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VIEWPOINT By Don Longo, Editorial Director

Back to Reality on the Backbar With big questions answered, tobacco industry realigns itself and stabilizes

year ago, the tobacco industry was experiencing a shakeup not seen in years. What was once the Big Three tobacco companies — Altria, Reynolds American and Lorillard — became the Big Two when Reynolds acquired Lorillard. Then, Imperial Tobacco bought several Reynolds and Lorillard brands that didn’t mesh with the newly combined company, and purchased the Lorillard operations in Greensboro, N.C. The U.S.-based Imperial business was renamed ITG Brands. Voilá. We had a new Big Three. And convenience store retailers had lots of questions. How would the new Big Three impact their backbars? How would it affect their existing contracts? Future contracts? A year ago, the backbar was also in a state of flux. For comments, please contact Electronic cigarette sales Don Longo, Editorial Director, were peaking. New vapor products at (201) 855-7606 or were trying to squeeze their way dlongo@stagnitomail.com. onto retailers’ planograms. Pundits were still predicting that electronic cigarette sales were on track to surpass combustible cigarettes. Meanwhile, on the regulatory front, retailers and suppliers were anxiously awaiting the Food and Drug Administration’s final rules regulating tobacco products not specifically spelled out in the Tobacco Control Act — rules that could significantly impact

the future of the growing electronic cigarette and vapor product categories. Today, it appears fears about suppliers using their clout to bully retailers were way overblown. Reynolds added Newport to its retailer contracts in November and all indications point to it going well so far. One retailer we spoke with for this special Tobacco Issue said Reynolds’ push behind Newport is even starting to pay off in increased sales. Meanwhile, e-cigarette sales growth appears to have hit the wall. Conversely, combustible cigarette volume has seen a resurgence. The longtime decline rate of between 2 percent and 4 percent has moderated significantly. Low gas prices and slightly better economic conditions have put a few more disposable dollars into the pockets of adult cigarette smokers. And, a year later on the regulatory front, the industry is still awaiting final deeming regulations pertaining to e-cigs, cigars, pipe tobacco, nicotine gels, water pipe (or hookah) tobacco and certain dissolvables not already under FDA’s authority. In fact, it seems tobacco retailers are more concerned about local municipalities enacting their own restrictive tobacco regulations, such as flavor bans, package size restrictions on cigars, and raising taxes or the minimum purchasing age for tobacco products, than they are worried about the deeming regulations. Our special cover story package this issue (starting on page 24) examines these and other critical issues impacting tobacco retailing.

CSNews has been recognized with more editorial awards, including the prestigious Jesse H. Neal Award for business journalism, in the past six years than any other industry publication. 2013 Jesse H. Neal National Business Journalism Award Best Single Issue, October 2012 2013 Jesse H. Neal National Business Journalism Award Finalist, Best Profile, August 2012 2008 Jesse H. Neal National Business Journalism Award Best Single Issue, October 2007 2010 Trade Association Business Publications Intl. Tabbie Awards Honorable Mention, Front Cover Illustration, October 2009 2009 Trade Association Business Publications Intl. Tabbie Awards Gold, Front Cover Illustration, February 2008 Honorable Mention, Best Single Issue, October 2008

2015 Eddie Award Honorable Mention, Folio: magazine Business to Business, Retail, Single Article, February 2014 2014 Eddie Award Honorable Mention, Folio: magazine Business to Business, Retail, Full Issue, October 2013 2014 Eddie Award Honorable Mention, Folio: magazine Business to Business, Retail, Single Article, February 2013 2013 Eddie Award Honorable Mention, Folio: magazine Business to Business, Retail, Full Issue, October 2012 2011 Silver Eddie Award, Folio: magazine Business to Business, Retail, Full Issue, October 2010 2011 Silver Eddie Award, Folio: magazine Business to Business, Retail, Best Single Article, October 2010 2009 Gold Ozzie Award, Folio: magazine Best Use of Illustration, October 2008 2009 Silver Eddie Award, Folio: magazine Business to Business, Retail, Full Issue, October 2008 2009 Bronze Eddie Award, Folio: magazine Business to Business, Retail, Website

4 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

2015 American Society of Business Publication Editors, National Silver Azbee Award Best Profile (long form), February 2014 2015 American Society of Business Publication Editors, Midwest Regional Gold Azbee Award Best Special Supplement, November 2014 2015 American Society of Business Publication Editors, Midwest Regional Silver Azbee Award Best Profile (long form), February 2014 2013 American Society of Business Publication Editors, Midwest Regional Bronze Azbee Award Best Editorial/Commentary, July 2012 2010 American Society of Business Publication Editors, Northeast Regional Silver Azbee Award Feature Article Design, November 2010

THIS BUD’S FOR YOU AND EVERY ONE OF YOUR CUSTOMERS HERE’S WHY 3-day weekends are key beer selling periods for retailers. · In 2015 the week-long periods leading up to 3-day weekends generated over $4 billion in total beer sales and $400 million in incremental sales.*

Premiums outperform every other segment over 3-day weekends. · The Premium segment accounted for 41% of all beer sales and 49% of all incremental dollars.*

Budweiser: King of the 3-day weekend. · Among full-flavored beers, Budweiser was the top selling 3-day weekend brand with over $250 million in sales.* · Among ALL brands Budweiser is the top performer on display with 60% of Budweiser customers recalling displays from their most recent trip.**

* Source: IRI-MULC TUS – Year Ending 12-27-15 ** Source: IPSOS ABI Shopper Poll TUS 2015

CONTENTS APRIL 2016

VOLUME 52/NUMBER 4

24 | COVER STORY A Tale of Two Ciggies Traditional and electronic cigarettes are experiencing surprising shifts in demand.

30 | OTP Opportunities A strong growth trend continues, in spite of pricing and regulatory pressures. 34 | Regulation Takes Up a New Residence Still without FDA’s final deeming rule, the frontline moves to the state and local levels. 38 | Tobacco’s New Big Three: One Year Later How much has really changed in the industry since the shakeup?

INDUSTRY ROUNDUP 14 | As Sale Rumors Swirl, Sunoco LP Preps for More Acquisitions 16 | CST Brands Exploring Strategic Alternatives 16 | CSNews Parent Company Merges With Edgell Communications

18 | Eye on Growth 18 | In Memoriam 20 | Retailer Tidbits 20 | Supplier Tidbits

Convenience Store News (ISSN 0194-8733; USPS 515-950) is published 12 times per year, monthly, by Stagnito Business Information, 570 Lake Cook Rd. Deerfield, IL 60015. Copyright © 2016 by Stagnito Business Information. All rights reserved. Subscriptions: One year, $93; two years, $152. One year, Canada, $110; two years, Canada, $175. One year, foreign, $150. Payable in advance with a bank draft drawn on a U.S. bank in U.S. funds. Single copies, $10, except foreign, where postage will be added. Printed in U.S.A. Periodicals postage paid at Deerfield, IL, and at additional mailing offices. POSTMASTER: Send address changes to Convenience Store News, P.O. Box 1842, Lowell, MA 01853.

6 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

BIC® Full-Size Lighter Only

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CONTENTS CATEGORY MANAGEMENT FOODSERVICE

46 | Munch & Run Sandwiches offer c-store retailers the perfect tool for attracting on-the-go consumers. FOODSERVICE

54 | Spring Cleaning Ideas for sprucing up your foodservice strategies in 2016. COLD VAULT

62 | Better-for-You Beverages Consumers’ desire for healthier options is changing the optimal makeup of the cold vault. SERVICES

66 | Movers & Washers Many c-store car washes are on the move, upgrading both equipment and experience.

DEPARTMENTS VIEWPOINT

4 | Back to Reality on the Backbar With big questions answered, tobacco industry realigns itself and stabilizes. 12 | CSNews Online

22 | New Products

STORE SPOTLIGHT

70 | Flip This Convenience Store Savvy c-store chains are rebranding, remodeling and creating new store prototypes.

570 Lake Cook Road, Ste. 310, Deerfield, IL. 60015 (224) 632-8200 Fax: (224) 632-8266 www.csnews.com BRAND MANAGEMENT Group Brand Director (330) 840-9557

Ron Lowy rlowy@stagnitomail.com

EDITORIAL Editorial Director (201) 855-7606 Editor-in-Chief (201) 855-7608 Managing Editor (201) 855-7614 Senior Editor (201) 855-7618 Associate Editor (201) 855-7619 Assistant Editor (201) 855-7604 Contributing Editor (303) 741-3377 Contributing Editor (201) 280-2614 Art Director (224) 632-8245

Don Longo dlongo@stagnitomail.com Linda Lisanti llisanti@stagnitomail.com Brian Berk bberk@stagnitomail.com Melissa Kress mkress@stagnitomail.com Angela Hanson ahanson@stagnitomail.com Danielle Romano dromano@stagnitomail.com Renée M. Covino reneek@aol.com Tammy Mastroberte tmastroberte@gmail.com Michael Escobedo mescobedo@stagnitomail.com

EVENTS • MARKETING • DIGITAL • RESEARCH • CIRCULATION Vice President/Custom Media Division Pierce Hollingsworth (224) 632-8229 phollingsworth@stagnitomail.com Production Manager Anngail Norris Strategic Marketing Director Bruce Hendrickson (224) 632-8214 bhendrickson@stagnitomail.com Director of Events Ken Romeo (203) 295-7058 kromeo@stagnitomail.com Director of Digital Strategy Matt McGuire (224) 632-8180 mmcguire@stagnitomail.com Director of Market Research Debra Chanil (201) 855-7605 dchanil@stagnitomail.com Audience Development Manager Shelly Patton (646) 217-1045 spatton@stagnitomail.com List Rental The Information Refinery (800) 529-9020 Brian Clotworthy Reprints and Licensing Wright’s Media (877) 652-5295 sales@wrightsmedia.com Subscriber Services/Single-Copy Purchases (978) 671-0449 Stagnito@e-circ.net

CORPORATE OFFICERS President & CEO

EXPERT’S VIEW

Vice President & CFO

76 | Is Your Company Making the Right Investment? Use return on invested capital as a tool to get your answer.

Chief Revenue Officer

Kollin Stagnito kollinstagnito@stagnitomail.com Kyle Stagnito kylestagnito@stagnitomail.com Ned Bardic nbardic@stagnitomail.com Korry Stagnito korrystagnito@stagnitomail.com

Chief Brand Officer

OUT & ABOUT

78 | Keeping Pace With a Changing Industry Convenience Distribution Marketplace addresses challenges in the convenience channel. OUT & ABOUT

82 | Finding the C-store Magic S. Abraham & Sons’ 30th trade show unveiled the latest product offerings for retailers. 98 | Getting to the Core

CONVENIENCE STORE NEWS AFFILIATIONS

Premier Trade Press Exhibitor EDITORIAL ADVISORY BOARD Brett L. Atherton Bolla Management Rick Crawford Green Valley Grocery Edward Davidson ER Davidson & Associates (7-Eleven Inc., retired) Ray Johnson Speedee Mart

Jack Lewis Village Pantry LLC

Jonathan Polonsky Plaid Pantries Inc.

Kyle McKeen Alon Brands Inc.

Roy Strasburger Convenience Management Services Inc.

Richard Mione GPM Southeast Matt Paduano Nice N Easy Grocery Shoppes

Jon Urbanik CST Brands Inc.

The contents of this publication may not be reproduced in whole or in part without the consent of the publisher. The publisher is not responsible for product claims and representations.

8 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

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CSNEWS.COM ONLINE EXCLUSIVE

TOP 5 Daily News Headlines The most viewed articles online.

Why CITGO Takes Its Marketer Roundtable Meetings So Seriously

1 | Global Partners to Hang For-Sale Sign at 125 C-stores The master limited partnership plans to sell 125 non-strategic convenience stores, President and CEO Eric Slifka stated during Global Partners LP’s 2015 fiscal fourth-quarter earnings call. He did not say where any of the stores are located, but did note he expects most or all of the stores to be sold within a year. 2 | Kum & Go Takes the Wraps Off Its New Prototype President and CEO Kyle Krause unveiled Kum & Go LC’s innovative, new Marketplace store design at a Feb. 17 ribbon-cutting ceremony. The prototype store, located at 5225 NW 86th St. in Johnston, Iowa, combines contemporary design with functionality, while putting an emphasis on the brand’s foodservice offerings.

The series of marketer roundtable meetings that CITGO Petroleum Corp. held from Jan. 12 through Feb. 2 are an annual event, but that doesn’t make them just business as usual for the company. “Our internal planning team begins months in advance, taking away key learnings from each session and region to apply to the next year’s event,” Alan Flagg, assistant vice president of supply and marketing, told CSNews Online. “Topics are chosen not only based on feedback we receive from marketers throughout the year and during regular marketer council sessions, but also surrounding which CITGO brand initiatives will be most relevant and beneficial to our marketers at their respective company and station levels.”

3 | Circle K Gets Hopping on Southeast Store Rebranding David Morgan, vice president of operations for Circle K, said all Kangaroo Express locations in Florida’s Marion and Alachua counties would begin the rebranding process in February. The transition will include swapping out the Kangaroo mascot with the Circle K logo, and some stores will get new fuel brands. All stores will offer 79-cent Polar Pop fountain drinks. 4 | Why Now Is ‘Perfect Storm’ for C-store Industry M&A While increasing consolidation in the convenience store industry is being driven by more sellers in the market than ever before, also sharing the wheel is stronger buyers than ever before — particularly large chains that are just getting larger. The majority of buyers that are scooping up small and mid-sized chains lately are the largest convenience store chains, as well as private equity firms.

POLL

5 | Delek US Holdings Considers Retail Dropdown to Logistics MLP In an effort to unlock value for its stock price, Delek US Holdings Inc. is strongly considering dropping down its retail division to its sister company Delek Logistics Partners LP. During the company’s 2015 fiscal fourth-quarter earnings call, Delek US Chairman, President and CEO Uzi Yemin said he prefers a retail dropdown as opposed to spinning off or selling the division, due to tax consequences.

Which of these factors is having the greatest impact on your cigarette sales?

68%

Lower gas prices

12 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

For more exclusive stories, visit the Special Features section of www.csnews.com.

PRODUCT HIGHLIGHT

The most viewed New Product online.

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Think Jerky’s chef-crafted jerkyy is made with grass-fed g beef and free-range turkey raised with no added hormones or antibiotics. Available in four varieties — Sriracha Honey, Ginger Orange, Sweet Chipotle and Thanksgiving — each singleserve bag has 100 calories, 16 grams of protein and 6 grams of carbs. Crafted by health-conscious celebrity chefs, Think Jerky is gluten-, nitrite- and GMO-free, paleofriendly and contains half the salt and sugar of mainstream jerky products, according to the company. The product is packaged in custom caddy boxes for display. Think Jerky LLC Chicago (312) 380-0039 hello@thinkjerky.com www.thinkjerky.com

14%

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11%

Supplier promotions/ incentives

Consumer uptrading to premium brands

Cherry Extra Strength is Here!

