The televised news images of depositors standing outside their shuttered bank in Pasadena this summer was a nightmarish reminder of an earlier era when this country's financial underpinnings shattered.
IndyMac Bank, the once thriving California-based mortgage lender, became the third-largest bank to fail in American history and the fifth bank failure so far this year after a run on deposits and rising defaults. Although no one is predicting the country faces another Great Depression, the combined impact of high energy costs, real wage stagnation, the real estate bust, a weakened currency, the mortgage financing crisis, shrinking employment and rising inflation is having a profound impact on the convenience store industry.
New research by The Nielsen Co. shows 85 percent of U.S. consumers believe the country is in a recession and almost 70 percent of them believe the next 12 months are either a "bad" or "not so good" time to buy things they want or need.
Last month's taxpayer bailouts of Freddie Mac, Fannie Mae and insurance giant AIG, Bank of America's acquisition of Merrill Lynch, and the collapse of Lehman Brothers rocked financial markets and caused panic among investors.
For the c-store industry, the news is grim. Skyrocketing prices in the channel's highest revenue category, motor fuel, is causing a reduction in gallons sold, inflating the price of almost everything else sold inside the store, and compelling customers to pay more with plastic, contributing to a meteoric rise in credit card transaction expenses.
The channel -- traditionally dependent on impulse sales -- is also experiencing difficulties in such categories as candy and snacks (almost one-fourth of consumers in the Nielsen survey said they have no spare cash, period).
"Consumers have many reasons to feel pessimistic right now, and even if we're not officially in a recession, consumers certainly feel like we're in one," said David Parma, Nielsen's global head of customized research.
During past economic downturns, c-stores were thought to be somewhat recession-resistant, with customers still picking up their inexpensive luxuries, such as candy bars or a six-pack of popular priced beer. (See "History Lesson: Tracking C-store Woes as Economy Slows," page 46.)
However, to many industry executives, this simply doesn't feel like any past recession.
"It's my feeling that what appears to many people as a 'struggling economy' is, in fact, not another business cycle, but a real transformation taking place in our economy," said Bill Douglass, CEO of Douglass Distributing, the North Texas petroleum distributor and operator of the Lone Star Food Stores chain.
Douglass, who is scheduled to be inducted into the Convenience Store Hall of Fame later this month, predicted the U.S. convenience market will become more like the convenience business in Europe. "After touring Europe, we got to see what the convenience store business looks like when fuel is selling at $10 per U.S. gallon [with appropriate adjustments in currency and volume measurement]," explained Douglass. "What we witnessed was not a 'step change,' but a transformation from convenience purchasing to value shopping."
The executive, who views the industry from the perspectives of both a retailer and wholesaler, said this transformation to affordability will drive convenience retailers to focus on private labels, different package sizes, different store designs, more energy-efficient lighting and equipment, and fresh food. "Wholesalers will have to develop a new business model with growers and manufacturers, which will include fast food," Douglass continued. Manufacturers, meanwhile, will be challenged to provide cost-effective convenience store sized products and a more collaborative means of distribution, he noted.
"In the U.S., we are probably several years behind the European consumer in these moves to affordability," Douglass added. "But the message is clear. We are not seeing a business cycle. We are in a transforming economy."
This economic downturn is drastically different from prior recessions, agreed Sheila McCusker, editor of Times & Trends, a newsletter published by research firm Information Resources Inc. (IRI). "Inflation has grown so dramatically. While gas prices, energy costs and food costs are up 12 percent or higher in some cases, income has not kept pace.
"It's not going to get a lot better soon," she continued. "Commodity costs are skyrocketing. Manufacturer costs, packaging costs -- plastic is up 40 percent -- makes it hard to find places to cut back on. We don't expect the economy to get better until the second quarter of 2009."
McCusker said other retail channels, especially drug stores and supercenters, have benefited from current shifts in shopping behavior. As gas prices spiked upward by 30 percent in the fourth quarter of 2007 over the previous year's period, drug stores have been grabbing more convenience shopping trips while supercenters and grocers are attracting consumers who are buying more meal components for at-home dining, rather than eating out. "The opposite effect took hold at c-stores. Demand for consumer packaged goods (CPGs) went down significantly -- 6 percent from the year prior," said McCusker. (This figure does not include foodservice purchases.)
