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    Where Opportunity Knocks

    Economics, site availability and a host of other factors drive successful c-store development

    By Debby Garbato, Stagnito Business Information
    Top Undersaturated Markets in U.S.

    Determining where to open ? or sometimes close ? a convenience store can be as difficult as trying to judge a candy bar by its wrapper. What may look good on the shelf may or may not live up to customer expectations. Hence, an undersaturated market may or may not be the best place to open new stores; the same holds true if a market is oversaturated.

    Predicting what works where can be challenging. Oversaturation can be driven by proximity to an interstate, university or military base. Or, a market can be a destination for tourists, employment or medical services. Factors causing undersaturation, in contrast, can include low income, high property costs, loss of a major employer or competition from another retail channel. There is no clear-cut answer.

    Using a combination of data and analysis, the Convenience Store News 2014 Saturation Study seeks to help retailers identify which areas of the United States are ripe for growth and which areas already have their fill of c-stores. This year?s study, which picks up where the 2008 and 2004 installments left off, is based on 381 markets, including metropolitan statistical areas (MSAs) that have an urban core population of at least 50,000.

    Saturation is defined as population divided by c-store count. The saturation for each state and market area is calculated and the results are then indexed against the national average. An index of 100 is average. Any index above 100 indicates an area with fewer people per c-store than the national average, or high saturation (generally not an opportunity for growth). An index below 100 indicates an area with more people per store than average, or low saturation (generally an opportunity for growth).

    Just looking at the indexes alone, though, doesn?t tell the whole story of a market.

    ?If you read the study and say you should build more stores in low saturation markets and you shouldn?t do so in high indexing markets, it?s not that simple,? cautioned Neil Stern, partner at retail consulting firm McMillian/Doolittle in Chicago.

    Take the case of Trenton, N.J., and Grand Island, Neb. These areas are polar opposites: Trenton is the most undersaturated market in the densely populated Northeast, while Grand Island is the most oversaturated city in the more thinly populated Midwest.

    CSNews chose to take a close look at these communities because the conditions they face are shared by a number of other markets in the study.

    Trenton is home to 370,414 people, which translates to a whopping 11,033 people per square mile, according to CSNews and city-data.com figures, respectively. With a population of 3,562 humans per store and a low index of 58, Trenton would seem ripe for development.

    It is not. Median income is $31,311 (compared to a state average of $69,667), median home value is $111,400 (state average is $311,500), unemployment is 23.6 percent and 26 percent of people did not finish high school. In addition, several thousand of the city?s residents live in the state maximum security prison, making them unlikely convenience store shoppers, according to city-data.com. The crime rate is also high.

    ?Many inner cities are not destinations since nobody works there,? said Aaron Jackson, director at Dechert Hampe & Co., a sales and marketing management consulting firm. ?And when it comes to inner cities and big chains, saturation is purely related to the business model of how much discretionary income people have.?

    Other markets that face challenges similar to those in Trenton include: Washington, D.C./Arlington, Va.; Chicago; Newark, Jersey City and Camden, N.J.; Philadelphia; Baltimore; El Paso, Texas; and Los Angeles.

    Then, there is Grand Island, Neb. With about a fourth of the population of Trenton, it is in the heart of a highly agricultural state and has just 2,329 people per square mile. With 56 convenience stores, population per store is 1,500. But unlike Trenton, many Grand Island residents are likely c-store shoppers. And there is little crime.

    According to city-data.com, median income is $44,217 (state average is $50,723), average home price is $110,579 (state average is $128,200) and a large manufacturing industry supports a steady stream of ?Bubbas? seeking smokes and Cokes. Unemployment is just 4.7 percent. And there is no state prison. Grand Island indexes high at 139.

    Cities like Grand Island also tend to attract people who work in the area but live elsewhere. This means the daytime population ? a.k.a. the convenience store customer base ? is higher than reported. This is not generally the case in inner cities.

    ?The population may increase 30 percent or 40 percent during the day,? said Jackson. ?Knowing the type and flow of people, along with income per capita, are two factors that dictate the types of businesses there.?

    RETAIL DIVERSITY

    In some undersaturated markets, other retail channels fulfill many of the roles that convenience stores could otherwise play. Delis are a big factor in the Northeast. Also in the Northeast and elsewhere, there are many small grocery stores and bodegas. The latter may cater to a specific ethnicity. These small stores can even exist in upscale areas since the cost of operation for a single store is much less than for a chain operator, said Jackson.

    New York City and both Jersey City and Newark, N.J., are among the Northeast markets where grocers and bodegas dominate. They are in both upscale and low-income areas. Sans fuel, their business models often revolve around strong foodservice components. This is partly because space is often too valuable for fuel.

    ?The minute you sell fuel, you need a larger site,? said David Bishop, managing partner at Balvor LLC, a sales and marketing firm based in Barrington, Ill. ?If you don?t have fuel, you can support the business with lower square footage. If you don?t have gas, and foodservice is strong, it drives higher margins and lets the retailer make a strong return on dollars.?

    What QuickChek Corp. looks for in a site, for example, and what RaceTrac Petroleum Inc. wants are very different. Two-thirds of QuickChek?s New Jersey stores do not sell fuel; some are in urban or downtown areas. RaceTrac is suburban and has a huge fuel operation.

