COST EFFICIENCIES RAISE STAKES FOR C-STORES

MARTIN SCHNEIDER

The C-store industry is quickly playing catch up and applying the formula that supermarkets have followed for years -- taking costs out of the distribution system.

In doing so, C-stores may become an even bigger threat to supermarkets once they begin to close the efficiency-price gap, say industry observers.

Convenience stores traditionally have a high cost-to-serve ratio. Industry studies show that it costs on average five times more to move a cubic foot of product to a convenience store than it does to get that product on the shelves of a supermarket.

The inefficiencies in distribution have kept prices on many convenience items high, securing the supermarket's role as the primary shopping destination for consumers of such items.

Now, however, convenience store operators have begun to consolidate their distribution practices, which will lead to price reductions at store level.

A new project called C/SCAPE (Convenience Supply Chain for Assortment, Profitability and Efficiency) has been created to identify ways in which convenience store operators can streamline the business to cut costs. The project is a joint effort sponsored by the National Association of Convenience Stores, Alexandria, Va., and the Washington-based American Wholesale Marketers Association.

Its goals are akin to those of the ECR (Efficient Consumer Response) program, which was developed by the food industry in the last decade and was a forerunner of many category management initiatives.

The project identifies key ways operators can cut costs at the distribution level.

Willard Bishop, president of Willard Bishop Consulting, Barrington, Ill., the project's facilitator, told SN that convenience store operators like 7-Eleven, Dallas, have rigorously restructured their supply systems to cut costs.

"7-Eleven has developed a consolidated network of distribution centers, a lot like what European retailers have been doing, fitting as much product into one truck to maximize delivery efficiency. They have even begun using special trucks that hold frozen, refrigerated and dry goods, which helps reset stores and turn inventory faster," Bishop told SN.

According to David Podeschi, vice president of demand chain integration at 7-Eleven, the convenience chain has moved to just-in-time delivery of products daily through its new distribution systems.

"7-Eleven has a unique combined distribution center system with 23 CDCs [Combined Distribution Centers] delivering fresh and packaged products daily. The CDC system allows stores to replenish inventory according to sales on a daily basis -- with just the amount they need. For example, dairy products used to be delivered to stores maybe twice a week, in multiples of four or six. Now, with the CDC system, stores have daily delivery of milk in the quantity needed. This ultimately means the freshest product is available on the shelf for our customers," Podeschi told SN.

7-Eleven also works with traditional DSD suppliers to deliver on the right frequency and schedule to best fit the stores. "To increase turnover rates, our merchandising department works with partner suppliers to develop individual or small case packing to fit the needs of our customers and stores," Podeschi said.

Bishop noted that other companies, like Sheetz, Altoona, Pa., a 70-unit C-store chain, have made the decision to move toward self-distribution. Like 7-Eleven's initiatives, Bishop said that a company like Sheetz controlling its distribution could lead to efficiencies and lower consumer prices for high turnaround items.

Louie Sheetz, C-store chain executive vice president, said the company will begin self-distribution next month, and expects to gain substantial revenue from the wholesale savings.

"We will benefit primarily from wholesale savings, but other things like promotional programs from manufacturers will help us at warehouse level," Sheetz said.

He noted that the company will go through a full operating year before assessing how it wishes to utilize the revenue it gains from the move to self-distribution.

"For the time being, we will keep the transfer costs to the stores at the current level. After we see what the distribution revenue does to the bottom line, we will then decide how we will pass the savings on at store level," he said.

Sheetz said he is confident the company will lower its transfer costs, thus creating a more competitive pricing situation in the stores.

In addition to moving toward self-distribution, convenience retail operators and distributors can work together to cut costs, according to Kit Dietz, chairman of Tripifoods, Buffalo, N.Y.

"Our opportunity is to work with retailers in understanding category dynamics. One of the high-cost areas from the distribution side is labor. When the labor path is spread out over 12,000 stockkeeping units, many of which are unprofitable, the result is high costs that get passed on to the customer. Now, if we can cut that amount in half, there is a more efficient pick process, and the amount of labor spent on slow-moving items is reduced," Dietz told SN.

Dietz, who was one of the industry figures responsible for bringing C/SCAPE to the industry, said that high-cost, hard-to-handle items must be analyzed for the item's true value in the store set.

"Items like prepackaged beverages can be very expensive to get into the store. Sometimes the sales numbers do not even cover the handling costs. A retailer must work with its distributor to determine if having these expensive items in the stores is really worth the effect it has on the bottom line," he said.

Jonathan Ziegler, managing director, Deutsche Banc Alex. Brown, New York, told SN that he has seen convenience store operators reinvigorating their categories.

"7-Eleven is one of the top companies gaining strength, as it focuses on ridding stores of items gathering dust and focusing on fast-moving items. And companies like Wawa [Wawa, Pa.] have really reinvented the convenience store model. Wawa is just as much a restaurant as a convenience store," Ziegler said.

Once convenience stores and supermarkets begin competing on a level playing field in terms of price, supermarkets could face further erosion of a larger portion of its sales base on convenience items, said some industry sources.

In addition to restructuring distribution channels, convenience stores can add a greater competitive edge by remerchandising.

