The 2012 Convenience Store Foodservice Report

Top-quartile chains continue to post strong sales across all food segments, while retailers express confidence for healthy category growth throughout 2012.

By David Bishop, Contributing Editor.

We all know times are tough. The consumer is looking for greater value at a time when retailers are focusing on being competitive without losing their shirts.

Retailers recognize that an effective foodservice program helps position a store as a destination for the on-the-go consumer across different times of the day, driving traffic into the store. These programs can help create competitive points of differentiation that are so vital to making the consumer’s consideration set in today’s hyper-competitive environment.

To understand the current state of the foodservice business in convenience retail, Convenience Store Decisions and Balvor LLC have partnered for their fifth annual Convenience Store Foodservice Report. The information in this report was gleaned from the 2012 CSD/Balvor 2012 Foodservice Survey. These results are based on a total of 102 convenience store operators, representing more than 29,000 stores, in which 51% operate less than 10 convenience stores.

Top-Line Performance
If sales are a proxy for consumer demand, then conversely sales are also a measure of how well a store is meeting that demand when compared against others. One benchmark is the industry average, which reports that foodservice sales are averaging just over $600 a day per store, according to the CSD/Balvor survey.

However, simply beating the average doesn’t mean that you’re winning the battle for greater share of stomach as a quartile analysis of the survey responses reveals a large disparity in sales performance across the industry.

Top-quartile retailers are generating twice the sales as the average, ringing up each day over $1,200 per store in foodservice products. On the other hand, bottom-quartile retailers are struggling to simply stay in the foodservice business, generating paltry sales of $135 a day, or only about one-fifth of the industry average.

What’s astounding is that the gap between the top and bottom quartiles stands at nearly $1,100 a day per store, highlighting just how dramatically different performance in foodservice can be amongst convenience retailers.

Growth Prospects
As reported in the January 2012 issue of Convenience Store Decisions, retailers expect foodservice to expand its contribution to inside sales as forecasted growth targets are higher than in the merchandise categories, according to the CSD/Balvor 2012 Convenience Retail Outlook Survey.

Based on the 2012 CSD/Balvor Foodservice Survey, all the foodservice categories are expected to grow on average between 4.7% and 7.2%. Moreover, retailers are targeting the strongest growth in the largest foodservice category—food prepared on-site—with top-quartile retailers planning to build this category even faster with a growth forecast of 7.8%, which is 80 basis points ahead of all other retailers.

While lapping strong sales comps or maintaining high growth rates on already high sales isn’t easy, top-quartile retailers are demonstrating that they are up for the challenge as their growth forecasts are higher across all five foodservice categories versus the rest of the industry. As such, the one theme for 2012 is that the strong will get stronger, while another is that performance gaps will continue to widen between the best and the rest in convenience retailing.

Caffeine Boost
Just as a cup of coffee gives consumers a helpful boost to start the day, the category jump starts convenience retailer’s business each morning. Retailers recognize the importance of hot dispensed beverages in kicking off their sales day. More than half indicate that it’s the most important foodservice category during the morning time period.

The performance gaps in this category highlight one key reason for the top-line sales differences in foodservice and suggest the importance of pursing different strategies as some retailers are faced with great opportunities while
others face serious challenges.

The challenge for the bottom-quartile retailers, who sell around only 30 cups a day per store, is not just how to build consumer demand, but to do so without pouring all the day’s profits down the drain. The opportunity for the top-quartile is how they can leverage the more than 420 cups a day sold to build the business—both in foodservice and throughout the store—with tactics that attract even more shoppers and build the transaction size of
existing shoppers.

Even though many convenience retailers would be thrilled selling over 400 cups a day per store, there are those retailers whose sales are percolating at more than 760 cups per store, which is nearly five times higher than the industry average and 25 times stronger than the bottom quartile. Now, that’s a serious caffeine boost!

Coffee Strategies
Branding continues to be a central element in building a strong coffee program. However, that really depends on how well-developed retail programs are today. If a store has a good cup of coffee and the shopper agrees, then promoting that the brand is only available at certain retail locations with a proprietary label makes a lot of sense. This rationale helps to explain why top-quartile retailers are 1.3 times more likely than the rest to use a proprietary brand to position their hot dispensed beverage program. But if a retailer is struggling to build consumer demand, then leveraging the value related to a third-party, branded program seems to be a better approach at that time.

Creating operational efficiencies that enhance the customers’ experience are more prevalent today given rising input cost and increasing competition are both pressuring margins. More than half of the retailers surveyed have adjusted their brewing practices—especially during slower times of the day—by brewing smaller batches, reducing the available number of blends and making fresh coffee on request.