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These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure or prevent any disease. Special Operations Warrior Foundation is a registered trademark of Special Operations Warrior Foundation Inc. The makers of 5-hour ENERGY® shots will donate $.05 for every Cherry Extra Strength favored bottle of 5-hour ENERGY® bearing the Special Operations Warrior Foundation Marks sold in the United States from May 1, 2016 through July 31, 2016 to Special Operations Warrior Foundation. For more information visit www.specialops.org. Special Operations Warrior Foundation does not endorse any brand or product. No portion of the purchase price is tax-deductible. Contains caffeine comparable to 12 ounces of the leading premium coffee. Limit caffeine products to avoid nervousness, sleeplessness, and occasional rapid heartbeat. Do not take if you are pregnant or nursing. Not recommended for children. Individual results may vary. See www.5hourenergy.com for more details. ©2016 Living Essentials Marketing, LLC. All rights reserved.

INDUSTRYROUNDUP FAST FACT

There are currently six local ordinances setting the legal age to buy tobacco products at 21 in California, five in Ohio, three in Missouri, 15 in New Jersey, and a staggering 73 in Massachusetts. Source: National Association of Tobacco Outlets (page 24)

QUOTABLES

“People will make an initial purchase based on price, a promotion or perhaps a suggestion by an associate, but quality is what will ensure they become a return customer.” — Chef Bob Derian, RaceTrac Petroleum Inc. (page 46)

As Sale Rumors Swirl, Sunoco LP Preps for More Acquisitions CEO Bob Owens confirms the company has received unsolicited offers

unoco LP is currently working on smaller-scale convenience store acquisitions as it refutes industry rumors that its sister company, Energy Transfer Equity LP, has been quietly shopping around Sunoco. During Sunoco’s 2015 fiscal fourthquarter earnings call in late February, CEO Bob Owens said the Houston-based master limited partnership is “optimistic we can announce something shortly” on the acquisition front. Beyond deals currently on the table, he added Sunoco will continue to look for further merger and acquisition opportunities, but will maintain its rigid criteria including stores that are located in “attractive markets at a financially attractive price.” The pending transactions come on the heels of the final dropdown of retail and wholesale fuel assets from another sister company, Energy Transfer Partners LP, to Sunoco LP. The transaction was officially completed in March, although it became effective Jan. 1. Included were 438 convenience stores, primarily in the Northeast, operating under the Sunoco and APlus banners. In exchange, Sunoco LP was slated to pay Energy Transfer Partners $2.226 billion.

14 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

Despite Sunoco’s forward-looking plans, it continues to face speculation of a sale. Recent media reports stated that Energy Transfer Equity held talks earlier this year to sell the convenience store operator, but those talks were tabled due to a disagreement over proper valuation of the company. Alimentation Couche-Tard Inc., Valero Energy Corp. and Tesoro Corp. were identified in the media reports as “logical buyers” for Sunoco LP. In a recent letter to the company’s employees, however, Owens shot down any talk of a sale. “The facts stated in the article are not accurate. No such discussions have been held. Energy Transfer Equity has no intention to sell the [general partner] of Sunoco LP,” he said. Owens did acknowledge Sunoco LP has received several unsolicited calls from parties interested in its assets over the years, but he maintained the company has not entertained any offers. “This level of interest, which we should all find flattering, is reflective of both the value of our assets — including the iconic Sunoco brand — and the performance of our enterprise,” the chief executive wrote in the letter.

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INDUSTRYROUNDUP

CST Brands Exploring Strategic Alternatives Retailer also names two new board members to ease shareholder unrest ST Brands Inc. began an “exploration of strategic alternatives to further enhance shareholder value” as of March. The review process will be comprehensive and include a “fresh look” at several of CST’s previously announced initiatives, such as its new real estate venture. “We believe there continues to be a disconnect between CST’s intrinsic value and the price of our common stock in public equity markets,” said Kim Lubel, chairman, president and CEO. “For this reason, our board of directors is initiating a process to explore and evaluate a wide range of strategic alternatives to maximize value for our shareholders.” In a news release, CST did not detail what poten-

tial strategic alternatives it will consider. But the parent of Corner Store convenience stores did emphasize that there is no assurance the strategic review will result in any transaction. No matter what avenue CST takes, two new members joined its board of directors and will be involved in the process. CST announced it struck agreements with investment firms JCP Investment Management LLC and Engine Capital LP, both shareholders of the c-store operator who sought to gain members on CST’s board at its annual meeting of stockholders this June. Joining CST’s board immediately are Thomas W. “Tad” Dickson, former chairman of the board at The Pantry Inc., and Rocky B. Dewbre, a former senior executive with Sunoco LP.

CSNews’ Parent Company Merges With Edgell Communications Move creates the most comprehensive B-to-B information resource for retail tagnito Business Information, parent company of Convenience Store News and Convenience Store News for the Single Store Owner, has merged with Edgell Communications. The newly combined company will continue operating under the Stagnito Business Information and Edgell Communications names in the short term, with a new corporate brand to be announced in the near future. The combined assets and brands of Stagnito and Edgell make it the most comprehensive business-to-business information, media and marketing resource serving retailers and their supplier/distributor partners in the North American grocery, convenience, big-box retail, specialty/apparel, hospitality, and pharmacy markets. Stagnito’s and Edgell’s vertically focused U.S.

16 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

brands include Convenience Store News, Progressive Grocer, Hospitality Technology, MURTEC conference, The Gourmet Retailer and Apparel. Horizontally focused brands serving all retail markets include RIS News, Consumer Goods Technology, Retail Leader, Store Brands, Multicultural Retail 360 Summit and Carbonview Research. Brands focused on vertical markets in Canada include Your Convenience Manager, Convenience Central, The Convenience U CARWACS Shows and Pharmacy Business.

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INDUSTRYROUNDUP

eye on growth n Five companies purchased Imperial

Oil’s retail division consisting of 497 company-owned, Essobranded stores in Canada. The new owners are Alimentation CoucheTard Inc., 7-Eleven Canada Inc., Harnois Groupe, Parkland Fuel Corp. and Wilson Fuel Co. Ltd. n GPM Investments LLC closed on an

acquisition of 15 convenience stores with gasoline sales from Gas-Mart USA Inc. In a separate deal, it also took ownership of 42 c-stores with gasoline sales from Fuel USA, plus supply to 20 dealeroperated stores. n TravelCenters of America LLC

bought the TD Pete’s network in northeast Illinois. The chain of five convenience and gas stores opened in 2000.

n Barney’s Convenience Mart Inc.

secured a $21.3-million credit facility to expand upon its business. It currently operates 18 convenience stores in northwest Ohio. n MFA Oil Co. acquired S&S Oil

and Propane Co. Inc. The purchase included 17 propane storage facilities, five bulk fuel storage facilities, five card refueling locations, and S&S’ headquarters in Emporia, Kan. n Buc-ee’s is buying a 15-acre lot in

Baton Rouge, La., to build a facility boasting 60,000 square feet of retail space and more than 90 fueling positions. It will be the first Buc-ee’s location outside of Texas.

in memoriam

CANADA’S FIRST HALL OF FAMERS

The convenience store industry lost a giant when Chester Cadieux, co-founder of QuikTrip Corp., passed away on March 14 at the age of 84. Cadieux was the first retailer ever inducted into the Convenience Store News Hall of Fame, back in 1987. “Chester’s vision, keen wit, insistence on fairness, and marvelous ability to mentor people will never be forgotten,” QuikTrip said in a statement. The company also recalled that Cadieux considered himself to be luckier than smart, as he consistently said his secret was to hire good people and promote from within. Cadieux and his business partner Burt Holmes opened the first QuikTrip store in Tulsa, Okla., in 1958. Cadieux’s son Chet became president of QuikTrip in 2002. Today, the Tulsa-based organization operates more than 700 convenience stores in 11 states.

Two retailers became the first inductees of the Convenience U CARWACS Show Hall of Fame during a ceremony held March 8 at the 13th annual event in Toronto. Steve Pitts, vice president of operations for Mac’s Convenience Stores Inc. (pictured above, center), accepted the chain retailer award on behalf of Mac’s. The chain, owned by Alimentation Couche-Tard Inc., is a frontrunner in the Canadian c-store industry. Jessica Friesen, CEO of Gales Fuels, was honored as the Hall of Fame’s first independent recipient. Gales Fuels is a family-owned and -operated petroleum company serving the Niagara, Ontario, region. The Convenience U CARWACS Show is Canada’s largest trade event. It is owned and produced by Convenience Store News’ parent company, Stagnito Business Information + Edgell Communications.

18 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

The Convenience U CARWACS Show hosts inaugural induction

Strongbow Hard Apple Cider, the #1 selling hard cider in the world1, is marking the start of summer with its Made For Ice program featuring the brand’s range of ﬂavors. Tap into Strongbow’s higher rate of sale3 and tap into increased sales and proﬁts this summer.

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• ‘Best Tasting Cider’ Recognition 5

CONTACT YOUR DISTRIBUTOR REPRESENTATIVE TODAY Enjoy Our Products Responsibly. ©2016 STRONGBOW® Hard Apple Ciders. Produced by Stassen SA. Imported by Bulmers Cider Company, White Plains, NY 1. Canadean, based on 2015 global sales volume of largest single cider brands 2. Nielsen Scan Fy 2011-2015 CAGR 3. Nielsen YTD 2016 w/e 3.5.16 4. Nielsen Homescan AOC L52 w/e 1.30.16 5. Strongbow Gold Apple awarded the 2014 & 2015 highest-rated common cider by Tastings.com Strongbow Honey awarded a Gold Medal in 2015 in the specialty cider category by Tastings.com Strongbow Ginger awarded a Silver Medal in 2015 in the specialty cider category by Tastings.com

INDUSTRYROUNDUP

retailer tidbits n BP plc will launch an improved version of its BP

gasoline with Invigorate this year and upgrade its BP-branded network of retail stations through a siterefresh initiative. n Alon Brands marked year six of its

Clean TEAM program. As part of the program, store managers companywide are evaluated and rewarded based on store interiors and exteriors, fueling areas, customer service, restrooms and more. n Kum & Go LC became the first

retailer to offer E15 in Missouri. Two of the retailer’s locations in Springfield, Mo., now sell the renewable fuel blend. n SuperAmerica LLC is launching a private label credit

card in partnership with First Bankcard. Holders of the new card will receive a discount of 5 cents per gallon at the pump, excluding diesel fuel. n 7-Eleven Inc. is selling 13 New England locations that

no longer fit its business model. The sites include 12 units in Massachusetts and one in New Hampshire. n QuikTrip Corp. and Sheetz Inc. earned

spots on Fortune magazine’s 2016 “100 Best Companies to Work For” list. QuikTrip was No. 76 and Sheetz was No. 97. n Maverik Inc. shuttered six of its

convenience stores on March 5. One store was located in Utah, another in Wyoming, and the remaining four sites were in Idaho. n Pilot Flying J and McLane Co. Inc. extended

their existing multi-year service agreement. The distribution pact covers all 530 Pilot Flying J travel centers in 42 states. n Wawa Inc. opened its first compressed

natural gas fueling station. The Paulsboro, N.J., location is part of a larger venture with South Jersey Gas Co.

supplier tidbits n Eby-Brown Co. LLC has agreed to acquire fellow con-

venience distributor Liberty USA. The move will bring Eby-Brown to new markets, including New York, Maryland and Delaware, and to new customers in Pennsylvania and eastern Ohio. n Anheuser-Busch is pairing with mobile shopping app

Ibotta to offer beer shoppers cash-back rebates on purchases made at convenience stores and other outlets. The partnership runs through February 2018.

house, Monster Beverage Corp. signed a definitive agreement to acquire American Fruits & Flavors. The deal is expected to further enhance its flavor development and global flavor footprint capabilities. n The Pinnacle Corp. launched an education portal

called the Pinnacle Learning Center to provide clients with a single access point for all resources, including online help, documentation and software upgrades from the technology company.

n Dos Equis’ annual Cinco de Mayo

marketing program will return this year. The 2016 Cinco de Mayo program includes a national sweepstakes in which participants can enter to win personal items from Dos Equis’ “Most Interesting Man.” n In a move that will bring its primary flavor supplier in-

20 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

n Tecate Light kicked off a new

campaign dubbed “Champions Night” on March 1. The marketing program highlights the brand’s partnership with boxing through television, digital, and on- and off-premise activations.

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Cheesewich Factory Lyons, Ill. (708) 458-3100 tony@cheesewich.net cheesewich.net

R.J. Reynolds Vapor Co. Winston-Salem, N.C. (800) 974-2227 vusevapor.com

Designed with today’s fast-paced, health-conscious consumer in mind, the Cheesewich line introduces its newest variety: Provolone & Hard Salami. This fast, grab-and-go meal consists of high-quality salami sandwiched between two slices of Deutsch Kase Haus cheese. The product comes vacuum-sealed in a 2.5-ounce serving. All Cheesewich sandwiches are low-carb, gluten-free, and have a six-month refrigerated shelf life. Other varieties in the line include: Colby Jack & Hard Salami; Mild Cheddar & Hard Salami; and Pepper Jack & Hard Salami.

The VUSE Fob power unit with Bluetooth technology perfectly combines form and function to adapt to the rapidly changing demands of adult tobacco consumers, according to the maker, R.J. Reynolds Vapor Co. VUSE Fob fits in the palm of the hand and is pocket-friendly. The power unit works with the same VUSE cartridges as VUSE Solo and VUSE Connect. Cartridges fit into the device and are retractable, minimizing the exposure of the mouthpiece to dirty surfaces. The device can be linked to a mobile app for advanced features, including detailed information about battery and cartridge levels, and two locks — a hard lock and a proximity lock to prevent young ones or others from using the device.

