The 2011 Foodservice Report

Convenience store retailers posted strong across-the-board sales gains in 2010 and expressed optimism for an even more robust 2011.

Thanks to an increasingly busy lifestyle, today’s convenience store customers regard food prepared away from home as a necessity, and the industry’s top-quartile retailers have benefited handsomely from meeting the growing demand for fresh foods.

For the past decade, the convenience store industry has consistently posted yearly sales gains in foodservice. Retailers are to be commended for the work they have done cultivating the demand for foodservice by enhancing their focus on quality, consistency, freshness and value.

While the industry has made strides, this isn’t to suggest that 2011 and beyond will be easier as foodservice is a very complex and competitive business. As part of the fourth annual Convenience Store Decisions/Balvor 2011 Foodservice Outlook Survey retailers demonstrated how they are taking advantage of opportunities while attempting to minimize the threats.

“Foodservice sales grew in absolute value and contribution to overall sales in 2010 and the retailers’ forecast indicates it will continue to do so in 2011,” said David Bishop, managing partner of Balvor LLC. “Although it’s easy to focus on a small set of retailers that do an exceptional job with food prepared on site, it’s important to recognize that there is value and profitability in other programs. The key is finding the right foodservice solution for your stores and doing an outstanding job every day.”

That solution could be proprietary brands, a commissary program that delivers fresh food to stores more frequently or an enhanced heat-and-eat offering. Each has a place in today’s market, depending on the capabilities and commitment of the retailer.

“Convenience retailers are employing a wide-array of strategies and each can be effective within an organization,” Bishop said. “Successful retailers build foodservice programs they can effectively and consistently execute and employ strategies to reinforce the value related to that offering.”

A total of 67 convenience retailers representing 2,082 stores shared their views in an online survey between Jan. 11-21, 2011 on a variety of topics, including foodservice branding strategy, dollar sales, product mix, distribution and daypart marketing for the coming year.

Positive Outlook
The one consistent theme throughout the survey is that convenience store retailers remain bullish on all foodservice segments.

The sales forecast for 2011 is ranging between the mid- to high-single digits, depending on the foodservice category. For example, top-quartile retailers believe food prepared onsite will grow 11.7% in 2011, while bottom-quartile operators are expecting a more moderate 4.2% growth. Other growth projections, comparing top- and bottom-quartile retailers are:

• Hot Dispensed Beverages, 10% to 8.3%
• Commissary/Packaged Products, 10% to 4.2%
• Cold Dispensed Beverages, 7.9% to 2.5%
• Frozen Dispensed Beverages, 5.4% to 0.1%

“Retailers are more optimistic about their foodservice prospects in 2011 versus last year, partially because of expected retail price inflation, easier comparables versus last year, and because continued reinvestment into growing this business is paying dividends,” Bishop said. “The top-quartile segment appears positioned to widen their lead with even more robust growth this year.”

One of the key findings in the 2011 CSD/Balvor survey is that there remains a performance gap between convenience retailers relative to foodservice. For example, although the average sales per day is just under $700, 40% of the retailers generate $499 or less each day in foodservice while 13% drive $1,500 or more.

“The difference among convenience retailers’ performance in foodservice can be staggering when you realize that top-quartile retailers generate nearly seven times the sales per store as compared to the bottom-quartile,” Bishop said. “The numbers illustrate and reinforce that the retailers who have been doing this well for a long time are fueling the virtuous cycle of strong sales and growth that accompanies excelling at and reinvesting in foodservice.”

Many other retailers have only recently realized that foodservice is vital to their future. And, while they are starting to invest, consumers at those stores are hesitant as the retailer still needs to demonstrate a consistent ability to execute a program that consumers can come to trust, depend on and value.

“Time, commitment, and consistency are ultimately what these chains need to build consumer confidence and improved results,” Bishop said.

Daypart Marketing
The strongest consensus retailers have regarding daypart opportunities is with hot dispensed beverages. Interestingly, 85% believe their best opportunity in this area during 2011 relates to the morning daypart, even though this is generally when most sales of hot beverages already occur.

