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With the price of oil hitting new highs, the housing bubble bursting and consumer confidence waning, how will c-stores fare over the next 12 months? Some answers can be found in the 2008 Convenience Store News Forecast Study, which predicts areas of both strength and weakness.
The bright spots in the coming year include the packaged beverage category, led by growth in bottled water and energy drinks, and the other tobacco products (OTP) category, driven by the cigar segment. Both categories are expected to show double-digit growth in 2008. Additionally, the candy and gum segment is expected to continue with solid growth due to the continuing strength in gum.
Among the challenges convenience store operators will face in 2008 is the continuing saga of volatile fuel pricing. While price increases are expected to be more moderate than those seen in the past few years, consumption growth will be minimal. And as for cigarettes, it is almost certain that federal taxes will increase, but by how much, and how this will this affect sales remains to be seen.
However, the biggest challenge extending further than just the c-store industry is the potential economic slowdown. At the recent meeting of the Forecast Study Council in November 2007, current economic trends -- and their effect on c-stores -- were top of mind for all attendees. Maureen Maguire, ThinkResearch president, predicted, "A slowdown is not out the picture, with a 30 percent probability of a recession occurring in 2008."
She cited the "double whammy of home price declines and oil price escalation" as contributing factors in the falloff of consumer confidence that occurred in 2007 and that is likely to continue. In the coming year, both demand and cost of retail gas and home heating oil are expected to rise.
"People have to heat their homes, so the tradeoff is going to come from their discretionary income, but exactly where, we don't yet know," Maguire said.
It's often said that the consumer is key to the vitality of the national economy. So, to get a look at what retailers can expect from the shopper in the coming year, this year's Industry Forecast Council invited TNS Retail Forward to present its consumer outlook, titled "Shopper 2015."
For c-stores, Retail Forward notes that shopping frequency is down at this channel as more shoppers fill up their tanks at alternative outlets, consolidate trips due to high gas prices and have less spending money for in-store purchases. Russo sees cross-marketing of gasoline with groceries by supermarket chains like Kroger and Giant Eagle as being a significant threat to c-stores.
Survivors in the c-store channel will be focused on immediate consumption and grab-and-go foods. "There's still not much focus on healthy, but some players are testing the waters," said Russo, citing 7-Eleven's Formula 7 private label brand of healthy foods and beverages and Pick Smart, a selection of fresh food items with lower fat and calorie content. (See TNS Retail Forward's "15 Trends for 2015," page 44.)
After several years of big jumps, motor fuel prices are expected to post more moderate increases. The average price per gallon for 2007 is expected to reach $2.79, while 2008 should see $2.88 per gallon, a 3.2 percent rise.
Volume growth during this time is expected to remain low, at 0.9 percent in 2007 and 1.1 percent in 2008.
The impact of gas prices on consumer spending is, of course, tremendously important to retailers. Rising gas prices will have the greatest impact on low-income consumers and the retailers that serve them. According to figures from the Department of Energy, at an average price of $3 per gallon, annual gas expenditures among more affluent households (those earning $75,000 per year or more) were about twice as high as households with incomes of $20,000 or less. However, on a percent of pretax income basis, gas expenditures were twice as high for low-income shoppers as they were for the higher income group.
Cigarettes and OTP
The potential for cigarette tax increases on the federal and state level was the top concern for retailers at Convenience Store News' Industry Forecast Council.
While a bill proposing a 61-cent per pack federal excise tax received a presidential veto late in 2007, a rise of some amount is still expected by 2008. Retailers at the table worried about the impact an increase would have on the industry's No. 1 selling in-store item. "Add 6 to 8 percent more decline in sales with the federal excise tax increase," said Mike Zielinski, president of Lisle, Ill.-based Royal Buying Group.
The CSNews Industry Forecast assumes a 43-cent per pack increase in federal excise taxes for 2008; coupled with state and local increases, taxes are forecasted to rise to $14.52 per carton.
Retailers predicted that large cigarette manufacturers would take promotional discounts away from brands in advance of tax increases to gear up for higher prices. One attendee was already seeing the impact of future legislative measures.
"We're having our best year," said Jim Papis, area sales manager for McLane Northeast. While the company has seen 218 cartons sold per store on average, according to Papis, the "heavy-hitter stores" -- which sell more than 300 cartons -- are "flat or in a slight decline of about 2 percent.
"They are trying to get onhand inventory down in anticipation of legislative measures," he added.
A brighter section in the tobacco category is OTP, which was estimated to reach $33,653 in sales per store in 2007, with a 13.1 percent increase in unit volume per store and a 10.8 percent increase in sales per store, according to the CSNews' Industry Forecast Study.
