CSN - June 2016 by ensembleiq

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VIEWPOINT By Don Longo, Editorial Director

Go Ahead, Give Yourself an ‘A’ Convenience store retailers go to the head of the class after a stellar 2015 financial performance

he 2016 Convenience Store News Industry Report shows a retail channel that is overachieving compared to competitive industries and racked up top grades across a range of important disciplines last year. Although lower gas prices sent total industry sales tumbling by 14 percent, the convenience store industry set new highs in motor fuel gallons sold and fuel profits, instore sales, and both gross and pretax profits — all against a backdrop of flat overall retail sales in America. By our admittedly subjective grading system, the c-store industry gets a C-minus for total sales; a B-plus for in-store sales growth; an A for overall For comments, please contact Don Longo, Editorial Director, motor fuel gallons sold and profits; at (201) 855-7606 or a B-plus for continued foodservice dlongo@stagnitomail.com. sales growth; and an A for beating the previous year’s record highs in both gross and pretax profits. (See 2015 Report Card at a Glance on page 38.) Compared with competitive retail channels, c-stores made the Dean’s List. With a 4.9-percent increase in in-store sales, c-stores left supermarkets in the

dust and edged out the drugstore channel as well. According to the U.S. Census Bureau, supermarket sales increased by only 2.5 percent in 2015, while drugstores saw a 4.6-percent sales gain. Total U.S. retail sales (excluding motor vehicle and parts dealers) were up only 0.2 percent last year. The CSNews Industry Report goes beyond the scores and numbers to present a complete and comprehensive analysis of the key merchandising, marketing and operational trends in the convenience store industry. Our editors and outside analysts help explain the factors that drove the industry to such a recordbreaking performance in 2015. However, like any good educator, we’d be remiss if we didn’t point out areas of concern for our c-store class. For example, how adversely will new federal overtime regulations, state minimum wage increases, and rising health care costs impact direct-store operating expenses this year? How will the Food and Drug Administration’s new deeming rule impact the tobacco categories? And how will retailers fare as fuel margins shrink from last year’s historic highs? By all means, enjoy last year’s results. But don’t bask in the glow for too long. While business in 2016 has looked pretty good so far, don’t be surprised if there are some challenges ahead.

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

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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

ÂŠ2016 Goya Foods, Inc. *Top selling coconut water SKU (in Grocery outlets) Source: Nielsen Strategic Planner, Total US (unit sales), 52 weeks ending 12/19/15

CONTENTS JUNE 2016

VOLUME 52/NUMBER 6

Industry

Report

40 | A Solid Year on the Forecourt Fuel profit growth cannot keep up with 2014’s pace, but remains strong. 44 | Wage War Labor costs continue to rise, with little relief in sight. 46 | Purchasing Power With more income at their disposal, tobacco users came back to cigarettes. 50 | Speeding Back Up Foodservice sales growth accelerates, but margins are being challenged.

28 | COVER STORY Basking in the Golden Age

Convenience store retailers turned in record 2015 results as low fuel prices ignited higher profit margins and in-store sales.

56 | An Innovation Evolution Consumers are increasingly drawn to beverages that cater to their changing tastes. 60 | Hungry for More Better-for-you snacks and bagged candy contribute to overall healthy growth. 64 | On the Rebound Frozen treats, HBC and non-edible grocery bounce back.

HOW TO DO WORLD-CLASS FOODSERVICE

INDUSTRY ROUNDUP

68 | How to Drink In More Dispensed Beverage Profits

14 | FDA’s Final Deeming Rule Arrives

68 | Call to Action: Foodservice 101 71 | Call to Action: Foodservice 201 72 | Call to Action: Foodservice 301

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.

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DRIVING CATEGORY GROWTH

Trusted iconic brands and expert category management delivering sustainable growth.

hersheysconvenience.com

CONTENTS 570 Lake Cook Road, Ste. 310, Deerfield, IL. 60015 (224) 632-8200 Fax: (224) 632-8266 www.csnews.com

CATEGORY MANAGEMENT

BRAND MANAGEMENT Group Brand Director (330) 840-9557

COLD VAULT

74 | Millennials: The Generation of Choice All grown up and of legal drinking age, this demographic likes lots of options. IN-STORE MERCHANDISING

78 | Gone In a Snap? If enacted as drafted, new SNAP eligibility standards could push tens of thousands of convenience stores out of the food stamp program.

DEPARTMENTS

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

VIEWPOINT

4 | Go Ahead, Give Yourself an ‘A’ Convenience store retailers go to the head of the class after a stellar 2015 financial performance. 12 | CSNews Online

26 | New Products

STORE SPOTLIGHT

82 | At the Cutting-Edge of Innovation 7-Eleven Japan stores operate at an efficiency level beyond the rest of the world. OUT & ABOUT

86 | Tobacco Insights Times Five Tobacco Plus Expo International 2016 provided an array of highlights. OUT & ABOUT

87 | Making an Impact at M-PACT Fuels, technology and M&A were hot topics at Midwest regional tradeshow.

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 Pat Benkar (973) 607-1330 pbenkar@edgellmail.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 Executive Chairman

Alan Glass aglass@stagnitomail.com Kollin Stagnito kollinstagnito@stagnitomail.com Chris Stark cstark@stagnitomail.com Ned Bardic nbardic@stagnitomail.com Korry Stagnito korrystagnito@stagnitomail.com Joel Hughes jhughes@stagnitomail.com

President & CEO Chief Financial Officer Chief Revenue Officer Chief Brand Officer

OUT & ABOUT

Chief Digital Officer

89 | Spotlight on Payment Security Wayne Technology Summit examined the future of mobile payment vs. EMV.

CONVENIENCE STORE NEWS AFFILIATIONS

Premier Trade Press Exhibitor

OUT & ABOUT

90 | Risks & Rewards NACS SOI Summit reported positive results, but the industry does face headwinds. 106 | Getting to the Core

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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.

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CSNEWS.COM TOP 5 Daily News Headlines

ONLINE EXCLUSIVE

The most viewed articles online.

Carbonated Soft Drinks Finding Their Fizz Again

1 | CSNews Reveals 2016 Top Women in Convenience Honorees More than 60 female managers, directors and executives who work in the convenience store industry will be honored this fall in the third-annual Convenience Store News Top Women in Convenience awards program. The Top Women in Convenience program recognizes a diverse array of women in the convenience retail industry, including leaders, mentors and role models. 2 | The Wait Is Over for New Federal Overtime Rule Long-awaited changes to the federal overtime rule were unveiled at a May 18 event, headlined by Vice President Joe Biden and Labor Secretary Thomas Perez. The most notable change announced was a nearly doubling of the current salary threshold from its current $23,360 to $47,476, under which virtually all workers will be eligible for time-and-a-half pay. 3 | Deposition Ordered for Pilot Flying J CEO Jimmy Haslam Three years after federal officials raided Pilot Flying J’s corporate headquarters in Knoxville, Tenn., CEO Jimmy Haslam is facing a deposition in a civil case related to the allegations of fraud in the company’s fuel rebate program. Alabama Circuit Court Judge Sarah Hicks Stewart issued a deposition order on April 15, the three-year anniversary of the 2013 raid. 4 | No Spinoff for Speedway Marathon Petroleum Corp. (MPC) will not spin off its Speedway LLC retail division, MPC President and CEO Gary R. Heminger stated. “The long-term value of having Speedway inside Marathon is large,” he said.

POLL

5 | CST Brands Exiting California & Wyoming CST Brands Inc. and 7-Eleven Inc. are trading assets to the tune of $408 million. San Antonio-based CST entered into a definitive agreement to sell its store operations in the California and Wyoming markets to 7-Eleven Inc. and its wholly owned subsidiary SEI Fuel Services Inc. The transaction includes 76 stores in California and three stores in Wyoming.

Soda is experiencing its best overall sales performance (flat to slightly positive) since 2012, according to Nielsen data, and some category analysts are attributing this to the smaller size/larger price trend that appeals to the widening group of consumers who reach for soda as a special treat — meaning they don’t want it in “Big Gulp” abundance anymore. Leading beverage companies The Coca-Cola Co., PepsiCo Inc. and Dr Pepper Snapple Group are steering these consumers to 7.5-ounce cans and 8-ounce bottles that cost more per ounce than their larger, more traditional (until very recently) counterparts. For more exclusive stories, visit the Special Features section of www.csnews.com.

PRODUCT HIGHLIGHT The most viewed New Product online.

Rich’s Mixing Bowl Cookies

In response to consumers’ desire for menu offerings that feature simple ingredients, Rich’s introduces Mixing Bowl Cookies. This “clean-label” line is made with 100-percent real butter, natural vanilla and no artificial ingredients, high-fructose corn syrup or hydrogenated oils. The cookies are also free of any artificial flavors, colors, sweeteners and preservatives. The line includes six varieties: Chocolate Chunk, Oatmeal Raisin, Peanut Butter, Butter Sugar, Candy Chip, and White Chocolate Macadamia Nut. Rich’s Mixing Bowl Cookies can be ordered in half-ounce to 5-ounce measurement sizes. Rich Products Co. Buffalo, N.Y. (800) 356-7094 www.richsfoodservice.com

Which best describes your feeling on the “healthy snacking” trend? c-stores should be offering a lot more healthy snacks c-stores should be offering a few, select healthy snacks c-stores just need to do more to promote the healthy snacks they already sell health schmelth!

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50% 23% 14% 13%

INDUSTRYROUNDUP FAST FACT

Motor fuel gallons sold, which peaked at 148.2 billion in 2007, set a new high last year at 151.3 billion, a 2.9-percent increase from 2014. Source: Convenience Store News Industry Report (page 28)

QUOTABLES

“Most c-store operators are struggling to be an employer of choice. This is especially true among women, who see few role models at the top.” — Joan Toth, Network of Executive Women (page 92)

FDA’s Final Deeming Rule Arrives Much-debated product grandfather date remains Feb. 15, 2007 By Melissa Kress

he long wait is over. On May 5, the Food and Drug Administration (FDA) issued its final deeming rule, extending its authority to all tobacco products, including electronic cigarettes, cigars, hookah tobacco and pipe tobacco. The issuance comes two years after the agency first released its proposed deeming rule. The final deeming rule was published in the Federal Register on May 10, thus starting the 90-day clock and setting the effective date at Aug. 8. In addition to prohibiting the sale of all tobacco products to consumers under the age of 18, the finalized rule keeps the muchdebated product grandfather date as Feb. 15, 2007. “This final rule is a foundational step that enables the FDA to regulate products young people were using at alarming rates, like e-cigarettes, cigars and hookah tobacco, that had gone largely unregulated,” said Mitch Zeller, director of the FDA’s Center for Tobacco Products. “The agency considered a number of factors in developing the rule and believes our approach is reasonable and balanced. Ultimately, our job is to assess what’s happening at the population level before figuring out how to use all of the regulatory tools Congress gave the FDA.” The final deeming rule includes the following provisions: • Not allowing products to be sold to persons under the age of 18 (both in

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person and online); • Requiring age verification by photo ID; • Not allowing the selling of covered tobacco products in vending machines (unless in an adult-only facility); and • Not allowing the distribution of free samples. The final rule also requires manufacturers of all newly regulated products to show that the products meet the applicable public health standard set forth in the law and to receive marketing authorization from the FDA, unless the product was on the market as of Feb. 15, 2007. Under staggered timelines, the FDA expects a manufacturer will continue selling its products for up to two years while submitting a new tobacco product application — and an additional year while the FDA reviews the application. The FDA will issue an order granting marketing authorization, where appropriate. Otherwise, the product will face FDA enforcement.

WHAT’S FRESH FROM McLANE KITCHEN?

Introducing McLane’s Fresh Produce+, the ﬁrst nationally-distributed produce solution for convenience stores. The Fresh Produce+ solution leverages industryleading cold chain capabilities to deliver a consistent fresh product mix to all customers, regardless of location. With easy-to-order shipments and customerdetermined markup, Fresh Produce+ makes produce simple and proﬁtable. For more information, visit mclaneco.com/goto/contactme

INDUSTRYROUNDUP

Category Management Is Getting Modernized Category Management Association is partnering with CSNews parent to deploy CatMan 2.0 to the retail industry

ategory management is one of the most successful business processes of the 20th century. It is used by virtually all major consumer packaged goods (CPG) retailers and manufacturers around the globe, but it has gotten long in the tooth. There has been no major modernization for nearly 20 years — until now. The Category Management Association (CMA), working with a blue-ribbon executive committee of leading retailers, manufacturers and solution providers, has developed CatMan 2.0, the first comprehensive improvement in this important process in two decades. One of the major contributors on the CatMan 2.0 committee was Dr. Tom Burkemper of 7-Eleven Inc. Moreover, one of the two leaders of the CMA team was senior vice president of best practices, John Drake, who served for seven years as director of strategy and merchandising at 7-Eleven, and was a part owner of the highly successful Stripes c-store chain. Why was it necessary to modernize the category management process? The answer is simple: Everything in the CPG environment has changed in the last 20 years. We have more data and more advanced analytical tools. We have a whole catalog of success models; things that have worked in assortment, pricing, in-store merchandising and promotion. But most importantly, the shopper has changed. Today’s shopper is more knowledgeable about brands, banners, new items and pricing than ever before. The internet and mobile devices have truly empowered the shopper. The CatMan 2.0 executive committee attacked the challenge of modernizing category management by dividing the work into 17 separate work streams.

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These work streams covered subjects such as internal alignment, scorecarding, strategy development, assortment rationalization, pricing optimization and measuring the return on investment of category management. Each of the 17 work streams went through a comprehensive three-step improvement process that started with the identification of issues, then moved to improvement input from the team members, and finally resulted in a series of drafts aimed at capturing everyone’s ideas on best practices for that specific work stream. The final product includes case studies, as well as links to websites including even more detailed information. These work stream documents comprise more than 200 pages and are the most comprehensive source of category management information on the planet. These documents will be hosted on a searchable database and be free to members of the Category Management Association. The CMA is partnering with Stagnito + Edgell, publisher of Convenience Store News, to deploy this revolutionary, new category management process across the CPG landscape. A series of webinars, conferences, handbooks and white papers are in the works. The CMA has made sure that CatMan 2.0 is applicable to the convenience store industry, as well as other major CPG retail formats — all of whom were represented on the CatMan 2.0 executive committee. Stay tuned for further announcements about CatMan 2.0 in the pages of CSNews, on CSNews.com, on other Stagnito + Edgell websites, and on the CMA website. Editor’s note: This article was contributed by the Category Management Association.

NEW CATEGORY RESEARCH UNCOVERS OPPORTUNITIES FOR OPTIMIZING PROFIT AT GROCERY AND C -STORES NATIONAL STUDY FINDS MILK IS AN UNDERLEVERAGED TOP PERFORMER

The dairy case has seen dramatic changes in recent years with the proliferation of new product segments competing with milk for space. Simultaneously, shopper behavior has changed and the retail landscape has evolved. To better understand today’s dairy case opportunities, the Milk Processor Education Program (MilkPEP) engaged industry experts Prime Consulting and Willard Bishop, who utilized national and proprietary research, including a major dairy milk shopper study with in-homes and shop alongs.

We invite you to learn more about the new research and the powerful insights that have the potential to help you MAXIMIZE THE DAIRY CASE • IMPROVE SHOPPER EXPERIENCE IN-STORE • DRIVE GREATER PROFIT WITH FLUID MILK • Join the webinar to unlock key growth opportunities, best practices and insights that have the potential to maximize sales and ultimately drive profit in your stores.

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INDUSTRYROUNDUP

eye on growth n Sun Capital Partners Inc. acquired

n Aloha Petroleum Ltd. is bring-

Admiral Petroleum Co. and Lemmen Oil Co. The deal includes 136 sites in the Midwest. Jeff Turpin, former CEO of VPS Convenience Store Group, will serve as CEO of Sun Capital’s new c-store division. n Alimentation Couche-Tard Inc. com-

ing Dunkin’ Donuts to Hawaii through a multi-unit store development agreement. The convenience store chain will develop 15 new Dunkin’ Donuts restaurants, with the first one slated to open in 2017. n The Cigarette Store Corp. dba Smoker Friendly

pleted its purchase of A/S Dansk Shell’s downstream retail business in Denmark. Couche-Tard’s network in Denmark now includes 286 company-operated-stores, 153 companyowned and dealer-operated stores, and 44 dealerowned and dealer-operated stores. n Northern Tier Energy LP unitholders will vote on the

company’s proposed merger with Western Refining Inc. on June 23. The merger was first announced in late 2015.

acquired the Tobacco Depot chain and its 13 stores located in and around Tampa, Fla. The Tobacco Depot stores will begin to be co-branded “Smoker Friendly” in the near future. n Since January, Sunoco LP has opened six

Laredo Taco Co. restaurant locations in c-stores outside of Texas, where the concept originated. The company expects to have 20 Laredo Taco Co. locations open outside of the Southwest by the end of 2016.

A few of the many reasons to choose Cash Depot...

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INDUSTRYROUNDUP

retailer tidbits n Sheetz Inc. plans to hire more than

8,000 new employees companywide. The initiative will create and fill jobs at Sheetz convenience stores across its seven-state footprint. n Global Partners LP retained NRC Realty & Capital

Advisors LLC to sell 86 non-strategic c-stores with gas in the Northeast and Mid-Atlantic. These sites are part of a larger plan to divest a total of 125 non-strategic stores within the year.

n Kum & Go LC selected MTI

Digital to provide its first-ever in-store music program. The program will be introduced at the retailer’s new Marketplace convenience stores and feature contemporary, upbeat music. n 7-Eleven Inc. added Card Isle greeting

card kiosks to five stores in Virginia. The customizable greeting cards showcase work from local Virginia artists.

n Sunshine Fuel LLC is selling the lease-

hold interests of 21 convenience stores with gasoline. The bulk of the sites are in Kansas. n Wawa Inc. teamed up with Comcast

to add free Wi-Fi to its more than 700 c-stores. Comcast will also manage a private network for Wawa moving forward.

Correction

In our March issue, Convenience Store News mistakenly identified the Dash foodservice concept as a brand of Nashville, Tenn.-based Tri Star Energy LLC and its Twice Daily convenience stores. Rather, Dash is a brand of Jacksonville, Fla.based First Coast Energy LLP and its Daily’s convenience stores. The two are not related. We apologize for this error.

One display… many OptiOns Strong plaStic indoor & outdoor Single unit iS 12” x 24” x 24” link aS many aS needed

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INDUSTRYROUNDUP

supplier tidbits n Convenience distributor Core-Mark

Holding Co. Inc. is acquiring substantially all the assets of Pine State Convenience, a division of Pine State Trading Co. The price is estimated to be approximately $112 million.

n The Hershey Co. purchased Ripple

Brand Collective LLC, the maker of barkTHINS. Terms of the deal were not disclosed. n ITG Brands LLC, Liggett Group,

n PepsiCo Inc. is shifting its focus

to “guilt-free” product lines, such as diet beverages and lowin-sodium snacks. This is part of a wider effort to reduce the company’s reliance on colas through innovation across its portfolio. n The Altria Group Inc.’s Marlboro

app is now accepted at more than 100,000 retail locations, covering 70 percent of industry volumes. The app delivers mobile coupons to tobacco customers who opt in.