“The morning daypart is clearly where retailers are digging in to win a larger share of the foodservice dollars,” Bishop said. “While there are opportunities during other parts of the day, morning is still where most convenience retailers are best positioned to win the food fight in the near-term.”

Although retailers expect increases in coffee prices in 2011 due to rising commodity costs, fierce competition is forcing a thoughtful response so as to protect volume. According to Balvor’s 2011 Convenience Retail Outlook Survey, 52% of retailers surveyed indicated that they’ll likely raise retails in 2011; however, only a quarter of these (14%) we’re extremely certain prices will go up. Of the other retailers that are less likely to be considering an increase, 11% already executed price increases during 2010.

Regardless of price, the ongoing growth in fast-casual restaurants and coffeehouses will have a significant impact on the overall breakfast market. Fast-casual restaurants tend to do their highest sales volume during lunch, but the breakfast daypart remains a core focus for these chains, as well as fast-food marketers like McDonald’s and Burger King.

Coffee chains like Starbucks and Dunkin’ Donuts are expanding menus to move beyond breakfast to capture more snack and fill-in daypart sales. The result is a convergence of menu offerings, which thrusts convenience stores in a precarious position. C-store operators must have a well-defined foodservice strategy so they are catering to their core customers and ahead of the trends, not chasing them.

Bringing Food to Market
More consumers are also becoming value-conscious, a reflection of current economic conditions. Consumers are now expecting better value in terms of price paid, service consistency and food quality. Consumers are also more interested in using technology and many would use self-service terminals if available, according to Eric Giandelone, director of foodservice research at Chicago-based Mintel and author of Mintel Menu Insight’s Foodservice Trends for 2011.

“Fierce competition in the industry will continue and proper menu, service and concept planning must be ongoing to prevent business failure,” Giandelone said. “Restaurant-goers value menu transparency, but still want the occasional indulgent dining experience.”

The complexity of foodservice is evident by the fact that the dominant branding strategy employed by retailers varies as much as the subcategories offered in the store. For instance, pizza is dominated by franchise or licensed brands, roller grill by manufacturer brands and bakery is spread across even others, including proprietary brands. The brand equity manufacturer brands possess is evident with roller grill, as over half of the retailers surveyed leverage these in what is typically the largest food prepared on site subcategory.

“Among the keys for retailers is understanding just which branding approach will help them the most today,” Bishop said. “Just as retailers are different, so are the reasons for using various branded options. Over time, as their programs evolve, so will their branding strategies’ potentially.”

The CSD/Balvor survey also showed it’s fairly common to find that retailers are adjusting the brands offered in their stores. More retailers have focused on the largest subcategory (sandwiches and roller grill) in each category over the last few years.
Interestingly, the survey revealed that over half of the adjustments during the last three years occurred in 2010, suggesting possibly that retailers took the down turn as an opportunity to re-evaluate their offering in order to improve their competitive positioning.

“Given that consumer taste and needs continue to change, it’s only natural that retailers adapt their product mix to ensure that they stay in step with current and emerging trends,” Bishop said. “In some instances, the changes may simply reflect the entry of new product segments, such ethnic wraps and egg rolls.”

Packaged sandwiches have long been a staple of many c-store foodservice offerings and the survey confirms this is still the case. Bakery goods, while maybe not actually prepared on site, are the second most prevalent item offered in convenience stores today, typically consisting of bagels, cookies, doughnuts and muffins.

“Although retailers have sold packaged sandwiches for a long time, a lot has changed relative to the quality of the ingredients, packaging and labeling available today in convenience stores,” Bishop said. “These improvements have been driven in part by technology, logistics and a stronger foodservice mentality.”

The industry also appears to be seeing an increase in commissary programs. The CSD/Balvor study found that 52% of retailers surveyed increased the number of commissary-prepared sandwiches and wraps in 2010. Thirty-six percent maintained their current offering, while just 12% reduced the offer.

