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    Slow & Steady Improvement

    Business should be good as consumers get a $230-billion windfall from lower gas prices

    Lower Unemployment & Slowly Rising Wages Portend Better Economic Times Ahead

    With the unemployment rate dropping, real wages rising slightly and oil prices plummeting to their lowest levels in years, business conditions in 2015 are expected to improve for both the national economy and convenience store retailers.

    ?There are a lot of positives going forward,? said Maureen Maguire, founder and CEO of ThinkResearch and chief analyst for Convenience Store News? annual Industry Forecast Study. ?The price of gas is dropping significantly and that amounts to an enormous tax break for the American consumer.?

    However, Maguire cautioned that although the drop in the unemployment rate to 5.8 percent in November 2014 is a significant decline from the previous year, the nation hasn?t seen the kind of robust job growth that usually accompanies a drop in the unemployment rate.

    ?Unlike past recessions where the aftermath rebound is usually stronger, this recovery feels like a long, slow uphill march,? said Maguire.

    Various sources suggest American motorists were saving $630 million a day on gasoline in late 2014 compared to what they paid at June 2014 prices, and that the annual savings would put $230 billion of disposable income into consumers? pockets if prices were to stay this low for an entire year.

    Still, the drop in oil prices also carries a potential negative impact: the fear that producers will no longer have an incentive to produce as much oil, running the risk of stalling what has been the great energy boom in the United States.

    A report last month by the U.S. Energy Information Administration (EIA) downplayed that risk. The report noted that despite lower crude oil prices, U.S. oil production is expected to increase in 2015. ?Based on the most recent data released by North Dakota?s DMR (Department of Mineral Resources), drilling and production activities in the state have not slowed, despite the significant decline in domestic crude oil prices since July 2014. Oil production in September 2014 ? the latest data available ? rose 5 percent from the prior month.?

    Other risks and uncertainties that could adversely impact Maguire?s generally positive forecast for 2015 are:

    • Lackluster growth in Europe. ?There?s fear of a recession in the European Union,? she noted.
    • A slowdown in China?s economy, which would put more downward pressure on world prices.
    • Housing prices and starts fade under potential interest rate increases by the Federal Reserve, which appears to have finished with its program of pumping additional dollars into the economy.
    • Geopolitical concerns such as ISIS and unrest/wars in Iran, North Korea, Syria and Ukraine.
    • Pandemic concerns such as a resurgence of Ebola, particularly domestically with global travel during the holiday season.

    On the positive side, overseas capital continues to flow into the U.S., consumer confidence is trending up and the latest retail sales figures are looking solid. In November, the National Retail Federation (NRF) reported retail sales increased a better-than-expected 0.6 percent seasonally adjusted over October, and 3.2 percent unadjusted over November 2013. The gain was consistent with NRF?s holiday sales forecast of 4.1 percent over the prior holiday season.

    Convenience store retailers also appear to be feeling pretty good about their business prospects for 2015. More than eight out of 10 retailers (86 percent) surveyed in CSNews? first-ever Retailer Forecast Study said they expect their average sales per store to increase this year over 2014. Only 8 percent expect a decline, and 6 percent feel their business will be flat this year. Overall, retailers in the survey are forecasting an average net change of plus 3.7 percent in sales per store this year (see story on page 48).

    Maguire noted that it is a good sign the country continues to add jobs, even though job creation is still running below that of a ?normal? recovery. However, as unemployment continues to decline, she said the demand for workers will increase and wages will go up.

    The bottom line: ?I expect 2015 to be better than 2014 ? a little bit better,? she said.

    MOTOR FUELS

    The lower prices seen recently at the pump are expected to last throughout 2015. The average retail price per gallon is forecast to be $2.80 in 2015, a massive 21-percent decline compared to the estimated $3.56 average retail price per gallon in 2014. Likewise, diesel fuel will join the party, forecast to average $3.07 per gallon in 2015 vs. an estimated $3.82 last year.

    These price projections assume a status-quo oil environment. An OPEC pledge to cut oil production, any sort of geopolitical turmoil or a domestic natural disaster disrupting refinery production would certainly cause gas prices to rise, perhaps significantly so.

    Convenience store fuel volume in terms of billions of gallons is expected to remain flat. C-stores are forecast to sell 148.5 billion gallons of fuel in 2015, just a fraction of a percent increase compared to 2014?s projected figure of 148 billion gallons sold.

    Due to the large decline in motor fuel prices, c-store fuel sales in terms of dollars are forecast to drop more than 20 percent. C-stores are expected to sell $512 billion worth of fuel in 2015, compared to the estimated $649.3 billion in 2014.