One reason: As consumers are filling up at the pump, the sticker shock is keeping them out of the stores. Another issue is product mix. "Sales of snacks are down in total as consumers cut back on what they deem are nonessentials," McCusker noted.
Adjustments Already Underway Joe DePinto, president and CEO of 7-Eleven Inc., told Convenience Store News the largest c-store chain is already reacting to changes in customer behavior.
"We are seeing lifestyle changes in the way individuals shop, drive, commute and eat," DePinto said. "Spiking prices of gasoline this year, coupled with the crisis in the housing market plus lower consumer confidence are profoundly impacting consumers. As a result, many are changing their purchasing patterns, increasing use of mass transit, altering their choices on where to dine, and even choosing to commute on two wheels rather than four. Many consumers are driving less frequently and using convenience stores for fill-in shopping with frozen foods, condiments, paper goods, and health and beauty items."
However, unlike McCusker, DePinto feels the convenience store industry is well-positioned to respond.
"At 7-Eleven, we are offering convenience-oriented customers solutions, which include high-quality private label products, daily fresh food offerings, take-home meals at a value, and products tailored to the local market," he insisted.
"The length of the weakness in the economy may determine how ingrained customers' new shopping habits will be, but when they see they can save time and money, and still get the quality and value they desire, these changes could be long lasting," said DePinto. "This is among the reasons 7-Eleven is focused on modernizing the product distribution model to drive out costs, and expanding its line of proprietary and private label products."
Jim Hertel, managing partner with Chicago-based consulting firm Willard Bishop, said the impact of rising food and fuel prices will very likely be long-term and industry-changing.
Supply Chain Challenges "One of the obvious ramifications is on the distribution model," Hertel said. "With so many sites to distribute to, distribution costs are much higher for the c-store industry. You're going to see alternative, emerging supply paths to the traditional direct-store delivery (DSD) model." He cited wholesalers such as McLane and Core-Mark, and warehouse clubs like Sam's as potentially gaining business when diesel fuel prices go to $8 per gallon or minimum order quantities are increased to reduce DSD costs.
Maureen Maguire, president of the economic forecasting firm ThinkResearch, also sees the high price of oil affecting every player along the supply chain. "For manufacturers, that usually means raising prices or be faced with lower margins," Maguire said. "Whether or not those price increases can work their way down the supply chain to the consumer is substantially a function of how optimistic the consumer feels."
Maguire noted in the past, price increases may have stuck, but not so now. "We have evidence today that consumers do not feel optimistic about the economy. Real wage gains have been stagnating and job losses are mounting," she told CSNews. Job losses since the beginning of the year have totaled approximately 605,000.
Today's supply chain will have to be more efficient and flexible, and keep an eye on increasing productivity at every turn, according to Maguire, who suggested three ways some business practices will change to fit the current economy:
-- With input prices rising, retailers will seek longer contract terms to lock in lower prices. -- Some retailers may want to take advantage of more local suppliers to capitalize on lower transportation costs as well as the emerging "eat/buy local" trend. -- Wholesalers may want to take advantage of this trend and the additional weakness in industrial real estate to provide inventory at distribution points that are closer to retailers.
"I think wholesalers are going to have to be better partners and move towards net pricing," said Dean Dirks, a Seattle-based foodservice consultant. "A lot of the rebates are driven toward volume. The smaller retailer can't drive enough volume to qualify for the highest structure. I think wholesalers may need to go to net pricing and have their products sell themselves."
On the retail side, several experts foresee an industry transformation that will benefit the prepared retail chains.
Consultant Burt P. Flickinger III, managing director of New York-based Strategic Resource Group, noted a growing trend he observed while traveling through the Grain Belt, North Central states, Southwest and Northeast United States this spring. U.S. consumers are starting to shop like Asians and Latin Americans, he observed. They are going to the neighborhood store to buy what they need for today and tomorrow -- a trend that benefits c-stores.
