Pricing, Promotions Key for Salty Snacks

When the American Public Health Association highlighted a December 2009 study on candy, snack and sweetened beverage availability in non-food retailers, it was worried about obesity.

Convenience store retailers are only worried about thin margins.

The Tulane University researchers found snack food in 41% of all stores whose primary merchandise was not food. Candy was most common (33% of all stories), ahead of sweetened beverages (20%), and salty snacks (17%). By trade channel, 96% of all pharmacies had snack foods, as did two-thirds of general merchandise stores, hardware and garden stores and automobile repair shops. Thirty-nine percent of salons sold snacks, 29% of rental businesses and book stores did, as well. Also, 22% of furniture stores and 16% of apparel stores jumped on the category.

This trend has been years in the making and is interesting if only for the strange bedfellows (chips, gum and candy bars at Bed Bath & Beyond?). C-store executives don’t see much share taken by the offbeat outlets like Home Depot or FedEx Kinko’s, but drug stores have been doing damage. Walgreens stopped selling liquor in all but three states in the 1990’s, but is in the midst of a national rollout of beer and wine sales that began in 2009.

“The drug chains are turning more and more into core convenience store items,” said Billy McNamara, general manager of 20 Signature Stores, based in Austin, Texas. “I have felt this for 20-some years, when they started selling beer.”

Competitive Watch
The one benefit convenience store retailers will always maintain over all other channels of trade is the ability to tie in foodservice to other categories, specifically salty snacks and beverages.

Jared Sturtevant, director of category management for Nice N Easy Grocery Shoppes, an 81-store chain in Canastota, N.Y., said his company quite successfully bundles chips with subs and wraps in locations with its Easy Street Eatery foodservice program.

Sturtevant finds Frito Lay the most proactive when it comes to flavor launches. “To be quite honest, it’s very difficult to keep up with all the new flavors they have out at any given time,” he said. “A majority of the flavor profiles being launched are spicy—and recently lime is showing up in everything from beer to corn chips.”

The key is to continue getting customers in the door. Information Resources Inc., Chicago, showed that average trips per shopper per month to drug stores fell slightly to 1.1 in 2009. Convenience store visits were flat (0.9) from the year before. IRI concluded that because of the two-year rise in gas prices beginning in 2007, shoppers boosted their fill-in trips to nearby drug stores to save gas. When gas prices dropped, so did this behavior.

“I heard once that drug stores are the convenience store for women. I think there’s a lot of truth in that,” said Howard Stroud, director of merchandising and purchasing for Sulphur Springs, Texas c-store distributor Grocery Supply Co. (GSC). Stroud could have been talking to Henry Bays, general manager of 32-store NOCO Express in Tonawanda, N.Y. Bays is only concerned with one non-food channel of trade, and that’s drug.

“I use the phrase that the drug stores are the women’s convenience stores,” Bays said. “The wife says, ‘I’ll pick you up a 30-pack of beer and some chips at the drug store, because I’m going there.’ They have a niche. They have a lot of people convinced it’s the place to buy beer and snacks, so that makes them a major competitor to the convenience store industry.”

Bays is concerned specifically about beer and salty snacks because they are core convenience store categories in which drug stores can do the most harm. Beer prices tend to be lower at drug stores in Bays’ markets, as well as McNamara’s. For instance, an 18-pack that cost $12.99 will sell for $14.59 in a Signature store, but $13.29 at a nearby drug store, McNamara said.

Cost Concerns
McNamara estimated the drug store is only adding 10% to its purchasing cost on beer and snacks, compared to a typical convenience store bump of 25-30%. He tells a similar story about soda: McNamara will sell a 20-ounce soda for $1.59 while the drug store price is $1.29.

Drug bulk sales can hurt, too.
“They do an outstanding 12-pack business, which is big in Texas,” McNamara noted.

Both men cited the advantages each channel has. Drug stores can attract female customers with cosmetics and anyone who needs medication; cut prices on certain common products;  and be open 24 hours. Both men feel drug stores can’t yet match convenience stores on cooler size and/or out-of-stock efficiency.

“They’ll correct it one of these days,” Bays warned.

Bays sees a drug store marketing strategy that takes for granted its status as the place to go for medicine; he said he’s noticed weekly ads featuring more food deals than drug. Still, for all the drug store strengths, Bays believes convenience store speed of service is a differentiator that larger stores just can’t touch. It’s only one advantage, but it’s an important one.

Stroud, like most, believes drug stores will not veer from their current path. But while they are a serious convenience store competitor, all is not lost. Convenience stores, in addition to fresh foods, offer a key point of differentiation: fuel. These two categories under one roof are not available to drug store customers, and that’s where c-stores have an advantage.

“I am not sure that the demographics of the consumers in the drug stores are the same as c-stores,” said Stroud, who doesn’t advise his clients how to battle drug stores. “Our planograms and product mix are based on the typical c-store customer. Also, many of the items sold in c-stores are impulse purchases.”

In fact, according to Mediamark Research Inc., New York City, in 2009, eight demographics of convenience store customers differed most from drug store patrons in the number of unemployed customers (35% for drug, 28% for c-stores), men (45%, 52%) and women (55%, 48%).

“I’m not sure that drug stores are utilizing space efficiently and earning sufficient profits,” Stroud said. “Fresh foodservice, including a quality coffee and dispensed beverage program; clean, well-lit stores; quality employees; and satisfying customer demand with our product mix will help us as an industry to differentiate ourselves.”

Bays and McNamara can also fire away with pricing and promotions on salty snacks, beer and beverages, and also work to bundle those items to offer customers an even better price proposition.

Signature stores had a bad year in beer, McNamara noted, but outpaced its competitors in Budweiser sales, and got a necessary boost from import sales. McNamara rotates promotion pairings with the three major brands: 12-packs of cans and 20-packs of bottles, followed by 12-packs of bottles and 18-packs of cans.

Bays also has a bulk issue with any non-food retailer that sells bulk beverages, like water or Gatorade.

“If a guy buys a case (there), he’s more than likely not going to turn around and buy a case at my place,” Bays said.

To complicate matters even more, Bays has watched as drug store giant CVS hired convenience store executives from chains such as Speedway, Dairy Mart and Speedway SuperAmerica. Walgreens recently hired a Tesco executive to guide its ongoing fresh foods push. Bays said he’s digging in for whatever comes.

“Everyone who sells what we sell is our competitor,” he said.

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