Reynolds American Inc. and The Altria Group Inc. hiked their wholesale cigarette list prices by 7 cents per pack. The increases went into effect in mid-May. n The Pinnacle Corp. and

NACS, the Association for Convenience & Fuel Retailing, jointly unveiled the SkimDefend app to combat skimming. The app registers and verifies NACS WeCare fuel pump decals. It is available for free download on Apple and Android smartphones.

Thank You Circle K Southwest Region! $1.6 Million Donated in 2015 43,000+ lives of individuals with disabilities forever changed! We are grateful for your partnership!

SOUTHWEST REGION

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Colorado | New Mexico | Oklahoma | Texas

INDUSTRYROUNDUP

legislative corner n The Food and Drug

Administration issued its final guidance on menulabeling regulations on April 29. The final document contains virtually no changes from the original draft guidance. The date for compliance is now set at May 2017. n The U.S. Environmental Protection

Agency proposed an increase in renewable fuel volume requirements across all types of biofuels under the Renewable Fuel Standard. The requirements were set for the years 2014-2018. n The Department of Labor unveiled

new overtime rules, which will nearly double the current salary threshold from its current $23,360

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to $47,476, under which virtually all workers will be eligible for time-and-a-half pay. The change will go into effect Dec. 1. n NACS, the Association for Convenience

& Fuel Retailing, and more than 140 fellow retail trade associations signed a letter reiterating their support for the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The letter also urged legislators to oppose any efforts that could weaken or repeal the swipe fee legislation. n California became the second state to set

its minimum legal buying age for tobacco products at 21 as Gov. Jerry Brown signed into law several pieces of tobacco legislation. Hawaii became the first state to do so on Jan. 1 of this year.

NEWPRODUCTS Sparkling ICE Essence of Sparkling Water Adding to its portfolio of sparkling beverages, Sparkling ICEâ&#x20AC;&#x2122;s newest line is free of sweeteners, contains zero calories, has no artificial flavors or preservatives, and delivers a refreshing essence of natural flavors, according to the company. Sparkling ICE Essence of Sparkling Water was developed in response to consumer demand for healthier carbonated beverage alternatives. Four varieties are available: one non-flavored sparkling water and three lightly flavored versions featuring the essence of lemon-lime, peach and tangerine. The single-serve bottles are clear and feature bright, bold-colored accents to distinguish the varieties. The suggested retail price is $1.19 to $1.29, varying by market. Sparkling ICE Preston, Wash. (800) 734-0748 sparklingice.com

Ryko SoftGlass Drive-Thru The Ryko SoftGlass Drive-Thru features multiple configurations, such as drive-thru or drive-in/back-out, for optimal use of space. A wraparound- and top-brush combo feature combines top and side brushes for maximum cleaning power for the vehicle front, sides, rear and top, the supplier noted. Other features include: a wash control center to integrate all wash components into one easyto-use control unit; simple setup with basic plumbing and electrical for easy installation and reduced downtime; and arches to provide precise and thorough chemical application and rinsing. Ryko Solutions Grimes, Iowa (515) 986-3700 ryko.com

Broaster Express Dipping Sauces Broaster Co. is rolling out a line of upgraded dipping sauces to add new flavor profiles to its Broaster Express food program. The updated line features new flavor profiles of existing consumer favorites, including Honey Mustard, BBQ, Chipotle, Wing and Ranch. The new sauces pair with a variety of Broaster Express food items, such as seasoned and ready-to-cook chicken fillets, wings, potato wedges, mozzarella sticks, popcorn chicken and more. Broaster Express dipping sauces are available in easy-to-open, 1.25-ounce portion packs. The packaging design complements the on-the-go menu options, the company stated. Broaster Co. Beloit, Wis. (608) 365-0193 broaster@broaster.com broaster.com

Red Bull Summer Edition Kiwi Twist Red Bull brings the taste of summer to convenience stores nationwide with the release of Red Bull Summer Edition Kiwi Twist. This limitededition variety joins other Red Bull Editions, including Red Bull Red (cranberry), Blue (blueberry), Yellow (tropical fruits) and Orange (tangerine). All are sold in single-serve, 12-ounce cans. The Red Bull Editions stand for taste and choice, offering a delicious flavor option for every palate whether new to the energy drink category, or currently enjoying Red Bull while working, studying, traveling, playing or juggling the daily demands of life, according to the company. Red Bull North America Santa Monica, Calif. (310) 393-4647 info@redbull.com redbullusa.com

SuperSeedz Mini Pouches SuperSeedz Gourmet Pumpkin Seeds expands its family of products with a new line of convenient, one-ounce mini pouches. Six flavors are available in the new package size: Maple Sugar & Sea Salt, Sea Salt, Somewhat Spicy, Cinnamon & Sugar, Coco Joe, and Super Spicy. Each SuperSeedz Mini Pouch has a suggested retail price of $1.49 to $1.99. The pouches are shipped in a display-ready, 12-count caddy. SuperSeedz Gourmet Pumpkin Seeds North Haven, Conn. (203) 407-0546 superseedz.com

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

cover story

Industry

Report

BaskIng in the

Golden AGe Convenience store retailers turned in record 2015 results as low fuel prices ignited higher profit margins and in-store sales

A Convenience Store News Staff Report

n-store sales were up. Gross profits were up. Motor fuel gallons sold were up. But overall revenues were down in what was, once again, a very strong financial performance for the convenience store industry in 2015. Total c-store industry sales declined 14.4 percent last year to $603 billion, due to sharply lower gasoline prices, according to the 41st annual Convenience Store News Industry Report, the longestrunning, continuously-published annual report on the health and performance of the convenience retail channel. By almost every other measure, the convenience store industry operated on all cylinders in 2015. It was one of the industry’s best years — maybe more impressive than 2014’s record performance. With the lowest pump prices in years, consumers hit the road more often in their cars and had more dollars in their pockets to spend on food, beverages and other merchandise inside the store. Retailers enjoyed record-high fuel profits on those low prices. “The industry was able to take advantage of lower fuel prices to help drive inside sales, while enjoying

28 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

historic fuel margins,” said Steve Montgomery, president of c-store consulting team b2b Solutions LLC, one of five industry experts CSNews tapped to lend their perspective to the industry’s financial results. In-store sales (merchandise and foodservice combined) were up 4.9 percent to $213 billion. This solid gain was achieved despite a less than 1-percent increase in the U.S. convenience store count from 152,749 stores to 154,195 year over year. Motor fuel gallons sold, which peaked at 148.2 billion in 2007, set a new high last year at 151.3 billion, a 2.9-percent increase from 2014. Motor fuel dollar sales declined 22.2 percent to $390 billion as the average price per gallon fell from $3.41 to $2.58. Motor fuels as a percentage of total industry sales dropped to a more-than-decade-long low of 64.7 percent. Total industry gross profits were up 3.5 percent to $92.8 billion. This figure is all the more impressive following the leap of 12.5 percent the previous year. Fuel profits were a record high $35.4 billion, a 0.6-percent increase over the previous year, also impressive considering fuel profits skyrocketed by 30 percent in 2014.

WWW.CSNEWS.COM | JUNE 2016 | Convenience Store News 29

cover story

Although total c-store industry sales fell 14.4 percent due to low fuel prices, in-store sales soared by 4.9 percent, the highest growth percentage since 2006.

Total Convenience Store Sales Total

Motor Fuels

In-Store

$602.9 -14.4% 2015

$389.9

-22.2%

$213.0 4.9% $704.5 -0.3% 2014

$501.4 -1.6% $203.1 3.2% $706.4 -0.2%

2013

$509.6

-1.1%

$196.8 2.1% Source: Convenience Store News Market Research, 2016

Store Growth Analysis Total Store Count

Chains

Single Stores

The number of c-stores in the U.S. increased slightly last year, with chain retailers again accounting for about 37 percent of the total.

2015

154,195 36.9%

63.1%

2014

152,794 37.0%

63.0%

2013

151,282 37.2%

62.8%

Source: Convenience Store News Market Research, 2016

Motor Fuel Volume 2015

2014

2013

151.3

147.0

143.3

GAlloNS (billions)

% CHANGE

2.9%

2.6%

1.6%

Motor fuel gallons sold rose 2.9 percent to 151.3 billion, surpassing the previous high of 148.2 billion gallons sold in 2007. Source: Convenience Store News Market Research, 2016

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

Maybe more impressive: In-store profits were up at an even faster pace than the previous year. Gross profits on foodservice and merchandise sales increased 5.4 percent to $57.4 billion, beating 2014’s 3.5-percent gain. Low gas prices and an improving economy appear to be driving sales of “premium” products, according to many c-store retailers. As a result, gross profit dollars per store rose to $613,129, an increase from $598,942 in 2014. Gross margin as a percentage of sales rose to 15.4 percent, up from 12.82 percent. In pretax profits, the industry again beat its record gains of the previous year. Total industry pretax profits in 2015 were $9.3 billion, a 3.4-percent gain after the whopping 34.1-percent increase the year before. Pretax profits per store were $61,277, an increase of 2.3 percent from the previous year when per-store profits ballooned by 32 percent. Foodservice sales (including prepared foods, hot, cold and frozen dispensed beverages) achieved its biggest percentage increase since 2012. C-store retailers’ hottest category grew 7.1 percent to a record $33.5 billion in sales last year. Merchandise sales (excluding foodservice) also saw its largest percentage gain since 2012, up 4.5 percent to $179.5 billion, easily topping the 2.6-percent gain of 2014. “Foodservice has been one of the primary drivers of growth for c-stores and 2015 proved that,” said Tim Powell, vice president of consulting for Q1 Productions. “Discretionary income was higher, unemployment dropped, the [labor] participation rate increased, and gas prices dropped to historical lows. These were all favorable to in-store purchases in c-stores. Also,

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from an operational perspective, c-stores have improved their implementation and execution of foodservice programs.” Average sales per store (exclud-

ing fuel) also hit an all-time high of $1,406,866, a 3.7-percent increase from 2014. It was only 10 years ago that average store sales barely topped $1 million.

Industry Sales Mix

Gross Profit Dollar Mix

IN-STORE

35.3%

61.9%

MOTOR FUELS

64.7%

38.1%

Fuel sales dropped to a 10-year low as a percentage of total sales, but only declined slightly as a percentage of total gross profit dollars.

Source: Convenience Store News Market Research, 2016

Industry Gross Profit

2015 $ bILLIONS

In-Store Motor Fuels TOTAL

$57.42 $35.40 $92.824

2014 $ bILLIONS

$54.49 $35.20 $89.688

% chaNgE

5.4% 0.6% 3.5%

Source: Convenience Store News Market Research, 2016

Industry gross profit rose 3.5 percent to $92.8 billion, mostly driven by in-store profit growth.

Gross Profit Margin

(As a percent of sales and profit dollars per store) In-Store Motor Fuels Combined

2015 gROSS PROFIT MaRgIN

2015 $ PER STORE

2014 gROSS PROFIT MaRgIN

2014 $ PER STORE

26.96% 9.08% 15.40%

$379,302 $284,625 $613,129

26.70% 7.21% 12.82%

$363,874 $281,206 $598,942

Source: Convenience Store News Market Research, 2016

Pretax Profits 2015 2014

Gross profit margin as a percent of sales rose to 15.4 percent last year, while gross profit dollars per store hit $379,302, up from $363,874.

Pretax profits grew to a record high of $9.28 billion, a 3.4-percent gain. That’s on top of a 34.1-percent increase the previous year. TOTaL INdUSTRy PRETax PROFIT

% chaNgE

PRETax PROFIT PER STORE

% chaNgE

$9.277 billion $8.968 billion

3.4% 34.1%

$61,277 $59,889

2.3% 32.0%

Source: Convenience Store News Market Research, 2016

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

“The average consumer [in 2015] had about $700 in incremental disposable income vs. 2014, due to deflation in fuel prices,” noted Jon Bratta, vice president of marketing for convenience distributor Core-Mark International Inc. “Foodservice again showed nice gains, as did the core categories, including cigarettes.” SALES ANALYSIS

The top 10 categories (as defined by Nielsen) accounted for 89.86 percent of in-store sales last year — a figure that has been fairly consistent over the past several years. Cigarettes remained the highest-grossing category, comprising 30.84 percent of in-store sales. Industrywide, cigarette dollar sales increased 3.9 percent last year. Foodservice was again the second-largest category in in-store sales, accounting for 15.71 percent of the total. Within foodservice, prepared food sales rose 7.7 percent, hot dispensed beverages were up 5.8 percent, cold dispensed beverages jumped 9.1 percent, while frozen dispensed beverages saw a 1.1-percent gain. The third-largest category in instore sales was packaged beverages, which comprised 12.69 percent, driven by a 7.3-percent sales gain last year. Beer/malt beverages is next at 9.51 percent (a 3.1-percent gain year over year), followed by edible grocery (5.11 percent of sales, a 4.5-percent increase), other tobacco products (4.91 percent of sales, a 5.4-percent increase), general merchandise (3.25 percent of sales, a 4.9-percent sales gain), candy/gum (3.22 percent of sales, a 3.5-percent sales gain), and nonedible grocery (1.89 percent of sales, a 3.7-percent gain). Among smaller categories, wine

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and liquor (up 10.7 percent in sales), alternative snacks (up 8.4 percent) and packaged sweet snacks (up 8.3 percent) had stellar years.

5-percent increase. Cigarettes just edged out packaged beverages for the spot of second most profitable category — with $59,256 in gross margin dollars vs. $58,569 per store for packaged beverages. Other top profit-generating categories were beer/malt beverages ($25,027 in gross margin dollars), edible grocery ($22,630), candy/

PROFITS ANALYSIS

Foodservice retained its crown as the c-store’s most profitable category, generating $96,662 in gross margin dollars per store last year, a

Total Merchandise & Foodservice Sales Total

Merchandise

Foodservice

Foodservice sales were up 7.1 percent last year, the largest percentage increase since 2012.

2015 $33.5 7.1%

2014

$213.0

4.9%

$179.5 4.5%

$203.1 3.2% $171.9 2.6%

$31.2 6.3% $196.8 2013

$167.4

2.1%

1.4%

$29.4 6.5% Source: Convenience Store News Market Research, 2016

In-Store Sales per Store

Average sales per store (excluding fuel) jumped 3.7 percent to more than $1.4 million, a record high.

2015 2014

SALES

% CHANGE

$1,406,866

3.7%

$1,356,301

2013

$1,335,357

1.6% 1.2%

Source: Convenience Store News Market Research, 2016

Top 10 In-Store Category Ratios Top 10 categories

All other categories

10.14%

10.26%

The top 10 categories once again accounted for just under 90 percent of total in-store sales.

10.25%

2015

2014

2013

89.86%

89.74%

89.75%

Source: Convenience Store News Market Research, 2016

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

gum ($19,902), general merchandise ($17,497) and other tobacco products ($16,817). More highlights of this year’s Industry Report include: • Credit card transaction fees declined last year from $74,374 per store in 2014 to $73,167 per store, or about 12 percent of store profits. • Total direct-store operating expenses, though, continued to rise — topping $536,000 per store in 2015, up from $515,000 the previous year. The biggest expense culprits were wages and health insurance. • In-store transactions were the highest in nine years, and the average in-store transaction hit a new high of $8.22. • Shrink held steady at about 1.44 percent of sales. “The biggest hurdle to c-store growth, outside of the fundamental economic factors, are the c-stores themselves,” noted Powell of Q1 Productions. “It is still a challenge to hire quality, dependable staff, keep up with wages and health care costs, and to instill excellent customer service and store cleanliness on a daily basis.” Most retailers are basking in the glow of what CSNews dubbed “The Golden Age of Convenience Store Retailing” in its January 2016 issue. However, some operators are wary about the future. Fuel margins are on the decline with prices at the pump inching higher. This is putting more pressure on retailers to generate stronger in-store merchandise sales, and specifically to increase made-to-order foodservice sales. “The economy, although slowly improving, still has its challenges as it relates to the rate of recovery,” Bratta of Core-Mark pointed out. The biggest challenge of 2016

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will be to manage internal and external expectations, according to Montgomery of b2b Solutions. â&#x20AC;&#x153;Fuel margins have dropped this year in many areas of the country. Retailers

seeking to offset this will seek to grow gallons, which will likely result in lower margins. Externally, the industry has attracted a great deal of attention from private equity firms

and other investors based on 2015 results. Sustaining that interest will require offsetting the loss in fuel margins with growth of inside sales and margins.â&#x20AC;?

In-Store Sales by Category PERCENT oF IN-SToRE SAlES 2015 2014

MERCHANDISE Cigarettes Packaged beverages Beer/malt beverages Edible grocery Other tobacco products General merchandise Candy/gum Salty snacks Non-edible grocery Fluid milk products Wine & liquor Alternative snacks Ice cream & frozen novelties Health & beauty care Publications Ice Packaged sweet snacks All other merchandise Merchandise subtotal

AvERAGE SToRE SAlES 2015 % CHANGE

ToTAl INdUSTRy SAlES (in millions) 2015 % CHANGE

30.84% 12.69 9.51 5.11 4.91 3.25 3.22 2.73 1.89 1.70 1.26 1.09 0.94 0.73 0.50 0.47 0.30 3.15 84.29%

31.13% 12.41 9.67 5.13 4.89 3.25 3.26 2.71 1.91 1.90 1.19 1.05 0.93 0.73 0.53 0.44 0.29 3.18 84.62%

$433,822 178,561 133,750 71,879 69,098 45,702 45,325 38,410 26,560 23,924 17,742 15,285 13,197 10,258 7,094 6,618 4,247 44,315 $1,185,787

2.7% 6.1 2.0 3.4 4.3 3.7 2.4 4.6 2.6 -7.4 9.5 7.2 4.2 3.4 -1.3 10.7 7.1 2.7 3.3%

$65,678 27,033 20,249 10,882 10,461 6,919 6,862 5,815 4,021 3,622 2,686 2,314 1,998 1,553 1,074 1,002 643 6,709 $179,521

3.9% 7.3 3.1 4.5 5.4 4.9 3.5 5.8 3.7 -6.4 10.7 8.4 5.3 4.6 -0.2 12.0 8.3 3.8 4.5%

FOODSERVICE Prepared food (prepared on- or off-site) 10.65% Hot dispensed beverages 3.26 Cold dispensed beverages 1.23 Frozen dispensed beverages 0.57 Foodservice subtotal 15.71% TOTAL IN-STORE 100.00%

10.38% 3.23 1.18 0.59 15.38% 100.00%

$149,900 45,867 17,293 8,019 $221,079 $1,406,866

6.5% 4.7 7.9 0.0 6.0% 3.7%

$22,694 6,944 2,618 1,214 $33,470 $212,991

7.7% 5.8 9.1 1.1 7.1% 4.9%

Cigarettes still account for the highest percentage of in-store sales, but the strongest growth came from prepared foods, cold dispensed beverages and packaged beverages.