"With fresh products competitively priced, c-stores [may see] trips change from a few times a week to a few extra times a week, and supermarket trips may go from 3.5 to 2.5 trips a month, wholesale clubs from two trips to one trip a month, and supercenter trips from three times to two times a month," said the consultant to manufacturers, retailers and investment firms.
To pick up sales during this economic downturn, savvy convenience store chains like Wawa Inc. are pricing competitively in every category, Flickinger said. "They make less penny profit on food per item, such as fuel per gallon, but make it up on volume. Customers who were coming in just for gasoline or nicotine, are now buying storewide for refrigerator, freezer and pantry stocking. They are buying meal prep for today and tomorrow, as well as for dashboard and desktop dining."
C-store shoppers are more likely to make unplanned purchases if the products are promoted with temporary price reductions, added David Bishop, managing partner for retail consultancy Balvor, based in Barrington, Ill. (not affiliated with Willard Bishop).
"I'm not suggesting every product would sell more if it was promoted," he said. "But if consumers routinely buy a product and perceive a good value through a price promotion, beer, tobacco or other real staples of c-stores will benefit."
Of special note, he said, are "two-for" deals, such as two energy drinks for $3 (instead of $1.99 each), two cigars for $1 (rather than one for 69 cents), or a 75-cent or $1 discount on two tins of smokeless tobacco, which Bishop has seen recently.
McCusker of IRI sees other opportunities for c-stores to grow their business by pricing more competitively. "Milk sales are down at c-stores," she said. "Prices are way up, but it is a staple everyone needs. If milk was promoted at a low price very aggressively, c-stores could be a good alternative to the grocery store. The same goes for bread."
Recession-Proof Categories As consumers quickly change their spending habits and priorities, some of the c-store industry's product offerings and locations may keep it in the game with the right promotions and price points. For instance, candy and beer are among the top five most recession-proof consumer product categories, according to a recent Nielsen analysis. (The list also includes seafood, dry pasta and pasta sauces.)
"With the demand for gasoline inelastic, and consumers looking to consolidate trips, c-store operators may have an opportunity to possibly alter their assortment, give more space to recession-proof products and tone down those more vulnerable, using things like milk and bread to drive the traffic in initially," said Colin Hare, Nielsen's director of business consulting.
Nearly half of the 3,500 consumers surveyed recently by Nielsen Homescan said the downturn in the economy has had no influence in the amount they are spending on beer, wine or spirits, considered by many an affordable luxury. Eighty percent of those surveyed said they are spending the same amount or more on beer, wine and spirits compared with a year ago.
Less than one-fifth of consumers said the economy has had a significant impact on their beer/wine/spirits spending. Of that group, more than 60 percent said they are now shopping at places where they can get a better price and nearly half said they are shopping at stores that are closer to home so they can save on gasoline.
Unfortunately, recession-vulnerable categories also include many c-store staples, including carbonated beverages, eggs, cups/plates, food prep/storage and tobacco.
"Retailers don't have to subsidize the price of recession-proof categories. But they either need to plan for higher risk with recession-vulnerable items or they need to shore them up with price promotions," Hare said.
Still, the routine nature of some core c-store purchases, such as tobacco or packaged beverages, may bode well for the channel, Bishop noted. "Some people are buying cigarettes, drinks or coffee four or fives times a week. Consumers perceive those purchases as less discretionary. They are likely to give up something else to continue to purchase those."
In the area of foodservice, the c-store channel may benefit from Americans trading down to lower-cost menus. "While supermarkets will benefit from consumers shifting to meals back home, c-stores may see increased traffic from customers who were eating at quick-serve or fast-food restaurants," Bishop said.
Bundling will become more important, he added. "We've especially seen a move in the morning, given McDonald's new premium coffee and higher retails. The price advantage McDonald's may have had has eroded. McDonald's may still have lower-priced coffee, but when you look at the full breakfast ticket, c-stores are much more competitive today. They will benefit if they can leverage that with customers already coming onto the lot for a routine motor fuel refill or some of the highly routine tobacco or coffee sales."
