TURF BATTLE 2004-02-16 (1)

LYNNE MILLER

As more supermarkets pump gas at their own convenience stores, C-stores are busy dishing out more fresh foods.

Indeed, operators of convenience stores recognize the profit potential that sandwiches and coffee offer. They're part of the segment that's expected to grow the fastest this decade, according to the National Restaurant Association's Industry 2010 report. It predicts the retail sector, which covers C-stores, supermarkets and other stores, will enjoy total growth of 6%. That's even better than full- and limited-service restaurants. "Our primary focus is growing our food-service business," said Bill Reilly, vice president of sales and marketing for Sheetz, an Altoona, Pa., operator of 297 C-stores.

A look at the profit margins makes it clear why food service is important. While motor fuel sales represented more than two-thirds of all sales for the average convenience store in 2002, gross margins on gas amounted to just 9.1%, according to a survey by the National Association of Convenience Stores, Alexandria, Va. Some industry observers believe gasoline ultimately will become a zero-margin business. On the other hand, the data showed food-service margins averaging 45.7%, with hot and cold dispensed beverages having especially strong gross margins -- 53.8% and 67.5%, respectively.

"What you've seen lately [at C-stores] is a lot of emphasis on food service, and experimentation around food service, that was very similar to what we saw in the supermarkets when home-meal replacement was a buzzword," said David Bishop, a director at Willard Bishop Consulting, Barrington, Ill. Food service "can really deliver a point of differentiation in the marketplace."

MTO (made to order) is the name of the proprietary food-service program operated by Sheetz. Each store has a touchscreen ordering system that allows customers to order a sandwich in much the same way as they withdraw money from automatic teller machines. Customers follow the prompts on the screen, choosing from among various breads, meats and cheeses, as well as 62 toppings. Unless special requests are made, there's no direct interaction between the customer and store associate during ordering. Associates in the kitchen fill the orders, and hand them off to customers. The program is built for speed, customization and accuracy.

"We're the only touchscreen ordering [system] in the world with this in all of our stores," said Reilly, who came to Sheetz after working for Disney. "Customization. That's our focal point. We think one of our strengths is allowing customers to dictate what they want, when they want it."

Dallas-based 7-Eleven only recently embarked on an aggressive campaign to boost food service. The company recently rolled out a slew of new items, including sushi, sandwiches and an expansive new hot coffee and tea program. The flurry of activity seems to be paying off: According to 7-Eleven, the fresh-foods category grew at a double-digit pace in 2003.

7-Eleven declined SN's request for an interview. However, a longtime company observer said 7-Eleven is aiming to build up fresh-foods sales in a manner similar to what's been achieved by the company's licensees in Japan and Scandinavia. 7-Eleven licenses about 20,000 stores around the globe, on top of operating 5,800 North American stores.

Japanese stores report more than 40% of in-store sales come from food service, while Scandinavian licensees enjoy food-service sales that account for more than 25% of in-store sales, said Bill Kennedy, senior consultant at Group Red, a New York-based retail consulting firm. In-store sales include sales of all merchandise in the stores, excluding gasoline.

"One of the things that made those food-service programs so successful in both Scandinavia and Japan was off-site production," said Kennedy, who is based in Dallas.

The use of central kitchens is no secret to supermarkets, who've come to learn that such facilities ensure consistency, lower production costs and quality control. Furthermore, store associates are free to focus on customer service rather than food preparation.

Other C-stores also rely on commissaries. It's only been five years since Bloomington, Minn.-based Holiday Stationstores ventured into food service. Now, the company is about to open a newly built, 44,000-square-foot central commissary that's four times bigger than the present facility. With 350 stores in 12 states, Holiday devotes a full 20% of each store to food service, featuring microwaves for reheating sandwiches, condiment stations stocked with 17 sandwich toppings, freshly made sandwiches, and an extensive hot beverage selection. The larger commissary will allow the company to accelerate its fresh-foods business. It's quite a switch for a 75-year-old company that used to be known for skiing and fishing equipment and sporting goods.

"You have more repeat customers buying cheese than fishing poles," said Larry Hill, the chain's director of food service, and formerly a director of operations for the Rainforest Cafe. "We think food service is the way to go."

Convincing consumers that your food is good is a challenge, especially for convenience stores without a history in food. Stores conducted demonstrations and also advertised extensively on billboards. Internally, Holiday drilled associates on the finer points of fresh-foods retailing, including the importance of having sandwiches available and keeping stores restaurant-clean, Hill said.