Source: Convenience Store News Market Research, 2016

Top 10 In-Store Categories 2015

Cigarettes Foodservice Packaged beverages Beer/malt beverages Edible grocery Other tobacco products General merchandise Candy/gum Salty snacks Non-edible grocery

PERCENT oF IN-SToRE SAlES 2014 2013

30.84% 15.71 12.69 9.51 5.11 4.91 3.25 3.22 2.73 1.89

Source: Convenience Store News Market Research, 2016

36 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

31.13% 15.38 12.41 9.67 5.13 4.89 3.25 3.26 2.71 1.91

32.09% 14.93 12.18 9.69 5.03 4.83 3.11 3.26 2.63 1.96

PERCENT oF GRoSS MARGIN dollARS 2015 2014 2013

15.62% 25.48 15.44 6.60 5.97 4.43 4.61 5.25 3.19 2.12

15.78% 25.30 15.12 6.70 6.00 4.41 4.68 5.34 3.15 2.16

16.57% 24.93 15.00 6.57 6.04 4.47 4.47 5.19 2.94 2.46

Packaged beverages almost passed cigarettes in percentage of gross margin dollars, both trailing foodservice.

cover story

2015 REPORT CARD AT A GLANCE

CB+ A

TOTAL SALES Sharply lower fuel prices sent total revenues tumbling by 14 percent

BA B+

STORE COUNT The U.S. c-store industry added 1,401 stores

METHODOLOGY

The 41st annual Convenience Store News Industry Report features data from a variety of sources in order to provide a complete picture of the convenience store industry. Preston/Rogers Associates Inc., based in Medfield, Mass., coordinated the various data used in this report. CSNews commissioned a survey among a random sample of c-store retailers on a confidential basis to gather data for 2015 fiscal year sales and operations. A total of 200 companies representing approximately 20,000 c-stores are included in the results. Store census data was provided by Nielsen TDLinx, which maintains a national count of both chain and single-store retail locations. Dollar

IN-STORE SALES A solid 4.9-percent increase MOTOR FUEL BUSINESS Revenue plunged 22 percent, but gallons were up 2.9 percent and profits beat the previous year’s record increase

sales and unit volume data for a variety of categories was provided by Nielsen Co. from its Convenience Track retail measurement service, which is based on UPC sales and other retail conditions that are measured through the use of point-of-sale scan data, as well as from data captured via electronic invoice and sales audits. Government sources include the Census Bureau, Bureau of Labor Statistics, the Department of Energy and the Federal Tax Administration.

PROFITS Gross profits were up 3.5 percent and pretax profits were up 3.4 percent — both figures exceeded the prior year’s record highs FOODSERVICE SALES The category saw its best sales gain since 2012, up 7.1 percent

In-Store Gross Margins by Category AverAge gross MArgin PercenT 2015 2014

gross MArgin Per sTore % chAnge

2015

ToTAl indusTry gross MArgin (in millions) 2015 % chAnge

13.66% 32.80 18.71 31.48 24.34 38.29 43.91 31.47 30.27 16.79 22.49 35.91 34.08 51.77 16.01 51.00 35.77 30.42 23.84%

13.60% 32.67 18.57 31.37 24.20 38.64 43.87 31.17 30.35 16.62 22.29 36.02 34.16 51.65 16.36 51.17 35.86 30.77 23.68%

$59,256 58,569 25,027 22,630 16,817 17,497 19,902 12,088 8,039 4,016 3,990 5,489 4,498 5,311 1,136 3,375 1,519 13,481 $282,640

3.2% 6.5 2.7 3.7 4.8 2.8 2.5 5.6 2.3 -6.5 10.4 6.9 4.0 3.7 -3.3 10.3 6.8 1.5 4.0%

$8,971 8,867 3,789 3,426 2,546 2,649 3,013 1,830 1,217 608 604 831 681 804 172 511 230 2,041 $42,790

4.4% 7.7 3.9 4.9 6.0 3.9 3.6 6.8 3.4 -5.4 11.7 8.1 5.1 4.8 -2.3 11.6 8.0 2.6 5.1%

FOODSERVICE Prepared food (prepared on- or off-site) Hot dispensed beverages Cold dispensed beverages Frozen dispensed beverages Foodservice subtotal TOTAL IN-STORE

38.85% 49.04 62.18 64.66 43.72% 26.96%

38.78% 50.64 62.98 64.78 44.13% 26.83%

$58,232 22,491 10,753 5,185 $96,662 $379,302

6.7% 1.4 6.6 -0.2 5.0% 4.2%

$8,816 3,405 1,628 785 $14,634 $57,424

7.9% 2.5 7.7 0.9 6.2% 5.4%

Source: Convenience Store News Market Research, 2016

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

The average gross margin percent instore was up slightly last year. Categories generating the biggest margin gains were prepared foods, packaged beverages and wine & liquor.

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Motor Fuels

A SolId YeAr on the Forecourt

Fuel profit growth cannot keep up with 2014’s pace, but remains strong

Motor Fuel Sales & Margins

n last year’s Industry Report, Convenience Store News proclaimed that in 2014, “c-store fuel profits enjoyed one of their best years ever.” Motor fuel profit growth for 2015 could not keep up the lofty pace, but by no means should it be construed as a bad year at the pump. Motor fuel sales per store did drop nearly 22 percent to $3.13 million per store last year. Gross margin cents per gallon also suffered a small decline to 23.40 cents per gallon, but this number is still robust on a historical basis. All other indicators at the fore-

Sales per store Gallons per store Gallons per store per month Gross margin cents per gallon Gross margin dollars per store Average sales price per gallon

2015

2014

% change

$3,135,117 1,216,492 101,374 23.40 $284,625 $2.58

$4,005,592 1,174,356 97,863 23.95 $281,206 $3.41

-21.7% 3.6% 3.6% -2.3% 1.2% -24.5%

Source: Convenience Store News Market Research, 2016

court were strong, given the steep price decline. Gallons sold per store and therefore, gallons sold per store per month, both enjoyed a 3.6-percentage-point gain year over year. Gross margin dollars per store also ticked higher by more

Much lower pump prices led to a nearly 22-percent drop in 2015 fuel sales. But c-stores held up relatively well in profitability, especially considering 2014 was dubbed one of the best years ever for fuel profits.

Last year’s fuel prices were the lowest in five years and nearly a quarter less than the previous year.

Retail Gasoline Prices by Year 2011

2012

2013

2014

2015

4.0

3.5

3.0

Prices include dollars per gallon for all grades, all formulations Source: U.S. Department of Energy/Energy Information Administration; Convenience Store News Market Research, 2016

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

Dec

nOv

Oct

Sep

aug

Jul

Jun

May

apr

Mar

Feb

2.0

Jan

2.5

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Motor Fuels

than 1 percent year over year to $284,625, although this number pales in comparison to the nearly 30-percent gain when 2014 results were reported. “It would be unrealistic to expect a 30-percent gain in fuel profits two years in a row,” said Steve Montgomery, president of b2b Solutions LLC. “Much of that has to do with the math, as the base is now 30 percent higher than it was in 2013. Fuel margins have been down recently, but are returning to ‘normal’ levels. Unfortunately, normal levels are below and, in some cases, far below 2014 and even 2015 levels.”

The Midwest continues to carry the mantle as the region having the most c-stores in the fuels business.

Stores Selling Motor Fuels, by Region tOtal StOreS

South Midwest West Northeast TOTAL

StOreS Selling MOtOr FuelS

% OF StOreS Selling MOtOr FuelS

61,012 27,510 19,981 15,871 124,374

84.5% 87.3% 76.6% 65.1% 80.7%

72,224 31,511 26,087 24,373 154,195

“It would be unrealistic to expect a 30-percent gain in fuel profits two years in a row.” Five-Year Trend: Motor Fuels

Source: Nielsen TDLinx, December 2015; Convenience Store News Market Research, 2016

— Steve Montgomery, b2b Solutions LLC

The other story in 2015 was clearly prices at the pump, which were cut by nearly one-quarter year over year to an average price of $2.58 per gallon. Prices reached their low in the Gulf Coast region in January 2015, when the average price per gallon dipped below the $2 mark to $1.99. Conversely, the

Sales per store % change Gross margin cents per gallon Average sales price per gallon

2014

2013

2012

2011

-2.6% 23.95 $3.41

-3.8% 18.91 $3.56

0.1% 18.72 $3.66

24.0% 18.86 $3.54

Source: Convenience Store News Market Research, 2016

West Coast had the highest fuel prices throughout 2015, peaking in July when this region saw fuel prices balloon to an average of $3.58 per gallon.

Stores Selling Motor Fuels

tOtal c-StOreS

Sell MOtOr FuelS

DO nOt Sell MOtOr FuelS

80.7%

19.3%

Source: Nielsen TDLinx, December 2015; Convenience Store News Market Research, 2016

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

2015

-21.7% 23.40 $2.57

Motor fuel sales have been all over the map in the last five years, up 24 percent in 2011 to down nearly 22 percent in 2015.

Four out of every five convenience stores sold motor fuels in 2015.

aMOng StOreS Selling MOtOr FuelS chainS

Single StOreS

41.0%

59.0%

RESULTS OF THE COLLABORATION BETWEEN TWO GREAT COMPANIES

Operations

Wage War

Wages shot up in 2015, rising by $17,791 per store to $264,185. With many states and municipalities considering a higher minimum wage, this line item is likely to keep increasing.

Labor costs continue to rise, with little relief in sight

onvenience store operators had a solid year in terms of profits in 2015, but if there was one Achilles heel, it was direct-store operating expenses, which continued to rise and reached an average of $536,118 per store, a 4.1-percent increase compared to the prior year. Most of the added expense came from wages, which jumped by nearly $18,000 per store to $264,185. Wages now make up more than 43 percent of a store’s profits, on average. “The biggest hurdle to c-store growth, outside of the fundamental economic factors, are the c-stores themselves. It is still a challenge to hire quality, dependable staff, keep up with wages and health care, and to instill excellent customer service and store cleanliness on a daily basis,” noted Tim Powell, vice president of consulting for Q1 Productions. With several states and local municipalities gung-ho on increasing the minimum wage to as high as $15 per hour, it is unlikely that wage relief is in sight for c-store operators. Still, quality employees are more important than ever. “The perception of a gas station is less negative for millennials, but the older generation still maintains the wealth. The perception will depend on the industry’s focus on service fundamentals,” Powell added. One bright spot in the expense

44 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

Direct-Store Operating Expenses DOLLARS PER STORE

Wages $264,185 Payroll taxes 15,106 Workers compensation 10,621 Health insurance 24,598 Other benefits 6,024 Labor subtotal $320,534 Credit card fees 73,167 All other direct-store operating expenses 142,416 TOTAL $536,118

AS A PERCENT OF PROFITS

43.14% 2.47 1.73 4.02 0.98 52.34% 11.95 23.26 87.54%

AS A PERCENT OF TOTAL SALES PER STORE

6.63% 0.38 0.27 0.62 0.15 8.05% 1.84 3.58 13.46%

Source: Convenience Store News Market Research, 2016

Lower fuel prices translate into greater discretionary income and this helped drive more in-store transactions per week at c-stores last year.

Transactions

2015

In-store transactions per week Motor fuel transactions per week Average in-store transaction Average motor fuel transaction Average gallons per transaction

3,291 2,544 $8.22 $23.70 9.2

2014

3,280 2,529 $7.95 $30.46 8.9

2013

3,273 2,533 $7.85 $31.21 8.8

Source: Convenience Store News Market Research, 2016

C-Store Square Footage Sales area Non-sales area Total store size Total property size

2015

2,411 822 3,233 27,749

Source: Convenience Store News Market Research, 2016

area last year turned out to be credit card fees, which declined by an average of $1,207 per store, or 1.6 percent, to $73,167 per store.

Despite some c-store operators building larger-format stores, the total store size in terms of square footage only ticked up slightly in 2015.

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Tobacco

PurchasIng Power With more income at their disposal, tobacco users came back to cigarettes

ncreased foot traffic, uptrading to premium brands and bigger basket purchases per trip were all ways the c-store tobacco business benefitted in 2015 from the lower prices at the pump. Cigarettes in particular enjoyed solid momentum. Coming off two years of declining per-store sales (down 1.5 percent in 2014 and 1.2 percent in 2013), the category found itself back on the positive side last year, growing by 2.7 percent in sales per store. “Cigarettes’ performance in 2015 was driven by increased consumer purchasing power and consumer demand returning to the category,” explained David Bishop, managing partner of Barrington, Ill.-based Balvor LLC, a sales and marketing firm. “Lower fuel prices and unemployment rates drove the purchasing power, while dissatisfaction with the electronic nicotine devices experience shifted spending back to cigarettes.” In addition, c-store retailers are

reporting steady and rational promotional activity, promoting a healthy competitive environment, according to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at New York-based Wells Fargo Securities LLC. Cigarettes, however, is not the only compelling story at the backbar. On the negative side, the electronic cigarette and vapor segment of the other tobacco products (OTP) category is causing some concern. The segment did register 4.2-percent growth in average sales per store last year, but this was a sizeable slowdown compared to

Cigarettes are still big business for convenience stores, but the category’s share of in-store sales has been slowly trending down the last five years.

Five-Year Trend: Cigarettes 2015

Percent change in per-store sales 2.7% Margin percentage 13.36% Share of in-store sales 30.8%

2014

2013

2012

2011

-1.5% 13.60% 31.1%

-1.2% 13.80% 32.1%

1.2% 14.21% 32.9%

0.2% 14.71% 33.7%

Source: Convenience Store News Market Research, 2016

Category Analysis: Cigarettes

(30.84 percent of in-store sales; 15.27 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Premium Branded discount Subgeneric/private label Fourth tier Imports TOTAL

$349,168 62,248 20,384 2,008 14 $433,822

Source: Convenience Store News Market Research, 2016

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

2.9% 2.0 1.6 9.7 7.7 2.7%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$52,862 9,424 3,086 304 2 $65,678

4.0% 3.1 2.7 10.9 6.7 3.9%

PERCENT OF DOLLAR SALES UNIT VOLUmE

80.5% 14.3 4.7 0.5 0.0 100.0%

77.6% 16.4 5.5 0.5 0.0 100.0%

Average sales per store for cigarettes ticked up 2.7 percent in 2015, with all segments on the positive side.

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14-percent growth in 2014. Factors at play, according to Herzog, are an evolving competitive landscape, an over-proliferation of brands and consumer dissatisfaction with the products. Sentiment on the segment’s growth “has turned more cautious,” Herzog noted.

Less than 50¢ 50¢-99¢ $1.00-$1.99 $2.00-$2.49 $2.50 or more

“Lower fuel prices and unemployment rates drove Cigarette Taxes by State the purchasing power, Missouri $0.17 Indiana while dissatisfaction Virginia $0.30 Oklahoma Georgia $0.37 Arkansas with the electronic nicotine North Dakota $0.44 Kansas North Carolina $0.45 Oregon devices experience West Virginia $0.55 Florida Idaho $0.57 Iowa shifted spending back South Carolina $0.57 Texas Kentucky $0.60 South Dakota to cigarettes.” Wyoming $0.60 Delaware STATE (IN ORDER OF TAx)

— David Bishop, Balvor LLC

Looking to the current year and beyond, Bishop believes cigarettes will likely move back toward its longer-term trend; however, a lot of variables can impact year-over-year trends. “State-level initiatives like the movement to increase the legal [purchasing] age to 21 could create headwinds for cigarettes, whereas merging OTP regulations could provide a tailwind,” he said.

Tennessee Nebraska Alabama Mississippi Colorado Louisiana California

TAx

$0.62 $0.64 $0.68 $0.68 $0.84 $0.86 $0.87

STATE (IN ORDER OF TAx)

TAx

STATE (IN ORDER OF TAx)

Illinois Alaska Arizona Maine Maryland Michigan Puerto Rico District of Columbia Wisconsin New Jersey Minnesota Washington Vermont Hawaii Massachusetts Connecticut Rhode Island New York

$1.00 $1.03 $1.15 $1.29 $1.31 $1.34 $1.36 $1.41 $1.53 $1.60 $1.60 $1.60 $1.66 $1.68 $1.70 $1.70 $1.80

Ohio Pennsylvania New Mexico New Hampshire Montana Utah Nevada

TAx

$1.98 $2.00 $2.00 $2.00 $2.00 $2.00 $2.23 $2.50 $2.52 $2.70 $2.90 $3.03 $3.08 $3.20 $3.51 $3.65 $3.75 $4.35

Source: U.S. Federal Tax Administration, December 2015

Five-Year Trend: Other Tobacco Products 2015

Percent change in per-store sales 4.3% Margin percentage 24.34% Share of in-store sales 4.91%

2014

2013

2012

2011

2.7% 24.20% 4.89%

7.4% 24.71% 4.83%

4.8% 24.53% 4.55%

2.5% 24.23% 4.51%

Source: Convenience Store News Market Research, 2016

OTP has steadily climbed in share of in-store sales over the past five years, though its per-store sales have seen some wild swings.

Category Analysis: Other Tobacco Products

(4.91 percent of in-store sales; 4.43 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Smokeless Cigars E-cigarettes Papers Pipe/cigarette tobacco Pipes Other TOTAL

$42,228 19,043 5,079 1,856 608 211 73 $69,098

Source: Convenience Store News Market Research, 2016

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

5.2% 2.9 4.2 -2.2 -6.2 111.0 -42.5 4.3%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$6,393 2,883 769 281 92 32 11 $10,461

6.4% 4.1 5.3 -1.1 -5.2 113.3 -42.1 5.4%

PERCENT OF DOLLAR SALES UNIT VOLUmE

61.0% 27.6 7.4 2.7 0.9 0.3 0.1 100.0%

39.4% 53.2 2.7 4.1 0.6 0.0 0.0 100.0%

Smokeless still holds a commanding lead over the OTP category in share of dollar sales. Cigars top unit volume.

Foodservice

SPeeding Back

Foodservice sales growth accelerates, but margins are being challenged

utting an end to a three-year slowdown trend, the rate of foodservice growth at U.S. convenience stores last year shifted back into acceleration mode. Average per-store sales of foodservice — which includes prepared food and hot, cold and frozen dispensed beverages — rose by 6 percent during 2015, up from 4.6 percent in 2014. In fact, this marked the largest percentage increase since 2012, when per-store sales grew by 6.8 percent. While sales of frozen beverages were flat, hot and cold dispensed beverages rebounded significantly year over year to contribute to the category’s accelerated growth. Prepared food also had another strong year, although its growth did slow a bit compared to 2014. According to industry experts, likely factors behind the strong sales performance of foodservice in 2015 were more discretionary income, reduced unemployment and lower gas prices.

