Convenience store leaders are testing hybrid formats and expanding foodservice offerings as they face competition from grocers, drugstores and quick-service restaurants that encroach on traditional c-store territory. The ball game is changing. Retailers focus on consumer need rather than on the classic definitions of channels.
Elsevier Food International, Vol. 7, Number 1, February 2004
Joel H. Vega

Alain Bouchard, the chief executive of Quebec-based c-store operator Alimentation Couche-Tard threw a challenge to major US c-store players when he was quoted in a recent interview as having said that the US c-store is mired in a cycle of predictable product lines and chronic reliance on weak cigarette sales and low-margin products such as gasoline. "We adapt ourselves to the neighbourhood market. When you know who your customers are, that can give you an edge on the competition," said Bouchard. "The idea is to tailor both product selection and interior design for each store and see what works."
Bouchard hit the current weak spot of c-store operators in the US whose game seems to have dropped just as other formats are gearing up to boost customer numbers. No one would argue that convenience and speed are still the main weapons for convenience store operators. But while consumers view these attributes as core strengths of c-stores vis-à-vis other formats, industry leaders must keep the ball rolling by developing new products and services.

Grab and go: The US experience

Mini coffe bars in the US are pulling in a steady stream of customers 'on the go' who are after fast and efficient food service.

According to the National Association of Convenience Stores (NACS) c-store sales in the US rose 2.7 per cent in 2002, up by US$7.6 billion to reach US$290.6 billion. But pre-tax profits fell 24.3 per cent to US$2.61 billion, or an average of US$20,400 per store. The year 2002 marked the first time in six years that the US c-store industry failed to outpace total retail sales compared to the Consumer Price Index. The only year that was worse was 1990 when US c-stores, which total to around 132,400 in 2003, reported a pre-tax profit loss of US$200 billion. As NACS chairman Hank Armour said, "The challenge to US c-store players is to change their business models and be fanatical about expenses."
As a consolation to c-store operators, other retail channels in the US did not fare better. Overall, US retail sales rose 3.3 per cent, with grocery and discount department store sales both showing less than two per cent growth in 2002. In contrast, warehouse clubs and superstores showed double-digit growth for the sixth consecutive year, growing by 17 per cent. Drug stores also had another strong year, growing by 8.4 per cent.
NACS figures also showed that petrol accounts for 62.4 per cent of c-store sales, reaching US$181.3 billion in 2002. Merchandise sales amounted to US$109.3 billion in 2002, while foodservice sales rose to US$13.4 billion in the same year. Coffee sales accounted for US$3.2 billion in the same year. But with profit from motor fuels expected to decline or stay flat.
NACS said fuel is more tied to being a traffic builder than a profit generator. US hypermarkets also now hold a 5.9 per cent share of all retail motor fuel sold, according to data from the Colorado-based Energy Analysts Information (EAI), which reflects 50 per cent growth in one year.
Even more worrying, petrol sales by so-called 'big box' retailers rose by seven per cent in the first quarter of 2003. Wal-Mart has strengthened its one-stop shopping strategy by opening 100 fuelling facilities in a year. Supermarket rival Kroger also operates c-stores using the same distribution centres for both formats. Kroger had around 300 supermarket fuel centres in 2002, and its c-store chains accounted for 2.7 per cent of Kroger's total 2002 sales. On the other hand, the San Diego-based fast-food chain Jack in the Box has 14 Quick Stuff c-stores, each located next to a Jack in the Box restaurant and a petrol station. Even McDonald's is testing a self-service c-store concept called Tik Tok Easy Shop. The market estimates that alternative petrol outlets, which hold around six per cent of the US motor fuels market, will continue to erode share from c-stores, eventually picking up a 12 per cent share by 2007.
More bad news for US c-store operators: cigarettes, the industry's so-called 'crown jewel' is also under severe pressure. Although cigarettes sales share is three times larger than the next closest category, foodservice, with 12.3 per cent of in-store sales, gross margin dollars for cigarettes dropped to 7.9 per cent store. Several factors have contributed to lower industry sales in 2002, such as Internet cigarette sales and the shift from premium to less expensive cigarettes.
Retail Forward, a retail management consultant group, has predicted US c-store sales to grow at an average annual rate of 3.8 per cent through 2006. But with pressures from all directions, US c-store operators are moving to improve operations, enhance performance, and position themselves to retain existing shoppers and attract new customers. The encroachment of competitive formats is thus driving c-store industry consolidation. Five years ago, the top ten players accounted for 28 per cent of industry sales. Today, the top ten US c-store groups control 42 per cent of sales. Market analysts also expect newly combined groups to integrate operations with a single infrastructure, often under a single brand name to achieve marketing clout.
NACS has also urged its members not only to play the (brand) name game but also to boost in-store investments to stimulate high-margin profits. Thus, US c-stores are moving to implement in-store branding efforts, upgrades/remodels, and are focusing on healthier 'fast food' alternatives. Coffee, worth around US$3.7 billion for US c-stores in 2002, is another category that c-stores are upgrading. "The challenge for c-store operators is to redefine convenience for their customers," said Sandy Skrovan, vice president of Retail Forward. "C-stores must decide what form/format convenience should take and must figure out how to differentiate themselves to retain existing customers and attract new ones in a landscape that's becoming increasingly crowded with convenience offers."
With other retail channels blurring the convenience concept, some US c-stores are moving to the 'grab-and-go' market, with an increasing focus on fresh food service offers, upscale coffee service and immediate consumption items. Other services on the works include quick oil change, car wash, dry cleaning and banking. US c-stores have also heeded the lesson of adapting technology.
Major c-store players such as 7-Eleven have become pioneers of innovative technologies. 7-Eleven's Vcom kiosks not only offer ATM services but have also expanded Vcoms services to include payments. Radio frequency identification (RFID), touch screen ordering systems, electronic kiosks, and mobile commerce are also among the new tech options that some operators are pursuing. As one c-store operator in Texas said: "If you're not using the latest technology, you're just silly. If you're not scanning, you're not moving forward."