    Urban or otherwise, there are a few markets where it may be too expensive for a convenience store to operate. According to Forbes, California has the highest number of ?overpriced? cities, with San Jose, Sunnyvale and Santa Clara topping the list. The state?s median home price is $625,000. While the total population is almost 2 million, there are just 421 convenience stores (4,560 people per store) so the area indexes low at 46.

    High-income cities can often support multiple retail food formats, which can also bring down the convenience store count. This is because convenience stores can exist at one end of the spectrum and supercenters at the other. In between, there are many formats and price points, including traditional supermarkets, upscale gourmet shops and specialty markets.

    ?When I look at the CSNews study, the big influence isn?t c-stores, but how they exist with other channels and whether other channels can fulfill multiple purposes,? said Jackson.

    In some instances, undersaturated markets present opportunities. McMillian/Doolittle?s Stern pointed to Ann Arbor, Mich., which indexes at 68. Since it is a college town, he believes it can support more convenience stores. ?It?s not just the campus. It?s the whole town, since colleges support service industries,? he noted.

    Opportunities also may exist in the Dakotas, which have the lowest populations of any Midwest states. At an index of 126 (North Dakota) and 125 (South Dakota), they also have the highest indexes in the region. Gross domestic product (GDP) is robust, unemployment is low and wage growth is strong, said Bishop. The populations are growing. Casey?s General Stores Inc. and Kum & Go LC may be considering growth in these markets, he added.

    OVERSATURATION

    In places where income is not high, Walmart is very strong, while other types of retailers (except convenience stores) are weak. ?Grocery stores and others in the ?middle? are killed off,? Jackson said. ?That leaves you with just c-stores for when people don?t want to go to Walmart.?

    This phenomenon appears to be most prevalent in the South. With a population of nearly 120 million (the count grew by almost 10 million since 2008), the South is home to 71,352 convenience stores ? more than twice that of any other market. Population per store is 1,659. The region indexes at 125.

    According to Wal-Mart Stores Inc.?s 2014 annual report, the retailer?s highest concentration of stores (100-plus per state) is in eight southern states, with Texas (345 stores) and Florida (207 locations) having the highest counts for the whole company. The other six states are Arkansas, Georgia, Missouri, North Carolina, Tennessee and Virginia. Four other states have 100-plus stores but are more scattered ? Pennsylvania, Ohio, Illinois and California.

    Walmart?s presence continues to grow and not just through supercenters, where it is nearing saturation. In Atlanta, Walmart ? as well as The Kroger Co. ? is investing heavily in fuel stations. This is destroying some c-store competition.

    ?In Atlanta, once you take QuikTrip and RaceTrac out, the rest are independents,? said Jim Tudor, president of the Georgia Association of Convenience Stores.

    191 DENTURE PROVIDERS

    Throughout the South, the most oversaturated city is Florence, S.C., which indexes at 215. There are 213 convenience stores and the population exceeds 200,000. Population per store is 968.

    Many businesses are based in Florence, but the big draw is its 191 denture providers, according to Tudor. Since the 1930s, dentists in this area have been providing affordable dentures in one day. ?It?s where everybody goes to get their false teeth,? he explained. Visitors, who often come by car, stay overnight and are frequently accompanied by other people.

    Weather drives southern convenience store activity, too. Balmy climates mean people are out and about more. There is also the infrastructure to consider. Since many southern areas, particularly Florida, did not experience huge population growth until at least the 1970s, cities were built around cars and highways, facilitating convenience store access and development. This is not the case in many parts of the Northeast.

    ?The South has less public transportation and is vehicle driven,? said Tudor. ?Eighty percent of fuel is sold in convenience stores. You don?t build a convenience store here without fuel.?

    Some southern cities serve transient populations, including Macon, Brunswick and Valdosta, Ga. They are among the top five southern markets, with each indexing at 200-plus. All three are on major interstates ? I-75, I-95 and I-475. Valdosta is also 995 miles from New York and 435 miles from Miami, making it a popular overnight destination for travelers headed south during cold months.

    Another city, Brunswick, Ga., indexes at 205 and is on the coast, also drawing tourists. ?They?re serving customers who don?t live there and don?t show up in store-per-capita data,? Tudor noted.

    He added that many Florida travelers stop for tobacco in Georgia, where cigarette prices are much lower than in Florida. The same goes for gas, which is 10 cents cheaper per gallon in Georgia, said Tudor.

    Whether it is Florida or somewhere else, and whatever the situation may be there, the bottom line is convenience stores? needs can be very different. When coupled with demographic and market conditions, this makes the growth jigsaw puzzle very complex.

    ?It ultimately comes down to feasibility,? said Balvor?s Bishop. ?This is different for every retailer since each has a different go-to-market strategy. How do I know there are opportunities? This is where the retailer?s resourcefulness pays off in spades.?

    ?If you read the study and say you should build more stores in low saturation markets and you shouldn?t do so in high indexing markets, it?s not that simple.?
    ? Neil Stern, McMillian/Doolittle

    ?When I look at the CSNews study, the big influence isn?t c-stores, but how they exist with other channels and whether other channels can fulfill multiple purposes.?
    ? Aaron Jackson, Dechert Hampe & Co.

    By Debby Garbato, Stagnito Business Information
    • About Debby Garbato Debby Garbato is the content editor for Stagnito Business Information’s Multicultural Retail 360 conference and is a regular contributor to the company’s various publications. She has 25 years of experience as a retail business writer and research analyst.

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