However, foodservice consultant Dirks pointed out Subway, Quiznos, McDonald's and many other fast feeders are committed to a discount pricing model to drive sales. "This is training customers to only purchase $5 subs, for example," he said. "The problem is that food, labor, rent and utilities go up every year. Margins are pinched and volume is the only way to cover this."
Very few, perhaps one-fourth, of consumers who buy coffee in a c-store also buy it from other channels, he said. "To the extent they can promote another food item with that, c-store operators are positioned very competitively with a QSR right now," said Bishop.
Even so, opportunities to capture new foodservice sales may be limited to operators with higher-income customer bases, McCusker noted. "Consumers making up to $55,000 -- which is 60 percent of our population -- are literally having trouble [affording] their groceries. It's getting to be they can't afford that sandwich [out]. It's horrible, but it's a fact," she said.
"Whatever they can do to provide some relief to lower-income customers would be well received. If you can provide a meal for a family for four at $10, you will be on to something. People are struggling and looking for ways to feed their families."
But c-store operators, especially independents who know their neighborhoods well, may benefit from close ties to the community. Hertel of Willard Bishop predicts a new urban migration. "We think that migration to the cities will help drive business to smaller format stores," he said. "We're very likely going to see more activity in the small format food arena, and who knows small format retailing like convenience store operators?"
Seattle-based business strategist Art Turock views a similar consumer trend to stay local as also potentially beneficial to convenience stores. "When money is tight, people don't go out to eat, so meal solutions -- heat and eat, simple to prepare meals -- become more important," he noted. "Doing a better job of marketing to your local neighborhood is also extremely important as consumers cut back on driving. I predict we're even going to see a resurgence in retailing to urban consumers where foot traffic and proximity to public transportation will be key. Look at how D'Agastino's [the New York City-based grocer] is doing better recently with its small stores and capitalizing on the decrease in trips to restaurants."
It's easy to see why c-stores would turn to foodservice as fuel margins continue to recede nationwide. Although fuel makes up more than 70 percent of industry sales, it contributes only about 30 percent to overall profits. Fuel is a "significant destination driver and will continue to be so," said Steve Montgomery, president of b2b Solutions in Lake Forest, Ill. "But the relative importance of fuel from a purely profit point of view is declining for the industry."
However, Montgomery fears many convenience store retailers have not developed the necessary skill sets to manage their non-fuel business. He points to the sell-off of sites by major oil companies and even some fuel jobbers as a sign of recognizing they lack the expertise and tools to maximize their long-term profitability for inside sales.
"Retailers have been pursuing foodservice as the Holy Grail for some time," he continued. "But many still don't grasp the internal changes developing a foodservice culture requires. Many still believe this is something you can do overnight, and when it doesn't yield the magical profits they sought, they become disappointed with the reality that foodservice is not just another category -- it is a fundamental change in how you go to business. It impacts everything from the sites you select to their layout, to the color palate utilized, to perhaps even the brand name you employ."
Demand Destruction Perhaps the strongest argument that the c-store and petroleum industry is undergoing transformational change comes from Brad Douglass, Bill's son and president of Douglass' distributing company. The younger Douglass advanced the notion that the low cost of energy in the past is responsible for such things as the suburbs, V-8 engines, individual auto ownership, single-family housing, highways and cheap electricity.
"The first hundred years of the petroleum industry (1871 to 1971) had very stable prices in real terms -- around $15 per barrel in 2005 dollars," said Brad Douglass, who noted fuel has always been plentiful and inexpensive for "this generation" that doesn't remember the shortages of 1972 or 1979. In fact, it's only been in the last three years that prices have really taken off.
"Europe is years ahead of us in energy efficiency," Douglass said, predicting U.S. energy demand will be dampened over time as the domestic market catches up with the types of energy efficiencies commonplace in Europe.
He conceded the projected increased demand from China, India, Brazil and other emerging countries might outpace the conservation efforts of developed countries. However, "in Europe, Japan and the U.S., there is demand destruction –a fundamental change in government policies, taxes and consumer perceptions that are changing buying behavior for the long run."
Senior editor Barbara Grondin Francella also contributed to this article.