“Store sales were certainly helped by the c-store consumers feeling they had more money in their pocket after paying for fuel,” explained Steve Montgomery, president of b2b Solutions LLC. “The other strong driver is [that] the industry is getting better at foodservice. In most cases, the purchase of the foodservice items contributes to the basket total. It is not the case of the consumer buying a foodservice item rather than another item.” By far, prepared food remains

the top foodservice segment and increased in average sales per store by 6.5 percent, or $9,146 per store, last year. Within this segment, sandwiches make up more than a quarter of sales. Hot dogs and pizza round out the top three items. For the most part, dispensed beverages had a banner year in 2015 compared to the prior year. Average sales per store of hot beverages increased 4.7 percent, compared to a decline of 0.6 percent

Five-Year Trend: Foodservice 2015

Percent change in per-store sales 6.0% Margin percentage 43.72% Share of in-store sales 15.71%

2014

2013

2012

2011

4.6% 44.13% 15.38%

5.5% 44.64% 14.93%

6.8% 45.05% 14.31%

6.2% 45.18% 13.93%

Source: Convenience Store News Market Research, 2016

With more c-store operators investing in foodservice programs, the category’s share of in-store sales has grown from about 14 percent in 2011 to almost 16 percent in 2015.

Category Analysis: Foodservice

(15.71 percent of in-store sales; 25.48 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Prepared food (prepared on- or off-site) Hot dispensed beverages Cold dispensed beverages Frozen dispensed beverages TOTAL Source: Convenience Store News Market Research, 2016

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

$149,900 45,867 17,293 8,019 $221,079

6.5% 4.7 7.9 0.0 6.0%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$22,694 6,944 2,618 1,214 $33,470

7.7% 5.8 9.1 1.1 7.1%

PERCENT OF SALES

67.8% 20.8 7.8 3.6 100.0%

The vast majority of c-store foodservice customers buy prepared food, with the segment accounting for 67.8 percent of the category’s sales.

Foodservice

Percent of Cold Dispensed Beverages Sales 2015 Fountain carbonated

86.5%

Fountain non-carbonated

7.4%

Fountain sports drinks

1.5%

All other cold beverages

4.6%

Source: Convenience Store News Market Research, 2016

Percent of Hot Dispensed Beverages Sales

2015 saw little change in share of hot dispensed beverage sales. Coffee still makes up about three-quarters of total sales.

Consumers’ changing tastes in packaged beverages hasn’t yet shifted to the fountain area in c-stores, where carbonated drinks still dominate.

2015 Coffee

74.6%

Cappuccino/ specialty

17.2% 4.1% 2.5% 1.6%

(including flavored)

Hot chocolate

“The devil is always in the details, meaning that how we arrived at flat margins is a more important consideration than that one single fact.”

Hot tea All other hot beverages

Source: Convenience Store News Market Research, 2016

— Jon Bratta, Core-Mark International Inc.

the previous year. Cold dispensed beverages increased in average sales per store by 7.9 percent, a significant change in direction from 2014’s 0.7-percent decline. Despite the acceleration on the sales side, the same could not be said for margins. The average gross margin percent for foodservice last year was 43.72 percent, down from 44.13 percent in 2014. This metric has actually declined in every one of the past five years.

“I think we’re seeing the evolution of foodservice in c-stores reaching the maturity stage. This may seem like a risky statement, but if you look at the concepts that dominate foodservice and dispensed beverage sales (Sheetz, Wawa, QuikTrip, QuickChek, Rutter’s), they have been doing it for years,” said Tim Powell, vice president of consultancy Q1 Productions. Even so, Jon Bratta, vice presi-

Category Analysis: Prepared Food

Every area of prepared food saw a sales increase in 2015, with five segments rising by more than 7 percent each in per-store sales.

AVERAGE SALES PER STORE 2015 % ChANGE

Sandwiches Hot dogs Pizza Chicken Bakery Salads Hamburgers Soup Frozen treats All other prepared food TOTAL Source: Convenience Store News Market Research, 2016

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

$39,030 25,035 25,003 18,562 10,322 5,909 5,251 3,626 2,782 14,380 $149,900

dent of marketing for distributor Core-Mark International Inc., pointed out that simply having a flat margin isn’t necessarily a bad thing. “Margins in foodservice are comprised of many factors: retails, cost, operations, efficiencies, waste. The devil is always in the details, meaning that how we arrived at flat margins is a more important consideration than that one single fact,” he said.

7.8% 4.7 7.2 7.3 6.5 4.6 7.3 4.4 7.9 4.6 6.5%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$5,909 3,790 3,785 2,810 1,563 895 795 549 421 2,177 $22,694

9.0% 5.9 8.4 8.5 7.7 5.8 8.5 5.6 9.1 5.7 7.7%

PERCENT OF SALES

26.0% 16.7 16.7 12.4 6.9 3.9 3.5 2.4 1.9 9.6 100.0%

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Cold Vault

An InnovATIon EvoluTIon

Consumers are increasingly drawn to beverages that cater to their changing tastes

he non-alcoholic side of the cold vault had a stronger performance in 2015 than the alcohol side, with no packaged beverage segments seeing sales declines. Beer and malt beverages, on the other hand, saw some significant ups and downs with multiple segments having sales declines, whereas other segments grew by more than 10 percentage points on a per-store basis. Packaged beverages as a whole increased in average sales per store by 6.1 percent. Although carbonated soft drinks (CSDs) had another fairly flat year at only 0.9 percent in per-store sales growth, other segments such as energy drinks, bottled water, ready-to-drink iced tea and enhanced water increased their average sales per store each

by 9 percent or more, indicating consumers’ continued interest in healthier and/or functional drinks. Despite this, CSDs remain comfortably on top in terms of both dollar sales and unit volume. “Carbonated soft drinks have been on the decline for many years now from both a volume and dollar perspective, yet don’t kid yourself that they are not important. Soft drinks still account for approximately 50 percent of overall beverage sales,” said Tim Powell, vice president of Q1 Consulting.

Five-Year Trend: Packaged Beverages 2015

Percent change in per-store sales 6.1% Margin percentage 32.80% Share of in-store sales 12.69%

Looking over the past five years, 2015’s per-store sales increase of 6.1 percent was the secondlargest gain, only trailing 2012.

2014

2013

2012

2011

3.5% 32.67% 12.41%

3.0% 32.91% 12.18%

8.8% 32.83% 11.96%

4.7% 32.79% 11.43%

Source: Convenience Store News Market Research, 2016

Category Analysis: Packaged Beverages

(11.43 percent of in-store sales; 14.08 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Carbonated soft drinks Energy drinks Bottled water Sports drinks Juice/juice drinks Iced tea (ready-to-drink) Enhanced water All other packaged beverages TOTAL

$56,013 46,224 17,973 17,570 14,882 10,218 5,502 10,179 $178,561

Source: Convenience Store News Market Research, 2016

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

0.9% 9.2 9.5 7.1 4.4 9.8 12.1 10.8 6.1%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$8,480 6,998 2,721 2,660 2,253 1,547 833 1,541 $27,033

2.0% 10.4 10.7 8.3 5.5 11.1 13.3 12.0 7.2%

PERCENT OF DOLLAR SALES UNIT VOLUmE

31.4% 25.9 10.1 9.8 8.3 5.7 3.1 5.7 100.0%

35.3% 18.9 11.7 10.0 9.1 7.5 3.1 4.4 100.0%

Enhanced water had the strongest growth year among packaged beverages, increasing its average sales per store by 12.1 percent.

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Cold Vault

“Carbonated soft drinks have been on the decline for many years now from both a volume and dollar perspective, yet don’t kid yourself that they are not important.” — Tim Powell, Q1 Productions “However, with innovation in sparkling waters, functional beverages and even ‘powder sticks’ and flavor additives, consumers have shifted tastes to different ‘for me’ beverages — much like craft beer is doing for [the malt beverages] segment.” Indeed, microbrews/craft beer (up 19.3 percent) showed the strongest growth in per-store sales last year among all beer/malt beverages segments. Imports (up 15 percent) and super premium (up 10.8 percent) turned in strong performances, too. Not faring as well were premium, budget, popular, malt liquor and non-alcoholic beverages, which all saw per-store sales declines. “The craft beer category is the new ‘energy drink’ category and the ‘Starbucks beverage’ category of the past few decades,” Powell noted. “The drivers of craft beer growth have been the millennial segment, the social media trend of ‘me first, my brand,’ and a combination of the mainstream brands just not tasting as good and getting tired. I think it’s a natural evolution.”

Approximately three-quarters of c-stores sold beer in 2015, posting increases of 2 percent in sales and 3.9 percent in gross margin dollars.

2015

2014

75.3%

Percent of in-store gross margin dollars

12.6% $177,623 8.8%

12.8% $174,179

Average gross margin dollars per store

$33,603

$32,353

Stores Selling Beer Percent of stores selling beer For stores selling beer: Percent of in-store sales Average sales per store

8.9%

Source: Convenience Store News Market Research, 2016

Five-Year Trend: Beer/Malt Beverages 2015

Percent change in per-store sales 2.0% Margin percentage 18.71% Share of in-store sales 9.51%

2014

2013

2012

2011

1.4% 18.57% 9.67%

0.9% 18.17% 9.69%

4.5% 18.15% 9.72%

-1.0% 18.19% 9.66%

Source: Convenience Store News Market Research, 2016

Beer/malt beverages’ share of in-store sales for 2015 was the category’s lowest in the last five years.

Category Analysis: Beer/Malt Beverages

(9.51 percent of in-store sales; 6.60 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Premium Imports Budget Popular Flavored malt beverage Microbrews/craft Super premium Malt liquor Non-alcoholic TOTAL

$67,387 18,092 12,008 11,057 10,945 6,017 5,297 2,880 67 $133,750

Source: Convenience Store News Market Research, 2016

58 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

-1.3% 15.0 -4.3 -3.4 6.5 19.3 10.8 -4.2 -1.5 2.0%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$10,202 2,739 1,818 1,674 1,657 911 802 436 10 $20,249

-0.2% 16.3 -3.2 -2.3 7.7 20.7 12.0 -3.1 0.0 3.1%

PERCENT OF DOLLAR SALES UNIT VOLUmE

50.4% 13.5 9.0 8.3 8.2 4.5 4.0 2.1 0.0 100.0%

44.1% 10.5 10.8 9.5 13.6 3.3 2.6 5.5 0.1 100.0%

Growth of microbrews/ craft beer slowed again in 2015, but still generated a 19.3-percent increase in average sales per store.

Candy & Snacks

Hungry for More Better-for-you snacks and bagged candy contribute to overall healthy growth

t’s not surprising the candy and snacks categories had another good year at convenience stores in 2015, given that more and more Americans are opting to snack and eat mini-meals throughout the day rather than eat the traditional three square meals. Alternative snacks, in particular, had a solid year at 7.2-percent growth in average sales per store. “Better-for-you” segments such as health/energy bars and meat snacks led the way. “Research has shown 33 percent of consumers are snacking on healthier foods. Many are seeking more protein in their snacks, which helped drive meat snack sales,” said Steve Montgomery, president of b2b Solutions LLC. “Better-foryou snacks are expected to grow by 8 percent by 2018. This is great news for our industry as we are America’s snacking headquarters.” In the salty snacks category,

which generated an overall 4.6-percent increase in average sales per store, potato chips remain the top salty snack in both dollar sales and unit volume, despite only growing by 2.1 percent in per-store sales last year. Nuts/seeds, another segment

falling under the better-for-you bucket, had this category’s highest percentage growth at 11.2 percent. As for the candy category, it saw the lowest per-store sales growth of the three. Still, C-stores are finding more profitability in candy. Last year’s margin percentage of 42.49 percent was the highest in five years.

Five-Year Trend: Candy 2015

Percent change in per-store sales 3.5% Margin percentage 42.49% Share of in-store sales 3.22%

2014

2013

2012

2011

3.2% 41.20% 3.26%

3.2% 41.05% 3.26%

5.2% 40.92% 3.23%

5.8% 40.96% 3.21%

Source: Convenience Store News Market Research, 2016

Category Analysis: Candy

(3.22 percent of in-store sales; 5.25 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Chocolate bars/packs Bagged/repacked peg candy Gum Novelties/seasonal Non-chocolate bars/packs Candy rolls, mints, drops TOTAL

$13,726 13,514 7,695 4,987 2,728 2,675 $45,325

Source: Convenience Store News Market Research, 2016

60 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

-1.9% 8.5 -0.9 8.4 -5.7 5.1 2.4%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$2,078 2,046 1,165 755 413 405 $6,862

-0.9% 9.6 0.2 9.6 -4.6 6.3 3.5%

PERCENT OF DOLLAR SALES UNIT VOLUmE

30.3% 29.8 17.0 11.0 6.0 5.9 100.0%

27.1% 27.1 18.6 14.0 7.6 5.6 100.0%

Bagged/repacked peg candy and novelties/ seasonal candy were the growth standouts, each increasing by more than 8 percent in per-store sales.

Candy & Snacks

Category Analysis: Salty Snacks

(2.39 percent of in-store sales; 3.19 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Potato chips Tortilla/corn chips Nuts/seeds Puffed cheese Mixed Crackers Pretzels Popcorn (ready-to-eat) Other salty snacks TOTAL

$9,406 6,645 5,674 3,322 2,087 1,757 1,552 1,532 6,434 $38,409

2.1% 3.3 11.2 6.3 -2.9 1.2 6.2 4.8 6.6 4.6%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$1,424 1,006 859 503 316 266 235 232 974 $5,815

PERCENT OF DOLLAR SALES UNIT VOLUmE

3.3% 4.5 12.4 7.5 -1.9 2.3 7.3 5.9 7.7 5.8%

24.5% 17.3 14.8 8.7 5.4 4.6 4.0 4.0 16.7 100.0%

24.0% 14.9 18.3 8.4 4.1 7.0 3.5 3.7 16.1 100.0%

Every salty snacks segment, with the exception of mixed salty snacks, increased its average sales per store, with nuts/seeds leading the way at 11.2-percent growth.

Source: Convenience Store News Market Research, 2016

Five-Year Trend: Salty Snacks 2015

Percent change in per-store sales 5.8% Margin percentage 31.47% Share of in-store sales 2.73%

2014

2013

2012

2011

6.3% 31.17% 2.71%

5.9% 29.93% 2.63%

10.8% 29.30% 2.53%

7.4% 29.10% 2.39%

Source: Convenience Store News Market Research, 2016

In each of the last five years, the salty snacks category has grown by at least 5 percent in per-store sales.

average candy sales per store rose 2.4 percent to $45,325 in 2015, or $1,063 more per store. Three segments — bagged/ repacked peg candy, novelties/seasonal and candy rolls, mints and drops — drove the overall category increase. All the other candy segments posted sales declines year over year. For the second year in a row, non-chocolate bars/packs had the steepest decline, decreasing 5.7 percent in average sales per store.

“Many are seeking more protein in their snacks, which helped drive meat snack sales.” — Steve Montgomery, b2b Solutions LLC

Five-Year Trend: Alternative Snacks 2015

Percent change in per-store sales 7.2% Margin percentage 35.91% Share of in-store sales 1.09%

2014

2013

2012

2011

8.2% 36.02% 1.05%

3.9% 34.12% 0.99%

12.0% 33.48% 0.96%

12.0% 32.70% 0.89%

Source: Convenience Store News Market Research, 2016

Aside from a blip in 2013, alternative snacks has been a consistently strong growth category for c-stores throughout the last five years.

Category Analysis: Alternative Snacks

(1.09 percent of in-store sales; 1.10 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Meat snacks Health/energy bars Granola/yogurt bars Other alternative snacks TOTAL

$9,082 4,340 766 1,097 $15,285

Source: Convenience Store News Market Research, 2016

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6.5% 10.2 3.4 4.6 7.2%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$1,375 657 116 166 $2,314

7.7% 11.4 4.5 5.7 8.4%

PERCENT OF DOLLAR SALES UNIT VOLUmE

59.4% 28.4 5.0 7.2 100.0%

48.2% 34.5 11.5 5.8 100.0%

Average sales per store of health/energy bars shot up by 10.2 percent last year, outpacing all the other alternative snacks segments.

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Other Merchandise

On thE REbOund

Frozen treats, HBC and non-edible grocery bounce back

veryone likes a comeback story and there were three in 2015 when it comes to center-store categories in the convenience store industry. Most impressive, ice cream and frozen novelties went from a 0.3-percent decline in per-store sales in 2014 to a 4.7-percent rise last year. Health and beauty care (HBC) went from a 1.3-percent loss to a 3.4-percent gain year over year. And non-edible grocery improved

from a 1.3-percent decrease to a 2.6-percent increase. While all segments of the ice cream and frozen novelties category saw per-store sales increases in 2015, the largest percentage growth came from frozen yogurt/ sherbet/sorbet (up 5.9 percent). Interestingly, this segment had the biggest loss in 2014, taking a 10.1-percent fall. Last yearâ&#x20AC;&#x2122;s rebound of HBC was helped along by per-store sales growth in vitamins (up 6.8 percent)

and analgesics (up 5.1 percent), in particular. However, all segments of HBC with the exception of family planning and feminine hygiene saw higher sales per store. The comeback of non-edible grocery was not as pronounced. Per-store sales of household care items jumped 11.1 percent, which offset declines in other segments like pet care and dish care. In addition, the catchall of all other non-edible grocery took an 8percent hit. CSN

Category Analysis: Edible Grocery

(5.09 percent of in-store sales; 6.13 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % CHANGE

Packaged dairy & deli Packaged bread Frozen food Perishable (including produce) All other edible grocery TOTAL

$22,185 11,208 9,907 6,214 22,365 $71,879

9.0% -0.7 -0.3 5.1 1.4 3.4%

INDUSTRY TOTAL (in millions) 2015 % CHANGE

$3,359 1,697 1,500 941 3,385 $10,882

PERCENT OF DOLLAR SALES UNIT VOLUmE

10.2% 0.4 0.8 6.3 2.5 4.5%

30.9% 15.6 13.8 8.6 31.1 100.0%

50.6% 10.7 9.5 5.4 23.8 100.0%

C-store customers like their deli meats, cheeses and yogurts as packaged dairy and deli tops edible grocery.

