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Strong growth of traditional competitors, changing consumer preferences, and economic headwinds are currently the three biggest threats to convenience store retailers, according to Applied Predictive Technologies’ (APT) State of Business Experimentation report.
Leading convenience stores are responding by bringing new innovations and strategies to market — from made-to-order foodservice kiosks and Blue Apron-like meal kits, to drone Slurpee delivery and takeout pizzas.
Here’s a closer look at these key trends shaping the industry and causing convenience store retailers to innovate faster than ever before:
1. Retailers are trying to balance improving the shopping experience with expanded offerings and cutting costs
Thirty-one percent of convenience, grocery, dollar and drug stores identified strong growth of traditional competitors as the biggest threat to business this year. As a result, many of these retailers are investing in new programs to draw customers to their stores in order to maintain or gain share.
Sixty-four percent of these retailers have labeled remodels, new store concepts, and shoppability as strategic priorities, and 45 percent reported that introducing new products and categories was one of their top priorities. However, in an industry with notoriously low margins, convenience executives are conscious of the costs associated with these new programs. Large remodels, such as Parker’s new drive-thru foodservice concept, carry significant costs and should be tested on a small scale first to minimize risk.
Convenience store retailers are not alone in their growing interest in displays and shoppability. Manufacturers share this focus, with 89 percent planning on testing in-store displays, and 79 percent focused on assortment optimization, according to the report.
"Consumer goods companies have seen these trends unfold in the convenience channel and are trying dozens of new ideas to adapt to the exciting changes. At Hershey, we’re introducing a number of new products like Hershey’s and Reese’s Snack Mixes, and continuing to innovate on product packaging for items like our Take5 Layer Candy Bar," said Brooke Steeneck, The Hershey Co.’s senior manager of category strategy and insights (c-store). "To understand which new innovations will work, we test them in-market. … Ultimately, we are all working to create an enjoyable shopping experience that allows shoppers to find what they want as quickly and easily as possible; but that’s very difficult without testing a number of different strategies in-market first and letting shoppers vote with their wallets."
Additionally, Steeneck noted, as a large percentage of convenience stores get remodeled each year and chains move toward larger formats, it becomes increasingly important for manufacturers to be able to grab shoppers’ attention where it matters the most — at the point-of-purchase.
Hershey relies on results from test analyses to back its decisions related to which products should be under the counter, how much space each category should receive, and how all of these factors vary by store format and retailer. "Rigorous testing that fuels innovation will continue to be the engine of profit growth for both CPGs and retailers in this channel," Steeneck continued.
2. Retailers are testing more mobile, loyalty and digital initiatives to drive store traffic and bolster customer loyalty
Nearly a quarter of convenience, grocery, dollar and drug store retailers (23 percent) named changing consumer preferences as the biggest threat to business this year. To attract new customers and retain existing ones, retailers have experimented with new strategies across a broad range of functional areas. Three of the most frequently tested areas included products and merchandising (32 percent of total tests), marketing and promotions (29 percent), and capital expenditures (18 percent).
Within marketing, retailers have started to test a wider range of mobile, loyalty and digital initiatives. For example, Pilot Flying J recently made headlines for its enhanced mobile app, which allows professional drivers to choose a fuel lane based on real-time estimates of remaining wait time, and receive a mobile code that activates the pump for card-less fueling.
Yet, despite the growth in digital and loyalty tests, promotions were still the most frequently tested marketing area, comprising 25 percent of marketing tests. Convenience retailers looking to attract customers to the store with promotions should remember, however, that the most popular offer is not always the best offer.
Evaluating the success of a promotion solely on redemption rate becomes an increasingly risky game because as redemption rates increase, retailers risk giving away more money by subsidizing sales that would have taken place anyway.
3. Retailers are responding to increasing labor costs by conducting labor and operational experiments
As many convenience retailers have traditionally paid what the market requires for labor and no more, stepwise increases in minimum wages, and the associated increase in payroll taxes, pose a novel challenge for operators today. As a result, many retailers are preemptively preparing for new labor costs by testing various labor and operational changes. The most commonly tested strategy was adjusting in-store labor levels (13 percent of labor and operations tests).
Additionally, retailers are looking to differentiate themselves by testing improved customer service (9 percent of labor and operations tests). Other retailers are looking to drive sales by offering order online and pick up in store (9 percent of tests) and delivery services (7 percent). In fact, 7-Eleven made headlines in July for delivering doughnuts and Slurpees by drone in partnership with startup Flirtey.
For each of these initiatives, convenience retailers are finding that business experiments maximize learning and profits. To that end, these retailers conducted more than 70 tests annually, on average, with the top quartile of retailers conducting nearly 150 tests annually.
Retailers also reported that nearly 40 percent of these ideas do not break even, underscoring the need to test each new idea before broad rollout.
By testing each new initiative in a subset of locations and comparing performance to similar stores that do not implement the new initiative, retailers can learn which ideas are most successful.
The industry is changing fast. Survival depends not only on innovation, but accurately understanding which innovations make money and which ones don’t.
Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.