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Rocky, Not Rocking, Start to this British Invasion
Tesco's stumbling entry in the U.S. shouldn't lull c-stores on a new threat from small-format grocery competition.
By Al Heller
In echo of the British pop invasion of the '60s -- when the Beatles and Rolling Stones came to the U.S.A., inspired imitative bands, shook their hair and frenzied young female fans -- we have the Tesco Fresh & Easy invasion of 2008.
So far not so smashing. But that could change fast as the U.K. giant refines its fresh, convenient and value-oriented offerings, connects with more consumers, and kicks expansion into gear. Imitators from the grocery, mass and drug channels are already surfacing, and experts believe convenience store operators could even find keys to their own future in Tesco's initiative.
C-store owners may remain indifferent to Tesco because its properties are 10,000 square feet, roughly five times the size of the typical c-store; or because its performance and expansion haven't lived up to the early hype; or because it hasn't sought classic c-store locations yet. But they need to watch closely, warned experts interviewed by Convenience Store News.
In their collective opinion, Tesco is an expert at bonding with shoppers of all kinds. Its success with Tesco Express (2,100 square feet) in England proves the retailer's competency in small formats, and its competitive tenacity has earned Tesco an international reputation. And Tesco, one of the world's largest retailers, has deep pockets, like many of its domestic copiers, among them Wal-Mart Marketside, Jewel Urban Fresh, Market by Vons (Safeway), Walgreens Cafe W, Giant Eagle Express, and a possible Stop & Shop entry.
"They're not targeting the traditional convenience store consumer, but the consequences of their format pose some threat to c-stores," said David Bishop, managing partner at Balvor, a sales and marketing consultancy in Barrington, Ill. "Fresh is what c-stores are focusing on. Tesco is learning a lot about how consumers react to their initial concept and will align to that. Their presence in convenience foods on the go is much less than their meal solutions for at-home consumption. But if consumers tell them they want food they could eat right away, Tesco could well introduce deli counters and sandwich bars like White Hen [now part of 7-Eleven] had in Chicago."
Tesco is not a c-store, according to Neil Stern, senior partner at McMillan/Doolittle LLP, Chicago. "Eat, drink and smoke now defines c-stores. Fresh & Easy is about home meal replacement with the chance to buy other groceries on the trip. Pricing, assortment, the core target market and shopping occasions are all different from c-stores. These formats are designed to take from the grocery business, and supermarkets will be harmed most."
Looking past these differences, however, it's still understandable that the Tesco stores, the Wal-Mart Marketside stores [at 15,000 square feet] and others could be positioned as quick trip destinations for milk, beer and snacks, all central to c-store traffic.
"Smaller formats such as Trader Joe's do a terrific job of satisfying a niche. Everyone is in the convenient space these days, and people are really watching their trips more with the energy crisis," said Harry McHugh, chief people officer at Wawa, one of the top 20 c-store chains in the U.S., according to the CSNews Top 100. "If quality and service are there, they'll definitely be in our competitive set. In England, people buy breakfast to eat and lunch for later from the [much smaller] Tesco Express stores [many of which are situated] by public transit. If similarly located, people might be inclined to do the same here."
The convenience industry needs to expect opposition from outside its traditional competitive set. "We offer what everyone wants, which is more time," said Richard Oneslager, president of Balmar Petroleum and chairman of NACS: the Association for Convenience and Petroleum Retailing. "C-stores are more in the rhythms of where and when people are going, and what they're doing. But in the near term we should be more concerned about quick-serve restaurant (QSR) competition."
Though the U.S. Tesco stores sell neither cigarettes nor gasoline, Bishop urged c-store owners to "look down the road 10 years. Philip Morris USA anticipates unit sales of cigarettes in the U.S. will decline by 2.5 percent to 3 percent annually over the next few years. Even if c-stores gain a larger share of a shrinking market, eventually they have to look in other directions for growth. Fresh is it."
Urging more nimble format decisions by c-stores based on location, Todd Hale, senior vice president, consumer and shopper insights, The Nielsen Co., said, "an urban setting close to more affluent consumers gives retailers a lot more opportunity in assessing where they can expand fresh foods."