More than one-third of operators polled have changed their coffee equipment within the last year, moving to soft-heat systems to extend holding times for brewed coffee. Interestingly, while less than one in five retailers is reducing the range of blends offered, lower-volume retailers are twice as likely to pursue this course of action as compared to the top quartile.

Pricing is another key area. Although a leading QSR rival offers all sizes at a single price point in many markets, less than 10% of the convenience retailers that participated in the CSD/Balvor survey indicated that they line-price their coffee. However, one regional retailer that is line-priced combined with their price leadership said it was enjoying market share growth.

As far as passing along the higher costs to consumers, nearly half of the retailers polled indicated they were increasing prices across-the-board on all sizes, and another 13% have raised prices on only select sizes within the past 12 months.

A large regional convenience retailer, for instance, maintained a 99-cent opening price point by introducing a 12-ounce cup to the mix while raising the prices by a dime on the three larger cup sizes, during the summer months of 2011.

Another important element relevant to pricing is how the messaging is framed to the consumer. Currently, nearly 60% of convenience retailers describe cup assortment to consumers by referring to the cup’s actual size, such as 16 ounces, 20 ounces, etc. Interestingly, the top-quartile retailers—like leading rivals outside the convenience store channel—are 20% more likely to refer to their cup set based on the relative size of the cut, such as small, medium and large.

Changing the frame of reference creates other opportunities. For example, a large regional chain shifted from ounces to sizes then a few months later reduced the size of the small cup by two ounces while maintaining the same retail. Consumers didn’t notice or complain about the change and the company was able to significantly strengthen its margins as a result.

Building Food Sales
It is clear that hot dispensed beverages are very important to driving sales during the morning, but so is food, according to over one-third of the retailers. The quartile analysis reveals that those who believe food is the most important are much more likely doing a great job already with hot beverages. In fact, 55% of the top-quartile listed food prepared on-site as the most important.

Here are a couple of interesting observations related to how the top-quartile views food versus the rest. First, when looking at the importance of food as part of convenience store programs, the top quartile places more importance on food prepared on-site as compared to the commissary products. Second, top quartile consistently ranked this category as the most important across all dayparts. All other retailers indicate that it’s the most important during the midday only. This is significant because emphasizing foodservice throughout the day could explain why top-quartile retailers continue to outperform all others in the industry.

So, while the best operators—the top quartile—continue to focus more resources on the food side of their program to strengthen their competitive positions, the rest work to build effective beverage programs anchored primarily by hot coffee. This year is looking like another good year for the best foodservice operators while even more challenges face the rest, as the race to grow share of stomach only gets tougher.

The Growing Demand for Fresh Foods

While cash-strapped consumers are cooking at home more often to help ease tight budgets, a study by the International Dairy Deli Bakery Association (IDDBA) found that these shoppers are on the lookout for fresh, healthful deli foods to stretch their dollars and find a balance between convenience and value.

These findings, should serve notice to convenience store owners looking for effective programs to outperform their competition.

In the report, consumers said they have modestly eased their penny-pinching habits since the height of the recession, but value is still key, making price and perception of price the prominent driver of purchases. Nearly two-thirds of respondents admit to monitoring their purchases more closely, and 65% are buying fewer items on impulse—down from 75% in 2009, IDDBA found.

Sixty-four percent of consumers said they’re paying extra attention to advertised prices, down from 73% in 2009. Sixty-three percent say they stick to a shopping list, and 54% are using coupons more often. Thirty-nine percent of shoppers said they visit discount stores more frequently in the current economic environment, a statistic that climbs to 50% if one household member is unemployed.

The effect is already becoming evident at supermarkets. Supermarket deli department sales were flat at $22 billion, according to the most recent figures available from IDDBA. Forty-five percent of consumers said they bought the same amount from their supermarket deli in 2010 compared to 2008. But the percentage who said they bought less has increased significantly since 2004—from 23% to 34%.

Marketing Foodservice

Whether it is text messaging, social media sites, or any number of communication platforms, reaching consumers off-site is rapidly changing these days.

Facebook is second only to Websites today and its role will continue to grow as nearly 60% of all convenience retailers plan to increase the use of Facebook in 2012, according to the CSD/Balvor 2012 Convenience Retail Outlook Survey.

Midsized retailers, those with 51-200 stores, are the most likely to expand their Facebook activity this year.
Text messaging and e-mail marketing are also both experiencing strong usage growth as convenience retailers are increasing the use of each 43% and 46% respectively. Retailers operating 11-50 stores are the most likely to leverage texting more while retailers with 200 or more stores are the most likely to increase e-mail marketing campaigns in 2012.

Expect to see a dramatic rise in the number of retailers who leverage these types of tools to promote their hot beverage programs and overall foodservice offering. For instance, 10% of the retailers indicate that they’ve already been doing this before 2012, another 26% say this is something that they’re extremely likely to start doing this year.

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