The C/SCAPE project identifies C-store categories believed to contain core store items, many of which were actually losing money.

In fact, the project noted that only 18% of the SKUs in a convenience store account for 80% percent of the profits.

One example that Bishop cited is publications. Historically, the category has performed poorly for convenience operators. But it is one that operators have always thought to be a necessity.

"Magazines are not a strong category for the most part, primarily because there are so many titles, and the ones that do not sell bring down the overall performance of the category," Bishop said.

The logical solution to the problem, according to Bishop, is to analyze scanner data, and simply eliminate several underperforming titles, thus streamlining the category and also creating more space in the store.

Convenience stores also have had troubles merchandising edible grocery, Bishop said.

"In this category, there were lots of product on the shelves, instead of just three faces, like you would see in a supermarket. By reducing the amount of product on the shelves, a convenience store can add a larger variety of product. Again, by utilizing scanner data, operators can figure out what products move and order accordingly. This may mean that some items may be ordered by less than a case-load, which is more expensive. But in the end, it means less product on the shelves and more turnaround for other items in the category," Bishop said.

Dietz said the best way to utilize information gleaned from projects like C/SCAPE is to slim down the number of redundant items in a store.

"The opportunity is to look at categories and see that there are sometimes five or six brands of the same item. By using data to understand what are the most desirable brands and how some items affect total volume sales, the store can be reset in a much more profitable manner," he said.

Resets, said Dietz, must be rethought to better serve customers and increase profits.

"Traditionally, when you'd reset an 8-foot-long candy section, you'd keep it the same size and try to put in all the best-selling items you could. The same goes for a 10-foot grocery section. But now, we're looking at the overall size of the category and seeing if it makes sense. With this new information we are looking at how the whole store is designed, not just individual sections. It is rethinking the whole box," Dietz said.

Overall, convenience stores' core business has always been cigarettes and chewing tobacco, candy and soft drinks. It is now important for convenience stores to understand this core business, and how it drives the economics of the remainder of the store, said Bishop.

"There has never been a recommendation for operators to completely abandon a category, but by understanding its worth and place in the store, operators can more effectively utilize the limited space of a convenience store and maximize profits by focusing on the high-selling, high-profit items," he said.

As convenience store operators begin to streamline operations, the true impact to supermarkets may be substantial, Bishop said.

"Convenience stores are continuing to gobble up the 'fill-in' grocery business. If these operators can figure out how to consistently be the destination for eggs, bread and milk, there could be trouble. Why would you go to a big supermarket and deal with the lines when you have comparably priced convenience stores? Many stores surprisingly have not stressed that aspect, but when they do, it will be hard for supermarkets to catch up," Bishop said.

Convenience stores can also add sales as operators continue to dominate and grow their single-serve, "grab-and-go" business.

"Consumers are eating on the go more and more. And if a competitor to supermarkets that already owns that market gets just a couple times better, it will be harder for supermarkets to participate in that growing market. Supermarkets have not had the same flexibility to follow where the market is moving that convenience stores possess," Bishop noted.

Ziegler said that he feels convenience stores do pose a definite threat, but the size and scope of the format will never ultimately threaten supermarket dominance.

"It's more like a piranha attack than a shark attack," Ziegler said. "Supermarkets are not going to be going out of business because of convenience stores getting their act together."

Dietz said he feels, however, it is still too early to tell just how operators will embrace the type of information C/SCAPE offers.

"No one has really had a chance to take this information and run with it. But retailers are getting ready to utilize some of the insights found in C/SCAPE's findings. It is going to be quicker than the supermarkets' move to category management, since convenience stores are typically dealing with 3,000 SKUs compared to the more than 30,000 SKUs that supermarkets handle," Dietz said.

However, many companies have begun defensive measures. Publix Super Markets, Lakeland, Fla., announced this year that it will build and operate several "Pix" convenience stores in the parking lots of existing Publix stores.

The smaller, 3,000-square-foot stores are meant to capture the "fill-in" and convenience shopping stops consumers make throughout the week. Like the addition of fuel centers to supermarket parking lots, the small-box format outside the store is one more way food retailers can keep customers coming to their stores.

Ziegler noted that Kroger, Cincinnati, has converted a combination store in Columbus, Ohio, into a supermarket with a convenience store attached that stays open 24 hours to cater to the convenience-oriented customer.

Chuck Cerankosky, analyst with McDonald & Co., Cleveland, Ohio, also told SN that convenience stores may not be more than a mild threat to supermarket sales.

"All the big guys are doing it. Kroger has nearly 800 convenience stores, Marsh Supermarkets [Indianapolis] operates some convenience stores, as does Ahold USA [Chantilly, Va.]. Even Albertson's [Boise, Idaho] sells some food items through its stand-alone drug stores and offers gas at many stores like a convenience store. I'm not sure what degree other players want to get into the game, but I think they understand the threat that the format presents," Cerankosky said.

Cerankosky added that he feels category management initiatives are a great idea for convenience stores.

"It makes a great deal of sense. Convenience stores have always had the problem of high costs because they traditionally buy in small quantities. If you can reduce the cost of product by working with distributors in a category management type of system, a lot of synergies and profit can be gained," Cerankosky said.