Good Thins Savory Snacks Hector Lombard Atomic Frozen Energy Drink

The Hector Lombard Atomic Frozen Energy Drink from Steve’s Frozen Chillers is available in two flavors: Orange and Raspberry/Pomegranate. Each 16-ounce serving of the beverage named for the popular UFC mixed martial artist has 1.6 times the energy boost of a can of most “regular” energy drinks, according to the company. Based on the initial success of the product, Steve’s Frozen Chillers is offering to assist convenience store owners in purchasing a slushie machine to sell the Hector Lombard Atomic Frozen Energy Drink in their stores. SFC Brands Inc. Boynton Beach, Fla. (561) 327-6052 steve@stevesfrozenchillers.com stevesfrozenchillers.com

Java Monster Salted Caramel

Mondelez International Inc. introduces its first new snack brand in more than a decade: GOOD THiNS. The brand starts with real ingredients — like wheat, potato and rice — and then combines them with enticing flavors like garlic, spinach and sweet potato. Each GOOD THiNS piece is baked thin and crispy without any artificial flavors, colors, cholesterol, partially hydrogenated oils or high-fructose corn syrup. GOOD THiNS are available in eight varieties: The Chickpea One!, available in Garlic & Herb flavor; The Potato Ones!, which come in Original, Spinach & Garlic, and Sweet Potato flavors; and The Rice Ones!, which come in Veggie Blend, Simply Salt, Poppy & Sesame, and Sea Salt & Pepper options. Mondelez International Inc. East Hanover, N.J. (855) 535-5648 mondelezinternational.com

Salted Caramel — the newest addition to Monster Energy’s Java Monster line — is a non-carbonated, hybrid coffee and energy drink featuring a harmonious blend of rich caramel with a sprinkle of salt, according to the company. Featuring a sweet and savory salted caramel flavor, the beverage is brewed with premium coffee and a silky, smooth and creamy Monster Energy proprietary blend. Available in a 15.5-ounce can, Salted Caramel Java Monster is made with half the caffeine of regular coffee. The new flavor joins existing Mean Bean, Loca Moca, Kona Blend, Vanilla Light and Irish Blend varieties. Monster Energy Co. Corona, Calif. (866) 322-4466 monsterenergy.com

22 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

A Cover Story

Tale of

Two Ciggies

Traditional and electronic cigarettes are experiencing surprising shifts in demand

By Melissa Kress

pproximately five years ago, a new product burst onto the scene and began demanding space on the backbar. Many, at the time, saw electronic cigarettes as the “great disrupter” — a product that would usher in a whole new era of tobacco products. And for a time, they did. E-cigarettes really gained legitimacy when the former Lorillard Inc. acquired blu eCigs in April 2012, and sales in general began to skyrocket in the convenience channel. One industry analyst even went so far as to predict e-cigarettes would outpace the demand for traditional cigarettes within the next decade. But then, 2015 happened and the story appeared to be rewritten: Traditional cigarette volume declines began to moderate and, conversely, e-cigarette volumes hit the brakes — hard. In a recent Convenience Store News poll, respondents overwhelmingly pointed to lower gas prices (68 percent) as the key driver behind the positive shift in their cigarette sales lately. Spending less money at the pump is seemingly leaving c-store customers with more money to spend in the store, particularly when it comes to their choice of smokes. But does that tell the whole story? Not necessarily, according to David Bishop, managing partner of Barrington, Ill.-based sales and marketing firm Balvor LLC. When trying to explain what happened on the backbar in 2015, Bishop said many industry insiders

24 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

will point to the impact of lower unemployment rates among core tobacco consumers. He added that “last year caught many people by surprise.” “When you have jobs, you have money; when you have money, you can spend that money,” he explained. However, he also echoed the CSNews poll respondents, dubbing lower fuel prices “significantly more of a contributing factor than unemployment.” “If you look at the effect of lower fuel prices in 2015 vs. 2014, you can equate it to almost saving $1 a gallon for every gallon filled up. Whether the fill-up was eight or 10 gallons — typically the average fill-up is 10 — the consumer had more money back in their wallet,” he said. Of course, not every consumer is a tobacco user. Still, when you consider purchase frequency, customers are purchasing tobacco more frequently than they are fuel. According to Bishop, that, without question, helped. Yet it still doesn’t fully answer the question of what happened. The STory Behind The STory

To understand what happened in 2015, you have to look at what happened in 2014. And what happened in 2014 was in part driven by what happened in 2013: the expiration of the federal payroll tax reduction, Bishop cited. This was significant to the core tobacco consumer, costing them somewhere around $600 to $700 per household per year, he said.

WWW.CSNEWS.COM | APRIL 2016 | Convenience Store News 25

Cover Story

The 2013 expiration meant the tobacco consumer was under that much more pressure. In addition, wage growth and income growth have not kept pace with inflation in tobacco products — trailing it by probably two-thirds, explained Bishop. “So, consumers were under a lot of pressure [in 2013], but then 2014 comes in. 2014 was not the first year we had electronic cigarettes, but it was 2014 that marked the national expansion of [The Altria Group Inc.] and [Reynolds American Inc.] into e-cigarettes,” he noted. With the national rollouts of Altria’s MarkTen and Reynolds’ VUSE products came strong promotional support, which helped build awareness and trial of those products. “It was driving a lot of trial for those items and that’s where we saw e-cigarettes really start to take off for the second time,” Bishop said. As a result, throughout 2014, e-cigarettes really benefitted from expansion of the category, from what previously had been mainly disposables to now disposables and rechargeables. While the interest for e-cigarettes was, without question, very high — and continues to stay very high — a

The Chapters Unfold…

2013:

The federal payroll tax reduction expires, leading to higher payroll taxes, less take-home pay, and more pressure put on the core tobacco consumer.

2014:

The national rollouts of Altria’s MarkTen and Reynolds’ VUSE products help to build more e-vapor awareness and increase trial of these products and others in the space. The category expands from what had been mainly disposables to now also include rechargeables.

2015:

Low satisfaction levels with the e-vapor products on the market result in a slide in repeat purchases. At the same time, traditional cigarette volume declines begin to moderate thanks to lower gas prices and lower unemployment levels.

2016:

Tobacco industry insiders predict traditional cigarettes are likely to move back to their normal rate of volume decline. On the e-vapor front, suppliers will continue to work at developing new products that fully meet adult smoker and vaper expectations.

26 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

major obstacle facing e-cigarettes became clear at the end of 2014 and heading into 2015. And that obstacle is how well the products satisfy tobacco consumers. “Repeat purchases started to slide” because of low satisfaction, said Bishop. SaTiSfacTion GuaranTeed?

Many tobacco industry insiders have acknowledged the right product is not out there yet. Altria, through its Nu Mark LLC operating company, and Reynolds, through its recently formed RAI Innovations Co. subsidiary, continue to search for the right formula for the next generation of e-cigarettes and vapor products. “According to our research, approximately 50 percent of adult tobacco consumers are looking for alternative tobacco products. As we’ve said, we don’t think today’s e-vapor products are fully meeting adult smoker and vaper expectations,” said Brian May, Altria’s senior manager of communications. “For us, we continue to believe category growth hinges on product innovation.” May declined to go into specifics on Nu Mark’s research and development, but said it is taking a disciplined approach, looking at technologies and investing in technologies that will satisfy adult tobacco consumers. It’s also taking a very holistic portfolio approach to innovation. “That’s what we see as the opportunity in the e-vapor space, the innovative products in general,” he stated. Couple the satisfaction quotient with the high rate of dual usage — or sometimes, even triple usage — among adult tobacco consumers, and e-cigarettes have work to do. Bishop points out that nearly 70 percent of adult cigarette smokers have an interest in quitting, and government-sourced data shows only about two-thirds of adult cigarette smokers exclusively use cigarettes. “There is a lot of dual usage or crossover in what consumers use. It’s no different than what you see in alcohol. Occasions and preferences drive consumption patterns,” the Balvor executive explained. “People consume wine in different occasions than they consume beer. It’s no different with large cigars and cigarettes, to a degree.” In short, the answer to the question of “What happened?” is this: The industry saw demand transfer from

Cover Story

cigarettes to e-cigarettes in 2014. Then, in 2015, it saw a significant return of volume to cigarettes mainly because the experience and satisfaction levels that e-cigarettes were delivering weren’t high enough to keep the interest in the segment and drive the repeat purchase cycle. The STory inSide The c-STore

The story that Kevin Campbell, marketing director of Fremont, Ohio-based Beck Oil Co., tells about his specific chain’s tobacco category experience over the last few years mirrors the overall industry tale. Electronic cigarette sales started to soften in the fourth quarter of 2014 at Beck Oil’s FriendShip Food Stores. The chain then saw a decent drop-off in 2015. Today, Campbell said the retailer has condensed its e-cigarette and vape sets to only include the blu, MarkTen, VUSE, Vapin Plus and Cig2o brands. At the same time as it has pulled back on e-vapor, FriendShip Food Stores has seen positive growth in traditional combustible cigarettes, including a trend toward premium brands. “With the gas prices low, premium brands are just another item people can afford to purchase. We have seen nice buy-up into the premiums, specifically Marlboro. We were pleased with the growth seen on the Marlboro core for 2015,” Campbell said. And he reported that the first two months of 2016 continued the same trend of premium trading-up. He also noted that R.J. Reynolds Tobacco Co.’s marketing efforts behind the Newport cigarette brand, which Reynolds acquired last year, are starting to pay off. “Overall, we’ve had growth in cigarettes in 2014 and 2015 as a chain, which has been wonderful,” Campbell explained. “Certainly, we’re focusing — as is everybody else — on developing our own proprietary foodservice. But we’re never going to forget about the tobacco category as a whole. We’re still going strong with promoting it, and getting the signage and the message out to our customers has paid off.” Duxbury, Mass.-based convenience store chain VERC Enterprises Inc.’s tobacco category manager spins a similar yarn. “Last year, we saw a better year than we had for cigarettes

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previously. E-cigarettes in 2015 were not where it was the previous year and, so far, the first few months of this year indicate the same,” said Anna Bettencourt, a VERC category specialist. She believes it’s unclear whether adult tobacco consumers are making the switch from e-cigarettes to cigarettes, but said news reports and social media posts questioning whether e-cigarettes are better for you than traditional cigarettes could be playing a role. The lack of innovation in e-cigarettes could also be driving users toward more advanced vapor products and vape shops, Bettencourt surmised. “I think, as far as traditional e-cigarettes, we haven’t seen a lot of changes in product and innovation, so I think people tend to gravitate more to the vaping side,” she said. “But even that is losing some traction [in c-stores] due to vape shops. It is still growing, but not as much in the c-store market as in the vape shop market. It’s tough to know where the business is going.” GeT ouT your crySTal Ball

What does all this mean for 2016 and beyond? Bishop’s crystal ball says: “We will return to the long-term decline rate, to a degree, in cigarettes simply because the correction was made last year. Absent a significant innovation in e-cigarettes being introduced in the immediate near term, given we are already a quarter through the year, consumers have pretty much moved back to their preferred consumption patterns.” He predicts cigarettes are likely to move back to their traditional decline volume rate of between 2 percent and 4 percent, depending on what happens in other areas like legislative activities and tobacco taxing at the state level. Altria’s May agrees, restating company CEO Marty Barrington’s prediction that over a period of time, cigarette volume will return to its normal pace of decline, which he puts at 3 percent to 4 percent. “That’s the reality until we see the next major innovation,” said Bishop. “I’m not sure if we have the next major innovation in the pipeline already. I think the next disrupter comes at the end of 2016, or more likely early 2017.”

Cover Story

OTP Opportunities

A strong growth trend continues, in spite of pricing and regulatory pressures

By Melissa Kress

s they say, the squeaky wheel gets the oil. Or, in the case of traditional cigarettes and electronic cigarettes, the squeaky wheel gets the attention of tobacco category managers. But, by no means, are they the only products on the backbar that should claim a retailer’s focus. Other tobacco products (OTP), specifically smokeless and cigars, present a great opportunity for convenience stores, according to Kit Dietz, principal of Huron, Ohio-based Dietz Consulting LLC. Speaking at the Convenience Distribution Association’s 2016 Convenience Distribution Marketplace event in February, Dietz presented data from InRhythm Inc.’s C-Metrics database showing the strength of the OTP segments. Per C-Metrics, which is used to provide benchmarks for warehouse-delivered products, total convenience

2015 Share of C-store Dollar Sales Cigarettes

OTP

Non tobacco

25% 11%

64%

Source: C-Metrics 52 weeks ending 1/2/2016; InRhythm Inc.

Percent Change vs. Year Ago 8.0% 6.0% 4.0% 2.0% 0.0%

3.9% Cigarettes

5.3% OTP

6.4%

Non tobacco

Source: C-Metrics 52 weeks ending 1/2/2016; InRhythm Inc.

store warehouse-delivered retail sales dollars for 2015 were projected at $95 billion, up 4.7 percent vs. a year ago. Of that total, cigarettes represented 64 percent and OTP represented 11 percent for the 52 weeks ending Jan. 2 of this year. “It was a good year for OTP,” Dietz remarked. Looking closer, the data shows OTP saw 5.3-percent dollar sales growth in 2015 vs. a year ago, charting a continued upward growth trend over the past three years.

30 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

Cover Story

Within OTP, smokeless products — including moist and snus — registered solid dollar growth of 8.5 percent vs. 2014, leading smokeless to capture a 69-percent dollar share of total OTP. Cigars accounted for the secondlargest dollar share of OTP, at 21 percent, but only saw dollar sales growth of 1.9 percent for the year, according to the C-Metrics stats shared by Dietz. He noted that while the cigar business is robust, it is becoming more price-driven. Kevin Campbell, marketing director at Fremont, Ohiobased Beck Oil Co., has experienced the pricing pressure firsthand. The company’s FriendShip Food Stores have seen a bit of a drop in both moist smokeless and cigars — mostly due to moves by the chain’s competitors. “In moist, some of our competition got a little more aggressive last year,” Campbell explained. “In some of our markets, we’ve given up the margin. In some, we’ve kept it and took a little hit in regards to sales.”

2015 Dollar Share of OTP Smokeless

Cigars E-Cigarettes Papers Vaping

Pipe/Cigarette Tobacco All Other

1% 0%

3% 4%

69%

21%

Source: C-Metrics 52 weeks ending 1/2/2016; InRhythm Inc.

Percent Change vs. Year Ago -100.0%

0.0%

Smokeless Cigars E-Cigarettes Pipe/Cigarette Tobacco Papers Vaping

-7.2% -7.8% -1.1% -27.6%

100.0%

8.5% 1.9%

All Other Source: C-Metrics 52 weeks ending 1/2/2016; InRhythm Inc.

32 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

48.5%

The competition is affecting cigars, too. Cigar sales at FriendShip Food Stores have been flat, but the chain has taken a hit in regards to market share due to its price-point strategy. “I think it has something to do with us resisting the 3-for-99 cents category. We’re trying to stay away from that. We’re all about penny profit, and we want customers in the store more,” Campbell said, adding that he’s concerned because he sees this price point popping up more in competing stores. “It’s certainly not where we want to go, but we will go there if we saw our customers were calling for it and it was starting to make a major dent in our cigar sales,” he said. LegisLative & tax Hoops

For Duxbury, Mass.-based convenience store chain VERC Enterprises Inc., it is not competition, but rather legislation that’s causing the retailer concern. The chain has stores in several Massachusetts and New Hampshire communities and, according to VERC category specialist Anna Bettencourt, each community has different tobacco rules on the books. “The whole industry is getting tougher and tougher, especially in Massachusetts where we have so many different regulations and different one-off scenarios, from the whole state to town to town,” Bettencourt said. Atop regulations, the Massachusetts state excise tax on moist snuff — which stands at 210 percent — is another challenge to VERC’s OTP business. Still, even with the levy, Bettencourt said moist snuff is holding its own across the chain, which she finds a bit surprising because neighboring states don’t have that hefty of a tax. This has resulted in an increase of product being brought into Massachusetts illegally. “The state has made strides in cracking down on people who do not obtain their product from legal channels and don’t pay the excise tax, but the state is still a ways away from where we need to be,” Bettencourt said. “It affects my business. Customers don’t understand; they just see a $2 to $3 difference and think I am price gouging. What they don’t realize is, I have paid all my taxes.” The state has made better strides this year and in the latter part of last year, she said, “but [Massachusetts] is a really large state and there’s a lot of work to be done.”