Rise of the Japanese 'konbini'
Nearly 30 years after the US exported its c-store model to Japan, the Japanese c-store, locally called 'konbini', has not only become a cornerstone in Japanese retail but has also evolved to offer a vast array of services. A typical Japanese konbini today not only sells food and other convenience items but also acts as a centre where customers can pay utility bills, book tickets for a concert or buy package tours. Some stores in Tokyo, aside from serving as agents and collection points for books sold via the Internet, have even started home delivery to elderly people, and in some cases and in partnership with a nursing services firm, have begun check-up visits on seniors.
Figures show that in the 2001 fiscal year (April 2001 to March 2002) there were 43 corporations operating c-store chains with a total store count of around 40,844 outlets. Combined c-store sales reached an estimated ¥7.14 trillion (US$62 billion at ¥115 to the US dollar), compared to ¥8.53 worth of sales (US$74 billion) generated in the same year by department stores.
7-Eleven Japan, operating around 8,602 stores, remains the top 'konbini' trailed by rivals Lawson, which owns a 7,683-store network, and the US-owned Equilon with 6,060 stores. Together, 7-Eleven and Lawson control about half of Japan's c-store industry, although the latter have a wider coverage of 47 prefectures compared to 7-Eleven's store network in 31 prefectures. Japanese c-store retailers also lead the international market and both 7-Eleven Japan and Lawson are the world's top two convenience store operators. 7-Eleven Japan owns more stores worldwide than any other company and is a subsidiary of leading Japanese retailer Ito- Yokado. To easily outpace its rivals, 7-Eleven, since its establishment in 1974, created 'clustered' networks of shops within close geographic range, not only to keep rivals away but also to reduce procurement costs by shortening the travel distance for delivery trucks.

