell’s satellite facilities and Subway sandwich units.

In addition to being on the cutting edge of foodservice, West Star was also a technological frontrunner. It was among the first in the industry to utilize such technologies as store-level automation systems, scanning at point-of-sale, and pay-at-pump capabilities.

Armour, who also served as NACS chairman of the board in 2002 and 2003, holds a bachelor’s degree in economics from Stanford University, a master’s degree in economics from the London School of Economics and a master’s of business administration and Ph.D. in economics from Stanford.

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