Sandwiches generally drive the commissary category, so it’s understandable that this is where retailers are most likely to invest in branding. However, a proprietary approach makes more sense for retailers who’ve already established a solid base business as the branding will help further differentiate their offering.

Given the infrastructure of most convenience retailers currently, the survey found wholesalers remain the leading source for commissary products (see chart on right).

According to Bishop, “Top-quartile retailers, in terms of total foodservice sales, are more than twice as likely to leverage a proprietary branded sandwich as compared to bottom-quartile retailers who rely more on manufacturer brands. In either case, each branding strategy has its place, depending on the strengths and capabilities of the retailer.”

Gus Olympidis, president and CEO of Family Express in Valparaiso, Ind., opened a new distribution center and commissary at the company’s headquarters in September 2010 to help manage costs as it boosts its food sales. The center produces baked goods, sandwiches and wraps for now, but its potential is seemingly limitless.

“A commissary system gives you the opportunity to reduce waste, test products and operate much more efficiently than when food is prepared on site,” said Olympidis, who operates 52 stores. “When it’s done right, central distribution is a cost-effective system that puts more control back in your hands, and that’s the way we want it because no supplier or foodservice brand can run our stores better than we can.”

The central distribution model requires other challenges, such as a trucking fleet, training foodservice employees and a research and development team to focus on new items. Still, the upside has been worth it for Family Express.

We are building brand equity,” Olympidis said. “You can’t convince me that flying someone else’s banner is good for my brand. Our customers expect outstanding quality and great service from Family Express, and that’s what they get. It’s who we are and what we work at every day. When a customer leaves our store I want them to remember the Family Express brand experience, not a national foodservice chain.”

Snack Occasions
Feeding the human proclivity to indulge in dayparts outside the traditional breakfast, lunch and dinner hours, retailers are reporting solid sales gains in coffee and frozen beverages. These dispensed treats are becoming crucial drivers at top-quartile chains. Consider Thorntons Inc. The Louisville chain has a strong focus on hot and cold dispensed beverages to improve the offering and meet consumer demand for unique products. Some Thorntons stores have as many as 15-20 frozen beverages when you include milkshakes and frozen carbonated drinks.

“The demand for all dispensed beverages—hot and cold—is overwhelming in our markets,” said John Zikias, Thorntons’ vice president of marketing. “Our customers can’t seem to get enough. That gives us a chance to introduce new flavors and keep the offering fresh. The result is that the demand is consistently high.”

Seventy-eight percent of retailer respondents to the survey said the biggest growth opportunity for frozen beverages lies in the afternoon from 2 p.m-6 p.m. (see chart on left).

Loyalty programs and social media are natural tie-ins for these snack occasions and fill-in daypart offerings. Facebook, Twitter and YouTube can help operators mitigate the economic environment as “word of mouth” advertising has moved online.

More consumers are also using the Web to browse menus, make reservations, order ahead and get recommendations from other diners. Restaurants’ use of e-mail, Internet and text messages in marketing efforts is also a growing trend.

Beyond the Menu
While meeting the customers’ demands for fresh foods is an integral part of success, 2011 will bring a host of challenges and regulations that go beyond the kitchen. For example, in light of the recent healthcare bill that requires restaurant operators with 20 or more units to list calorie counts on the menu, operators are now tasked with balancing federal regulations with the differing demands of their customers.

“Both the government and consumers want healthier menu options, but restaurant-goers are also very concerned about value and how their food tastes,” said Giandelone, of Mintel. “Keeping both parties satisfied might be a challenge as we move into 2011.”

Giandelone went out of his way to praise the efforts of convenience stores when it comes to delivering a quality food program.

“It’s no secret that the industry has struggled to convert fuel customers to foodservice customers, but the success of the market leaders has helped change the consumers’ perception of the industry and its ability to execute a top-notch food program,” he said. “The bar has been raised very high so now it’s up to convenience store operators to continue executing at a high level—to diversify their offerings and drive traffic without sacrificing quality and value. From everything we’ve seen, the industry is embracing the challenge.” CSD

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