    Despite projections for lofty fuel price declines in 2015, convenience store retailers are not as convinced the downward trend will last.

    Overall, respondents in CSNews? inaugural Retailer Forecast Study predict fuel sales will decline just 0.3 percent in 2015, significantly below the predictions rendered by the CSNews Industry Forecast Study.

    Among the chain and single-store operators surveyed in November, 37 percent expect fuel sales to decrease in 2015, while 35 percent expect an increase and 28 percent believe sales will stay the same vs. 2014.

    As for the trends c-store operators expect to be prominent in 2015, a majority of the Retailer Forecast Study respondents expect low gas prices to dominate talk. Some cited the fact that lower gas prices could pad consumers? wallets, leading to increased in-store merchandise sales. Others wonder how long fuel prices will remain at depressed levels.

    Growth in compressed natural gas sales; the possibility of a national gas tax increase; and potential approval of the Keystone XL Pipeline, a 1,179-mile crude oil pipeline connecting Canada and the United States, were also cited as noteworthy topics by respondents.

    FOODSERVICE

    Retailers expect foodservice sales in the convenience channel to stay relatively hot in 2015. A majority of the respondents (81.3 percent) to CSNews? retailer survey predict that their per-store sales in the foodservice category, which encompasses prepared food as well as hot, cold and frozen dispensed beverages, will increase in 2015 compared to the prior year.

    Among the remaining respondents, 14.6 percent expect their foodservice sales to stay the same, while the rest (4.2 percent) anticipate a decrease in the category.

    Overall, the net foodservice sales change forecasted by retailers for the new year is an increase of 6.2 percent. As one retailer put it, this category will continue to be a ?solid growth engine.?

    Healthy eating tops the list of trends retailers believe will have the biggest impact on their foodservice business in 2015. Increased competition, customer demand for higher-quality food from c-stores, and more awareness of c-stores as a foodservice option also made the list.

    TOBACCO

    Despite making up the lion?s share of the tobacco category, cigarettes continue to hang over retailers? heads like a black cloud. In CSNews? survey of c-store operators who sell tobacco, the majority cited cost and pricing when asked what will have the biggest impact on the segment in 2015. One retailer even went so far as to say ?this is a dying category.?

    However, the numbers don?t paint such a stark picture. According to the CSNews Industry Forecast Study, the segment is expected to fare better this year. The data indicates cigarette unit volume per store is projected to dip just 1.1 percent in 2015. This is compared to the estimated 3.6-percent decrease in 2014 and 0.9-percent decrease in 2013.

    Also on the brighter side, retailers have higher expectations for other tobacco products (OTP) and see continued growth specifically in electronic cigarettes and vapor products. One retailer noted that ?e-cigarettes could be very popular in 2015,? while another added that ?e-cigarettes are important, but staying on top of the quick-moving trends is more important.?

    Potential regulation does raise some concern. The Food and Drug Administration has proposed deeming regulations, which take aim at e-cigarettes and cigars among other segments of OTP, but there is no timeline for final implementation (see story on page 54).

    In the meantime, CSNews Industry Forecast Study data projects OTP unit volume per store to remain flat with a 0.2-percent decline in 2015, compared to an estimated 1.9-percent increase in 2014 and 5.7-percent jump in 2013. The forecast also calls for a 3.5-percent rise in sales per store for 2015.

    The real head scratcher for 2015 may be electronic cigarettes. Growth in this segment skyrocketed in 2013 ? with actual unit-volume-per-store growth at 169 percent. The original forecast numbers for 2014 indicated much of the same, with unit volume growth pinned at 130 percent. However, with new data coming in, the CSNews study now estimates the final 2014 growth number to be closer to 42.9 percent and 2015 volume is anticipated to flatline.

    Whether these surprising numbers point to a reasonable leveling off of electronic cigarettes ? previous growth came off a relatively small base ? or if e-cigarettes are falling victim to innovation in the vapor category, remains to be seen.

    COLD VAULT

    C-store operators hold a largely optimistic view on their cold vault prospects for 2015, particularly regarding alcohol. More than half of surveyed retailers expect average sales per store of beer and malt beverages to increase, while 61 percent expect per-store sales of packaged beverages to increase.

    Retailers? estimations of the net change for each segment of the cold vault are more cautious than what the CSNews Industry Forecast Study projects, particularly regarding packaged beverages. Interestingly, while more retailers expect beer sales to increase than expect packaged beverage sales to increase, the estimated net change is higher for packaged beverages.

    Positive expectations for malt beverages may be due to the category growing a higher-than-expected estimated 3.1 percent by volume per store in 2014, with 3.7 percent forecast for 2015. Dollar sales per store increased even more, growing by an estimated 3.8 percent with growth of 4 percent expected for 2015.