Source: Convenience Store News Market Research, 2016

Category Analysis: General Merchandise

(3.25 percent of in-store sales; 4.61 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % CHANGE

Automotive products Phone cards Smoking accessories Seasonal items Batteries Novelties/toys Telecomm hardware Film/photo All other general merchandise TOTAL

$9,329 7,018 4,855 4,324 4,125 3,209 733 89 12,020 $45,702

Source: Convenience Store News Market Research, 2016

64 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

-2.9% 7.6 4.7 3.8 1.1 7.3 23.4 -62.9 7.1 3.7%

INDUSTRY TOTAL (in millions) 2015 % CHANGE

$1,411 1,061 735 655 624 486 111 14 1,819 $6,916

-1.9% 8.6 5.9 4.9 2.2 8.4 24.6 -62.0 8.2 4.8%

PERCENT OF DOLLAR SALES UNIT VOLUmE

20.4% 15.4 10.6 9.5 9.0 7.0 1.6 0.2 26.3 100.0%

11.2% 25.6 19.5 6.9 7.8 6.3 0.2 0.0 22.5 100.0%

Though not the 51-percent increase of 2014, telecomm hardware was once again a stellar performer in general merchandise.

Other Merchandise

Category Analysis: Non-Edible Grocery

(1.89 percent of in-store sales; 2.12 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Paper, plastic, foil products Pet care Household care Laundry care Dish care Other non-edible grocery TOTAL

$10,053 7,054 6,519 2,048 793 92 $26,560

INDUSTRY TOTAL (in millions) 2015 % ChANGE

1.9% -2.3 11.1 1.5 -4.2 -8.0 2.6%

$1,522 1,068 987 310 120 14 $4,021

PERCENT OF DOLLAR SALES UNIT VOLUmE

3.0% -1.2 12.3 2.6 -3.2 -6.7 3.7%

37.9% 26.6 24.5 7.7 3.0 0.3 100.0%

40.9% 29.2 21.6 4.8 2.9 0.6 100.0%

Household care was easily the sales standout in last year’s non-edible grocery business at c-stores.

Source: Convenience Store News Market Research, 2016

Category Analysis: Fluid Milk Products

(1.70 percent of in-store sales; 1.06 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Whole milk 2% milk Flavored milk 1% milk Skim/nonfat All other fluid milk products TOTAL

$7,761 7,206 4,947 1,764 971 1,275 $23,924

-5.1% -14.6 6.3 -10.1 -25.1 -2.6 -7.4%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$1,175 1,091 749 267 147 193 $3,622

PERCENT OF DOLLAR SALES UNIT VOLUmE

-4.0% -13.7 7.5 -9.2 -24.2 -1.5 -6.4%

32.4% 30.1 20.7 7.4 4.1 5.3 100.0%

28.1% 26.4 30.3 6.3 3.6 5.3 100.0%

For the second consecutive year, skim/nonfat milk posted the largest sales decline in the fluid milk category.

Source: Convenience Store News Market Research, 2016

Category Analysis: Ice Cream & Frozen Novelties

(0.94 percent of in-store sales; 1.19 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Frozen novelties Premium ice cream Ice cream Frozen yogurt/sherbet/sorbet TOTAL

$7,424 4,848 799 126 $13,197

4.8% 4.6 5.1 5.9 4.7%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$1,124 734 121 19 $1,998

PERCENT OF DOLLAR SALES UNIT VOLUmE

5.9% 4.6 5.2 5.6 5.4%

56.0% 37.0 6.1 0.9 100.0%

72.2% 22.6 4.5 0.6 100.0%

Every segment of ice cream and frozen novelties made a positive contribution to the overall category’s growth.

Source: Convenience Store News Market Research, 2016

Category Analysis: Health & Beauty Care

(0.73 percent of in-store sales; 1.04 percent of in-store gross margin dollar contribution) AVERAGE SALES PER STORE 2015 % ChANGE

Energy shots, liquid vitamins, supplements $3,019 Vitamins/supplements 1,704 Analgesics 1,565 Cough/cold remedies 1,090 Family planning 568 Stomach remedies 515 Grooming aids 462 Feminine hygiene 192 Cosmetics 46 All other health & beauty care 1,096 TOTAL $10,258 Source: Convenience Store News Market Research, 2016

66 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

0.2% 6.8 5.1 4.0 -2.2 1.4 1.8 -1.0 15.0 10.2 3.4%

INDUSTRY TOTAL (in millions) 2015 % ChANGE

$457 258 237 165 86 78 70 29 7 166 $1,553

1.3% 7.9 6.3 5.1 -1.1 2.6 2.9 0.0 16.7 11.4 4.6%

PERCENT OF DOLLAR SALES UNIT VOLUmE

29.4% 16.6 15.3 10.6 5.5 5.0 4.5 1.9 0.5 10.7 100.0%

28.2% 15.7 17.7 11.7 3.9 7.2 4.7 1.4 0.5 9.0 100.0%

Though the segment’s sales growth is flattening out, energy shots still make up about a third of c-store HBC sales.

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Why Non-Perishables Are Key to Retaining Shopper Loyalty at the Convenience Store Wednesday, June 15, 2016 | 11:00 am ET | Duration: 1 hour

www.csnews.com/June2016_Webcast

FOODSERVICE Prepared Food + Hot, Cold, Frozen Dispensed Beverages

HOW TO

How to Drink In More Dispensed Beverage Profts By Bob Phillips

Call tO aCtIOn: Foodservice 101

• Always offer at least three cup sizes. If there are three options, consumers will often choose the middle one. When only two options are offered, they tend to go small. • Do your homework and find out what programs are available from direct store delivery (DSD) suppliers, particularly in the frozen dispensed segment. • Determine what will set your store apart from the competition.

ariety, so goes the saying, is the spice of life. In the convenience store universe, nowhere is diversity more prevalent than across dispensed beverages. From crazy flavors in the frozen dispenser to red-hot coffee, tea, lattes — and everything in between — there quite literally is something for everyone. And the fact that dispensed beverages are easy on customers’ pocketbooks can play a significant role in making your stores a destination. “Customers seeking more bang for their buck will always find value in dispensed products,” explained Convenience Store News How To Crew retailer Ryan Krebs, director of foodservice for York, Pa.-based convenience store chain Rutter’s Farm Stores. “The main ‘callout’ to customers is the 99-cent, any-size price point from QSRs [quick-service restaurants]. So, if you charge according to size, make sure the ‘value’ of your products is greater than that offered by the competition.” Indeed, there are several factors to consider when designing and executing a dispensed program. For starters, determining the proper equipment for your locations. “It’s essentially a function of space, money and store traffic,” explained How

68 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

FOODSERVICE

Prepared Food + Hot, Cold, Frozen Dispensed Beverages

To Crew member Chad Prast, senior category manager of fresh foods and dispensed beverages for Murphy USA Inc.’s convenience store portfolio. “Putting 24 heads into a lower-volume store can result in lots of spoilage.” For high-volume locations, Prast recommends a 16- to 24-head fountain as the optimal arrangement, provided space is available. Muy CalIEntE!

Coffee bars are a staple in the convenience trade, offering up piping-hot coffee, hot chocolate, hot tea and barista-style beverages in a self-serve format. Customers have their choice of adding milk, cream, sugar and syrups among other options. According to How To Crew expert David Bishop, managing partner of Balvor LLC, a sales and marketing firm, males are currently the primary target for c-store hot dispensed beverages “mainly because males are the dominant segment making in-store shopping trips in c-stores,” he said. “But, in fact, females who shop inside c-stores are just as likely to purchase hot beverages.”

A new demographic helping to drive sales of hot dispensed beverages at c-stores is millennials. This group of consumers is loyal to products that suit their beliefs and lifestyles. They are not as affected by pricing as other groups and they want their product of choice quickly, noted Tim Hume, director of sales and marketing for B.O.V. Solutions Inc., a pioneer in Bag On Valve technology and manufacturing. “The quality of coffee at convenience stores has improved dramatically, and coupled with the amount of offerings available, the millennial can make a quick choice and have it quickly. Many c-stores are offering a social setting, Wi-Fi and a more relaxed experience. This is attractive to those who are active in social media and can review the products before they purchase — again, millennials,” Hume continued. “Other c-store chains are increasing the size of their stores. This offers [millennials] the opportunity to purchase a coffee while they shop for more products.” While hot dispensed beverages rule the roost during the morning daypart, they can be top sellers

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throughout the day (and night) as well. “Popular belief is that c-stores sell the most hot beverage cups per hour from 4 a.m. to 11 a.m.,” said How To Crew member Larry Miller, president and founder of Sanford, Fla.-based Miller Management & Consulting Services. “Then, Starbucks, Gloria Jean, and Peet’s Coffee & Tea came along and showed us that hot beverages can be sold all day long.” Cup volume does drop off after the morning drive, however, and according to Miller, fresh-brewed coffee has a relatively short shelf life (approximately 30 minutes). “Many operators don’t want to waste coffee, so they only brew it at certain times. In order to sell hot beverages all day, you first have to build a reputation for having fresh coffee at all hours,” he emphasized. Speaking of fresh coffee, Prast points out that younger consumers are trending toward single-cup machines that grind and brew their coffee on the spot. “Right now, the technology is slow and doesn’t always do the size of cup the customer wants. But as that gets better, this could easily be the next wave that cuts shrink to

Call to aCtion: Foodservice 201

• Obesity has had the biggest negative impact on bottled soft drink sales over the past decade, but this hasn’t been the case with dispensed beverages. Still, make sure you offer something for everyone. • Dispensed juices? Energy drinks? Iced tea and coffee? Always keep abreast of new products being offered in the dispensed category, such as SoBe and vitamin- and mineral-infused teas.

almost nothing and allows for fresh coffee each time.” Another emerging trend in coffee is cold brew, which despite its name, can actually be enjoyed hot or cold. Smooth, flavorful and with less bitterness or acidity, cold brewed coffee is growing at a pace of 120 percent annually compared to regular brewed coffee at 4 percent annually, according to Hume of B.O.V. Solutions. Convenience store retailers can use cold brew to differentiate from the competition. “7-Eleven is the only c-store that I am aware of that

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FOODSERVICE Prepared Food + Hot, Cold, Frozen Dispensed Beverages

offers a cold brewed, cold coffee option. The quality of the cold brewed is second to none,” Hume said. “Liquid coffee (cold brewed) is the coffee of the future due to better taste and less waste.” thE StOnE-COlD tRuth

While the fountain beverage dispenser is usually considered the domain of younger consumers, it’s important for c-store operators not to limit their target for cold dispensed beverages (CDBs), ‘less you risk cutting off your nose to spite your face. “Your typical consumer [of cold dispensed beverages] depends on your store’s brand and location,” said How To Crew expert Tim Powell, vice president of Q1 Productions, a Chicago-based consulting firm. That said, the core consumer of CDBs is male, between 18 and 35 years old, and skews Hispanic. “If you have kept up with innovation and you offer a large variety, all your customers are potential refreshment customers,” noted Miller. On the other hand, he said, “If you have the same equipment and offer from 10 years ago, then chances are you have already lost most-all of your dispensed beverage business to a competitor.” While convenience stores face an enormous amount of competition in the foodservice Foodservice 301 arena from virtually every other channel, • If possible, purchase your dispensing particularly QSRs, equipment. If you are selling 100 cups c-store operators of dispensed beverages per day, this can win the war for will definitely cover your costs. the dispensed bever• If you have to lease because of age dollar by offerfinancial considerations, do so from ing more variety an equipment leasing company, than the guy down not a bottler. This will allow you to the street. control what products you have in “Certainly anyyour dispensers. If you lease from one in your immedia bottler, you are locked into their ate area that sells proprietary offerings. dispensed beverages • Offer as much variety and flexibility as is the competition,” possible to customers. Having Pepsi, explained Rutter’s Coke, Dr Pepper, 7Up, Mountain Krebs. This is where Dew, as well as any brands or flavors differentiation, varicurrently in vogue in your area, gives ety and customizaa c-store a huge advantage over the tion come into play. competition — especially QSRs. “It’s imperative to stay on trend with

Call tO aCtIOn:

72 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

Our How To Crew David Bishop — Balvor LLC Joseph Bona — MoseleyBona Retail Ed Burcher — Coen Markets Joseph Chiovera — XS Foodservice & Marketing Tom Cook — King-Casey Jack W. Cushman — CST Brands Inc. Dean Dirks — Dirks & Associates Eric Giandelone — Mintel Foodservice Ryan Krebs — Rutter’s Farm Stores Mathew Mandeltort — Eby-Brown Co. LLC Larry Miller — Miller Management & Consulting Services Tim Powell — Q1 Productions Chad Prast — Murphy USA Inc. Holly Veale — McLane Co. Inc.

dispensing systems [Coca-Cola Freestyle, Pepsi Spire, Cornelius Pro Touchscreen] that offer visual appeal, more variety and customized flavor offerings.” The competition is everyone, from QSRs to Walgreens to big-box and club stores, agreed Miller, who also adds home beverage systems like SodaStream and the Primo Flavorstation Home Beverage Maker to the list of competitors for the c-store dispensed beverage dollar. “Even some dollar stores are adding cold and hot dispensed beverages to their footprints,” he pointed out. thE hEalth OF FROzEn BEVERagES

Switching gears to frozen beverages, current trends in this segment somewhat surprisingly lean toward “better-for-you” consumption. This opens the door for flavors such as green tea and pomegranate, which also helps attract female consumers. Of course, younger consumers are still going to be attracted by the lesshealthful sweet flavors such as bubble gum and root beer float. So, it’s important to not limit what you’re offering at the frozen dispenser. “Find out what programs are available from DSD suppliers like Slush Puppie, Gator Ice, ICEE distributors and smoothie programs,” advised Miller. “The key is determining what you can do to set your stores apart from the crowd.” Variety is very important, echoed Murphy USA’s Prast. “Blue, red and cola flavors will usually make up 80 percent of frozen sales, but after that, the more flavors you can add, the more sales you will bring in. It also helps to do in-and-out flavors to keep the area exciting.” CSn

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

Millennials: The Generation of Choice All grown up and of legal drinking age, this demographic likes lots of options By Angela Hanson

espite the efforts that retailers, suppliers and marketers are putting into understanding millennials, they can be a hard demographic to pin down. Of course, an entire generation will encompass a wide variety of tastes and preferences. And this is especially true of millennials who, in comparison to their elders, value choice, customization and the opportunity to experiment. Alcoholic beverages, in particular, is a category where there’s a lot of conversation happening around millennials — consumers born between 1977 and 1995. Every supplier is trying to attract more millennial dollars, and millennials in turn are proving to be “far more promiscuous” in their consumption of alcoholic beverages, brand choice and choice of beverage type than previous generations, according to Eric Shepard, vice president and executive editor of Beer Marketer’s Insights. “Everything had been going on fairly smoothly

74 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

before this generation,” Shepard told Convenience Store News. “I’m not sure why, but [millennials] have a much broader portfolio of beverages and brands than previous generations. That creates very interesting challenges.” Rather than selecting one drink as their beer or malt beverage of preference, millennials are exploring their options, making suppliers work harder to catch their attention. “There’s a huge choice of beverages that is much broader than previous generations had. Whether you’re on-premise or off-premise, there’s just a lot more choice out there and they’re exploiting that choice,” Shepard said, noting this applies to beyond alcoholic beverages. FLAVOr FAns

Breweries are responding to the call for choice by developing new flavor innovations that let adventurous beer drinkers expand their palates. The proportion of new flavored beer product launches grew from 15 percent of total U.S. beer launches in 2010 to 27 percent of total U.S. beer launches in 2015; a staggering 80-percent increase over the five-year period, according to Mintel’s Global New Products Database. The increased interest in flavor extends to hard cider, which saw volume sales grow fivefold during the same period. This growth was most strongly driven by millennial dollars. “Mintel research reveals an explosion of innovation in the flavored beer category,” said Beth Bloom, food and drink analyst for the research firm. “The fact that well over half of all U.S. alcohol drinkers say they are interested in flavored beer highlights a significant opportunity to boost participation in the beer category.”

COLD VAULT

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

Craft beer is also on the rise as the segment continues to see substantial growth despite accounting for a relatively small portion of market share. And it’s not just the flavor of beers in this segment that is attracting millennial drinkers; it’s the marketing, too. “I think millennials respond to different types of messages than brewers, distillers and vintners were used to using in the past. [Millennials] talk about experiential and authenticity, and all the buzz words,” Shepard said. “Producers have had to change the message and the way they reach out.” The key challenge for convenience store operators as craft beer keeps growing is a practical one: very few c-stores have the room to add numerous craft brands without cutting into what they already stock. As a result of this tricky balancing act, craft in the convenience channel is significantly undershared compared to the grocery channel. It’s also difficult to know how many millennials will walk away and not choose the next-best

option if their preferred craft beer is unavailable. “It’s hard to put numbers to that because the mass global brands are still mass global brands. Millennials are drinking them, too,” Shepard said. “But if you’re looking for something more local, you’re more likely to go with a craft type of beverage.” Further proving the power of craft beer, larger breweries are thinking small by acquiring craft breweries and incorporating them into their portfolios. Anheuser-Busch in particular has aggressively expanded its presence in the craft beer segment. Its most recent acquisition came in April when it announced the purchase of Devils Backbone Brewing Co. of Virginia. This marks the eighth craft brewery the beer giant has acquired. PACkAging & POUring

In addition to flavor options, another way c-store operators can cater to promiscuos millennial drinkers is to offer packaging options. This can mean selling single cans in addition to six-packs and cases. While the growth of singles as part of c-stores’ beer business may not be a strictly millennial-driven change, younger consumers are a prime example of busy, on-the-go customers who are likely to make a single impulse purchase. Growler programs are another option for c-stores that want to promote themselves as a destination for higher-quality beer, such as Georgia-based Parker’s Convenience Stores, which Age Matters: Younger Generations began piloting a growler More Brand Promiscuous program in 2012. However, Approximately how many different brands have you purchased in the last year? while growler programs can serve as a point of differentiation, they do bring WINE SPIRITS BEER extra challenges in terms of space and staffing. In the end, while millennials hold a variety of sometimes conflicting opinions, just avoiding the one-size-fits-all approach will serve c-stores well in attracting this demographic. “Anything that expands All 21+ 21-34 All 21+ 21-34 All 21+ 21-34 choice will help c-stores,” Age Group Age Group Age Group Shepard concluded. CSn Source: Nielsen QuickQuery Omnibus survey (Feb. 12-17, 2015)

76 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

CONNECTING with MILLENNIALS

on Their Terms

Tuesday, June 7, 2016 | 2:00 pm ET | Duration: 1 hour

Join this free CSNews webcast for a discussion on the millennial generation and recommendations for key digital and social connection points with convenience retailers and brands. Michelle DeLamielleure and Kelly Kees, consumer insights researchers with General Mills Convenience & Foodservice will share background on millennialsâ&#x20AC;&#x201D;who they are, how they shop at c-stores and most importantly, how to connect with them on their terms. Millennials, the largest segment visiting convenience stores today, are an important target audience for retailers and one that hold a lot of infuence. From reshaping the defnition

of snacking to redefning the role of technology in the shopping experience, they are driving change in the c-store channel as well as opening up new opportunities. In order for c-store retailers to position themselves for success, it is important to take a closer look at the distinct behavior and preferences of Millennials. The Consumer Insights team at General Mills Convenience & Foodservice, a dedicated group of researchers that uses consumer insights to drive actionable results, recently conducted a couple of studies to better understand the perceptions and desires of the Millennial generation.