"The biggest challenge has been to get past the mentality that you go to Holiday to get gas," he said. "It's still a hurdle in some people's minds. We have to make sure we have great-quality food, and we have to get them to try it."

Quick Chek Food Stores, a 106-store chain based in Whitehouse Station, N.J., already had a reputation for food, and that helps the food-service operation. Originally, Quick Chek was known for dairy and deli products, and now oven-toasted subs are the chain's claim to fame, especially at lunchtime. Wraps and traditional wedge sandwiches, salads and soups are also available. Each store produces fresh bread and sandwiches on-site, with the menu changing every quarter to reflect changing trends and seasons, said Phil Masiello, vice president of marketing and merchandising at Quick Chek.

"We've always been at the forefront of selling food," he said. "It eliminates a tremendous amount of barriers. The consumer is used to us selling food, which is half the battle."

Nestled in the Blue Ridge Mountains, Charlottesville, Va., is home to Thomas Jefferson's Monticello, the esteemed University of Virginia, celebrities and tony restaurants. Against this backdrop, the Tiger Fuel convenience store chain introduced upscale stores with gourmet-style delis featuring freshly prepared entrees, complete meals for two and four, rotisserie chickens and sandwiches. Four of Tiger Fuel's 14 C-stores, under The Market banner, have the gourmet deli format.

In an untraditional move, the company also partnered with a local GE plant and hospital to operate the format at those sites. Tiger Fuel associates work in small kitchens at the sites, but rely increasingly on food deliveries from the company's central commissary. Lunch is the top daypart, followed by dinner and breakfast.

At one of the busiest stores, deli sales have been known to reach $3,000 in one day, said Stuart Lowry, director of marketing for Tiger Fuel. Food service generates roughly 30% to 35% of overall sales for the company, and the numbers are climbing, he said.

The Market had an inauspicious beginning in 1994. Neighbors protested when the company announced plans to convert a traditional service station to a high-end deli, Lowry recalled. Yet, after they tried the food, the locals were sold.

"Word travels fast among students," he said. "That happened first. We won the college audience. Then they brought their parents. Initially, we targeted influential audiences with advertising ... people with a lot of pull in the community. It didn't hurt that John Grisham started hanging out at our market."

Fill 'Er Up (With Coffee)

Just as consumers need a jolt of caffeine to wake them up in the morning, convenience stores are relying more and more on the hot brewed beverage to perk up profits.

Unlike other products, hot dispensed beverages deliver hefty gross margins with little labor cost. In fact, hot drinks offered gross margins in excess of 53% in 2002, higher than the average margin for all food-service items prepared on-site, 45.7%, according to the NACS statistics.

In just over 20 years, coffee and other hot drinks have nearly doubled their share of food-service sales for C-stores, from 17.5% in 1982 to almost 33% in 2002, the data showed.

Retailing consultants with Willard Bishop ConsultIng concluded hot dispensed beverages were the No. 1 planned purchase for convenience store shoppers, based on interviews with 4,000 consumers in 2002 and 2003.

"More consumers knew they were going to buy hot beverages when they went into the store than cigarettes," said David Bishop of Willard Bishop Consulting, Barrington, Ill. "It's a destination for many who shop convenience stores. The second reason hot dispensed beverages are important is the high purchase frequency. The typical consumer that purchased hot beverages at convenience stores buys the product on average four times per week. Not only do they know they'll buy coffee when they go into the store, they go to the store quite frequently."

Last year, 7-Eleven, the first retailer to sell hot coffee to go, announced its new hot beverage bar, featuring five or more varieties of coffee, flavored syrups, toppings, steamed milk mix and a selection of popular tea varieties for brewing with hot water.

At Quick Chek Food Stores in New Jersey, consumers are guaranteed fresh brewed coffee every 20 minutes. "That's how we get across to consumers our belief in freshness," said Phil Masiello, the company's vice president of marketing and merchandising.

Holiday Stationstores in Minnesota worked with roasters to develop blends especially for the C-store chain. "We sell six million cups a year or so," said Larry Hill, director of food service for Holiday, Bloomington, Minn. "It's a tremendous draw for our business."

Altoona, Pa.-based Sheetz dedicates 22 linear feet to the coffee program at a typical store. The chain recently introduced flavored coffees.

"We're always in [research and development] with coffee," said Bill Reilly, vice president of sales and marketing for Sheetz. "It's critical. That's the driving force behind this marketing department."