    ?Solid but unspectacular growth is likely,? commented one retailer.

    Numerous c-store operators mentioned the continued importance of craft beer, whose rate of growth is slowing even as the segment sees strong expansion. Unit volume per store grew an estimated 25.4 percent in 2014 and is expected to increase 21.5 percent in 2015, while dollar sales per store grew 22.5 percent in 2014 and are expected to increase 17.1 percent this year.

    While retailers predict positive results from craft beer and growler sales, some expressed concern about the decline in premium brews and low margins in the premium segment.

    Packaged beverage sales are also likely to grow in 2015, with some segments facing more challenges than others. Overall, packaged beverages performed slightly better than expected in 2014, growing an estimated 5.1 percent in unit volume per store and 6.8 percent in dollar sales per store. In 2015, unit volume per store is forecast to increase 6.7 percent, while dollar sales per store are expected to increase 7.8 percent.

    ?The days of explosive growth are over, but [packaged beverages are] big business,? said one retailer.

    The biggest packaged beverage segment, carbonated soft drinks, struggled again in 2014, increasing an estimated 1.5 percent in unit volume per store and 3.2 percent in dollar sales per store. 2015 is likely to see only slight improvement of 1.8-percent growth in unit volume per store and 3.7 percent in dollar sales per store.

    Bottled water slightly underperformed vs. expectations in 2014, but was mentioned by numerous retailers as a notable beverage trend and is expected to see stronger growth in 2015.

    Alternative drinks were the category standout in 2014, with an estimated 7 percentage points more in unit volume per store than what was originally predicted and 5 percentage points more in dollar sales per store. Double-digit growth is likely to continue in 2015, with an expected 12.9-percent increase in unit volume per store and 12.1 percent in dollar sales per store.

    Energy drinks are also among the most frequently cited as likely to have an impact in 2015. Some retailers expect sales to continue growing as the energy segment itself grows, while others expressed concern over the potential effect of government regulation.

    CANDY

    The majority of c-store retailers have a sweet outlook on the candy category for 2015. Six in 10 said they expect per-store candy sales to increase in the year ahead. Meanwhile, 26 percent expect their sales to stay the same as 2014, and just 14 percent anticipate a decrease.

    More so than with any other category, what retailers are predicting in terms of a net sales change for next year ? an increase of 3.2 percent ? closely mirrors what the CSNews Industry Forecast Study projects ? a 3.3-percent increase per store. This would be in line with 2014?s 3.2-percent gain.

    According to the CSNews forecast numbers, non-chocolate will once again be the standout segment of the candy category in 2015. Per-store sales are projected to increase 11.3 percent, coming off estimated gains of 14.2 percent in 2014 and 9.4 percent in 2013. Per-store unit volume is projected to increase 8.4 percent, vs. 9.8 percent last year and 5.4 percent in 2013.

    As for the other candy segments, chocolate, which saw sales and volume declines last year, is forecasted to stay down in 2015. Gum, too, is not expected to have a good year ? a trend that?s been ongoing for several years now. Mints, on the other hand, are forecasted to see a volume decline accompanied by a slight sales gain, indicating higher product prices.

    ?More price increases? is among the trends retailers expect to have the biggest impact on the candy category this year. Other such trends are healthy eating; promotional growth; the need for more upscale candy; and packaging/format innovation including bites/minis and resealeable pouches. Retailers also anticipate more new product and new flavor introductions.

    SNACKS

    Salty snacks will continue to outperform most other product categories in a c-store this year. The category, which includes potato chips, tortilla chips, pretzels, ready-to-eat popcorn, nuts and seeds, grew at a high single-digit pace last year and is forecasted to nearly match that performance in 2015.

    According to the CSNews Industry Forecast Study, salty snack sales in the industry grew by an estimated 8.8 percent in 2014, after a solid 6.3-percent actual gain in 2013. For 2015, CSNews is forecasting a 7.1-percent increase in total industry dollar sales.

    On a sales-per-store basis, salty snack sales will increase by 5.7 percent in 2015, just a tab below the 7.4-percent estimated increase generated in 2014. Unit volume per store will increase 2.3 percent, following a 4-percent unit volume gain in 2014.

    Retailers remain bullish on their salty snack prospects. Nearly three-quarters of respondents to CSNews? Retailer Forecast Study said they expect an increase in their average sales per store in the salty snacks category in the coming year.

    About one in five respondents said their salty snack sales are likely to remain the same as in 2014, while only about 6 percent are expecting a decline.

    Retailers are a little more conservative than the CSNews forecast, predicting a mean net increase of 4.3 percent in salty snack sales per store for the coming year.

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