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Cover Story

Regulation Takes Up a New Residence Still without FDA’s final deeming rule, the frontline moves to the state and local levels

By Melissa Kress

t was 2011 when the Food and Drug Administration (FDA) revealed it would take steps to regulate electronic cigarettes under the Tobacco Control Act of 2009 — after its bid to regulate the products as medical devices failed a legal challenge. Three years later, on April 24, 2014, the federal agency released its long-awaited proposed “deeming rule,” which seeks to extend its authority to cover additional tobacco products including e-cigarettes, cigars, pipe tobacco, nicotine gels, water pipe (or hookah) tobacco, and certain dissolvables not already under the agency’s authority.

34 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

Another two years have now passed and that deeming rule is still in the proposal phase. As of press time, the proposed regulations sat with the White House Office of Management and Budget (OMB) awaiting final clearance, according to Ann Simoneau, director of the Office of Compliance and Enforcement at the FDA’s Center for Tobacco Products. Speaking in mid-February to attendees of the Convenience Distribution Association’s Convenience Distribution Marketplace event, Simoneau said there is no exact date when OMB will give its approval. In fact, she thought it would have happened already. If and when OMB takes action, though, it likely will not mean finality. As noted by Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), it’s possible the OMB could send the deeming rule back to the FDA with recommended changes, which would continue the back-andforth between the two government offices. “The OMB has final regulatory approval; it cannot go into effect unless it signs off on it,” explained Briant, who was also a presenter at the Convenience Distribution Marketplace event, discussing the issue of tobacco regulation at all levels. Expanding its authoritative reach to other tobacco products is not the FDA’s only focus these days either. The agency also counts tobacco research as a main priority — investing roughly $500 million on research to date, according to Briant. This research will shape future regulation, based on scientific studies. The FDA’s timeline, the

Cover Story

NATO chief said, is three to five years. Any future litigation, however, could slow the regulatory process. The agency may also use the research to craft new product standards. Any product that does not comply with any new FDA-issued standards would be pulled from the market, effectively banning products without the need of regulation or legislation, he cautioned. The LocaL BaTTLeground

While the industry still anxiously awaits the final deeming rule — the FDA’s first step in regulating tobacco products not specifically spelled out already in the Tobacco Control Act — local municipalities across the country are taking action of their own. In fact, “the fight will be won or lost at the local level,” Briant boldly said. His reasoning is that tobacco regulation has shifted from how products are sold — like banning cigarette vending machines — to what products are sold. For instance, at the local level, flavor bans on other tobacco products are gaining traction. In Minnesota, Minneapolis’ ban on the sale of fla-

On the FDA’s Radar

According to Thomas Briant, executive director of the National Association of Tobacco Outlets, the Food and Drug Administration is investing $500 million on tobacco research. Here is a sampling of the specific research studies being fielded by the federal agency:

What level of nicotine causes addiction, and what is the impact of lowering nicotine levels on rate of initiation and use?

vored tobacco products in convenience stores went into effect Jan. 1 of this year. One week later, St. Paul lawmakers followed suit and approved a similar ban, which was slated to go into effect April 1. Providence, R.I., was the first municipality to enact a flavor ban. Larger cities like New York and Chicago also have restrictions in place, although NATO is fighting the ban in Chicago. Along with flavors, local legislators are taking aim at other targets including pricing standards for tobacco products and package size restrictions (mainly for cigars). Raising the minimum legal buying age for tobacco products is also becoming a trend. The federal minimum age stands at 18, but several state and local lawmakers have put forth proposals to up the age to 19 in some places, and as high as 21 in other locales. On the state level, Hawaii became the first to raise its purchasing age to 21 statewide — the regulation went into effect Jan. 1. Similar Do flavors statewide legislation failed to pass in 12 other appeal to youth states in 2015. But such measures are once and increase initiation? again making an appearance this year. Case in point: As of early March, California lawmakers had approved a statewide increase in the purchasing age Besides nicotine, what to 21. At press time, the bill was awaiting ingredients enhance Gov. Jerry Brown’s signature. addictiveness? On the local level, there are individual cities with higher purchasing ages, as well. Currently, there are six local ordinances setWhat is the impact of a price promotion ting the age at 21 in California, five in Ohio, on consumer three in Missouri, 15 in New Jersey, and a stagbehavior, including gering 73 in Massachusetts, Briant cited. initiation? On the other hand, 19 states have pre-emptive laws so that local municipalities cannot adopt a minimum legal buying age higher than the state’s minimum.

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Cover Story

Tobacco’s New Big Three:

One Year Later

How much has really changed in the industry since the shakeup?

By Melissa Kress

ast year at this time, a lot of questions surrounded the planned merger of Reynolds American Inc. (RAI) and Lorillard Inc. and the expansion of Imperial Tobacco Group plc to a larger portion of the U.S. tobacco business. As the cover story of Convenience Store News’ April 2015 issue reported, the majority of con-

venience store retailers anticipated the shakeup would be a good thing for them, bringing increased competition to the tobacco supplier community. The merger became official on June 12, 2015. Winston-Salem, N.C.-based RAI acquired Lorillard, and at the same time, London-based Imperial Tobacco Group (now known as Imperial Brands plc) acquired several RAI and Lorillard brands, plus Lorillard’s Greensboro, N.C., operations. A new Big Three — as the top tobacco companies are dubbed — emerged. When the dust settled, Richmond, Va.-based The Altria Group Inc. kept its title as the No. 1 player in the U.S. tobacco space. RAI remained the No. 2 player, but was now bolstered by Lorillard. And ITG Brands LLC (the name Imperial gave its U.S. business) became the new No. 3. So, what’s happened since then? Has anything really changed for convenience store retailers that sell tobacco? Has the shakeup delivered on the positive predictions? To find out, CSNews catches up with tobacco’s new Big Three. From AltriA’s PersPective

Since the merger of its competitors, Altria has not seen any real significant change in the competitive landscape that it did not previously contemplate, Marty Barrington, chairman, president and CEO, said during the company’s fourth-quarter earnings call in January. “The brands have some new owners, and [those] owners talked about their plans about what to do with the brands at retail. We fully contemplated that, but we haven’t seen anything that I’d call out as significant or material,” observed Barrington. The company’s standard operating procedure has

38 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

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Cover Story

largely continued without interruption, Brian May, Altria’s senior manager of communications, further explained to CSNews. “We always evaluate and contemplate what our competitors are doing, but we haven’t seen anything that would significantly alter our plans for the year,” May said. Altria’s numbers across its stable of operating companies back this up. The tobacco leader had a productive 2015. Overall, it grew full-year 2015 adjusted earnings per share (EPS) by nearly 9 percent, in line with its longterm EPS growth objective. In addition, Altria returned nearly $4.2 billion in dividends to its shareholders, consistent with the company’s goal of paying out approximately 80 percent of its adjusted, diluted EPS. Looking ahead, May said, “Altria and its operating companies are well-positioned for continued success. Our core tobacco businesses are strong, thanks in part to the investments we’ve made in our premium brands.” Altria also completed a $1-billion share repurchase program and announced a new $1-billion share repurchase program it expects to complete by the end of 2016. Still, Altria is not resting on its track record. Its operating company, Phillip Morris USA, expanded Marlboro Midnight Menthol nationally in November. Its U.S. Smokeless Tobacco Co. is bringing Copenhagen Mint to the national market later this quarter. And its Nu Mark LLC subsidiary is continuing to build a portfolio of new tobacco products by leveraging internal capabilities and a partnership with Philip Morris International on heat-not-burn products. From rAi’s PersPective

For RAI, 2015 was certainly a “transformational year,” as President and CEO Susan Cameron noted during the company’s latest earnings call

40 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

“The [Newport] brand’s expanded presence is delivering additional gains. We saw growth in both the premium menthol styles, as well as in Newport Red. We also believe contributing to that, in addition to the contracts and the larger sales force, is the consumer engagement strategy. We are out there talking to smokers and talking about the Newport brand in markets where it really hasn’t been represented.” — Susan Cameron, CEO, Reynolds American Inc.

in early February. A major piece of the transformation has been the addition of the Newport brand — which was formerly Lorillard’s leading brand — to RAI’s R.J. Reynolds Tobacco Co. portfolio. RAI expects to complete the manufacturing transition of Newport to its Tobaccoville facility this year. In addition, the brand was added to R.J. Reynolds’ retail contracts in mid-November, following the expiration of the initial five-month standstill period. “The [Newport] brand’s expanded presence is delivering additional gains. We saw growth in both the premium menthol styles, as well as in Newport Red,” Cameron said. “We also believe contributing to that, in addition to the contracts and the larger sales force, is the consumer engagement strategy. We are out there talking to smokers and talking about the Newport brand in markets where it really hasn’t been represented.” Industry analysts Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC,

RESULTS OF THE COLLABORATION BETWEEN TWO GREAT COMPANIES

Cover Story

and Vivien Azer, director and senior research analyst at Cowen and Co., both agree Newport is a bright spot for RAI. Newport is poised for greater-than-expected share gains and faster growth, strengthening the company’s long-term profitability, Herzog observed after RAI released its fourth-quarter results. Citing Wells Fargo Securities’ latest Tobacco Talk survey, she said retailers now expect Newport to gain roughly 95 basis points of incremental share in 2016 under RAI’s ownership, up from approximately 80 basis points when posed the same question in early December 2015. In fact, one retailer in the latest survey said R.J. Reynolds Tobacco “gained major power with Newport. It’s really a two-horse race now.” Added Herzog: “We believe RAI is now well-posi-

ON DECK

A look At whAt the Big three hAve plANNed iN the NeAr term

Altria

• Productivity initiative, expected to result in

approximately $300 million in annual savings • Marlboro’s MHQ mobile app

rAi

• The next generation of VUSE: VUSE Connect,

VUSE Fob, VUSE Port and VUSE Pro • Spot You More retail technology pilot program

itg Brands

• Strengthening of the

retail focus of the business • Development of key brands,

Dutch Masters and Backwoods

42 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

tioned to drive share gains and margin expansion, while managing its growth brand pricing structure and accelerating growth for Newport and its entire portfolio.” February marked the third consecutive month that Newport delivered accelerating share gains, Azer cited. From itG’s PersPective

Since the beginning, the biggest question mark in the shakeup has always surrounded ITG and whether it could be a viable No. 3 competitor to Altria and RAI. While the company is still in its early days, Alison Cooper, chief executive of Imperial, revealed in trading statements that the company as a whole continued to make good progress against its strategic objectives for the three months ended Dec. 31. In the United States, “the ITG Brands team has made excellent progress in the quarter successfully executing our retailer and wholesale program, and establishing the foundations for a year of strong delivery,” Cooper stated. Consistent with the better trends seen in the U.S. market, ITG’s parent company remains constructive on the trading environment, Azer pointed out. The company also remains encouraged by the market share trends for Winston and Kool — two of the brands it acquired — after doing more work on brand equities over the course of the deal. However, Azer did note in her analysis of cigarette volume from Nielsen’s all channel data for the four weeks ended Feb. 27 that ITG’s volume share fell 0.4 points in the period due to share losses from Maverick, Kool, Salem and Sonoma. Winston’s share was flat in the period. The company fared slightly worse on a dollar share basis, losing 0.5 points in the period. Similarly, Herzog in her analysis of the latest numbers observed ITG’s “volume declines markedly accelerated to -5.9 percent during those four weeks (vs. -4.1 percent for 12 weeks) as volume for three of its top cigarette brands — Maverick, Kool and Salem — declined 9.7 percent on average.” The company’s “severe topline underperformance” translated to a 60 basis point year-overyear loss in retail share, to 7.2 percent, she added, noting that ITG’s losses appear to be RAI’s gains in regards to the Newport brand. CSN

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As the retail environment for the tobacco category continues to evolve, all industry players are challenged to make difficult decisions around what products to carry, how to promote / merchandise them and most importantly how to navigate the regulatory environment and maximize category profitability. Retailers who respond thoughtfully to this evolving landscape of consolidation, legislation, regulation and the myriad of new products are clearly in a better position to take advantage of the profit opportunities in electronic cigarettes and vapor products. Join Convenience Store News and industry experts -- Miguel Martin, President of Logic Premium Electronic Cigarettes and Anthony Hemsley, Head of Government Affairs for Logic -- as they examine the latest developments across the category and subcategories, review and provide perspective on the latest regulatory and taxation issues, and examine how leading retailers are profitably growing their category sales by taking a sustainable and long term perspective. Brought to you by Logic Premium Electronic Cigarettes, this webinar will focus on the ever changing environment, putting data trends and merchandising practices into perspective, while sharing insights related to profit opportunities in electronic nicotine devices. Also, when you register, tell us what you are interested in hearing us discuss. We’ll do our best, time permitting, to answer all your questions in this interactive webcast. If you’re a convenience store retailer, you can’t afford to miss this event.