Great balls of rice
Overall, Japanese konbinis are half the size of the average US c-store but they generate twice the sales by rigorous and consistent application of retail competencies. 7-Eleven Japan, while exploiting its effective franchise strategy in South Asia, shares its expertise on marketing, logistics and inventory control. According to Japan Consuming, 'konbinis' are selling more in terms of value food items compared to the largest grocery stores. Onigiri (rice balls), a staple of Japanese picnics and lunch boxes, remains a top-selling product in c-stores since the 1970s, and some cafes have even specialised in onigiri as their signature dish.
Ever since Lawson opened a year after 7- Eleven, the two groups have been battling for market control. While 7-Eleven employs its 'clustered stores' strategy, Lawson develops scale and aims for customer reach. 7-Eleven, however, has widened its lead in terms of number of locations, and analysts believe that Lawson may yet be prompted to scale back due to smaller per-store sales. But the biggest tussle between the two chains is in product development. To maintain its lead, 7-Eleven is co-developing its top selling items with major manufacturers such as Chez Lui Valentine's Day chocolates or Nissin instant noodles, brand names that unfailingly impress the brand- conscious Japanese customer. Tit for tat, Lawson developed its own line of onigiri, bento (traditional lunch boxes) and other fast-food items. To further sharpen its strategy, Lawson opened two experimental natural-food stores to attract health-conscious women shoppers However, Japan's food retail industry as a whole has been operating under grey skies, and although c-stores are Japan's fastest growing retailers, the sector has not escaped the economic malaise that has dampened overall sales targets. Sales in 2001 dropped by 1.7 per cent for the second consecutive year. In the last quarter of 2003, the Japan Franchise Association reported that c-stores sales dropped 0.7 per cent in November compared to the previous year on a same-store basis, the ninth consecutive decline on a monthly basis. "Only the most innovative companies will survive. Those who only slash prices without offering new products of high value will fall by the wayside," said 7-Eleven Japan Chairman Toshifumi Suzuki in a Japan Times report. Innovative tactics for both rival chains now occur in cyberspace. Lawson fired the first electronic salvo when in 1998 it launched the Lawson Online Shopping or 'Loppi' system, which allows customers to buy tickets, download game software and pay bills at its terminals. In 2000, 7-Eleven offered its 7dream.com. Subscribers of the two chains can order products from PCs or mobile phones for a later pick up at local outlets. Although earnings from the ATM and e-commerce activities have yet to deliver hefty profits, both chains are hopeful that their innovations will eventually attract huge customer numbers and stimulate purchases.

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What's up on the c-store front?
 
The number of convenience stores developed by the world's biggest international retailers rose 22 per cent to 46,000 units between 1997 and 2002. Market analysts expect the c-store sector to see further growth in the short to medium term as these retailers exploit niches in maturing markets and to meet the demand for snacking and fast foods. The key markets for c-stores are Asia Pacific, Western Europe and North America.

NORTH AMERICA
• Canada's Couche-Tard now ranked as the fourth largest c-store operator in the US after the recent acquisition of the Cirkle K chain from ConocoPhilips. Couche- Tard's CEO Alain Bouchard aims to expand the chain's network to other US states such as Texas and California.
• Japanese c-store operator FamilyMart announced its plans last year to open stores in major US cities by 2006. FamilyMart plans to open up to 200 franchised stores, each in several large cities such as New York and los Angeles. FamilyMart, which also operates in South Korea, Thailand and Taiwan, will be the first Japanese c-store chain to move into the US retail market.

JAPAN
British retailer Tesco has entered the Japanese market when it made a recommended UK£173 million (US$ 2777.2 million) bid offer for the C Two-Network. C Two operates a profitable chain of 78 stores, many of them located in Tokyo. Tesco's move is interpreted as an attempt to gain an initial foothold in the notoriously competitive Japanese market.

EUROPE
British retailer Sainsbury's is creating 100 new convenience stores at Shell petrol stations. The shops will open over the next three years generating around 2,000 jobs. The new stores will be based on the existing 'Sainsbury's local' outlets, but will also offer car care products and motor accessories.
French consumers are still likely to make food purchases at hypermarkets despite a rise in c-store visits, according to Datamonitor. In comparison, Italy's small local c-stores will remain a major grocery channel, with c-store market share expected to grow from 19 per cent in 2001 to 20.5 per cent in 2006.
Despite tough economic times and the growing dominance of discounters, Germany's c-store market is expected to gain momentum as demand for 24-hour fast food grows. At least 20 per cent of German shoppers are receptive to convenience shopping, according to the Cologne-based EHI Retail Network.

ASIA
7-Eleven Japan has launched a joint venture in Beijing. The chain owns about 600 stores in Hong Kong and Shenzhen, but has no stores in other parts of China. The retailer will have a 65 per cent stake in a $70 million joint venture with Beijing Shoulian (Allied Capital) Commercial
Group and China National Sugar and Alcohol Group. The new company, Seven Eleven (Beijing), plans to open stores in Beijing, nanjin and areas close to the Hebei Province in the north within a few months.
ExxonMobil Asia Pacific and Singaporean grocery retailer NTUC FairPrice has linked up in a new service station retail concept, the first in Singapore. Under the venture, ExxonMobil will continue to own the Esso and Mobil sites with responsibilities for fuel supply, marketing and pricing. FairPrice will operate the forecourt/c-store outlets under the FairPrice Express or Cheers banners. The venture will initially operate eight service station sites for one year starting in the first quarter (2004) before launching expansion plans.
Countries like Thailand, where the retail market has matured and new planning restrictions are being implemented, will likely see a diversification of store formats towards smaller outlets such as discount and c-stores, 387

