Convenience Stores: Transforming with Their Communities a Special Report from Media Group Online, Inc

Convenience Stores: Transforming with Their Communities A Special Report from Media Group Online, Inc.

may be a metaphorical stretch, but convenience Despite changes in business conditions, consumer stores are like the general store and travel behavior and technological advancements wrought It waystation of the 19th century: they are by the pandemic, convenience stores are surviving essential to their communities, but as with so many and have many opportunities to expand their offerings retail sectors during the pandemic, the transformation and increase their value to their communities. already begun must accelerate so convenience stores remain vital. This month’s Special Report from Media Group Online explores the path, the evolution of convenience stores Some convenience stores have been critical during during the past 12 months and their work to create a the pandemic, such as the Arivaca Mercantile in better future. Arivaca, AZ, as the nearest gas station and grocery store are more than 35 miles distance. pg. 2 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com

Finding Ways California remained the state with the most C-stores (12,074) and the only one to add stores (84) during 2020. to Remain Essential C-store counts decreased the most in the next three most-populous states: New York (393), Florida (192) and The convenience-stores industry started 2020 in a good Texas (161). place. Although total 2019 sales decreased 1.9% to $648.8 billion, primarily because of lower fuel prices, pretax Despite multiple challenges, a September 2020 survey profits increased a very healthy 7.8% to $10.58 billion. from CSP Daily News found 52% of C-store operators said The all-important inside-store category increased 2.6% they expected their 2020 sales to increase from 2019: 16% and foodservice had its best performance since 2016, “much more” and 36%, “somewhat more.” 39% expected increasing 5.2%. a decrease, or 30% “somewhat less” and 9% “much less.”

Considering the many retail-store closings, the 1.6% C-store operators, much like grocery stores (and to remain decrease of total C-stores to 150,274 at the end of 2020 competitive with them), adjusted their product offerings to indicates the strength of the industry. Unsurprisingly, serve their communities. single-store operations had the largest decline, or 3.1%, but are still 61.4% of all C-stores.

How C-Store Operators Adjusted Their Product Offerings, December 2020 Adjustment Percent Focused more on cleaning/toiletry items 39% Focused more on beer and wine 39% Focused more on grocery items 34% The Association for Convenience & Fuel Retailing (NACS), January 2021

C-Store Operators’ Primary Pandemic Challenges, September 2020 Challenge Percent COVID-19 safety concerns 64% Able to hire and retain necessary workforce 51% Employee turnover 34% Increase traffic/store visits 27% Credit-card fees 23% Wage inflation 21% Regulatory pressures 18% Fuel-margin volatility 12% Increased competition from other retailers 11% Increased competition from other C-stores 10% As with many retailers and other B2C businesses, Gas prices 10% COVID-19 safety was the #1 challenge cited by C-store operators responding to the September 2020 Convenience Increased competition from e-commerce 8% Store News survey. CSP Daily News, November 2020 pg. 3 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com Convenience Still Drives Consumers

A September 2020 Gallup survey found 33% of adults said they were always working from home, 25% sometimes and 42% never. Almost two- thirds of those working at home would prefer to continue, even if their employers opened their businesses for all employees and the pandemic ended. Not good news for the convenience-store industry.

Although many consumers still had reasons to visit C-stores, 64.4% had decreased their spending during the early-pandemic period. The general trend hadn’t changed much by November when 52% of consumers said they were shopping less than before the pandemic.