Yet fresh isn't the only way to compete, McHugh suggested. As consumers clamp down on spending, Wawa prices for value storewide and imposes no surcharges on its ATMs, but also weighs the value of other appeals. "We have to be faster and more flexible, consider smaller portion sizes, and engineer products better so we have less labor cost. We want process improvements in every transaction so we can deliver on our value proposition," he said.
To stand up to the new formats, "our intention is to do what many others aren't willing to do -- improve our operation," stressed Kyle McKeen, president of Alon Brands for Alon USA, a 7-Eleven licensee. "Talk is cheap. People who really do product mix, convenience and people well, will succeed.
"Stores like Tesco provide a valuable lesson in what we need to do to broaden our appeals to women. They do a lot for raising the reputation of c-stores. Yes, they're a threat, but they'll also make us better marketers," he added. "There will be a greater convergence of food and convenience. People will raise their standards. Fresh variety will be key. And operators will rivet their focus on enhancing margins and attracting customers with food done right."
There's plenty c-stores can do to determine if they'll emerge stronger from the competition, or become collateral damage in supermarkets' battle with Tesco for fresh food share.
State of Small-Format Competition Tesco's initial stakes in America remain quite distant from the $10 billion opportunity initially touted for its small-format stores. Sales per store are well below targets of $200,000 per week, according to analyst reports. One source pegged initial sales at only $60,000 per store per week.
Yet when juggernauts like Tesco and Wal-Mart commit to a new retail approach, who is going to bet against them or has the resources to beat them?
Tesco currently has approximately 70 stores in Los Angeles, San Diego, Phoenix, Las Vegas and central and northern California. It is also looking for additional sites in Chicago, New York and Florida. Citigroup forecasted Fresh & Easy's sales could hit $7 billion to $10 billion by 2012.
In a recent job advertisement, Wal-Mart described its new Marketside format as "expected to start with 10 stores and evolve to between 1,000 and 1,500 stores with over $10 billion in annual sales." In response to additional media queries, the chain later re-termed Marketside as a "pilot" project and removed the ad from its Web site. This downplaying of Marketside's potential comes from the retailer that was quiet about toys until it ravaged Toys 'R' Us, and played coy when it introduced $4 generic drugs and later identified pharmacy as one of its primary growth areas.
It is known that Wal-Mart is expected to launch Marketside this fall with four "pilot" stores in the Phoenix area. Billed as a "smaller, urban convenience-type store," Marketside will be targeted to higher-income shoppers than is typical for the low-price retailer. The Bentonville, Ark.-based retailer has had good track record with new formats -- its Sam's Club and Supercenter formats are enormous success stories.
However, even the world's largest retailer stumbles occasionally. It has also tested and abandoned other new concepts, including a discount drug store, a closeout division and a crafts chain. And the jury is still out on its Neighborhood Market, a downsized supercenter store that debuted a decade ago.
Learning from Tesco and Wal-Mart C-stores should have lots to explore in how a British chain comes to grips with American consumers, and how a fierce discounter tries to take food upscale while making it convenient. Most other players are grocers who are likely unsure whether small formats will succeed, but don't want to be left behind and don't want to lose more food share to more convenient outlets.
Is Tesco so smart, or is everyone playing follow the leader? "That's the $10 billion question. I'm on the pessimistic side based on performance so far. I didn't see a lot of customers in their stores," said Stern of McMillan/Doolittle. "But it takes time to change shopping patterns. Habits are ingrained. With all the warning that Tesco was coming, U.S. competitors were hard at work preparing their response. Wal-Mart is sending a message it'll make it tough on Tesco by putting its stores right next to theirs."
While a Fortune magazine report last December said fewer than three out of four Fresh & Easy shoppers (74 percent) were satisfied with stock levels on the shelf, and attributed it to unexpected demand, Stern felt this figure represented a matter of Tesco needing to "re-educate shoppers" about the way it reinforces its fresh image. "In Europe, they sell down the shelf to be bare each night. By 6 p.m. shelves are empty, then they restock with fresh product in the morning," Stern said. "When Americans don't see full shelves, they think goods have been picked over, and they question the quality of what remains. It will take consumers a long time to see empty shelves and think that is excellent customer service. It may never take." McHugh of Wawa was less critical. He noted "people who are used to shopping fresh in open markets, fish stores and bakeries are familiar with selling down, and see it as a reinforcement of the fresh image."