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Retail morphing
If the blurring of traditional c-store formats is widespread in the US, the morphing of retail formats has prompted Japanese operators to forge creative strategies. Last September, trading house Nichimen Corp announced a joint venture with discount store group Cowboy to operate small supermarkets in the greater Tokyo area.
Planned as a combined superrnarket/c-store with extended opening hours and located in train stations, Nichimen aims to open 37 outlets within five years and generate a target of ¥40 billion (US$336.6 million) in sales in five years. In August last year, Lawson and Japan Post opened two outlets of a combined post office/convenience store in Tokyo's Yoyogi district and in Yokohama. The outlets, open 24 hours daily, allow customers to buy stamps and send parcels long after the standard opening hours in other post offices.
Aside from innovation, a key element in Japan's dynamic c-store industry is franchising, an expertise that Japanese retailers like 7-Eleven have completely mastered. Franchising has allowed c-store chains to roll out quickly across regions and countries without massive capital outlays. In the case of 7-Eleven, the franchise system has allowed the group to operate with the marketing and merchandising support of a larger organisation.
Effective merchandising is also a key to the success of Japan's retail industry, where retailers concentrate on item-by-item management. And, again, in the case of 7-Eleven the group has fully exploited the tactic of area dominance to ensure success. Retailers not only develop stores but also develop trade area by trade area in order to reach critical mass and discourage their rivals.

European c-stores  
In Western Europe, real estate restrictions from planning authorities have somehow limited the big push towards hypermarkets and superstores. Thus, retailers are prompted to extend and remodel existing stores, or develop smaller store formats such as convenience stores. Total c-store sales in 2001 in Western Europe were estimated at €92 billion, with Germany, France and the UK having the largest markets. Despite being the largest convenience market in sales terms, the UK has only average c-store penetration and number of shopping trips per week. Italy is the only country to have above average c-store penetration and an above average number of shopping trips per week. In contrast, c-store penetration level in the Netherlands is surprisingly low despite frequent shop visits by Dutch consumers, which shows that the average Dutch shopper goes to supermarkets for small, regular purchases rather than to c-stores.
According to M + M Planet Retail, small store formats in 2002 in Western Europe have seen the largest growth in terms of outlets, with the number of convenience/forccourt stores operated by the Top 30 rising by 26 per cent to 10,349 outlets (See table). Among the noteworthy deals were Tesco's purchase of 1,200 stores from T&S and the Co-operative Group's acquisition of Alldays (630 stores), both in the UK. But supermarkets still dominate the overall portfolio of the Top 30 leading Western European retailers with around 36,000 outlets in 2002, or a growth of 1,300 stores compared with 2001. Retailers are also boosting their discount store base with total outlets in 2002 reaching 25,328 including 1,000 newly opened stores.
In Scandinavia, Sweden's filling stations and convenience stores achieved the distinction of having the fastest growing sales in the fast-food market. Among the top ten in the fast food sector, three are filling-station chains and two convenience stores. The third largest is Statoil, which has linked up with supermarket chain ICA-Ahold, with fast food sales exceeding €55 million. More than 100 Statoil stations carry the ICA Express banner and offer a larger variety of fast food. In Finland, Kesko's c-store chain Pikkolo has widened its assortment to include fresh take-away food ranging from coffee, sandwiches and salads to microwaveable meals. Since opening in 2000 in Helsinki, Pikkolo now plans to open around 100 stores across the country.
In 2001, the average European made 1.1 visits to a convenience store per week, with a total of 18.6 billion c-store visits that year. Industry leaders believe there is still significant growth potential in Europe's convenience sector, with c-store sales expected to increase from €92 billion in 2001 to €108.2 billion in 2006. Reassessing strategies is crucial for manufacturers to effectively penetrate the c-store market and the experience of top European c-stores shows that developing a deeper understanding of consumer needs is essential in refining product attributes. Areas of expansion are new store formats (Marks & Spencer 'Simply Food Stores'), the so-called 'on-the-move' market (Ahold's AH to Go and Delhaize's Shop 'n Go) and emerging channels.

Sources: NACS 501 Annual Report, Retail Forward, Japan Times, M + M Planet Retail, Datamonitor, EHI Retail Network