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Don Longo Editorial Director Convenience Store News

FOODSERVICE

Prepared Food + Hot, Cold, Frozen Dispensed Beverages

Munch & Run Sandwiches offer c-store retailers the perfect tool for attracting on-the-go consumers By Bob Phillips

long with coffee, cigarettes and snacks, sandwiches may be the ultimate staple in any convenience store’s in-store portfolio — and a shining star in the foodservice arena. According to Nielsen convenience store data, packaged sandwich unit sales increased by 5.1 percent in the 52-week period ended Dec. 19, 2015 over the previous year and accounted for a 10.6-percent increase in dol-

46 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

lar rings to more than three-quarters of a billion dollars ($766.1 million) over the same period. Of course, that doesn’t even include the burgeoning growth of made-toorder sandwiches at c-stores across the country. “Sandwiches are a perfect fit for a few reasons. They can be customized for the customer, or they can be featured in the grab-and-go case. There aren’t many food items that can work that way,” said Jeff Lenard, vice president of strategic industry initiatives for NACS, the Association for Convenience & Fuel Retailing. “Sandwiches are very versatile and like any convenience store food that sells well, are very portable.” Elaborating on the topic of portability, Lenard pointed to a recent article in The New York Times that blamed a downward trend in cereal sales on millennials, who have passed baby boomers as the largest consumer segment in the U.S. marketplace. The reason millennials are shying away from cereal is the same reason for the growing popularity of sandwiches. “They eat on the run,” said Lenard. “With cereal, they have to clean the bowl and the spoon. The opportunity with sandwiches — especially breakfast sandwiches — is enormous, particularly with millennials who prefer c-stores more than any other consumer demo.” Consumers can eat sandwiches easily while driving, and there is virtually no fuss and no mess beyond discarding the packaging. “Twenty percent of households today are single, and those households are largely millennials,” continued Lenard. “Singles aren’t inclined to race home, work on dinner for an hour, eat by themselves and then clean dishes. With the food options available, particularly at convenience stores, millennials are seeking sandwiches out as an option for dinner.” To many consumers, a grab-and-go sandwich from a c-store offers a far better option than dining out alone, according to Lenard. “Almost as bad as cooking and cleaning up

FOODSERVICE

Prepared Food + Hot, Cold, Frozen Dispensed Beverages

for one is going to a sit-down restaurant and hearing the phrase, ‘Party of one?’” he noted. “So, the convenience store offers a perfect solution.” Mathew Mandeltort, vice president of foodservice strategy and education at convenience distributor EbyBrown Co. LLC, agrees that sandwiches are now considered a foodservice staple in c-stores — particularly if breakfast sandwiches are included in the mix. “They define what I refer to as ‘road food,’” he said. “My spin on ‘street food.’” According to Mandeltort, sandwiches should be: fresh, tasty, convenient, on trend, wholesome, customizable and portable. BEyOnD thE BaSICS

The first thing that comes to mind when thinking of c-store sandwiches is probably ham, turkey or roast beef and cheese. Or maybe egg, tuna and chicken salad sandwiches. However, as people are exposed to a wider variety of cultures and cuisines, the options and variations for sandwiches can become quite literally limitless. “You can specialize in South American sandwiches like Fast Gourmet, a store in Washington, D.C., does,” said Lenard. “Just fantastic sandwiches. At the gas station! And you’ll find bánh mì sandwiches in neighborhoods with a large Vietnamese population.” Also, one can’t forget wraps, or other offerings made with tortillas, which expand the sandwich category greatly — certainly among Hispanic consumers, but also throughout the entire cultural landscape. “Is a burrito a sandwich?” asked Lenard, rhetorically. “Stripes and Sunoco are rolling them out on the East Coast, and I’m sure they’ll experience the same kind of success they had in Texas. So, it doesn’t have to be just

48 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

“Female customers are trending toward the cold case as wholegrain, non-deli meats, alternative bread options and more diverse flavor profiles are being added to sandwich offerings.” — Ryan Krebs, Rutter’s Farm Stores

the traditional turkey, ham or tuna.” Along with their basic attributes and functionality, sandwiches offer c-stores an excellent point of differentiation, be it against another c-store in the immediate area or the nearby quick-service restaurant (QSR). “If you offer a unique sandwich that you can’t get from the station down the street, it gives the customer a reason to come to your store, besides the price of gas,” said Lenard. “It also starts to shift that model from, ‘I’m going to get everything I need from the place with the best gas price’ to ‘I’m going to the place that has the food I like and oh, by the way, I’ll get my gas there as well.’” Jeff Wallace, vice president of operations for Kahala Brands, the parent company of Blimpie, observed that while sandwiches have long been a staple in the country overall, only recently has the convenience channel realized the full benefits of offering their customers freshly prepared, high-quality, branded foodservice options in a quick, convenient, grab-and-go format. “Such a program goes a long way toward attracting new customers — customers who may have previously been inclined to go to a QSR,” said Wallace. “By catering to these all-important customers’ needs, convenience retailers have been able to significantly boost their foodservice sales. Especially when consumers are pressed for time, the Blimpie On the Go program is a perfect solution to their needs.” Of all the key attributes in a foodservice operation, taste and quality should be at the very top of any retailer’s list. And in no other category is this more important than sandwiches. “The quality of products in premade sandwiches has been improving dramatically over the last five years,” said Paul Pierce, former vice president of fresh foods and dispensed beverages at 7-Eleven Inc. and

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FOODSERVICE

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now vice president of sales at Eby-Brown. One of the main reasons for the improved quality is the dramatic improvements in packaging in recent years. This has allowed premade sandwich products that include lettuce, tomato and other condiments to hold up in cold merchandisers for up to a week — unheard of in days gone by. “Artisan breads are being used today,” added Pierce. “Varieties in cheeses, meats and spreads have all drawn greater attention to the category. Chains are improving their distribution, many are adding their own commissaries, and we are seeing more and more made-to-order programs. Additionally, many chains are looking to hot sandwich offerings.”

Still, while the quality of premade sandwiches continues to improve, thanks largely to the improved technology in packaging, nothing calls out “freshness” quite like a sandwich made in-store, believes Chad Prast, senior category manager of fresh foods and dispensed beverages at convenience store operator Murphy USA Inc. “In terms of overall quality, it is hard to beat made-to-order sandwiches,” he said. C-store retailers must also remember that when it comes to quality, perception is more often reality to the customer. With regard to sandwiches, packaging plays an integral role in perception. “If the packaging format conveys a handmade look and feel, consumers will view it as fresh,” explained Nancy Todys, vice president of convenience marketing at sandwich supplier AdvancePierre Foods Inc. “Merchandising premade sandwiches near other perceived fresh-made items like salads and fruit cups

50 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

reinforces the consumer’s fresh perception. But most important, the sandwich must deliver fresh flavor. Sandwiches served hot convey the fresh message. Offering a fresh flavor guarantee will also gain consumer confidence for trial.” ChangES In attItuDE

While as a category, sandwiches may be as old as the hills, consumer preferences are constantly evolving. Wise c-store operators will stay abreast of what’s hot and what’s not, and incorporate those trends into their foodservice operation. Chef Bob Derian, director of food and beverage innovation at convenience store chain RaceTrac Petroleum Inc., sees two trends taking place simultaneously in the sandwich category: consumers’ demand for higher quality, and the use of non-traditional breads such as pretzel buns, ciabatta, or even longtime favorites like croissants and biscuits. “People will make an initial purchase based on price, a promotion or perhaps a suggestion by an associate, but quality is what will ensure they become a return customer,” noted Derian. “For this reason, quality and food safety need to be at the top of the list when developing a sandwich program. This should be considered an industry best practice.” Indeed, high-quality breads seem to be raising the bar in the c-store sandwich category. Some larger retailers are empowering bakeries to formulate breads engineered to stay fresh longer by avoiding moisture absorption from the other materials used in making a sandwich, according to industry consultant Joe Chiovera, who has held executive foodservice positions at leading c-store companies such as 7-Eleven, Sheetz Inc. and Alimentation Couche-Tard Inc. “We’re seeing breads being properly engineered for refrigeration. If you’re able to take care of bread’s No. 1 nemesis, refrigeration, as well as absorbing moisture from the produce or deli meat that’s on it, then you’ve got yourself a quality product,” he continued. “So, it’s important to understand the functional intent of the product — needing production plus four or five days.” At Wawa Inc., a leader in the convenience channel in sandwich sales, both made-to-order and premade sandwiches are offered. Yet, they are intentionally not offered in the same formats. “We have a good wrap business, and we’ve added some lighter sandwiches in the last few years,” explained Lynn Hochberg, director of product development for Wawa. “We like to keep our premade and

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FOODSERVICE

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made-to-order sandwiches differentiated so that there’s no duplication or misunderstanding of what you get.” In response to the “good-for-you” trend that’s been impacting virtually all product categories over the past decade, Wawa has introduced “healthy” sandwiches into their premade program mix. “Certainly, healthy consumption is important to our consumers,” said Hochberg. “We have a special symbol on our premade sandwiches that are under 500 calories.” thE SEaRCh FOR ValuE

Consumers are always looking to get the biggest bang for their buck — that’s a central component in Retailing 101. Thus, it’s imperative for c-store retailers to follow the lead of QSRs and market their foodservice operations, with sandwiches front and center.

“More than ever, consumers are looking for value,” agreed AdvancePierre’s Todys. “Quick-serve restaurants have trained consumers to look for deals on their favorite foods, like classic cheeseburgers and chicken sandwiches. Convenience stores are in a great position to compete by offering bundled meal deals or twofer deals on hot or cold grab-and-go sandwiches.” Todys also pointed to a huge advantage c-stores can offer their consumers vs. the QSRs. “The wait is usually considerably shorter than at a fast-food drive thru,” she said. Due to their ability to be easily and effectively merchandised, sandwiches have strong appeal with the core convenience store shopper — the on-the-go, quick-in, quick-out shopper. “If the store is a little crowded and you don’t have time to wait, it’s a great option,” noted Wawa’s

52 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

Hochberg. “Often when people come into the store in the morning, they’ll also pick up their lunch and it’s much easier for them to buy something prepackaged.” A comprehensive sandwich program has the power to draw the QSR loyalist into the convenience store instead, by making it unnecessary for that consumer to make an extra stop in his/her busy day, according to Kahala Brands’ Wallace. “A program such as Blimpie On the Go provides more choices for the consumer who wants to get in and get out quickly and yet still enjoy a high-quality, better-for-you food option,” said Wallace. “It offers more choices that fit their lifestyle.” Consumers are looking for sandwiches that don’t look like premade sandwiches, he added. “Ones with fresh, high-quality ingredients, bold flavor profiles, and with healthy options.” But the popularity of sandwiches doesn’t stop there. Perhaps their most important attribute to the c-store operator is that sandwiches appeal to virtually every consumer demographic. In fact, with their wide array of healthy attributes such whole-wheat bread, low-fat cheese and lowsodium meats, sandwiches have become a useful tool to attract women into the c-store. “Sandwiches are crossing several segments,” said Ryan Krebs, foodservice director at Pennsylvania convenience store chain Rutter’s Farm Stores. “Female customers are trending toward the cold case as wholegrain, non-deli meats, alternative bread options and more diverse flavor profiles are being added to sandwich offerings.” Because sandwiches span all consumer segments and all dayparts, there is still a lot of growth opportunity for the convenience channel, particularly among those consumers who want a sandwich for now and a sandwich for later. Indeed, that very well may have been the consumer’s plan all along, rather than an impulse decision. “People are seeking cold, premade items for later in the day, such as picking up lunch while they’re getting morning coffee,” advised Krebs. “Grabbing a sandwich that can be refrigerated at work and eaten later is more of a plan than a quick decision.” CSn

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FOODSERVICE

EXPERT’S VIEW

Prepared Food + Hot, Cold, Frozen Dispensed Beverages

Spring Cleaning Ideas for sprucing up your foodservice strategies in 2016

s spring approaches, it is always a good time to review the situation of a retailer’s foodservice programs. I have been traveling quite a bit lately, and from my personal perspective, there have been tremendous leaps in convenience store foodservice quality in stores across the country. Still, not all stores under a single banner have fully executed the foodservice basics systemwide — such as craveable food, helpful service and clean stores. Considering these threshold needs should By Paul Clarke, be met — meaning a customer may never Q1 Consulting return if they are not — I’ve developed a few ideas for c-store operators looking to “tune up” their foodservice perception that will hopefully lead to increased traffic, basket size and sales. “FRESh” IS thE CORnERStOnE

C-store operators have long battled the perception that their food offerings are, for the most part, low in quality and not very fresh. But today, with plenty of customizable, made-to-order foods offered at c-stores, there’s no reason for this expectation to persist. For example, Wisconsin-based Kwik Trip not only offers fresh baked goods, but decided to vertically integrate into a baked goods manufacturer. While the use of commissaries has been on the rise over the past five years, Kwik Trip (and others) have capitalized on becoming a manufacturer to maintain quality control. The venture is expensive, but as c-stores compete with fast-casual restaurants, consumers will respond favorably to a variety of fresh fruit, fresh-cut steaks, custom-made salads and prepared meals — all of which are key staples of Kwik Trip’s menu. FROm “GaS StatIOn” tO “my CORnER ShOp”

In the past, foodservice customers may not have had much of a reason to linger at a c-store location; let alone use the restroom. In my experience, the best convenience stores are those that are called by name. For example, I once heard a group of coworkers say “Let’s head over to

54 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

Wawa” or “I’d like to go to Casey’s for lunch.” There was no mention of “c-store” or “gas station” in either of these cases. Once a convenience store makes this leap, consumers are becoming loyalists. Differentiation has occurred. A couple ideas on how to do this: Keep restrooms spotless. It is absolutely true that a dirty bathroom equates to a dirty kitchen and therefore to unhygienic workers. Pilot Flying J claims to use cleaning solution that’s up to 1.5 times what is required by law because they understand it’s the small things that make a difference. Limited-time offers. Consumers love change. Limited-time offers (LTOs) offer a point of differentiation and a reason for new patrons to visit your store. They also allow operators to keep up with the “fast feeders” and with what foodservice patrons want. Portability. More than 65 percent of consumers will consume their foodservice items immediately after purchase, according to our data. This means foods like wraps, sandwiches and even bowls lend a cue to consumers that these items can be consumed in-transit. Ensure spoons, napkins and packaging are well within reach and durable. FOCuSInG On thE FEmalE COnSumER

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FOODSERVICE

Prepared Food + Hot, Cold, Frozen Dispensed Beverages

solution for their family; better-for-you, healthful offerings for themselves and their family; and an inviting, clean and attractive setting in which to make food and beverage purchases. C-store operators could work to boost appeal among female customers by promoting foods as fresh, all-natural, organic, seasonal or local, if possible. Fresh fruits, oatmeal, salads, yogurt and other better-for-you food items should be front and center for this type of approach. This not only provides a menu option for mom when the kids just go for the “2 for $2” chili hot dog deals, but also encourages repeat visits. (RE)InVESt In FOODSERVICE EquIpmEnt

Many retailers tend to jump into foodservice before doing some basic calculations that can predict whether a menu or food program will succeed or fail. One of the key variables overlooked is equipment. The first step operators must take when offering a hot food program is costing out the menu items they wish to offer. Once this is determined, operators are in

a better position to identify equipment that can handle the proposed and additional items. In other words, with limited space on the counter and in the back-ofhouse, operators will require equipment that is versatile, scalable and can be used for multiple applications. A high-speed oven, for example, has multiple functions and can heat or cook frozen food within seconds. While this is not meant to be an immediate “To Do” list, the ideas I’ve provided should encourage c-store operators to revisit their foodservice programs and consider areas of improvement and growth. By investing time and money in even just one of these areas, c-store operators should begin to see an uptick in loyal patrons and new customers alike. CSn Paul Clarke is business development director for Q1 Consulting. He brings more than 20 years of foodservice experience, including 12 years delivering consumer insights to chain restaurants and foodservice suppliers. He can be reached at pclarke@q1consulting.com. Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.