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Gone Broke
Retailers are succumbing to a challenging economy and increased costs
By Mehgan Belanger
After 22 years in business, it only took one hour on a Friday morning in May for brothers Harley and Hadley Hintergardt to make the decision to close their full-service Sinclair gas station and service shop in Oklahoma City because of the high cost of fuel.
"I told my brother that we needed to pre-pay for another delivery on Wednesday, and that I didn't know if we had the money to pay for it all," said Harley, 61. "We needed to decide to buy another tank by 9 a.m., but we looked at each other at nine and said, 'we're out of business.'"
It was one of the toughest decisions he had ever made, said Harley. Although the brothers previously discussed selling the site -- which was in a prime location between two hospitals -- Harley wanted to stay in business for five more years to ensure he received full social security benefits. "If the price of gas didn't get us out, we'd still be there today." The pair estimated, though, if they had bought another delivery of fuel and continued to run the business into June -- the same month the loan for the store would have been paid off -- they would have lost $6,000. The station was paying 12 cents per gallon in credit card fees, averaging approximately $1.44 per fill-up, according to Harley.
Interestingly, the brothers Hintergardt were more experienced at running a gas and service station than the usual single-store owners. They both worked at gas stations while in high school and college. After college, Hadley began a career in banking, while Harley was an accountant. The pair wanted to start their own business, and decided on the gas retail industry because it was something in which they both had experience. In 1987, they leased a site from Kerr-McGee Corp., an oil company later acquired by Anadarko Petroleum Corp. in 2006.
Getting started was difficult, according to Harley, but the duo eventually found stability in the full-service gas station business. "It was tough the first two years. We took no salary, and built the business pumping gas, doing tire repairs, etc.," said Harley. "The next 17 years, we did really good business. It was a nice living then, but the price of gas got up so high. Competition was so tough, we could barely scrape by the last few years." While he noticed problems with profitability as long as three years ago, it wasn't until eight months before the station closed that Harley had serious concerns.
They lost approximately $60,000 of their own money during the past three years, according to Harley. "The bottom line is -- we couldn't pay the gas bill next month. The little money we had went out the window." At one time, the store employed five others including a full time mechanic. However, for the past three years, it was solely the Hintergardt's running the station because the business could not afford to keep its other employees.
The Hintergardt brothers are not alone. Rather they are members of a dying breed of gas retailers who are suffering, and in many cases, going broke with a business to which they dedicated years of their lives. As the economy worsened in the summer of 2008 and gas prices hit record highs, small gas retailers across the country caught the attention of local media outlets, which told the sometimes tragic story of these small operators and their fight to survive.
The Michigan Citizen reported in late July high gas prices and competition forced Earl Brown and his son, Joe, to sell at auction their northwest Detroit BP station after 36 years in business.
In Mendon, Mass., Gaskell's Service Station, a 50-year-old business, was shuttered on July 1, by Dave Gaskell and his son, David, due to high fuel prices, the Milford Daily News reported.
Elsewhere in the state, the Boston Globe reported Chip McAllister shut off the pumps and let go of two employees at his North Andover service station after consistently losing $5,000 a month on gas.
Chuck Rollins sold his Mobil gas station and convenience store located in Winooski, Vt., to its gas supplier, R L Vallee Inc., in June. Rollins cited the economy, high gas prices and competition with larger companies for the decision, according to the Burlington Free Press.
The challenging retail environment is not just affecting single stores and small operators. Convenience Store News' daily news Web site, CSNews.com, followed the trials and tribulations of a number of convenience chains forced to sell locations or file for Chapter 11 bankruptcy in the face of these conditions.
On July 22, 2008, New West Petroleum LLC sold at auction 30 of its 35 convenience stores in San Diego and Northern California for one reason: "With rising credit card fees and high fuel prices you can't make enough money," Gil Moore, president and owner of New West Petroleum, said at the time.