Reasons Consumers Were Shopping Less at C-Stores, November 2020 Reason Percent Trying to consolidate or make fewer total shopping trips 40% Not buying gasoline/fuel as often 38% Not traveling as much for leisure 34% Not eating outside the home as often 33% Don’t feel safe shopping at convenience stores 29% Choosing to shop at online stores/sites 24% Convenience Store News, November 2020

Despite more remote working and less commuting, Convenience Store News’ 2020 New Realities of the Aisle Survey of more than 1,500 C-store shoppers found “general convenience” received the highest performance rating of the stores they shopped most often. Performance Ratings for C-Store Shopped Most Often, 2020 Excellent/ Factor Good Fair/Poor Very Good General convenience 80% 17% 3% Speed of shopping trip 76% 18% 7% Store organization 72% 23% 5% Store cleanliness 71% 22% 8% Employee friendliness 71% 21% 8% Employee helpfulness 68% 22% 10% Although the pandemic has resulted in fewer Variety of products 66% 24% 10% C-store shoppers, they remain very loyal, Loyalty/Rewards program 66% 21% 13% according to summer 2020 Convenience Store News research: 74% of all and 78% of Quality of prepared food 63% 27% 10% daily C-store shoppers visit the same store. Fun to shop 58% 28% 14% 18% of Millennials and 17% of Gen Xers visit Price of products 56% 25% 19% a C-store twice daily, compared to 8% of Gen Zers and 6% of Baby Boomers. Convenience Store News, 2020 pg. 4 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com

Pandemic Pushed and Pulled In-Store Sales

During the first half of 2020, C-stores experienced mixed sales results for in-store categories, compared to 2019 total in-store sales. On the plus side, beer sales were unsurprisingly robust, increasing 12.0% after having only increased 0.1% during the first half of 2019. Although cigarette sales only increased 0.2%, it was a major turnaround from the 4.9% decrease for the first half of 2019.

As with grocery stockpiling, many consumers visited C-stores for edible and non-edible groceries in search of an alternative source of necessities they couldn’t find at other stores.

Edible and Non-Edible Grocery C-Store Sales, 1H 2020 vs. 1H 2019 Edible 1H 2020 1H 2019 Non-Edible 1H 2020 1H 2019 Breakfast cereal -7.5% -0.3% Dish care +15.3% -7.4% Condiments +13.1% -2.6% Household care +3.1% -9.7% Other +11.1% -3.0% Laundry care +1.3% -1.0% Packaged coffee/tea +3.6% +3.8% Other +11.9% -8.4% Total +7.3% +0.3% Paper/Plastic/Foil +8.4% -4.6% Pet care -3.8% +2.6% Total +3.3% -4.0% Convenience Store News, July 2020

Among the inside-store categories which performed worse Another inside-store category the pandemic influenced was during the first half of 2020, salty snacks had the biggest general merchandise. Although 1H 2020 sales decreased decline, or -7.6%, compared to a 4.1% increase during 4.4%, it was a significant improvement from the 11.5% 1H 2019. Packaged beverages decreased 2.2% while the decrease during 1H 2019. The two subcategories with the category gained 1.0% during 1H 2019. biggest increases were batteries +12.7% (-8.5% 1H 2019) and video/audio tapes +4.0% (-45.0% 1H 2019). Bottled water -10.9%, enhanced water -9.3% and ready- to-drink iced teas -8.0% declined the most, reflective of Consumers were clearly purchasing hardware/housewares fewer commuters and total visitors and more purchases at at other stores, most likely hardware, home improvement mainstream grocery stores and online. and mass merchandisers, as sales decreased 23.3% at C-stores, extending a trend from the first half of 2019 when Another big loser was other tobacco products, which they decreased 20.4%. increased 16.1% during the first half of 2019, but only 1.9% for 1H 2020. The e-cigarette sub-category led the decline at -8.6% after a 76.5% gain during 1H 2019. Industry analysts cite California’s ban of flavored tobacco and vape products as a major factor, a trend other states may follow. pg. 5 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com

During the first half of 2020, 53% of all C-store operators Foodservice Suffers as responding to Convenience Store News’ Foodservice Study said their foodservice sales had decreased, 47% Consumers Shun Self-Service among small operators and 63% among large operators. Approximately one-third said their sales had increased: all Foodservice has been a primary focus of the convenience- 36%, small 36% and large 34%. store industry for several years, as other foodservice options are becoming more competitive and the variety Unsurprisingly, 69% of survey respondents said their biggest and quality of the food at C-stores required major upgrades obstacle to increased foodservice sales was “COVID-19 and improvements. restrictions on self-service food and beverages.”