Panelists:

Michelle DeLamielleure Global Consumer Insights Senior Manager General Mills Convenience & Foodservice

Kelly Kees Global Consumer Insights Researcher General Mills Convenience & Foodservice

Moderator:

Don Longo, Editorial Director Convenience Store News

www.csnews.com/GeneralMills_Webcast_2016

IN-STORE MERCHANDISING Grocery + General Merchandise + HBC + Periodicals

Gone In a Snap? If enacted as drafted, new SNAP eligibility standards could push tens of thousands of convenience stores out of the food stamp program By Renée M. Covino

nap! Just like that, a significant number of convenience stores could be wiped out of the federal Supplemental Nutrition Assistance Program (SNAP), meaning drastic drops in their grocery category sales, if new eligibility standards are enacted. SNAP, known in its earlier days as the food stamp program, provides nutrition assistance to low-income individuals and families. “Problematic” is what NACS, the Association for Convenience & Fuel Retailing, has called the proposed retailer eligibility standards, which were published in February in the Federal Register by the U.S. Department of Agriculture’s Food and Nutrition Service (FNS). Problematic because the proposed rules “went well beyond the intent of Congress in the 2014 Farm Bill,” according to Anna Ready, director of government relations for NACS, and would result in significant negative, unintended consequences for c-stores and many SNAP beneficiaries. “In fact, if enacted as drafted, our survey data shows that this rule would wipe out tens of thousands of c-stores — a very significant amount of the over 106,000 stores currently in the program,” Ready told Convenience Store News. And that clearly was not the intent or the expectation, as the industry sees it. FNS’ proposed rule will implement statutory provisions of the 2014 Farm Bill, which was supported by NACS, requiring retailers to stock more varieties of products in four “staple food” categories in order to meet SNAP requirements: meat, poultry or fish; bread or cereal; vegetables or fruits; and dairy. Specifically, retailers must stock no fewer than seven dif-

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

ferent varieties of food items in each of the four staple food categories. Prior to the 2014 Farm Bill, retailers had to stock three different varieties in each. So, the minimum number of staple food items would rise from 12 to 28. In addition, retailers would be required to offer at least one perishable food item in three categories, rather than two. NACS expected and supports these changes; the expanded requirements are not in contention. What is in contention is the fact that the definition of a “staple food” item would now exclude multiple-ingredient items, meaning a can of chicken noodle soup, a box of macaroni and cheese, a frozen pizza, a frozen dinner or a mixed fruit cup could no longer be counted in a staple food category and would not go toward a retailer’s “depth of stock” requirements. This is a dramatic shift from current rules, which permit multiple-ingredient items to be counted in one staple food category based on the main ingredient. For instance, since the main ingredient in macaroni and cheese is pasta, it counts today as one item in the bread/cereals category. The FNS’ new proposal would also add a “stocking requirement” whereby retailers would always have to have six different units of any food item in a store at any given time. So, multiplying that by the 28 staple items required, retailers would have to have a minimum of 168 SNAP items on their shelves at all times. “This requirement is unrealistic for small-format stores where shelf and storage space are limited,” Ready argued. And there’s even more bad news for c-stores in the FNS proposal. If 15 percent or more of a store’s total food sales come from items that are “cooked or heated on-site before or after purchase,” that store would be automatically ineligible to participate in SNAP. This provision alone would push tens of thousands of convenience stores

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IN-STORE MERCHANDISING Grocery + General Merchandise + HBC + Periodicals

Understanding the Food and Nutrition Service’s SNAP Proposal Pre-2014 Farm Bill 3 varieties in each of 4 staple food categories = 12 items MEAT, POULTRY OR FISH

BREADS OR CEREALS

VEGETABLES OR FRUITS

DAIRY

2014 Farm Bill 7 varieties in each of 4 staple food categories = 28 items MEAT, POULTRY OR FISH

BREADS OR CEREALS

VEGETABLES OR FRUITS

DAIRY

FNS ProPoSal 6 units of each of 7 varieties in 4 staple food categories = 168 items MEAT, POULTRY OR FISH

BREADS OR CEREALS

out of the program, according to NACS. Dennis Lane, a 7-Eleven franchise owner in Quincy, Mass., pointed out that approximately 6,000 of 7-Eleven Inc.’s 8,000 U.S. c-stores currently sell hot food. Aside from the ramifications for convenience store operators, who this will also ultimately hurt is the many SNAP recipients who use their benefits at convenience stores, the association noted. Many times, convenience stores are the only stores that are close by or open late at night when SNAP beneficiaries are looking to buy necessary food items for their families. With 50 percent of SNAP households having a family member who is a shift worker, “oftentimes the only place to go at the end of a shift to get milk or cereal is your local convenience store,” Ready explained. “Many SNAP families depend on our stores for the times when they cannot easily get to a larger retailer.”

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VEGETABLES OR FRUITS

DAIRY

Even if the new SNAP proposal is enforced, Lane said he will do whatever it takes to keep accepting food stamps. “I’ve been doing this for 42 years. We feed our communities and neighborhoods,” he said. “I don’t want to see people become collateral damage. It disadvantages folks who are already disadvantaged.” WHAT CAN BE DONE?

Help may be coming for the industry from Capitol Hill. In late April, the House Appropriations Committee passed an amendment to the 2017 Agriculture Appropriations Bill that prevents the FNS from using any funds to enact or implement its proposed rule altering retailer standards for SNAP beyond what was agreed upon by Congress in the 2014 Farm Bill. As of press time, the bill was awaiting consideration by the full House of Representatives. CSN

STORESPOTLIGHT 7-Eleven Japan

At the Cutting-Edge of Innovation 7-Eleven Japan stores operate at an efficiency level beyond the rest of the world By Don Longo

onvenience stores in Japan — particularly those of the country’s leading operator, 7-Eleven Japan, based in Tokyo — operate at a level of efficiency and innovation far beyond what’s commonplace in the rest of the world, according to two veteran convenience store industry executives who recently visited the Asian nation. Guy Strayer, foodservice director of Country Fair Inc., the Pennsylvania-based chain of 72 stores, and Australasian Association of Convenience Stores (AACS) CEO Jeff Rogut were invited by Asahi TV

of Japan to participate in filming a behind-the-scenes look at the operation and inner workings of the Japanese convenience store industry, including exclusive access to the stores, factories and innovation center of 7-Eleven Japan. What they witnessed in February was a highly professional industry that’s focused on the customer experience, and at the cutting-edge of innovation, according to Rogut. “It was an enlightening experience,” Strayer told Convenience Store News. Convenience stores are a major contributor to the Japanese economy. “They are a part of everyday life for the Japanese. They are visited frequently. They are influential in a social and political context, and they are run by some of the most successful convenience operators on the planet,” Rogut wrote in his association’s recent newsletter to members. In Japan, Strayer and Rogut visited a new 7-Eleven store; toured the c-store retailer’s factories that produce food products exclusively for its 18,000 stores; and checked out the company’s innovation and distribution center. Here are some highlights of their trip: IMMACULATE STORES

Guy Strayer (center), foodservice director of Country Fair, and Australasian Association of Convenience Stores CEO Jeff Rogut (right) participated in filming a behind-the-scenes look at 7-Eleven Japan.

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The new 7-Eleven store in Japan they visited was clean and well-organized, with clear signage and bright, well-lit shelves, and a spotless sales counter. Food cabinets displayed fried chicken, doughnuts and steamed buns, while two coffee machines (one for hot, the other for iced) used the company’s own exclusive beans for grinding. Rogut noted that an open, heated, shelved display with different teas can also be used as a chiller in the summer. There are separate hot water kettles for customers who buy cup noodles to take away.

Frozen take-home meal solutions complement the fresh foods offered.

Then, there are open food displays with more fresh foods — rice balls, sandwiches and lunch boxes, for instance — on glass shelves that can be pulled forward for ease of stocking and rotation. Opposite these is the bakery offering, with fresh, wrapped products surrounded by softer, warmer lighting. Bread is sold in either loaves, packs of four slices or packs of six slices, providing real choice and convenience, Rogut observed. The Japanese stores carry a full display of salty snacks, but have less emphasis on confectionery than their American or Australian counterparts. Magazines and newspapers are still strong sellers in Japan, and seasonal promotions like Valentine’s Day are huge. Chilled beverages, including beer and wine, are well-represented, while frozen take-home meal solutions complement the fresh food offerings. More than 70 percent of the store’s products are 7-Eleven branded, and Rogut noted that the brand of 7-Eleven Japan’s holding company, Seven & i Holdings — the same parent company of the U.S. 7-Eleven chain — is promoted on the storefront. CUSTOMER SERVICE

“One of the most striking observations I made during my visit was the approach of staff in the store,” recalled Rogut. “While there are obvious cultural differences from the Australian retail experience, the energy and commitment of the employees I engaged was really impressive.” Rogut described a culturally different service experience. At a change of shift, he observed three employees

gathered in the back office. They each recited the company pledge before running through “smiling techniques” and different methods for greeting and thanking customers. “They actually practiced smiling,” he said, “and it is very successful.” The retailer’s success is owed not only to a focus on customer service, but also actually knowing the customer. For each transaction, the cashier enters the gender and approximate age of the customer, using two rows of keys clearly marked for easy identification to ensure speed of data entry. “Imagine how powerful this information would be,” commented Strayer. “To identify products by customer demographics and by the demographics of the shoppers to a store.” Both Rogut and Strayer were impressed by the simplicity with which this important data is collected. FRESH FOCUS

Hot and cold fresh food is delivered to the store three times a day, seven days a week. “This means they are inventorying and ordering at each store for 300 fresh SKUs,” said Strayer. “And, if you’re counting, that means they are receiving delivery and rotating product three times a day, and pulling out-of-date product even more often.” These products sold fresh are checked nine times daily by staffers. “This strict attention to detail highlights just how strong the emphasis on fresh products is,” added Rogut. The 7-Eleven Japan distribution center services around 1,000 stores. About 100 trucks were being loaded at the time of Rogut’s and Strayer’s visit. The trucks are monitored, with routes set via GPS so that the timing of deliveries can be recorded. For cold items, the temperature in every vehicle can be monitored. TIME TO MAKE THE DOUGHNUTS

On a manufacturing plant tour, the two foreigners were able to review 7-Eleven’s doughnut program. Strayer reported that orders come in from the stores in

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STORESPOTLIGHT 7-Eleven Japan

three dayparts. The plant sets their production based on those orders. The doughnuts are packaged and delivered in four-packs from the third-party bakery to 7-Eleven’s distribution center, and then delivered to the stores from there. “The plant was not the most efficient, both on the design aspects and the short production runs,” observed Strayer. “They were not willing to discuss sanitation protocols, though the facility was among the best I’ve seen. The exception was the totes, which did not look clean.” The product itself is good and is primarily cake doughnuts, according to Eight flavors of doughnuts are made by a third-party supplier exclusively for 7-Eleven Japan. Strayer. “They market eight flavors, primarily with some combination of chocolate and a topping.” I visited hosts meetings weekly covering the various fresh food categories. The absolute commitment to the quality of the products was plain to see.” BEHIND CLOSED DOORS Strayer said his takeaway from both of the extended Strayer and Rogut also got the rare opportunity to sit in meetings is “that they make inroads in improving their on two of 7-Eleven Japan’s weekly meetings with suppliproduct, but really don’t focus their marketing on these ers. Rogut reported that each category team meets with changes, at least not to potential new customers. I hope their suppliers weekly to review products, discuss new to remember this lesson with our own program.” formulations and sample new innovations. Rogut concluded his observations of 7-Eleven These meetings are typically held in off-site locaJapan should inspire Australian c-store retailers. tions, and the first one they attended focused on “While our industry is without the natural advannoodle quality in lunch boxes. In the room, there were tages of urban population density compared to Japan, 35 suppliers to 7-Eleven waitwe can learn something from 7-Eleven Japan’s total ing; each had a temperatureEach category commitment to quality, innovation, systems, procontrolled cooler containing team meets with their products for review. cesses and, importantly, people in our own efforts to drive continued success.” Each product was then their suppliers “7-Eleven Japan is a machine,” added Strayer. “I tasted, measured and recorded. weekly to review Decisions were made about don’t agree with all of their methods of business, some products, discuss how they might be improved. of which may just be cultural. But the worst that I It was clear that consensus was saw was good business methods. When adding all of new formulations the guiding principle. the aspects that I saw, they are the best c-store operator I know of. In the other meeting, attendand sample new “The overall impression I have is simple: I can’t ees discussed new mayonnaise innovations. imagine that they’ve missed any fundamental aspect products for the 2.5 million rice balls sold annually through in their business model,” he continued. “I think the equivalent in the U.S. is one of our Study Group part7-Eleven Japan stores. There were about 12 suppliners, Kwik Trip. I have to believe that they have had ers in this meeting, along with the 7-Eleven Japan an opportunity similar to mine to experience what I representatives. Each supplier’s products were tasted, have learned [in that weeklong trip].” commented on and then voted on by everyone. The Strayer concluded: “The simplest and potentially supplier of the winning products, following a 9-to-3 vote, secured a new contract away from the incumbent greatest way for us to understand the fundamentals of who our customers are is to determine how we can supplier of well over 20 years. mimic the data collection of who is purchasing our “There’s much at stake in these meetings,” said goods at time of tender.” CSN Rogut. “Big gains, big losses. Every room in the center

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OUTABOUT &

Spotlighting major industry events

Tobacco Insights Times Five Tobacco Plus Expo International 2016 provided an array of highlights By Renée M. Covino

in City was alive earlier this year with March Madness, St. Patrick’s Day and Tobacco Plus Expo International (TPE) 2016, perhaps the only trade show where traditional tobacco products are featured alongside the latest in vapor products, as well as a sprinkling of tobacco machinery and equipment manufacturers. The vapor side of the show grew by roughly 5 percent this year, making up about 45 percent of the exhibitors Tobacco Plus Expo overall. International repreInternational sentation was also a healthy March 16-18, 2016 part of the mix, most notably Las Vegas from Chinese suppliers. To help attendees take in the even more eclectic mix, TPE 2016 added a half-day to the schedule, making it a three-day show. If you missed it, or just need a refresher, here are five quick hits from TPE 2016: The quality of nicotine is said to have a huge impact on e-liquid flavor (a smooth throat hit) and thus on the market. Pharmaceutical-grade, 100-percent nicotine is the direction more e-liquids are headed, predicts Tom Schrier, vice president of business development and sales for Alchem USA Inc. Its NicSelect product is touted as the only liquid nicotine that is branded. The best new products at the show were judged by local Las Vegas tobacco retailers and ran the full gamut of the industry, just like the show’s exhibitors. Grover, N.C.based Cheyenne International’s limited-edition Tropical 100s Cigars was voted the best new tobacco product. Pomona, Calif.-based Square Advanced Hookah Systems took home the best new vapor product award. Color Flame Kings, out of Sarasota, Fla., won best new tobacco accessory with a refillable torch lighter that is windproof and features electronic ignition and red and green flames. Finally, the award for best

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non-tobacco product went to E-Liquid Therapeutics, based in Fremont, Calif., for BotaniVape. Limited editions are lighting up traditional tobacco. “As adult consumers expect more choices than ever before, it’s important for retailers to provide a breadth of options,” Cheyenne International Marketing Director Jessica Fratarcangelo said of why her company believes limited editions are a good fit for the little cigar marketplace. “As manufacturers, we understand space constraints are an issue, so by providing a limited edition, we’re giving retailers something new and exciting that will turn quickly and deliver high margins.” Local legislative issues are in the spotlight and of increasing concern. At the state level, 24 states so far this year have proposed to increase cigarette taxes, increase taxes on other tobacco products (OTP), or impose new taxes on electronic cigarettes/ vapor, acccording to the Smoke-Free Alternatives Trade Association (SFATA). As of April, three of the attempts to raise cigarette taxes had died — in Florida, Indiana and New Mexico — but the rest of the state proposals were still very much pending. “As long as governments mismanage their money and look to raise revenue from somewhere else, it will be an issue for this industry,” said Cynthia Cabrera, SFATA’s executive director. Hookah is gaining traction. But retailers must be sure they evolve with the category and beware of cheaply made hookahs that will only offer a one-time sale and profit. “You need to understand a happy hookah customer is a returning hookah customer,” said Mike Ahmad, spokesperson for Square Advanced Hookah Systems. CSN

Making an Impact at M-PACT Fuels, technology and M&A were hot topics at Midwest regional tradeshow By Brian Berk

uels and technology led the way at M-PACT 2016 — an acronym for the Midwest Petroleum and Convenience Tradeshow — in terms of both educational sessions and exhibitors sporting their wares on the show floor. The regional tradeshow covering the states of Ohio, Kentucky, Illinois and Indiana, drew a large crowd to the M-PACT Show Indiana Convention Center March 22-24, 2016 in Indianapolis from March Indianapolis 22-24. The annual spring event bills itself as the largest gathering place in the

Midwest for energy and convenience industry leaders. One topic presented with emphasis was credit card and debit card skimming at the pump, a big threat facing Midwestern retailers, and all retailers for that matter. Sandra Morgenstern, president of Par Mar Oil Co. and a 2015 Convenience Store News Woman of the Year, shared with M-PACT attendees how this topic hits home for her. Her 50-store convenience chain, based in Marietta, Ohio, suffered credit and debit card skimming at its pumps. Hence, she was the perfect person to introduce “Skimming the Surface” session presenter Chris Ingram, an attorney with Vorys, Sater, Seymour and Pease LLP, who started off by pointing out that with an estimated

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OUTABOUT &

Spotlighting major industry events

29 million Americans paying for gasoline with a debit or credit card at the pump every day, skimming will not go away anytime soon. Skimmers are devices criminals use in an attempt to steal customer card information. C-stores located near interstate highways are most vulnerable to skimming crime rings, Ingram said. “You can purchase skimming devices on the Internet. And with so many different varieties of skimmers, the sky is the limit,” he cautioned. To make matters worse, criminals can install skimmers in just seconds and now have the ability to steal customer information via Bluetooth or text technology, as opposed to needing to return to the dispenser to remove the illegal device once the information has been captured. If a c-store operator has been the victim of a skimming incident, Ingram said they should follow a ninestep protocol: 1. Close the pump 2. Do not touch the device 3. Contact law enforcement 4. Contact legal counsel 5. Preserve relevant security footage 6. Document actions taken by the retailer 7. Review contracts for notice obligations 8. Notify insurer, if applicable 9. Notify affected individuals Forty-seven states have notice-of-breach laws. Alabama, South Dakota and New Mexico are the exceptions. Laws vary by state, and several charge financial penalties for retailers who do not notify affected individuals of a breach. To prevent further skimming incidents, Ingram recommended c-store retailers take the following steps: change to unique locks; install anti-tamper devices; install security cameras; use customized anti-tamper tape; train associates; and establish an inspection protocol. In regards to training associates, the attorney explained that c-store operators can take any number of steps, such as providing photos of what both normal dispensers and dispensers with skimmers look like, as well ensuring inspection logs are completed. THE M&A ENVIRONMENT

Fuels and technology topics were not the only focus at M-PACT. The merger and acquisition environment in the convenience store industry was another hot-button topic on the show floor and throughout the hallways of the tradeshow, and for good reason. “There will never be a better time to be either a seller or buyer in the convenience store and gas industry,” Terry

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In addition to several educational sessions, many exhibitors showed off their latest products at the Indiana Convention Center.