In addition, 2008 will be another strong year for the category, with $37,200 in sales per store, with unit volume growing 12.2 percent per store and sales jumping another 10.5 percent per store.
Attendees stated that the cigar segment is the No. 1 product in terms of unit growth in the category. Similar to 2007, flavored cigars continue to push the category. Steve Wegert of Altadis U.S.A. Inc. said that in E-Z Mart's market in Texas, Phillies brand cigarillos are taking off, while the Dutch Masters brand is the hot item from Florida to New England.
With both R.J. Reynolds Tobacco Co. and Philip Morris USA are rolling out smokeless snus products along with other smokeless items, retailers were slightly concerned about merchandising the items. Zielinski noted that there is "slick merchandising for Marlboro moist to put in the MST racks," while other retailers were concerned with the placement of refrigerators at the point-of-sale (POS) for R.J. Reynolds' Camel Snus.
While 2006 was a strong year for malt beverages, growing 4.2 percent in total volume, 2007 has proved to be somewhat bleak, with volume growth estimated only reaching 0.6 percent for the year, according to CSNews' Industry Forecast Study. Attendees agreed that the year has been difficult for this part of the cooler, and one attendee offered up his explanation:
"We had a wet summer," said Valero's Bartys. "It's been tough for all beverages in general."
Retailers calmed their fears with 2008, however, as total volume is forecast to grow 2.3 percent, with sales dollars up 4 percent. On the store level, 2008 will overcome the 1.2 percent decline in volume per store seen in 2007 and increase 0.2 percent, according to the CSNews Industry Forecast study. Meanwhile, sales dollars per store will increase 1.9 percent, slightly better than the 1.4 percent increase estimated in 2007. 2008 will see $101,057 in sales per store, and 19,846 in unit volume, according to the forecast.
One factor in the category that interested council attendees was the proliferation of import, specialty and craft/microbrew beers, and how that may impact the convenience channel.
"Import and specialty beers will play a much more significant role," said Gary Braaten, Cenex retail support manager. "The rule is -- put a beer cave in the store if it's near a university, and provide the product mix to meet the consumer demands."
Like last year, packaged beverages are the brightest spot in this year's Convenience Store News Forecast Study, with a whopping 24.1 percent increase in per-store sales projected for the category in 2008 -- more than double the 11.8 percentage point gain of 2007.
That increase may seem too huge to believe, however, the category is being powered by the enormous popularity of energy drinks and bottled water, two segments expected to see yet another year of double-digit per-store-sales growth in the coming year.
"The cooler has seen the most change in the past 10 years. Now, there are up to two doors for energy drinks and two doors for bottled water. We sell almost twice the amount of energy drinks compared to all carbonated soft drinks combined," said Paul Casadont, manager for merchandising at Chevron.
Overall, the forecast calls for a 16 percent boost in per-store sales of energy drinks in 2008, tapering somewhat from the 27.7 percent per-store increase for 2007.
Along with energy drinks, the bottled water segment has convenience retailers singing its praises. "It's huge, especially enhanced waters," said Michael Scarpelli at Alon USA, reacting to the 2008 forecast of 14.7 percent growth in per-store sales for the segment.
Candy & Gum
For 2008, the candy and gum category is forecasted to exceed last year's growth with a 7.6 percent increase compared to 6.3 percent in 2007. And while, last year, retailers attributed the growth in dollar sales to price increases, new products were once again at the forefront of the growth projected for 2008.
"The growth in chocolate is really around new products," Casadont said. The same is true in the gum category, which is forecasted to grow 15.7 percent in 2008, a big jump from 2007's forecasted 10.2 percent.
"New high-end gums like Wrigley 5 and Stride were tremendous launches," said McLane's Papis.
While gum has the highest overall growth, nonchocolate is outperforming chocolate in the candy category, with 5.2 percent growth in 2007 and a 6.4 percent increase expected in 2008.
With last year's price increase, some retailers reported their customers looking for value in their impulse confectionery purchases.
Value to a consumer is a king-size bar, a promotion or theater-size box of candy, according to the Forecast Council members.
For the first time in recent years, the CSNews 2008 Forecast Study included projections for the salty snacks category. Growth has been small but steady, and looks to be continuing that way. According to the forecast, per-store sales will improve by 6.5 percent in 2008, up just slightly from the 6.1 percent increase shown for 2007.
"It's a category on a constant ebb and flow for us," Bartys said, noting that the chain is building bigger stores with larger sets, and uses salty snacks as filler. "We're always in the stores talking about our salty sets, especially jerky, wondering if we have too much footage dedicated to it," he added.
One segment of the salty snacks category where retailers say they're seeing a lot of innovation these days is nuts. "There's a proliferation in nuts," said Zielinski of Royal Buying Group. "It used to be just peanuts and cashews, but not anymore."