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56 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

Grab a bigger “hunk” of the fresh pizza market With pizza servings at c-stores showing double-digit growth according to recent NPD Group research, this booming $3.5 billion category is rolling in dough. Co ve ie ce Store News reported that average pizza sales per c-store hit $23,320 in 2014, which is an 8.2% jump for the third-highest-selling category in prepared foods and the second-largest percentage increase. U.S. consumers show no signs of easing up on their passion for the pie: One in eight Americans eat pizza on any given day, according to recent data from the U.S. Department of Agriculture, and a new Harris Poll found that pizza is by far the No. 1 comfort food in the United States, garnering twice as many votes as any other food. When consumed, pizza provided one-fourth to one-third of total daily energy and contributed one-third of calcium intake and more than half of the daily intake of lycopene, a natural chemical in tomatoes that may be linked with health benefts.

Percentage of U.S. population who consumed pizza on any given day Male Female

26%

25% 20%

18%

15% 15%

15%

Source: What We Eat in America, NHANES 2007-2010

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All

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CASE STUDY LAUNCHING A HOT FOOD PROGRAM Location: Bucksnort, Tenn. Goal: Add hot food offerings to drive business in rural area near interstate and local community Strategy: Maximize limited floor space with compact Hunt Brothers Pizza shoppe offering whole pizzas, Hunk A Pizza®, Wings, WingBites®, and Cheesebread Results: Took only 3 months to recoup their investment in 2015 As a traditional component of a heart-healthy Mediterranean diet, pizza offers a favorful way for consumers to get more veggies and protein with fber into their own diet, too. The secret to getting as big a piece of that pie as possible? Partnering with a trusted national brand that can provide the fexible, customizable support needed to capitalize on the sales potential a pizza program brings. From free sales-boosting materials such as special limited time offers (LTOs), eye-catching point-of-purchase items and promotions to account managers who can show your employees how to pair these materials with suggestive selling techniques and local store marketing plans, a nationally branded pizza program can help keep pizza top-of-mind for your customers and boost business. Hunt Brothers® Pizza goes even further to offer convenience retailers a choice of pizza shoppes in various sizes, each with unique features designed to ft the needs of the store. To help maximize proft potential, the company helps each convenience retailer evaluate his or her store and then provides the best confguration options based on Hunt Brothers Pizza’s merchandising criteria, so staff can work effciently. C-stores also can select the specifc Hunt Brothers Pizza products they’d like to sell at their store, ranging from just pizza 1

Source: Hartman Group, 2013

CASE STUDY ADDING ON TO A SUCCESSFUL PIZZA PROGRAM Locations: Houma, La., and Theriot, La. Goal: Enhance a decade of strong Hunt Brothers Pizza sales with an expanded menu Strategy: Add Hunt Brothers Pizza Cheesebread, positioned as an add-on so there’s no competition with pizza sales Results: Increased sales by 10% to the complete lineup, including Breakfast Pizza, Cheesebread and Marinara Dipping Sauce, Wings and WingBites®, and LTO pizzas available throughout the year. Menu offerings can be customized to the c-store based on the capabilities of the workforce, the pizza shoppe confguration and local community preferences. For example, one store may want to participate in selling Cheesebread, while another may not. Or, a store could decide to sell pizza only in Hunk A Pizza® portions.

National promotion partners help bring in customers Getting customers into your store to buy food can be a challenge, and one way to meet that challenge is through sweepstakes with well-known brands. Hunt Brothers Pizza, for example, runs an annual fall sweepstakes, Hunt to Win, that continues to grow each year, building awareness of the pizza brand both online and in stores. The biggest c-store pizza purchasers tend to be rural men ages 18 to 49 whose interests include hunting and fshing, so the 2015 promotion featured some of the top names in the sporting and outdoor industries: Bad Boy®, Realtree® and Bass Pro Shops®, in addition to a new partnership with country music star Easton Corbin. 2

Building on the hunting program success, Hunt Brothers Pizza introduced its inaugural fshing sweepstakes in Spring 2016. Hook, Line & Winner, which features national partner Bass Pro Shops, will award a grand prize of a Tracker Boats® Grizzly 1760 Sportsman Boat valued at $16,000, in addition to Archenemy® bowfshing packages and Bass Pro Shops gift cards. Another way to bring customers into your store is to partner with sporting events like NASCAR, another important interest among male c-store pizza consumers. In 2016, Hunt Brothers Pizza is teaming up with JR Motorsports to sponsor the #88 Chevrolet for Kevin Harvick® for the sixth year in a row. This NASCAR sponsorship provides all the pizza company’s c-store partners with free national exposure, and the stores also receive Hunt Brothers Pizza Racing marketing materials. Combo meals are a great way to increase your check average and can serve as effective promotional vehicles for pizza, such as Hunt Brothers Pizza’s combos with national partner Coca-Cola: a Hunk A Pizza and a Coca-Cola 20-ounce soft drink, and a whole pizza and a Coca-Cola 2-liter soft drink. Hunt Brothers Pizza recommends the limited-time combo offer a 10% savings compared with individual combined retail.

CASE STUDY LEVERAGING A PROMOTION FOR HIGHER SALES Location: Fort Riley, Kan. Goal: Increase Hunt Brothers Pizza Cheesebread sales by participating in the national promotion in August 2015 Strategy: Promote the 4-week contest inviting customers to share their “selfies” eating Cheesebread via social media, for grab-and-go buys Results: 600% jump in weekly units sold during the contest period

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CASE STUDY BOOSTING SALES WITH A LIMITED TIME OFFER (LTO) Location: Berryville, Va. Goal: Maximize sales potential for the entire Hunt Brothers Pizza line by offering customers a unique LTO pizza flavor Strategy: Sell Hunt Brothers Pizza LTO Chicken Bacon Ranch flavor pizzas Results: 172% increase in total pizza units sold

and other portable snack products, such as the Hunt Brothers Pizza program’s expanded menu: Hunk A Pizza—1/4 of a large 12'' pizza Wings—Southern Style and Hot ‘n Spicy WingBites—Home Style and Buffalo Cheesebread and Marinara Dipping Sauce—the newest permanent menu offering with 100% mozzarella cheese, creamy garlic butter sauce and Just Rite Spice™ topping

Capturing the grab-and-go consumer As eating occasions continue to blur and more consumers opt to eat on the run according to IRI, the market for grab-and-go continues to expand. In fact, 24% of consumers frequently eat snacks instead of meals because they are on the go, suggests IRI’s 2013 Consumer Snacking Survey. C-stores are key players in this grab-and-go market, with $2.5 billion in sales in the category, according to Technomic data. These shoppers on the run are prime candidates for pizza

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The company’s more than 25 years of experience means Hunt Brothers Pizza knows exactly what c-store owners need in order to be successful: Great-tasting pizza that is easy to execute On-location marketing materials Promotions that drive traffic, sales and profits beyond just pizza Techniques and materials to motivate c-store staff to sell more pizzas Exceptional weekly service from Hunt Brothers Pizza’s own trucks, driven by HBP pizza professionals High profit margins with no franchise fees, royalty fees or advertising fees The best pizza deal for the consumer: All Toppings No Extra Charge® National advertising with NASCAR sponsorship and TV, radio and digital commercials

The ABC’s of HBP With more than 7,300 locations in 28 states, Nashville, Tenn.-based Hunt Brothers Pizza is the nation’s largest brand of made-to-order pizza in the convenience store industry. The family owned and operated company provides all the food products, marketing programs, equipment and training for c-stores to operate their own turnkey pizza program, with a complete product line of pizza, Cheesebread, Wings, and WingBites. The roots of Hunt Brothers Pizza go back to the 1960s, when Don Hunt sold pizza supplies to convenience stores and taverns out of the back of a station wagon. The business soon expanded to include his three brothers, forming the successful Pepe’s Pizza model. Pepe’s was sold in the early 1980s, but the brothers reunited in the early 1990s to form a brand new pizza company. Their faith-based company created partnerships with the c-stores they serviced as they moved the industry forward with a program designed specifcally for the c-store industry with direct store delivery. In 2004, the family-owned venture offcially became Hunt Brothers Pizza, still very much grounded in faith and dedicated to running the organization according to their Guiding Principles. Place God frst in all we do, Be a blessing to people, Trust God to meet our needs, Strive for excellence. 4

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COLD VAULT

Beer + Wine + CSDs + Energy + Water + Sports + Juice + Dairy

Better-for-You Beverages Consumers’ desire for healthier options is changing the optimal makeup of the cold vault By Angela Hanson

oday’s convenience store customers are interested in having more healthy fresh food options available alongside roller grill dogs, fried snacks and other c-store staples, but the growing desire for better-for-you products is affecting the cold vault as well. Packaged beverages are frequently paired with a foodservice purchase, and sales of teas, juice and bottled water are growing rapidly. “Demand for healthier packaged beverages is accelerating at a remarkable pace. Across channels and across most key beverage segments, we see healthier options leading the pace when it comes to both innovation and growth,” Brent Guinn, vice president of marketing for good2grow, maker of licensed, healthy beverages, told Convenience Store News. “The current trend is far different than some of the health fads we’ve seen in the past, as millennials really are changing the way the world thinks about what we eat and drink.” Millennials are also helping change the way society has traditionally thought about c-stores; that it’s a chan-

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nel predominantly catering to men who are far less choosy about sticking to a healthy diet. As consumers’ perception of c-stores change and retailers target other demographics, packaged beverage sales are shifting in turn, particularly in recent months. “We are seeing double-digit growth in ingredientenhanced water, sparkling water and ready-to-drink (RTD) coffee, along with strong performance in RTD tea and sports drinks in c-stores,” reported Clint McKinney, director of convenience retail category advisory and space strategy for Atlanta-based beverage giant The Coca-Cola Co. While carbonated soft drinks (CSDs) still dominate the cold vault in terms of total dollar sales, CSD growth has stalled in recent years as the popularity of betterfor-you packaged beverages keeps rising. Savvy retailers must not ignore the opportunity this represents. One convenience store chain recognizing and capitalizing on this movement is Lubbock, Texas-based United Express, which has more than 30 c-stores throughout the Lone Star State. “This niche in healthier beverages is driven by teas (both packaged and fresh-brewed), as well as flavored waters, children’s juices, dairy products and craft sodas,” said Angelos Lambis, director of fuel and convenience for United Express, a division of The United Family. “United Express has dedicated more shelf space to these micro segments in select stores and, as a result, is seeing higher dollar sales and additional gross profit margin from them.” Not only does this let the retailer capitalize on a growth area, but it also serves as a strategic move that enables United Express to create a point of differentiation from its competitors, many of whom remain focused on “older, declining [beverage mix] subcategories,” Lambis noted. STOCking YOUr SheLVeS

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COLD VAULT

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calories consumed, bottled water is an “This niche in healthier beverages is obvious choice, and sales have reflected this. Recent research from Mintel driven by teas (both packaged and freshshows that bottled water sales grew 6.4 brewed), as well as flavored waters, percent to reach $15 billion in 2015. That figure is only expected to grow children’s juices, dairy products and craft through 2020. The research firm presodas. United Express has dedicated dicts total bottled water sales will see 34.7-percent growth, with sparkling/ more shelf space to these micro segments mineral water/seltzer in particular seein select stores and, as a result, is seeing ing 75.1-percent growth. Consumers aged 18 to 34 are the most higher dollar sales and additional gross likely to consume any kind of bottled profit margin from them.” water. They are also the age group most — Angelos Lambis, United Express likely to purchase flavored bottled water. Along with the product’s lack of calories, consumers have expressed an interest in the functional attributes of bottled water that is ings. With the majority of beverage sales coming enhanced with vitamins. from the cold vault, you have to ensure you have the Those customers in search of healthier beverages right assortment to satisfy consumer demand.” are also likely to seek out teas. There’s a number Better-for-you does not only have to be limited to of consumers who correlate the tea segment with the beverage itself, either. Smaller package sizes in the wellness, according to a recent Mintel/GMI (Global form of mini-cans and bottles are in growing demand. Market Insite Inc.) study. Some consumers prefer to manage their diets through “It’s important for c-stores to maintain overall portion control rather than eschewing sugar and calobalance with their products by ries altogether. incorporating sweet, unsweetIncreasingly, consumers also care about the way ened and diet tea beverages in their beverage is sweetened as much as what type of order to drive growth while beverage it is. Certain groups are on the lookout for meeting consumers’ preferences,” natural sweeteners that don’t add empty calories, paradvised Coca-Cola’s McKinney. ticularly the female customer base many c-store retailEven consumers who don’t ers are trying to build. have a specific better-for-you “We consistently hear our moms talking about beverage in mind when they two major areas that are critical signals for them in approach the cold vault assessing the health credentials of a children’s beverare still interested in age: ingredients and sugar content,” good2grow’s specific attributes. Guinn said. “They want to see that there’s nothing “We know conartificial and that the ingredients are things they can sumers want variety actually pronounce.” and choice when it After several years of hearing about the impact Consumers aged comes to beverages,” of sugar on children’s health, “moms are demanding 18 to 34 are the most McKinney said. “The products with no added sugar and low overall sugar likely to consume any biggest opportunity I content,” he continued. continue to see with Although better-for-you beverages are not going kind of bottled water. retailers in convenience to overtake the Cokes, Pepsis and other longtime They are also the age retail is managing their favorites for the foreseeable future, consumer prefgroup most likely to space and assortment erences are undeniably changing. So, making the purchase flavored to meet consumers’ most of the cold vault will mean evolving in pace bottled water. needs for unique offerwith those preferences. CSn Source: Mintel

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Movers & Washers Many c-store car washes are on the move, upgrading both equipment and experience By Renée M. Covino

ar washes are going places in the convenience channel. Industry experts speak about the acceleration of the convenience car wash movement, which basically means channel operators are smitten with improvement — and for good reason, according to top suppliers who recently opened up to Convenience Store News. Sonny’s Enterprise, based in Tamarac, Fla., is one such supplier that has been focusing on the convenience store market, recognizing the potential of many operators in the channel to offer a “professional” car wash experience. C-stores with car washes are upgrading to be on par with professional car wash businesses. “C-stores are falling in love with the car wash business,” explained Kevin Collette, c-store car washes are upgrading these days. vice president of sales, CTO (Compact Tunnel “Conveyors can definitely wash more volume, Organization), for Sonny’s. “The profits they are and in the ‘80s and ‘90s, major fuel retailers like BP, generating, the incremental growth at the pumps and Exxon, Mobil, Shell, Petro Canada, Sunoco and othinside the store are all very appealing. Secondly, they ers had thriving car wash sites with conveyor systems are experiencing how easy it is to manage a high-volon them,” recalled Rob Deal, vice president of interume, professional-level car wash requiring few employ- national and corporate sales for Innovative Control ees and few vendors.” Systems (ICS), a supplier based in Wind Gap, Pa. Sonny’s is also witnessing more businesses in the “Many of those sites have been converted back convenience channel utilizing existing land for building to in-bay automatics for various reasons. I think the a better car wash, properties which are turning out to c-store market is ready to get back into more conveyor be ideal for high-volume express car washes. Offering systems as part of the overall ‘bigger site’ trend, which the ultimate in car washes is the ultimate goal. continues to grow,” Deal relayed. The rationale for c-stores is that the site has the fuel But does that mean all c-stores with car washes traffic already, so why not capitalize on it from a wash should convert to conveyors? perspective with a more professional touch — one that “If the site can service over 100 customers fueling can give it an edge over nearby fuel competitors and at the same time, then you need a conveyor car wash put it on par with the professional car wash business? system to handle the volume,” Deal reasoned. But of course, the answer isn’t always that easy. For most c-store operators, a multifaceted evaluation is needed. GEttInG on thE ConVEyoR BElt Just deciding to conduct an evaluation is the Movement from an in-bay automatic system to a first critical step. Once that decision is made, a site tunnel/conveyor system is one of the chief ways that

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evaluation and ROI (return on investment) calculation are critical in the determination whether or not to convert, advised Laura Edgmond, marketing specialist with Ryko Solutions Inc., based in Grimes, Iowa. C-stores should initially make a physical evaluation, according to ICS’ Deal. “One of the most basic ways to evaluate a site is to look at the volume of current car wash business and the size of the site,” he told CSNews. “The layout and stack/queue areas are critical to ensure you don’t disrupt the current business. Having ample room to make modifications is a must.” Free vacuums enhance the customer experience.