During 2019, foodservice sales totaled $39.8 billion, a 5.2% increase, twice the 2.6% increase for all C-store sales. Frozen, dispensed beverages increased the most, or 11.8%, but was only $1.37 billion of the $39.8 billion total. Prepared foods (onsite or offsite) was the largest sub- sector by sales, or $27.72 billion.

Matching or even approaching 2019 foodservice sales has been challenging during 2020. A late-2020 survey from Intouch Insight found 9% more respondents than its spring survey said, “they are extremely unlikely to use self- serve condiments or coffee bars, purchase self-dispensed beverages or purchase food from a bakery case or roller grill,” as reported by CSP in a December 2020 article.

Biggest Obstacles to Increase Foodservice Sales, 2020 Small Large Obstacle All Operators Operators COVID-19 restrictions on self-service food and beverages 69% 65% 76% Changes of store traffic and trips due to COVID-19 62% 57% 71% Less foot traffic in stores 49% 53% 42% Difficulty hiring and retaining employees 35% 39% 27% Supply chain 28% 29% 27% Negative consumer perceptions of C-store foodservice 23% 21% 27% Lack of alternative shopping options (mobile ordering, etc.) 17% 10% 29% Operational inefficiencies at store level 15% 13% 20% Increasing competition for foodservice business 13% 10% 17% Finding the right products/programs 12% 10% 15% Convenience Store News, August 2020

Despite the many obstacles to increasing foodservice sales, 44% of all surveyed C-store operators expected to increase their sales for all of 2020 and the same percentage expected increased foodservice profits. While less than 30% (28%) expected foodservice sales to decrease, 33% expected decreased profits at yearend. pg. 6 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com

Less Commuting and Travel, Fewer Fuel Sales

With more people working from home, fewer activities outside the home and less travel, average fuel transactions during summer 2020 were 6% less than summer 2019, which was better than many analysts expected. More Americans were choosing personal instead of public transportation and more were vacationing in an RV.

The pandemic also affected when people bought gasoline, with a 12% decrease of purchases during the morning Upgrading fuel pumps to comply with the EMV chip card commute from 4am–7am. People were more likely to visit a by April 2021 is a major challenge for many C-stores. The convenience store for gasoline from 9am–12pm, increasing 14% responding to CSP’s 2020 Outlook Survey who said 12%; however, purchases from 6pm–12am decreased 27%. they weren’t planning to upgrade could have to pay an average of $17,315 per site. Reduced driving is clearly evident in the monthly data from the Federal Highway Administration. Although monthly The expected and significant increase in electric-vehicle travel improved from the early-pandemic period, it is likely (EVs) sales is starting to impact C-store operators’ views to decrease again with the COVID-19 surge during the on future fuel demand, as 24% told CSP EVs would have a winter months. positive or negative effect, third behind changing consumer behavior/preferences 37% and fuel prices 25%.

YOY Changes of Monthly Travel on All Surprisingly, almost half of C-store operators participating Roads and Streets in the US and by in the survey said they were not planning any changes to their fuel offerings during 2021, despite the long-term, Region, December 2020 anticipated changes in personal transportation. May August October Area 2020 2020 2020 C-Store Operators’ Planned Changes United States -25.5% -12.3% -8.8% Northeast -33.4% -14.3% -11.5% to Their Fuel Offerings During 2021, South Atlantic -26.1% -12.5% -8.5% September 2020 North Central -26.3% -11.1% -10.4% Change Percent South Gulf -19.8% -11.1% -7.4% Not planning any changes 43% West -24.3% -13.1% -7.1% Upgrade pumps to EMV specifications 30% Federal Highway Administration, December 2020 Add new marketing technology at the pump 21% Add EV-charging stations 21% Add ethanol-free gasoline 16% Change fuel brands 9% Add biodiesel 7% Revamp or expand fuel islands 4% Add diesel 3% Add E15 1% Add E85 1% CSP, November 2020 pg. 7 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com Adopting New Technologies to Ensure Future Growth

Upgrading technologies at C-stores was already a challenge prior to the pandemic, but is even more so with the significant changes in shopper behaviors. According to Convenience Store News’ 2020 Technology Study, C-stores are making more of an effort, as 31.5% increased their tech budgets by 10% or more during 2019 and 73.7% said they would spend more during 2020.