Monroe, founder and president of American Business Brokers & Advisors, told attendees during the “Retail Fuel Aggregation Landscape” educational session. Although his statement may seem contradictory as it is seemingly difficult to be a great time for both parties, Monroe explained in his presentation that “money is so cheap.” Still, he said although the environment is optimal right now, c-store retailers should not rush to sell their businesses. First, research must be conducted to determine fair market value for c-store assets, and interested sellers should know who may pay the most for their assets. Convenience stores with real estate in the Midwest generally obtain a sales price of five to seven times EBITDA, or earnings before interest, tax, depreciation and amortization, while c-stores being sold without real estate generally garner two to three times EBITDA, according to Monroe. These multiples tend to be higher in other regions, he said, specifically c-stores located on the West Coast and in the Northeast. Monroe emphasized that a c-store will not simply sell based on its cash flow. Whether or not a property sells depends on five factors: • What’s the upside for the buyer? • Where is the business located? Urban locations generally bring higher value. • Is it branded or unbranded? • What is the current competition? • Is it a fee property or leased? Once these questions are answered and a c-store operator decides to sell his or her business, they should make sure to hire an attorney experienced in such transactions, a tax accountant and an experienced intermediary, advised Monroe. “Do not attempt to sell it yourself,” he emphasized. “You are not objective, are too close to it, and you won’t get as much value as you should. You also don’t know how to appraise the property fairly. Do-it-yourself selling will devour your time, and you don’t know how to find a qualified buyer.” CSN

Spotlight on Payment Security Wayne Technology Summit examined the future of mobile payment vs. EMV By Brian Berk

wo topics dominated the Wayne Fueling Systems 2016 Technology Summit: mobile payment and the 2017 EMV forecourt liability shift deadline. In fact, the two topics are intertwined as mobile pay is far superior to EMV from a security standpoint, Chuck Cagas, executive vice president of business development for XAC Automation Wayne Fueling Systems Technology Corp., told the approximately 225 attendees of Summit the event, which took place April 4-6, 2016 April 4-6 at Austin’s JW Austin, Texas Marriott hotel. Mobile payment is “one of the best security mechanisms we have to prevent fraud,” Cagas said during his “Mobile Payment 101” educational session. “In fact, in China, they are considering skipping EMV altogether and just going straight to using mobile payment for ecommerce.” EMV is an acronym that stands for Europay, MasterCard and Visa, the three companies that originally created the security standard. As Cagas explained, mobile payment is more effective than payments made with EMV chip cards because each mobile pay transaction involves tokenization, whereby personal customer information is replaced with a token. This is much more difficult for cyberhackers to steal, he said. Aside from stronger security, the executive ticked off six other benefits of offering mobile payment at the pump: 1. Differentiate your brand; 2. Leverage location-based services; 3. Push out offers to drive customers to your location; 4. Streamline the fuel dispenser experience; 5. Push out offers/notifications while fueling to drive traffic into convenience stores; and 6. Make the payment process virtually invisible to consumers.

Keith Gardiner of Chevron (left), Chuck Cagas of XAC Automation and Wayne’s Tim Weston discussed EMV during a panel discussion.

It is unlikely, however, that mobile payment will be able to overtake pay-at-the-pump by the Oct. 1, 2017 deadline, the date upon which forecourt dispensers must have EMV chip card readers or convenience store retailers face the possibility of being held financially responsible for fraud occurring at the pump. Thus, retailers will need to make necessary EMV pump upgrades. Upgrading will prove difficult for convenience store industry players, to say the least, Keith Gardiner, IT manager for Chevron Corp.’s Americas Product Business Unit, acknowledged during an EMV readiness panel discussion. “It’s going to be a challenging process, will be expensive and may take longer than we expect. [But] we will get through this and hopefully get done by 2017.” C-store retailers hoping to get a reprieve in terms of the forecourt liability shift deadline are unlikely to receive such help, added fellow Technology Summit panelist Tim Weston, product technical leader at Wayne, which celebrated its 125th anniversary during the event. “There is no interest on the part of [the credit card] companies to extend the date because they have to pay the bill [for fraud] longer,” he noted. CSN

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Risks & Rewards NACS SOI Summit reported positive results, but the industry does face headwinds By Brian Berk

015 was a fantastic year to be a convenience store retailer, highlighted by the record instore sales the c-store industry achieved. Times were so good, in fact, that Billy Milam, president of RaceTrac Petroleum Inc., said it was “easy” to deliver industry financial data to attendees of the 2016 NACS State of the Industry (SOI) Summit. Likewise, Western Washington University Professor of Economics David M. Nelson, Ph.D., provided more good news to the record 600-plus convenience store retailer and supplier executives who assembled at Chicago’s NACS SOI Summit Hyatt Regency O’Hare hotel April 11-13. Although a April 11-13, 2016 seven-year economic recovery Chicago is often considered long-in-thetooth, Nelson expressed no concerns whatsoever that the United States is currently on the brink of a recession. He did acknowledge that annual growth in the U.S. economy is slow on an annual basis, but stressed this is actually good news. “In a word, the economy is slow. But it is better to go slow in the right direction than fast in the wrong direction,” the professor stated. Three other factors that should greatly benefit c-store retailers moving forward are: • Strong housing starts, leading to more construction workers frequenting c-stores; • Robust new vehicle sales, forecasted to reach 18 million new car sales in 2016; and • A low inflation rate. Of course, the c-store industry is not without its challenges. In the headwinds column for 2016 and beyond is: declining fuel margins as oil prices stabilize, and direct-store operating expenses, which grew faster than gross profits during every month of 2015, data from NACS, the Association for Convenience & Fuel Retailing, revealed. An even bigger concern, though, is the changing

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labor landscape. NACS Chairman Jack Kofdarali, president of J&T Management Co. Inc., said the approved minimum wage increase to $15 per hour in his company’s operating state of California will be a “nightmare.” Fellow SOI Summit speaker Joe Kefauver, managing partner of Align Public Strategies, took the labor talk even further, discussing how unions are organizing quickly and effectively. Employee compliance is another concern, he said. “With break times, holidays, etc., it’s almost impossible to not trip up,” Kefauver explained. “C-store retailers need to have a healthy, expedited, internal compliance conversation.” And as always, competition remains a headwind. “We have a target on our back,” said Andy Jones, president and CEO of Southeast c-store retailer Sprint Food Stores. He focused on quick-service restaurants (QSRs), which he said have taken many ideas from c-stores. McDonald’s all-day breakfast and Burger King’s grilled hot dogs are two prominent examples. Jones encouraged c-store retailers to turn the tables in these five ways: 1. Franchising and cleaning up balance sheets. QSRs are increasingly getting rid of owner-operator models and moving to all-franchisee models. 2. Twofers. QSRs have followed c-store retailers’ lead and now offer twofers, threefers and even fourfers to attract customers. 3. Health, wellness and sourcing. McDonald’s has committed to having 100-percent cage-free eggs by 2025, and several QSRs are eliminating preservatives and additives. 4. Importance of food safety. Problems at Chipotle Mexican Grill are a prime example. 5. Focus on millennials. Taco Bell is just one QSR chain that is using advertising campaigns to try and attract millennials. CSN

Free CSNews Webcast

Harness your Data: Drive Profts to Your Bottom Line Tuesday, June 21, 2016 | 2:00 pm ET | 1 hour Presented by:

Sponsored by:

Moderator:

Today’s competitive market requires retailers to be on their game. How can you stay one step ahead of the competition? First and foremost, you must have insight into what your customers want, and stay ahead of changes in proftability so you can take action immediately. There are many options out there to help retailers gain this kind of edge: invest in new equipment, pursue loyalty programs or investigate the best franchise options for a proftable foodservice program. However, there are several other ways to improve customer experience and your fnancial position by using the data you have all around you.

Don Longo Editorial Director Convenience Store News

Panelists:

For Convenience Stores, this means a better understanding of your POS scan data, including where the best margins exist and what merchandise is the most proftable. It also means getting a better vision of the customer experience by discovering the true effects of planograms, shelf sets and the results of promotions. Your data is there to help you make the right decisions—you just need to harness it. In this webinar, our panel of experts will review examples of real business value that you can gain today by taking advantage of your data. Topics will include: • Managing your staffng needs • Identifying critical service times • Minimizing foodservice waste • Maximizing fnancial incentives (Scandata sharing, rebates, etc.) • Product Ranking and comparison analysis • Cashier exception reporting • Improving category management

Chris Kiernan Director of Retail Applications ADD Systems

www.csnews.com/ADDSystems_Webcast_2016

Rich Hathaway Director of Business Intelligence ADD Systems

EXPERT’SVIEW

Rewriting the C-store Industry’s Talent Story 7-eleven’s Shanita Brown offers a lesson on women’s leadership

wenty-two years ago, the movie “Clerks” was released. Filmed on the cheap in the convenience store where first-time director Kevin Smith worked, the movie compared a slowwitted clerk’s day at work to Dante’s Nine Circles of Hell. It spawned a sequel, a television show, an animated series and a By Joan toth, comic book. Network of “Clerks” wasn’t the first or last time Executive Women convenience store employees were portrayed as dim, male slackers. But the movie powerfully personified a stereotype the industry has long fought: that it hires any warm body and doesn’t reward (or have) talented, committed employees. We know a different industry. One where dedicated store employees can advance to positions of leadership, overseeing teams that run multimillion-dollar locations. Where young leaders are offered meaningful assignments and given real opportunities. Where companies are involved in their communities. An industry with a diverse and innovative workforce, where one person’s idea or insight can turn things around. But what we see is not what much of the public

Convenience Store News is pleased to continue this series of exclusive educational columns by the Network of Executive Women (NEW), leading up to the 2016 CSNews Top Women in Convenience awards this fall. More than 60 female managers, executives and directors who work in the convenience store industry will be honored in

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sees. Most c-store operators are struggling to be an employer of choice. This is especially true among women, who see few role models at the top. Despite the acknowledged benefits of women’s leadership — and the industry’s pressing need for women’s insights — the c-store industry still mirrors the rest of the retail industry, where few women advance to the highest levels. Meet Shanita Brown

To advance women’s leadership, we should look at our most promising talent. Who are they? What do they need to advance? What barriers do they face? Smart c-store operators are asking these questions and offering talented and ambitious women a path to success. These operators — like Network of Executive Women partner 7-Eleven Inc. — are not only making our industry more diverse, but they’re also making it more inclusive. They are remaking their image as an employer and the industry’s image as a destination for talent. Take Shanita Brown. She started her retail career 17 years ago as a sales clerk at Dominick’s Finer Foods. Since then, she has taken every opportunity to gain new skills and seize new opportunities, which

the third-annual program. In addition to being a presentation sponsor for the Top Women in Convenience program, NEW and CSNews have partnered to develop this series of columns directed at helping corporate leaders drive more inclusive company cultures. Sponsored by:

has led to jobs of increasing responsibility in the big-box and convenience channels. Today, she’s a business systems manager for 7-Eleven, overseeing 15 commissaries that service nearly 7,000 stores across the country each day. Her responsibilities include managing P&Ls, collaborating with IT, developing training materials, contingency planning for emergencies, and more — much more. Shanita serves as a role model for the many women, and women of color, who want to succeed in the c-store industry. Her story illustrates the opportunities possible in retailing. “Retailing requires a sense of urgency, attention to detail and ability to consistently execute at a high level,” Brown said. “But it also provides exposure to business operations, marketing, finance and manufacturing, which has helped me accelerate my personal and career growth in an aggressive environment.”

“My path has demonstrated that a mother, wife, student, minority or colleague can effect change across all lines of an organization.” — Shanita Brown, 7-Eleven Inc.

Her career strategy has included volunteering for, and positioning herself for, ever-challenging roles that require critical thinking and hard work; roles that have defined her as a talented person, who happens to be a woman. “My path has demonstrated that a mother, wife,

student, minority or colleague can effect change across all lines of an organization,” said Brown. Shanita’s story demonstrates how companies like 7-Eleven are working to level the playing field. 7-Eleven’s Young Professionals Network, for example, helped Shanita familiarize herself with the goals and workings of many departments and allowed her to collaborate with peers in a noncompetitive environment. “By interacting in this diverse group, we all gain — and empower — new insights,” she said. Her belief in the power of diversity and inclusion has compelled Shanita to tackle gender bias head-on. She frequently encourages young women to pursue degrees and careers that require strong math, technology and analytical skills — skills that lead to senior-level roles. And she is not afraid to talk about the common workplace biases that hold women back from assignments that would lead to senior roles. “I’m committed to identifying ways to break through barriers,” she said. “I’m committed to advocating for other women roles and aligning key stakeholders to effect change.” If more c-store leaders followed the lead of their peers at 7-Eleven, the industry would shed its “Clerks” image and become a real destination for the nation’s talent. CSN Joan Toth is president and CEO of the Network of Executive Women, Retail and Consumer Goods, a learning and leadership community representing 10,000 members, 750 companies, 100 corporate partners and 20 regional groups in the United States and Canada. 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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Petroleum/Equiment

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CLASSIFIED Equipment/Supplies

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102 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

Age Verifier

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Plastics

General Merchandise

DAVY CROCKETT HATS SELL BY THE TENS OF THOUSANDS AT $4.00 EACH. Silver Fox tails are a good seller!

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Rabbit skins come in White, Natural colors, Cheetah, Tiger, Leopard, Ocelot and Black.

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WWW.CSNEWS.COM | JUNE 2016 | Convenience Store News 103

CLASSIFIED Financial Services

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Equipment / Supplies

Wholesale Text Program

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104 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

HOTPRODUCTS Special Advertising Section

ADINDEX Ability Connection Texas .........................22 Add Systems ..............................................91 Advance Pierre ..........................................19 ....................................www.advancepierre.com

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

Alon Brands ...............................................37 ....................................www.alonbrands.com Altria Group Distribution Company ........2-3 ..................................www.insightsc3m.com American Coalition for Ethanol ...............24 ....................................www.flexfuelforward.com BakeNJoy ....................................................51 ....................................www.bakenjoy.com B.O.V. Solutions .........................................75 ....................................www.bovbeverage.com

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

Buc-ees.......................................................Outsert ............................owner@buc-ees.com Cash Depot.................................................18 ....................................www.cdlatm.com Cheyenne International ...........................85 ....................................www.cheyenneintl.com Del Monte Fresh Produce NA Inc. ...........21 ....................................www.freshdelmonte.com Follett Corporation ....................................73 ....................................www.horizoneliteice.com Forte Product Solutions ............................20 ....................................www.forteproductsolutions.com General Mills Inc. ......................................77 Goya Foods, Inc .........................................5 ......................................salesinfo@goya.com Growth Energy ..........................................81 ....................................www.ethanolretailer.com The Hershey Co. ........................................7 ......................................www.hersheyconvenience.com Imageworks Display .................................69 ....................................www.imageworksdisplay.com

Kollin Stagnito Chief Operating Officer 224-632-8226 kollinstagnito@stagnitomail.com Ned Bardic Senior Vice President/Partner 224-632-8244 nbardic@stagnitomail.com Korry Stagnito Chief Brand Officer 224-632-8171 kstagnito@stagnitomail.com

Inline Plastics Corp. ..................................87 ....................................www.inlineplastics.com Iowa Rotocast ............................................59 ....................................www.irpinc.com J&J Snack Foods Corp. .............................61 ....................................www.jjsnackfoodservice.com J.T. International USA, Inc. ......................49 ....................................800.966.9709

Ron Lowy Group Brand Director 330-840-9557 rlowy@stagnitomail.com

Kraft/Heinz Crystal Light .........................33 ....................................www.kraftfoodservice.com KT&G...........................................................23,25 ..............................877.580.5506 Life Support................................................27 ....................................www.lifesupport.com Liggett Vector Brands ...............................31 ....................................877.415.4100

Michael Hatherill Business Development Manager 201-855-7610 mhatherhill@stagnitomail.com

Logic Technologies ...................................10-11 ..............................www.logicecig.com Lost Art Liquid ...........................................107 ..................................www.LostArtLiquids.com McKee Foods/Little Debbie ......................54-55..............................www.littledebbieCstore.com McLane Company......................................15 ....................................www.mclaneco.com

Steve Lichtenstein Vice President/Southeast Regional Manager 201-855-7613 slichtenstein@stagnitomail.com

MilkPep .......................................................17 Mondelez International Group ................35 National Tobacco Co. ................................65 ....................................800.331.5962 Nestle Professional Beverage ..................57 ....................................www.nestleprofessionalusa.com

Terry Kanganis Account Executive & Classified Advertising 201-855-7615 tkanganis@stagnitomail.com

PFS Brands .................................................70-71 ..............................www.pfsbrands.com Phillips 66 ..................................................41 ....................................www.video.76.com Procter & Gamble ......................................67,108 RJ Reynolds Tobacco Company ..............9 ......................................www.engagetradepartners.com

Rachel McGaffigan Northeast Regional Sales Manager 508-385-2524 rmcgaffgan@stagnitomail.com

Subway.......................................................45 ....................................www.subway.com Swedish Match ..........................................39,47...............................customerservice@smna.com Swisher International...............................43,79 ...............................www.swishersweets.com Tillamook Country Smoker, Inc. ..............63 ....................................www.tcsjerky.com

Roz Gilman Ad Manager 314-403-4753 rgilman@stagnitomail.com

Tyson Foods ...............................................13,53...............................www.tysonconvenience.com Universal Merchant Services ...................Outsert Wm Wrigley Jr. Company ........................CV1

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.

WWW.CSNEWS.COM | JUNE 2016 | Convenience Store News 105

GETTINGTOTHECORE

Snack Attack

Cravings, promotions drive snack-item purchases at c-stores

or convenience store operators wondering how to get more snack items in their customers’ baskets, the answer may be as simple as a game of “Let’s Make a Deal.” According to a recent survey by Carbonview Research, sister company of Convenience Store News, 72.5 percent of c-store foodservice shoppers indicated they are enticed to add a snack to their baskets if there is a price deal, discount or promotional message.