The physical evaluation should also include looking at the length of the wash tunnel; if/where vacuums can be installed; and how point-of-sale (POS) entry systems can potentially be placed to manage the flow into the wash, added Collette. Sonny’s will also work with retailers to look at demographics “very deeply,” studying traffic patterns and individual store information — i.e., gallons pumped and transactions at the kiosk inside, he said. “This is a detailed study. It requires many skill sets and access to good information, as well as a ton of experience.” Observationally, c-stores can evaluate their lineup of cars. If it is constant, then they should consider an upgrade to a conveyor system, according to Deal. Additionally, a market evaluation can be considered if the operation wants to take a more proactive approach to converting to a conveyor system. “You can be an early adopter by doing a market evaluation of current car wash types in a three-mile radius from the location to be upgraded,” Deal advised. “If the market is full of in-bay washes, it might be opportune to be a market leader and capture more car wash volume” with a tunnel system. Finally, obtaining proper financing is a crucial step.

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“Tunnel car washes are a greater investment compared to a rollover or touchless, so financing is an important factor,” said Ryko’s Edgmond. othER EnhanCEmEnt optIonS

If, after thorough evaluation, it is determined that a site cannot accommodate a conveyor system, there are still options to enhance the convenience store car wash. Car wash equipment manufacturers are providing additional features that can be added to existing in-bay equipment to increase revenue and offer more visual features, such as triple foam and total surface sealants like Turtle Wax Ice and Zep’s RainX. “The site can also change the wash program to speed up the wash to help increase volume,” noted Deal. Some c-stores are integrating water recovery systems into their wash models for a variety of reasons that include: as a means of reducing water/sewer costs; as a solution to being located in a drought region; to combat municipal restrictions; and/or to effectively communicate their commitment to environmental stewardship. Water treatment system manufacturer New Wave Industries Ltd., located in North Highlands, Calif., works closely with c-stores to assist them “in determining ROI, product selection for the targeted wash, providing the necessary engineering support, as well as professional installation by a factory-trained and authorized dealer,” said President Gary Hirsh. He pointed out that upgrading to a superior car wash represents both a significant profit center and a customer loyalty builder for c-stores today. Whether a c-store has a rollover, touchless or tunnel system, it is important that customers experience a “superior” car wash, Edgmond echoed. “Car wash customers are not just looking for a clean car anymore; they want the ‘wow’ factor. They want brightly colored detergents and LED lights — the ultimate show.” Savvy c-store car wash operators are likewise keeping up with other current car wash trends such as RFID passes, social media marketing, wash clubs and remote monitoring. Collette suggests c-store retailers venture out and evaluate professional car wash businesses in the area to get other non-equipment ideas and practices. CSn

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STORESPOTLIGHT C-store Industry Refresh

Flip This Convenience Store Savvy c-store chains are rebranding, remodeling and creating new store prototypes By Tammy Mastroberte

ompetition in the convenience store industry continues to increase, leading many operators to step up their game not only to stand out among the crowd, but also to meet the needs of customers and keep them coming through the doors. One of the ways they are doing this is through innovation, including rebranding, refreshing and remodeling their stores. Outdated stores are being updated; in-store layouts are changing; and in some cases, an entirely new logo, color scheme and brand are being created. How do operators know when it’s time for a refresh? Many rely on instinct coupled with research.

A market analysis led NOCO to decide to rebuild or remodel all of its stores.

“The NACS/Coca-Cola Retailing Research Council did a study on how to evaluate your sites, and we took that study, did some surveys and came back with where we rated the lowest, which was customers’ perception of value,” Jeff Miller, president of Norfolk, Va.-based Miller Oil Co., told Convenience Store News about the rebranding his company — operator of 26 convenience stores — is embarking on now. “We knew we were competitive on prices, so we

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had to retool and create a better perception of value; going to market differently,” he explained. Further up the East Coast, at NOCO Express based in Buffalo, N.Y., the decision to remodel/rebuild its 36 locations also involved research. The c-store chain brought in experts to perform a market analysis, which included studying the demographics, new houses being built around locations, current traffic counts, and even contacting the Department of Transportation to see if there were any road improvements underway, according to Michael Newman, executive vice president and co-owner of NOCO. The company has also targeted stores with sales declines or ones that were visibly showing signs of age. “It is very data-driven, and we also look at the stores themselves to see how tired they are,” Newman said of the remodel/rebuild strategy. “The remodels are the same footprint, but feature new equipment. And any rebuilds feature our brand-new format, which is around 6,000 square feet in total and includes new foodservice partners.” Another route, chosen by Savannah, Ga.-based enmarket (formerly Enmark Stations) is consumer focus groups. The chain, operating 60 locations, wanted to gain a better understanding of what its brand meant to the general public. These groups validated what they suspected, said Matt Clements, director of marketing. “The Enmark brand resonated well with consumers, but it was mainly known as a brand that carried competitively priced, high-quality gasoline,” he said. “Our stores are evolving into a destination where you can find fresh food, healthy snacks and much more than just quality gas, so we felt a slight change in our name and a bigger change in our logo would better reflect what we were doing inside the stores.” The stores are now known as enmarket, and the logo features the words, “Fresh Choices, Friendly Faces.” The entire team felt the brand was in need of a refresh, but the focus groups confirmed it for them, Clements explained.

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STORESPOTLIGHT C-store Industry Refresh

CrAftiNg A remOdel

Making the decision to remodel, rebuild or create a new store prototype takes time and planning. For most companies, the plan gets modified each year. At NOCO Express, leaders work off a five-year plan, but review it and make modifications every year. This year is dedicated to refreshing the brand through remodeled and rebuilt stores. For those being remodeled, changes inside the store include new graphics, equipment, countertops, cabinets and light fixtures, along with adding open-air coolers and expanding some of the craft beer selections. Changes outside the store include installing LED lights and implementing energy management systems.

Alon recently unveiled a new store prototype that aims to be “attention-grabbing.”

“We have a good team doing space and sales analysis to look at the space we are using and the sales we are generating from it,” Newman explained. “We also do some local demographic tailoring. For example, we have a store near a university where we have a sizeable craft beer selection that we might not do in another area.” For those NOCO stores being rebuilt based on the new, larger format, the chain is partnering with branded foodservice providers, including Tim Hortons, for a “store within a store concept,” said Newman. Rebuilt stores are around 6,500 square feet vs. remodels at 2,500 square feet. So far, NOCO has remodeled 15 stores and rebuilt eight. Yet another c-store chain giving its network a makeover is Alon Brands LLC, the largest 7-Eleven licensee in the United States, which has been doing remodels and is now focusing on new builds using a new store prototype.

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Legacy Alon 7-Eleven stores were built in the late 1970s to mid-1980s. The company wanted to “raise the bar and be different,” said Jonathan Ketchum, senior vice president. “We needed to innovate and make a quantum change if we wanted to compete in today’s demanding environment,” he explained. “We needed to expand our product mix by adding fresh choices and prepared foodservice.” In the past three years, Alon has built three new stores and continues to evolve the design based on feedback from customers. Once Alon’s management made the decision to build new stores, the company brought in a design firm to help hone the overall message and convey it to customers. “We knew we didn’t want to replicate our existing look. We wanted to set ourselves apart,” said Ketchum. “We had not built a new store since 2007 before embarking on this new prototype. We did start an aggressive remodel program in 2011 and have completed over two-thirds of our store base.” The new Alon prototype is 4,500 to 5,200 square feet, compared to legacy stores at 2,400 square feet, and offers either branded foodservice or in-store dining with seating. The overall design goal is to be attention-grabbing. Bright and colorful graphics are used, the fascia logo is being upgraded, and an embossed 7-Eleven logo is incorporated into the stonework. Similar to NOCO, Alon tailors its stores to the demographics of the area. For example, its Rio Rancho, N.M., prototype store offers an upscale wine selection, with a wine wall featuring 225 slots for wine and two built-in refrigerators with chilled white-wine varietals, Ketchum noted. In contrast, its El Paso, Texas, location was built to cater to international transport drivers traveling between Texas and Mexico, so this store offers a different variation, namely trucker supplies and quick-service-restaurant hot foods. “Our initial new build moved the checkout to the rear of the store, but we reverted back to the sidejustified register area in the following new builds,” Ketchum said. “However, in both cases, the feature area is the foodservice and dispensed beverage sections. We built a design that directs the flow to these high-profit and highly desired products.” So far, 20 Alon 7-Eleven stores have been remodeled to incorporate some of the new elements from the prototype design. Going forward, the retailer plans to carry on the new design and theme as the chain continues to refresh its network.

STORESPOTLIGHT C-store Industry Refresh

reCreAtiNg A BrANd

When the strategy is to rebrand a company and its stores, a number of factors are involved. However, the biggest one is customer perception. At Miller Oil, management realized they were not doing the best job at promoting the Millers brand. Being part of a study group, Jeff Miller brought in fellow group members to view some of his stores. Many suggestions were made about the image. “Last time we did an overhaul and converted to Millers Neighborhood Markets was in 1998. If we are going to grow the business A “fresh” theme is behind the rebranding of enmark to enmarket. and not get out of it, then we have to be relevant and stay current,” Miller said, explaining that in addition to advice from his peers and industry other categories in terms of profitability, he said. There research, he spoke with customers. The company sells is a more extensive fountain offering, plus its placeShell gasoline, and while on a university campus where ment is more prominent. The chain is also partnering one of the stores is located, he talked to a few graduwith nationally branded, quick-service restaurants, ates. He discovered they knew the store as the Shell including Dunkin’ Donuts, and the color schemes and station rather than Millers. materials used are now different as well. Today, in addition to branding the gasoline as “The only thing we haven’t finished is the graphics Millers, the chain shortened its name from Millers package. Once that is done, we can adapt it to the rest of the chain,” Miller told CSNews. Rebranding is more than just the look of a store, stressed enmarket executives. The rebrand of Enmark to enmarket was a decision made as a team, where they examined the brand to make sure it was in sync with the future direction and purpose of the chain, said Clements. New design elements, a new logo, new products and a renewed commitment to their people and communities are among the changes being made. “The stores were rebranded previously around 1990 when the company officially adopted the name Enmark Stations Inc.,” Clements recalled. “Now, there the goal of miller Oil’s new store design is to modernize its image. is a fresh theme throughout our brand — from our logo to our products to our uniforms.” Because rebranding is more than just the look of Neighborhood Markets to just Millers, while streamlina store, companies need to pick the right partners to ing and modernizing the logo. The rebrand started at help them, advised Clements. A chain needs to be clear the forecourt and will now be moving inside the stores. in communicating what is behind the brand. For the “The overall goal was to modernize our image new enmarket, the rebranding was about what they because we were looking dated. To remain competitive, stand for, their mission and purpose, and their people. we had to modernize,” said Miller. “From our survey “Recruiting and employing people who share the work, we also knew we had an issue with value, so that same vision as the company creates the continuity pushed us toward the Millers branded gasoline, and we throughout the organization that is necessary to have more competitive prices there, too.” effectively communicate your brand to the public,” The new Millers store design inside is focused on refreshments, which has surpassed cigarettes and many said Clements. CSN

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EXPERT’SVIEW

Is Your Company Making the Right Investment? Use return on invested capital as a tool to get your answer

here are many ways to look at whether an investment is profitable. However, one of the primary profitability ratios our firm recommends to our customers is return By John C. Flippen Jr. & John Sartory, on invested capital, or Petroleum Capital and Real Estate LLC ROIC. ROIC is a useful tool when you want to compare a company’s profitability to its value-creating potential after taking into account a company’s initial capital investment.

The ROIC formula (see above) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns, per Investopedia. Typically, our firm’s buy-side engagements begin by “riding” a prospective acquisition of retail sites with our client and senior management team. After the ride is completed, the client and PetroCapRE work together to develop the company’s initial acquisition assumptions. We then prepare a site-by-site acquisition model. The model includes an income statement for each site, opening balance sheet, cash flow statement and various projected capital structures that could be used to close the acquisition. Most importantly, the model calculates the client’s expected ROIC based upon various capital structures and bid prices for the network of sites. We use the calculation of ROIC to help companies

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more succinctly understand the internal rate of return that each type of capital structure provides, while at the same time providing a clearer picture of the associated risks or opportunities related to each potential financing structure. For example, many times, operators are hesitant to bring on institutional investors and instead prefer equity partnerships. Although this can be understandable from a risk perspective, in the long run it may be much more profitable from a ROIC perspective to pay a higher interest rate in the early years and maintain 100-percent ownership, rather than pay a percentage of the profits in perpetuity. Another structure we typically look at when helping our clients assess a transaction is: What is the ROIC of owning the real estate vs. entering into a sale leaseback? We have seen that as companies become much larger, and depending on the cyclicality of financing, companies tend to finance their assets under a saleleaseback method because it improves their ROIC. The ROIC of all financing structures changes dramatically depending on the character of the underlying assets and the cyclicality of the financial markets. The bottom line is that if the ROIC regarding an investment — be it an acquisition, land purchase, equipment investment, etc. — does not meet or beat your expected return, unless there are other qualitative factors that cannot be calculated, you should look for better, more fruitful opportunities. CSN John C. Flippen Jr. and John Sartory are managing directors of PetroCapRE (www.PetroCapRE.com). The firm provides buy-side advisory, refinancing, capital restructuring and select sell-side advisory services for clients exclusively in the retail petroleum industry. PetroCapRE has facilitated the closing of more than $1.75 billion in transactions. They can be reached at jflippen@PetroCapRE.com and jsartory@PetroCapRE.com. Editor’s note: The opinions expressed in this article are the authors’ and do not necessarily reflect the views of Convenience Store News.