The pandemic has likely caused difficulties for C-stores to achieve those additional tech expenditures, but the pandemic also forced many of them to initiate those changes.

Impact of the Pandemic on Tech Despite renewed efforts to adopt new technologies, the Development at C-Stores, 2020 Convenience Store News survey found only a bit more Impact Percent than one-third (34.8%) had a delivery service and, worse yet, 43.5% said they don’t offer a delivery service and Increase implementation of new don’t plan to add it. As the survey was conducted during contactless technology, delivery and 33.3% early 2020, it is likely more C-stores have added a delivery curbside pickup options service during the pandemic. Generated interest to explore contactless technology, delivery and curbside pickup 26.7% A more recent survey (May–August 2020) from NACS options for the future found C-stores remain slow to add/improve their last-mile Increase expansion and/or enhancement fulfillment services, as 46% of those in North America said of existing contactless technology, 20.0% they have, compared to 80% in Europe and Australia. delivery and curbside pickup options The survey also revealed the pandemic prompted 68% of North American C-store operators to offer these services. None of the above 20.0% Convenience Store News, February 2020 Technologies C-Store Operators Are Offering to Accept Last-Mile Fulfillment Orders, May–August 2020 Plan to Currently Technology Offer Next Offering 12 Months Mobile order (app or call) for in-store pickup 65% 44% Mobile order for delivery to alternate location 46% 26% Mobile order for curbside pickup 36% 38% Website order 26% 34% Third-party locker at store or other retailer 23% 16% (Amazon, UPS) Mobile orders for drive-thru pickup 15% 8% Order at the pump for in-store pickup 11% 34% Order at the pump for delivery to vehicle 8% 20% NACS, October 2020 pg. 8 Convenience Stores: Transforming with Their Communities www.mediagrouponlineinc.com

Working Towards a Better Future

Although the pandemic and consumers’ responses to it have adversely affected many C-stores, the industry will remain critical, especially since 80% of all fuels are sold there. As more people are vaccinated and the pandemic diminishes, C-stores will be well-positioned to regain foot traffic and revenues.

Nonetheless, some operators noted anecdotally they might not return to profitability until 2022 or even 2023. Even with some return to normalcy, consumers will expect a continuation of many pandemic health and safety protocols.

To remain competitive, more C-stores will have to consider the addition of drive-thru services, especially those with made-to-order food offerings, since fast-food restaurants were very successful with drive-thru during the pandemic. According to NACS data, many C-store operators will emphasize foodservice during 2021.

C-Stores’ Plans to Offer More Meal Despite the many challenges C-store operators have faced Solutions During 2021, January 2021 during the pandemic and how they will have to change Meal Solutions Percent their business model during 2021 and beyond, 16% said they expected a great improvement in 2021 business Will emphasize prepared foodservice 58% conditions, according to CSP’s 2020 Outlook Survey. A Will focus more on fresh, prepared meals 51% majority (64%) expected some improvement, 16% said Will focus more on ready-to-heat meals 30% business conditions will remain the same and only 4% said they would somewhat decline. NACS, January 2021 All of these changes, adjustments and introduction of new technologies will require more advertising and promotions for C-stores during the next few years, so they should be near the top of your prospects’ list.

Sources Convenience Store News Website, 1/21; CSP Daily News Website, 1/21; The Association for Convenience & Fuel Retailing (NACS) Website, 1/21; Gallup Website, 1/21; Federal Highway Administration Website, 1/21.

Prepared: January 2021