No Other Purchase Necessary

Nearly two-thirds of c-store foodservice shoppers purchase snacks as standalone buys.

Has a price deal, discount or promotional message ever influenced you to purchase a snack item at a convenience store? total

How often do you purcHase foodservice at a c-store 2-3 times per week or more once a week or less

72.5% 27.5

81.8% 18.2

66.9% 33.1

Heavy purchasers of c-store foodservice are more likely to add a snack when seeing a deal, discount or promo.

Base: 501 c-store foodservice shoppers

How often is the purchase of snack items the primary reason you go inside the convenience store? Always Often Sometimes Rarely Never

total

by age: 18-24

25-34

35-44

10.1% 35.5 42.9 10.1 1.4

12.2% 28.0 54.9 4.9 0.0

12.2% 36.7 39.8 10.3 1.0

6.3% 36.5 46.9 9.3 1.0

Millennials may be the “It” consumer of the moment, but 57.3 percent of those aged 55-64 walk into a c-store often or always to buy a snack. 45-54

5.5% 41.8 41.8 8.8 2.1

55-64

65+

17.3% 40.0 29.3 12.0 1.4

7.0% 23.3 44.2 20.9 4.6

Base: 501 c-store foodservice shoppers

Thinking about your last snack purchase, which best describes the reason you made this purchase? total

To satisfy a craving I had To indulge or treat myself 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.

106 Convenience Store News | JUNE 2016 | WWW.CSNEWS.COM

To hold me over until my next meal It was an impulse buy Base: 501 c-store foodservice shoppers

by gender: male

37.9% 34.1% 29.3 33.0 25.3 27.7 7.5 5.4

female

42.2% 25.3 22.8 9.7

While the majority of c-store foodservice shoppers buy snacks to satisfy a craving, women do so more often than men.

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FEEL THE BURN:

JUNE 2016

Who smokes most (and least) How todayâ&#x20AC;&#x2122;s 40 million smokers break down by gender, age + more

Regulation nation!

The legal issues that matter mostâ&#x20AC;&#x201D;and what you can do to beat the heat!

The future of tobacco

Making sense of sales figures, smoking rates, and other tobacco trends

Also: New Products Showcase

Who Smokes Cigarettes The Most, Least?

By Age: By Income: By Region: By Ability: By Education: By Race/Ethnicity: By Sexual Orientation:

Female (14.8%)

Male

(18.8%)

Ages 65+ (8.5%)

Ages 25-44 (20%)

Below poverty line

At/above poverty line

(15.2%)

(26.3%)

West

Midwest

(13.1%)

(20.7%)

Northeast

South

(15.3%)

(17.2%)

Those with disabilities

Those without disabilities

(16.1%)

(21.9%)

Graduate degree

(5.4%)

GED certifcate (43%)

Asians

Native Americans

(9.5%)

(29.2%)

Multiracial Adults (27.9%)

Straight

(16.6%)

LGBT

(23.9%)

LESS LIKELY LESS LIKELY LESS LIKELY LESS LIKELY LESS LIKELY LESS LIKELY LESS LIKELY LESS LIKELY

By Gender:

MORE LIKELY MORE LIKELY MORE LIKELY MORE LIKELY MORE LIKELY MORE LIKELY MORE LIKELY MORE LIKELY

The number of cigarette smokers dropped about 20 percent between 2005 and 2014â&#x20AC;&#x201D;down to an estimated 40 million American adults today. But who is that smoker most likely to be?

How Does Cigarette Use Compare to Other Tobacco Products? Cigarettes and other combustibles remain the most prevalent form of adult tobacco use. A 2013 survey by the Centers for Disease Control and Prevention found the breakdown of total-tobacco smokers to be the following: Cigarettes (18%), Cigars/ Cigarillos/Filtered Little Cigars (2%); Pipes (.3%); Water Pipes/Hookah (.5%); E-Cigarettes (1.9%); Smokeless Tobacco (2.6%). SOURCE: CDC. CURRENT SMOKING AMONG ADULTS IN 2014. JUNE 2016

SPECIAL SUPPLEMENT: COMBUSTIBLES

Regulation Nation! Key regulatory issues facing combustibles and what can you do to beat the heat.

overnment ofcials at all levels are clamping down on combustibles. And with so many regulations in progress, it can be tough to know where to focus—or what the impact will be. We asked Tom Briant, executive director of the National Association of Tobacco Outlets (NATO), to help us cut through the clutter. Here’s a summary of our chat:

Are there other emerging issues? One efort to watch is the push for a “tobacco-free generation,” which has ranged from an attempt at an all-out tobacco ban (which failed in Westminster, Mass., in 2014) to a proposed ban on tobacco for anyone born afer 1995 (under consideration in Brookline, Mass. this year).

Are federal or local regulations the bigger threat?

How do the new FDA regulations impact retailers?

In the near term, the greatest impact on retailers will be from local tobacco restrictions, says Briant. “We have seen a signifcant increase in the number of local ordinances being proposed at a city or county level,” he says.

Most of the new FDA rules fall on manufacturers, not retailers, says Briant. And the biggest near-term impact is on e-cigarettes. In terms of combustibles, he says, the FDA said it intends to issue a future regulation that would eliminate characterizing favors in all cigars, cigarillos and little cigars—which would be a signifcant reduction in favored cigar products available for sale through retail stores.

What trends are we seeing across these efforts? According to Briant, there’s been increased activity in favor bans, coupon redemption bans, minimum package size and prices set by local lawmakers, and minimum purchase age increases (including California just last month). Which issues will impact short-term sales most? Te favor bans and minimum package and pricing laws, says Briant. Tey literally reduce the number of products you can sell and, in many cases, prompt customers to shop in the next city. You not only lose the tobacco sale, says Briant, but the potential gas, beverage, snack or other sundries sale at the same time. “Te fnancial impact on the average convenience store could be very great,” he says. Where is most local activity taking place? Massachusetts is number one—by far—says Briant, followed by California and Minnesota. But there are other local pockets, like Chicago, that have also been very active.

What can retailers do to prepare and respond? Retailers should participate in the legislative process, says Briant. Tat means being involved with your state convenience store association or another related group, and having direct contact with lawmakers. “We’ve seen it time and again, if a legislator receives 10 emails—all opposing a particular issue—they take notice.” How else can retailers protect their businesses?

“The fnancial impact on the average convenience store could be very great.” — Tom Briant, on local favor bans and minimum pricing laws.

SPECIAL SUPPLEMENT: COMBUSTIBLES

Invite elected ofcials out to your stores and give them a tour, says Briant, and explain not only how you’re taking action to comply with current regulations, like preventing tobacco sales to minors, but also how all the taxes and regulations burden your business and impact sales. COTC

JUNE 2016

Is There a Future in Tobacco? Making sense of smoking declines, sales lifts, and the combustibles outlook

igarette smoking rates are at all-time lows—down from 43% of the adult population in 1965 to just 17% in 2014, according to the Centers for Disease Control and Prevention (CDC).

increased by 3.6%, and volumes increased by 0.9% (up from a 0.5% volume decline the year prior), with nearly 67% of sales taking place in the Midwest and South.

And while the decline has been steady since the mid-60s, there have been signifcant drops in recent years. In 2005, for instance, nearly 21 percent of American adults smoked regularly. But by 2014 that number had plunged (nearly 20 percent) to about 17 percent—to the 40 million adult cigarette smokers we see today.

“It was really good to have the numbers we did, when fat is generally considered a win,” says Kraig Knudsen, a former industry consultant who now serves as category manager for tobacco at Circle K. “It was a perfect storm of fuel prices and other economic issues that provided a bit more expendable income. And consumers were applying that back into the category.”

The smoker profle So, who’s still smoking? More men than women. And the rate tends to be highest among the poor and less educated, and more prevalent among Millennials and Generation Xers than Boomers and older populations. (Tough adults between the ages of 18 and 24 did see the biggest decline in cigarette smoking from 2005-2014.) Tere have also been historic shifs in how much smokers are actually consuming—and even year to year declines. Between 2000 and 2011, for instance, consumption of cigarettes dropped nearly 33%, according to the CDC. And from 2012 to 2013 alone, the number of cigarettes sold by the major tobacco companies decreased by 4.1%, according to the Federal Trade Commission’s latest Cigarette Report. A unique year In spite of all that, the industry experienced a surprising lif in the last year. Nielsen data tell us that, in the 52 weeks ending March 12, 2016, total cigarette sales in the convenience channel

SPECIAL SUPPLEMENT: COMBUSTIBLES

Ann Flint, senior category manager of tobacco for Cumberland Farms, says that lif also translated to sales in her stores, which are concentrated in the Northeast and in Florida. “We saw cigarettes increase overall and premium cigarettes grow,” she says. Another factor driving cigarette sales is a growing dissatisfaction with vaping products, which some smokers had turned to as a more economical way of getting nicotine, says Don Burke, senior vice president of Management Science Associates. “People found that combustibles provide far better satisfaction in terms of mouth feel and throat feel,” he says. “What we’re seeing is that consumers with a little more money are now going back to combustibles.” Where the gains are More pocket money also seems to have provided smokers an opportunity to trade up. Premium cigarette sales were up 3.8% in the last 52 weeks, according to Nielsen, and volumes were up 1.2% (reversing a .2% decline the year prior).

JUNE 2016

And consumers haven’t just been indulging, they’ve also been stocking up across the board. Sales of cartons rose .3%—overturning a 5.2% decline the year prior.

Reynolds’ CEO Susan Cameron admitted she could see the day when people might forgo combustibles entirely.

What about cigars? So, is the rising tide only lifing cigarette sales? Well, according to Nielsen, cigar sales rose 4.4% and volumes shot up by 10.5% in the last 52 weeks, bettering returns of 2% (sales) and 6.7% (volume) the year prior. In terms of size, there’s a continuing shif to cigarillos. And while recent increases in that segment come from an increase in promotion (which may have hurt proftability for retailers), according to Don Burke, “it has helped in terms of consumption.” Little cigars, which had been growing at a decent pace, did not see the same gain because “in many areas they’re now being taxed like cigarettes,” he says. Flavors, which had also been gaining popularity, seem to have tapered of too. Flavored cigar sales saw just a .7% increase, compared to gains of 2.1% the year prior, and volumes were only up 2.6% compared to 6.2%. Future prospects for favored cigars will likely hinge on the FDA, though, because the agency’s long-awaited deeming regulations, released in May, not only pulled cigars in under its authority but also stated an intent to enact a ban on characterizing favors in cigars.

minimum purchase age increases, coupon bans and minimum package and pricing limitations. And 24 states have proposed tobacco tax increases on the table. But since most legislatures have adjourned for the summer, it’s too early to see how those proposals will shake out, says Briant. Continued smoking declines To be sure, no one is expecting U.S. smoking rates to reverse— but the CDC says it won’t even be happy if they taper of. Te agency says it wants to further reduce the smoking rate to 12% (or lower) by 2020.

Regulation nation

Even tobacco executives are clear-eyed about those projections. Last year, when the Wall Street Journal asked Reynolds American’s Susan Cameron what the typical smoker will look like in 10 years, she said it’s too early to say because the science isn’t all in on vaping. But she admitted she could see the day when people might eventually forgo combustibles entirely.

To be sure, the fact that combustibles have done so well overall is noteworthy in such a tough regulatory climate—one that shows no signs of lightening up.

“Everybody understands what’s not in that vapor—burning plant,” she said. Te outcome, she explained, will be largely related to the consumers’ ability to make educated choices.

While the FDA rules won’t have a tremendous bearing on c-stores in the near term, local tobacco laws and regulations are a substantial threat, says Tom Briant, executive director of the National Association of Tobacco Outlets (NATO).

What’s in store?

“We’ve seen a signifcant increase in the number of local ordinances being proposed,” he says, including favor bans,

Until that all shakes out, combustibles will continue to be a huge driver of c-store sales. Data from Convenience Store News’ Industry Report show that in-store sales reached a record $213 billion last year, with tobacco (cigarettes and OTP) contributing 35.8% of that.

Where The Gains Are: Cigarette Sub-Segments C-store dollar sales change vs. year ago C-store unit volume change vs. year ago +3.8% +1.2% Premium

+2.8%

+6.6% +5.2% +3.6%

+2.9%

+1.5%

+0.2% Branded Discount

-1.5%

Fourth Tier

Imports

+3.6% +0.9% TOTAL

SOURCE: NIELSEN, 52 WEEKS ENDING MARCH 12, 2016

Private label JUNE 2016

SPECIAL SUPPLEMENT: COMBUSTIBLES

Wine And Grapes Endangered? The FDA plans a future ban on characterizing cigar favors. But in the last year, favors represented 52% of c-store cigar sales. Here’s how the three top-selling favors broke down by region.

Northeast 1 2 3

Wine Sweet Grape

$26.2 $21.2 $14.8 South

1 2 3

Wine Grape Sweet

$119.5 $55.4 $52.1 Midwest

1 2 3

Wine Sweet Grape

1 2 3

Sweet Grape Wine

$33.7 $33.4 $20.0 West

SOURCE: NIELSEN. 52 WEEKS ENDING MARCH 12, 2016

$34.5 $26.4 $18.5

And this year has also been of to another strong start.

Increase your market basket

“We believe combustibles look good for the rest of 2016 as long as disposable income remains high and there are no unforeseen tax/ regulatory hurdles,” says Cumberland Farms’ Ann Flint.

Pushing for market-basket growth is another good strategy, says Management Science’s Don Burke. Consumers may have adjusted to the impact of lower gas prices, he says, so targeted eforts may be required to further boost in-store sales.

But it’s unlikely that future years will see as signifcant a performance. “I think we’ll return to a more normal trendline of 2.5 to 4% declines,” says Circle K’s Knudsen. “It’s just a matter of how soon things will change.” Manage your SKUs So, what can c-store operators and tobacco category managers do in the meantime? Carefully managing SKU selection is a crucial start and, increasingly, an important way to protect your investment, says Knudsen. “We no longer have the convenience of having manufacturers guarantee their items,” he says, “so if you’re carrying an obscure SKU selection, and a product goes out of code, you’re stuck with it. You’re really at risk for product that you’re not able to turn.” Of course, proper category management can be difcult if tobacco company agreements override your ability to make local decisions. Anne Flint says she uses a variety of proprietary and industry data sources to optimize assortment but that manufacturer agreements don’t restrict her evaluations because Cumberland Farms owns and controls its own merchandising racks. “Tis allows us to make decisions based on evolving consumer demands versus manufacturer mandates,” she says.

SPECIAL SUPPLEMENT: COMBUSTIBLES

One way to do that? Keep capitalizing on the trade-up consumer, he says, with a continued focus on premium tobacco. Another way is to promote complimentary categories like packaged beverages, chocolate, and gum, which Burke’s research shows were purchased alongside 49% of cigarette sales. And no surprise here: Mobile coupons, apps and other digital innovations are increasingly being viewed as a smart, efcient way to do all of that. Altria Group’s CEO Marty Barrington told attendees at February’s Consumer Analyst Group of New York conference that the company saw success in its launch of mobile coupons last year, with nearly 100,000 retailers accepting them afer just several months in the market. Of course, it’s not as if any one marketing or promotional efort will put you over the top with combustibles, in 2016 or beyond— it’s really a compilation of things, says Circle K’s Knudsen. “You have to look at what your strengths are, and how you compare to your competitive market,” he says. “And then you really have to decide, ‘What is my identity as a retailer for tobacco products’.” Because you just may get a diferent answer than in years past. Te good news is that, even with all the smoke swirling around the category, most insiders say combustibles will hold strong for the foreseeable future—it’s a category that, according to NACS, has no end in sight. COTC

JUNE 2016

Be a part of Multicultural Retail 360 Summit! The retail industry’s top multicultural marketing event Optimizing the Omni channel Experience for Multicultural Consumers Learn how to engage with nontraditional consumer segments and what organizational and strategic requirements are necessary to grow your retail business through a multicultural focus!

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Plus, cutting-edge educational sessions include speakers from Facebook, Jewel-Osco/Albertsons, Zumba, Gannett, AT Kearney, AARP and more! • Mobile usage by multicultural consumers • Experiential activations celebrating Hispanic, African-American and Kosher communities • How companies can make themselves more relevant and interesting to multicultural consumers

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BIC Special Edition International Sports Series Lighters

BIC Consumer Products USA Global sports fans can faunt their allegiances with the 11 designs in BIC’s new Special Edition International Sports Series. Each lighter features a stylized version of the national fag and the name of a different country, with England, Germany, the United States, Columbia, and Brazil (host of this summer’s Olympic Games) among those in the series. The U.S.-made collection has a suggested retail price of $1.89 per lighter. Bicworldusa.com

Cheyenne Limited-Edition Tropical 100s Cigars Cheyenne International Cheyenne Cigars’ new citrus-infused Tropical 100s Cigars is the brand’s frst limited-edition style. Co-created by consumers who voted on whether a proposed strawberry, tropical, or wine favor would make it onto store shelves, the tropical cigar was also named “Best New Tobacco Product” at Tobacco Plus Expo in March. Each cyan-colored pack, available through the summer months, houses 20 fltered cigars. Cheyenneintl.com

Swisher Sweets Cherry Dynamite Cigarillos Swisher International Now in season: Swisher Sweet’s Cherry Dynamite cigarillos. The new limited-edition variety delivers a blast of cherry taste and comes in a resealable, two-count pouch with a “Sealed Fresh” guarantee. The product is available nationwide in “2 for 99 cents” and “Save on 2” pricing options designed to help drive incremental volume. Swisher.com

Little-N-Wild Pipe Tobacco Cigars Good Times USA Good Times is adding two new favor profles—wine and peach—to its Little-N-Wild line of pipe tobacco tipped cigars, which includes classic, sweet, mango, fruit punch, watermelon, kush and blueberry varieties. Each individually-wrapped cigar is made from a blend of pipe tobaccos and packaged in 25-count uprights. The brand is also debuting wood tips for the new wine favor, and for the brand’s existing classic and mild varieties. Goodtimestobacco.com

LEX12 Temptation And Red Krush Little Cigars S&M Brands Apple (“Temptation”) and cherry (“Red Krush”) are the newest favors in S&M Brands’ LEX12 line of little cigars. Available in regular and wides, the varieties join an existing portfolio of pipe (“Classic”), menthol (“Menthol Chrome”), clove (“Sweet Chaos”), wine (“Napa Night”), and apricot brandy (“Carnal Ecstasy”) favors. The new varieties are available in 12-count embossed tins or convenient, 4-count boxes—adding eight retail SKUs to its 113-SKU LEX12 line. Smbrands.com

SPECIAL SUPPLEMENT: COMBUSTIBLES

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TAKE ROOT WITH THE FASTEST GROWING CIGARETTE SEGMENT. $1BILLION+ NATURAL TOBACCO CIGARETTE SALES IN CONVENIENCE*

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