Horizon Travel Plazas LLC, operator of 24 locations based in Franklin, Tenn., filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in the Middle District of Tennessee in mid-June. As a result, the company will sell all but 14 sites, according to published reports citing Jim Curtis, vice president of RJ Investments, one of the companies that builds and leases properties to Horizon.
A month earlier, Uni-Marts, operator of 283 c-stores based in State College, Pa., filed for Chapter 11 bankruptcy, and was reportedly going to close locations and possibly pursue a sale of the chain. As of press time, no sale has been announced.
In a statement regarding the filing, Uni-Marts founder and CEO Henry Sahakian stated, "The overall condition of the economy, aggressive competition in the areas in which we operate, increased fuel and other inventory prices, and other matters outside our control have reduced the company's cash reserves, which prevented us from executing our business plans and tightened our operating margins."
In mid-January, Rennie Petroleum Corp., a petroleum marketing and convenience-store company headquartered in Richmond, Va., sold its chain of 24 convenience stores throughout central and eastern Virginia. The sale followed a Chapter 11 bankruptcy filing a year prior. In its filing, Rennie Petroleum blamed a number of factors for its situation, including, among other things, the practice of major oil companies selling gasoline to their own stations cheaper than it is sold to wholesalers; increasing competition from other retailers including Sheetz, Wawa and Sam's Club; and an uncompetitive contract that required Rennie to pay credit card fees that were higher than independent card services.
Although it seems a significant number of struggling c-store retailers are exiting the market, one industry expert believes there should be more operators leaving the business.
"There's a little bit more [activity] than normal, but there should be more getting out than there are, and that's the sad point," said Terry Monroe, president and COO of American Business Brokers, a national business brokerage based in St. Louis. He said it is unfortunate c-store retailers are losing personal money in business, and despite this, refuse to let a flailing store go. The difficulty of leaving a business is rooted in psychological factors, according to Monroe, and for many, closing a store is the equivalent of failing.
"They say, 'But dad built that store.' But now it's on a one way street and all the competitors are across town. It's just a piece of real estate," he explained. "Never fall in love with a business or a building. It can't love you back."
Monroe tells a story of a second-generation owner of a 13-unit c-store chain who was losing $100,000 per year at one of her locations. He insisted the owner immediately close the store and sell it as real estate. However, she thought if foodservice or other programs were added, it could recoup the losses and "justify the store's existence," Monroe said.
To avoid a similar situation, Monroe recommended making long-term plans and routinely re-evaluate the business' status.
"We can't take a short term view [of the economy]. Everyone has his or her own different tolerance level," he said, explaining people are more apt to deal with hardship when there is a long-term objective. "Set up plans, subject to change, for three to five years. Commit to it, and at the end, re-evaluate the situation." Be prepared to walk away if the business does not meet a plan's goals, he advised.
Just as important, reinvest in the business to take the operation to the next level, he added.
"If I am not making any money on fuel because of credit card fees and a tough market, and if profits are going down on cigarettes, where else can I make money in the store, and what products can I add to increase profitability?" Monroe asked.
Like the businesswoman with the 13-store chain, an obvious answer is foodservice, but Monroe urged operators to look outside the box, especially while food costs remain high.
"Not everybody is or can be a food operator," he said. "The life of a store depends on you. There are factors you can't control, but you can control what you sell and what you price it at."
But for some c-store retailers, this is advice coming too late. For those, Monroe recommended looking at the big picture.
"Everything in business and in life goes in cycles. Sometimes you have control, but sometimes you don't. And that's when you need to make a personal decision. How long will you continue to do this?" he asked.
For the Hintergardt brothers, the answer was quick but difficult. When news of the closing spread, the station's customers were devastated. "It was a sad for me, and sad for them, but life goes on," he said. "I still care for those people who we took care of, and wonder where they are going to go this winter when they need their antifreeze checked."
Harley Hintergardt now works at a local credit union, while his brother, Hadley, is employed at Cactus Drilling Oil Co.
This year is special for Convenience Store News, as it marks the 40th year of publication, making it the longest continuously published news source for the convenience store industry.
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