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As oil prices escalate, and related transportation and packaging costs inch up, it's only a matter of time before inflation hits core convenience store products and retailers will have to choose between higher retails or lower margins. But, for now, suppliers to the c-store channel appear to be doing their best to keep increases at bay.
"If you look across other retail channels, you are starting to see manufacturers impact pricing and this is affecting volume," said Nik Modi, a consumer goods analyst at UBS, the New York-based securities investment firm.
In the household care sector, for instance, trash bags, bleach, detergents and other products are seeing price inflation driven by higher raw material costs. But manufacturers are trying to manage their channel mix and take price increases where appropriate, Modi said. "The only way you see price increases by a large retailer like Wal-Mart or Costco is if the pricing environment is going against them."
But despite pricing pressure in some categories, most manufacturers with products in the c-store channel are not eager to impose hikes. "We have not seen many recent price increases," said Roger Grogman, vice president, marketing, for McLane Co. Inc., the nation's largest c-store distributor, based in Temple, Texas. "It's certainly on everyone's mind now. But, frankly, I think most people in the industry are so into cost containment, we discourage any increases. We like to think we are good enough to do what needs to be done to offset the costs and wait it out."
Still, remaining optimistic is getting more difficult. "Every product is touched by the price of oil," Grogman said. "The only question is to what degree? I suspect pricing will begin to catch up more at the end of the year and into 2007."
Like other c-store wholesalers, McLane — with a fleet of 1,255 trucks making more than 15,000 grocery order deliveries each day — has fuel escalators built into some of its long-term retailer contracts. These escalators offset petroleum increases, Grogman said, "but they aren't designed to be a full-cost offset."
To manage those costs, the distributor looks for proper training of drivers and efficient routing, with investments in state-of-the-art routing technology, to reduce miles driven.
Still, the competitive environment sets wholesale margins, and distributors as a group are making much lower margins "than they should, relative to the value of the product they deliver," asserted Kit Dietz, a distribution industry consultant based in Huron, Ohio.
Most distributors have a "cost-plus" arrangement with their retail clients. If the markup is 4 percent, for example, they will keep that 4 percent, passing on manufacturer price increases to retailers. "The real challenge is for wholesalers who are locked into long-term supply agreements without a built-in fuel charge and have to eat these increased fuel prices," Dietz said. (Eby-Brown declined to comment, and calls to Core-Mark International and H.T. Hackney Co. were not returned by press time).
A bit of good news for convenience retailers: the majority of products found in a c-store come through a warehouse-delivery supplier and they all ride the margin of common delivery, Dietz pointed out. A slight fuel adjustment — say a 5 percent or 7 percent fuel up-charge — on a per-delivery basis is pretty inexpensive overall, when considered against a $6,000 or $7,000 delivery, said Deitz.
"The challenge of holding back product price increases is greater on direct-store-delivery (DSD) suppliers, who may have only a $100 or $200 delivery at each store and whose products are often packaged in plastic and take up more truck space," he continued. "Adding fuel costs, you could anticipate a price increase on DSD products.
This is the second in a series of articles examining how the nation's rising gasoline prices are affecting c-store customers and operators. Next, we look at the impact on customer shopping and spending behavior.