NACS SOI Reveals Mixed Results

Convenience store industry sales reached a new high of $577.4 billion in 2007, but profits dropped by $1.4 billion, largely because of higher credit card fees, according to data released this morning by NACS.

Overall, industry revenues climbed only 1.4%, leveling off an extraordinary decade of growth that saw industry revenue grow more than three-fold from $174.2 billion in 1997.

In a decidedly mixed year of industry performance, the biggest concern for convenience retailers remains escalating credit card fees, which surged $1 billion, or 15.2%, to reach $7.6 billion. Meanwhile, industry pretax profits dropped by roughly the same amount, $1.4 billion, falling to $3.4 billion. The net effect is that the industry’s credit card fees are now more than double the industry’s pretax profits, an extraordinary development considering that credit card fees surpassed industry profits for the first time ever last year.

Motor fuels prices increased 8.8% in 2007 but industry motor fuels sales increased only 0.7% to reach $408.9 billion. The convenience store industry sells an estimated 80 percent of the fuels purchased in the United States, and motor fuels sales continue to dominate industry revenues, comprising 70.8 percent of the industry’s sales. However, because of low gross margins, motor fuels are only 33.8% of the industry’s gross profit dollars.

On a percentage basis, motor fuels gross margins shrank to 5.2%, their lowest level since 1983, and are closing in on the record low of 4.2% in 1981. On a cents-per-gallon basis, motor fuels gross margins were 14.3 cents, but only 10.1 cents per gallon before store expenses after factoring in credit card costs across all fuels transactions.

By nearly all performance measures, the gap is continuing to widen between the industry’s top performers and the bottom performers as the number of new one-store operators continues to grow. Since 2000, the number of one-store operators has grown 51%, from 59,876 stores to 90,683 stores, as major oil companies continue to divest their retail assets and operators sell off underperforming stores, frequently to new entrants who often initially lack experience and resources. Today, major oil companies own and operate less than three percent of convenience stores selling motor fuels.

The bifurcation of industry performance is particularly evident with respect to gross profits: The top quartile of stores showed store operating profits of $17,715 per month, while the bottom quartile only captured $559 in profits per month.

Once again, cigarettes dominated in-store sales, accounting for more than one in every three dollars spent in stores, but were second to packaged beverages (non-alcohol) with respect to overall contribution to gross margin. The continuing growth of coffee sales in the channel led to its being pulled out of the traditional catch-all category of foodservice, which included food prepared on site as well as hot, cold and frozen dispensed beverages. By itself, hot dispensed beverages (which includes coffee) now ranks in the top five in both sales dollars and gross margins dollars.

Nearly 80% of in-store sales were from the top five categories:
1. Cigarettes (36.9% of in-store sales)
2. Packaged beverages (16%)
3. Beer (13.2%)
4. Food prepared on site (7.9%)
5. Hot dispensed beverages (5.5%)

More than 70% of gross margin dollars were from the top five categories:
1. Packaged beverages (20.1% of gross margin dollars)
2. Cigarettes (18.9%)
3. Food prepared on site (12.3%)
4. Hot dispensed beverages (11%)
5. Beer (8.4%)

The industry’s 2007 metrics are based on the NACS State of the Industry survey powered by CSX, the industry’s largest purpose-designed business development tool, and based on data from 144 firms representing more than 19,000 stores. Complete data tables and analysis will be released in June in the NACS State of the Industry Report of 2007 Data.

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