OUTABOUT &

Spotlighting major industry events

Keeping Pace With a Changing Industry Convenience Distribution Marketplace addresses challenges in the convenience channel By Melissa Kress

n early 2015, the Convenience Distribution Association (CDA) emerged from the former American Wholesale Marketers Association (AWMA). But, like the industry it serves, its transformation is ongoing. Taking the stage at the Convenience Distribution Marketplace, held in Las Vegas Feb. 16-18, CDA’s 2016 Chairman Chad Owen said continuing the status quo and hoping for the best Convenience is not the way to do busiDistribution ness anymore. Marketplace “Change is not easy, Feb. 16-18, 2016 but it’s necessary,” he said. Las Vegas “That’s what the new CDA is all about.” Owen serves as vice president of business affairs for Chambers & Owen Inc., a family-owned convenience distribution business based in Janesville, Wis.

Kit Dietz discussed the importance of core categories.

He grew up in the company and acknowledged that even though Chambers & Owen is a family business, “we know today, more than ever, we need to change with the times.” The same goes for CDA as it makes moves to become more relevant in today’s environment. More than just changing its name, the association has streamlined meetings and educational offerings, adding online webinars to its education programming. It recreated an online directory for all CDA members with a single online login. The association’s new CDBX Meeting Match System also helps member distributors arrange meetings with key trading partners. Keeping up with change — and thinking one step ahead — was likewise a key theme of the keynote presentation during the Convenience Distribution Marketplace’s opening session. Speaker George Blankenship knows all about staying ahead. The former executive worked at several top retailers ahead of their time, notably Apple Computers and Tesla Motors. According to Blankenship, winning in the everchanging retail world takes more than winning over customers and earning their loyalty. He said all players in the convenience channel, regardless of which side of the supply chain they stand on, must think about the circumstances behind their business decisions — for example, generational changes or increased competition. He encouraged the audience members to close their eyes and think about what is going on in the industry. Whoever comes up with a solution will hold the industry in the palm of their hands, he stated. “To change the world, sometimes you need to do the impossible,” Blankenship explained. “It’s not impossible; it just hasn’t been done yet.” ShareD ChallengeS

Keeping up with the changing industry is not the only

78 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

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OUTABOUT &

Spotlighting major industry events

thing CDA and its members have in common with convenience store operators. Both sides of the retail equation face similar challenges as well. “We are all just part of a supply chain, delivering and satisfying consumers,” said Richard Oneslager, owner of Balmar Management Group LLC, which has eight c-stores in the Denver area. He was one of the participants in a retail panel discussion during the event. Oneslager joined Lisa Dell The Convenience Distribution Marketplace event caters to wholesale distributors. Alba, president and CEO of Square One Markets, and Iris Yost, owner of four 7-Eleven locations in Las Vegas, and customer expectations. on a panel moderated by Ieva Grimm, president of However, the same can be said for the distribution Pittsburgh-based business improvement firm Synerge. side of the supply chain. During the executive panel disGrimm said she began working in the channel cussion on retailer-wholesaler relationships, distributors in 2000 and has observed the face of the industry participating from the audience indicated that competi“clearly changing.” She compared a convenience store tion from other distributors and increased operating operator’s mind to “a whirlwind,” filled with issues costs are key factors impacting their business today. like gas prices, equipment and out-of-stocks. Part of satisfying today’s consumer means hav“Regardless if you have one store or 50 stores, you ing more fresh offerings in the stores, according to live in it and it can be painful,” Grimm said. “It’s perOneslager, who noted “fresh food is a huge piece of sonal. It’s what we’ve chosen to spend our lives at.” our business.” He noted, however, that traditional To be successful, c-store retailers need to stay on wholesalers and suppliers still “need to figure out how top of increased competition, regulatory pressures — to handle that part.” Those who are doing foodservice which ultimately lead to increased operating costs — well are making a big commitment and investment. “You can’t just dip your foot in it,” Oneslager said. WorKing Your Core

Keeping up with change was the message of keynote speaker george Blankenship.

80 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

While no one disputes change is good, the convenience channel can keep one foot rooted in the past as it looks to the future. This includes keeping a focus on tried-and-true core products. “This business was all about cigarettes, candy and snacks,” said CDA Marketplace speaker Kit Dietz, principal of Dietz Consulting LLC in Ohio. “That’s where everybody started.” Core products, he believes, still present great opportunities to keep growing. For example, according to data compiled from warehouse-delivered c-stores, center-store categories accounted for $15.6 billion in 2015 sales — a 5.8-percent increase vs. a year ago. And despite the challenges in the tobacco category, “everybody who rides the supply chain benefits from the efficiencies of tobacco,” Dietz noted. CSN

OUTABOUT &

Spotlighting major industry events

Finding the C-store Magic S. Abraham & Sons’ 30th trade show unveiled the latest product offerings for retailers By Angela Hanson

s spring drew near, S. Abraham & Sons Inc. (SAS) offered convenience store operators the opportunity to cultivate new growth at its 2016 Vendor Exhibit and Trade Show. Held Feb. 25-26 at Grand Rapids’ DeVos Place Convention Center and billed around the theme of “Where the Magic Begins,” it marked the convenience distributor’s 30th event. C-store chain representatives, single-store owners and approximately 200 vendors were in attendance. During the kickoff dinner on the evening of SAS set up a model convenience store called “Houdini’s Magic Mart.” Feb. 25, SAS President Alan Abraham thanked everyone in attendance, noting the real convenience especially highlighting the ingredients list, which store magic comes from them. consists of only “meat and spices.” The supplier He shared with Convenience Store News that like the compa- also previewed an upcoming promotional partnerS. Abraham & Sons ny’s clients, SAS is also cultivat- ship with Angry Orchard hard cider. Vendor Exhibit & Last, but certainly not least, enhanced foodservice ing new growth. The distributor Trade Show offerings drew a lot of attention on the SAS show just recently finished the first Feb. 25-26, 2016 floor. Longtime c-store foodservice staples, such as stages of a self-improvement Grand Rapids, Mich. taquitos, are getting a kick with new varieties like evaluation. Abraham pointed to extra-long taquitos and taquito/hot dog combos. the connection between fulfilled Exhibitors noted that grab-and-go offerings are in high employees, efficient work prodemand right now, along with bold and spicy flavors. cesses and, ultimately, happy customers. Daypart is also seeming to matter less when it comes On the trade show floor, retailers were happy to check to the foodservice category. According to one exhibitor, out the latest product offerings from SAS’ vendor partc-stores should pay close attention to their specific marners, as well as the distributor’s proprietary programs. ket as a number of consumers are interested in eating One of the major trends seen was the increasing breakfast items during non-breakfast hours. demand in the convenience channel for a high-quality, As in previous years, SAS once again featured its quick bite. Snack suppliers are responding by offering model convenience store at the back of the exhibition more premium items, such as individual guacamole hall to demonstrate its enhanced foodservice proservings and bite-size fudge pieces. grams. But this year, it also featured its new “space Another trend on display was the growing to sales” analysis, which helps retailers optimize their desire for better-for-you items. For instance, individual stores. creativity and healthfulness combine in the This free process examines the layout and stocked Cheesewich, which substitutes cheese for slices products at individual stores to determine which segof bread around the featured protein. And The ments are underallocated or overallocated. CSN Hershey Co. spotlighted its Krave beef jerky line,

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HOTPRODUCTS ADINDEX

Special Advertising Section

Add Systems ..............................................71 ....................................www.addsys.com Advance Pierre ..........................................47 ....................................www.advancepierre.com Altria Group Distribution Company ........2,3 ...................................www.insightsc3m.com Anheuser-Busch........................................5 ......................................www.anheuser-busch.com

570 Lake Cook Road, Suite 310, Deerfield IL 60015 Phone (224) 632-8200 Fax (224) 632-8266 www.stagnitobusinessinformation.com

BIC ..............................................................7 ......................................www.biclighter.com Cash Depot.................................................56 ....................................www.cdlatm.com Cheyenne International ...........................35 ....................................www.cheyenneintl.com Del Monte ...................................................53 ....................................www.freshdelmonte.com

Harry Stagnito President and CEO 224-632-8217 hstagnito@stagnitomail.com

General Mills..............................................17.....................................www.generalmillsconvenience.com Growth Energy ..........................................77 ....................................www.ethanolretailer.com Hatco Corp. ................................................51 ....................................www.hatcocorp.com Heineken ....................................................19 ....................................www.enjoyheinekenresponsibly.com

Kollin Stagnito Chief Operating Officer 224-632-8226 kollinstagnito@stagnitomail.com

Hunt Brothers Pizza ..................................57-60 ..............................www.huntbrotherspizza.com IDDBA .........................................................49 ....................................www.iddba.org Imageworks Tobacco Displays ................73 ....................................www.imageworksdisplays.com Innovative Control ....................................69 ....................................www.icsCarWashSystems.com

Ned Bardic Senior Vice President/Partner 224-632-8244 nbardic@stagnitomail.com

Iowa Rotocaster.........................................81 ....................................www.irpinc.com Inter-Continental Cigar/Capone .............29 ....................................www.alcapone-us.com J.T. International .......................................37 ....................................www.JTI-usa.com KraftHeinz//Crystal Light .........................63 ....................................www.kraftfoodservice.com KT&G...........................................................21,23 ...............................877.580.5506 Liggett Vector Brands ...............................99 ....................................877.415.4100 Living Essentials .......................................13 ....................................www.5hourenergy.com Logic Technologies ...................................CV1,10-11,44 ..................www.logicecig.com McLane Co. ................................................15 ....................................www.mclaneco.com Nat Sherman ..............................................83-84..............................www.natsherman.com National Tobacco .......................................31 ....................................800.331.5962

Korry Stagnito Chief Brand Officer 224-632-8171 kstagnito@stagnitomail.com Ron Lowy Group Brand Director 330-840-9557 rlowy@stagnitomail.com Michael Hatherill Business Development Manager 201-855-7610 mhatherhill@stagnitomail.com

Nestle Professional....................................65 ....................................www.nestleprofessional.us Paytronix ....................................................45 ....................................www.paytronix.com Phillips 66 ..................................................79 ....................................www.video.76.com R.J. Reynolds Tobacco Company ............9 ......................................www.engagetradepartners.com R.J. Reynolds Tobacco Co/Santa Fe........27 Ryko ............................................................67 ....................................www.ryko.com S&M Brands ...............................................39 ....................................www.SMBrands.com Save-A-Lot .................................................100 ..................................www.save-a-lot.com Swedish Match ..........................................33,43,75 .........................customer.service@smna.com Swisher International...............................41 ....................................www.swishersweets.com Tillamook Country Smoker ......................55 ....................................www.tcsjerky.com U.S. Smokeless Tobacco ...........................3 Universal Merchant...................................Outsert ............................www.nynab.com World Tea Expo .........................................61 ....................................www.worldteaexpo.com

Steve Lichtenstein Vice President/Southeast Regional Manager 201-855-7613 slichtenstein@stagnitomail.com Terry Kanganis Account Executive & Classified Advertising 201-855-7615 tkanganis@stagnitomail.com Rachel McGaffigan Northeast Regional Sales Manager 508-385-2524 rmcgaffgan@stagnitomail.com Roz Gilman Ad Manager 314-403-4753 rgilman@stagnitomail.com

Stagnito Business Information U.S. brands: Convenience Store News (ISSN 0194-8733; USPS 515-950) is published 12 times per year, monthly, by Stagnito Business Information, 570 Lake Cook Rd. Deerfield, IL 60015. Copyright ÂŠ 2016 by Stagnito Business Information. All rights reserved. Subscriptions: One year, $93; two years, $152. One year, Canada, $110; two years, Canada, $175. One year, foreign, $150. Payable in advance with a bank draft drawn on a U.S. bank in U.S. funds. Single copies, $10, except foreign, where postage will be added. Printed in U.S.A. Periodicals postage paid at Deerfield, IL, and at additional mailing offices. POSTMASTER: Send address changes to Convenience Store News, P.O. Box 1842, Lowell, MA 01853.

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GETTINGTOTHECORE

Walking the Walk

Health-conscious c-store shoppers do choose healthier options, but not always

aying it is important to eat healthy is not just lip service for convenience store shoppers, although it does depend on the category. Just take a peek inside their baskets. Carbonview Research, sister company of Convenience Store News, recently surveyed 589 c-store shoppers and found that those who say maintaining a healthy diet is important to them will choose a bowl of salad over a hot dog, as well a health bar over a candy bar.

How important to you is eating healthy in each of the following categories?

C-store shoppers are most concerned about healthy eating in the prepared food category, more so than in beverages and snacks.

(Percent who answered extremely/moderately important) Prepared food Beverages Sweet snacks (packaged doughnuts, cookies, health/granola bars, etc.) Salty snacks (chips, nuts, etc.) Candy/gum

DID YOU KNOW?

Bar none, purchasers of health bars have the potential to be lucrative c-store shoppers. When everyday c-store shoppers were asked what products they would be most likely to buy, 77.5 percent of them said health bars.

TOTAL

bY AGE: 18-24

25-34

35-44

45-54

55-64

65+

61.8% 56.4

57.5% 57.5

65.6% 56.1

60.8% 59.2

64.6% 57.3

64.2% 53.7

50.0% 50.0

53.1 51.4 36.0

51.3 52.5 36.3

47.8 50.0 33.3

54.6 50.0 33.8

59.8 58.5 36.6

61.2 53.7 41.8

50.0 44.0 42.0

Base: 589 c-store shoppers

Shoppers who say eating healthy is important to them favor the healthier option only some of the time. Exceptions include when purchasing soda, potato chips and pizza.

How likely are you to purchase each of the following at a convenience store? (Percent who answered very/somewhat likely)

TOTAL

Want to collaborate and share expertise with your peers? The Council of Retail Experts (CORE) is an exclusive network of convenience store retail leaders who do just that. For more information on how to join CORE, please visit www.cvcoreinsights.com.

Regular soda Diet soda Regular potato chips Low-salt potato chips Regular pizza Pizza with low-fat cheese Bacon, egg & cheese on a croissant Turkey sausage, egg whites & cheese on a natural-grain English muffin Hot dog on roller grill Salad bowl Candy bar Health bar (granola, protein, etc.) Base: 589 c-store shoppers

98 Convenience Store News | APRIL 2016 | WWW.CSNEWS.COM

EATING HEALTHY TO ME IS: IMPORTANT NOT IMPORTANT

47.4% 40.6 54.3 44.8 40.1 29.5 39.9

46.0% 42.1 53.3 46.2 38.8 31.2 40.4

64.5% 32.3 77.4 41.9 54.8 22.6 35.5

39.9 28.5 50.9 55.0 64.9

41.7 27.5 54.8 54.4 68.7

29.0 35.5 16.1 71.0 54.8

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