Dunnhumby Retailer Preference Index

dunnhumby Retailer Preference Index

Think, Feel, and Do Convenience Channel Edition October 2019 State of the Market: The Davids versus the Goliaths Winning in today’s Modern Convenience market requires a keen understanding of the Customer and ability to rapidly adapt to their changing needs

2018 was a banner year for the U.S. Convenience channel. For the 16th year in a row, in-store sales broke records, soaring to $242.2 billion. As with most retail channels, the Convenience channel is undergoing foundational change as it works to adapt to today’s consumers. In general, it is on the right end of a major trend — the time-starved consumer — but is on the wrong end of the growing desire for fresh and health food options. Convenience is positioned well against eCommerce because the quick trip, whether for gas, an impulse snack, or a ready-to-eat item, generally can’t wait days or even hours for delivery. In fact, more than 80% of these items are generally consumed within an hour of purchase. Some of the more nimble Convenience stores are building on their strengths to not only win more Share of Wallet from other c-stores, but also defend against encroachment from other retail channels. The NACS State of the Industry report details what success looks like across the market and is, by far, the most cited resource when it comes to understanding the overall Convenience market. Our 2019 RPI will focus on the “National” versus “Regional” Convenience store dynamic. The number of Convenience stores exploded after WWII, but decades of sub-par Customer interactions have resulted in some not-so-positive stereotypes for c-stores. For example, a small store, often somewhat dingy, where one can quickly fill up on gas, tobacco, alcohol, candy, and other impulse items. The notion often includes questionable clientele, in a potentially unsafe location, with bathrooms that haven’t seen a good cleaning since the demise of the full-service gas station. This stereotype is consistent with the growth strategy of many national c-store retailers, focused on rapidly building or acquiring new stores, which requires enlisting franchisees or licensees. In order to grow quickly, the national retailer relinquished some control of the brand to maximize profit, at the time. Although they often receive guidance from the mother ship, franchisees are independent operators, so quality of the stores can vary significantly across the brand. Rather than a Customer First approach tailored to Customer needs, this strategy is largely “company first,” which tends to work well in a largely homogenous market with a tolerant shopper who is out to serve a quick, functional need. One of the positive but challenging things about today’s market economy is “the Customer is king/ queen.” They vote with their dollars on what meets their needs. In today’s fragmented and seemingly chaotic retail environment, “convenient” shopping alternatives are popping up everywhere, and driving big changes across retail channels. With greater choice than ever before, Customers are increasingly seeking out different types of technology and retailers to meet their quick trip and smaller basket needs. Compared with the national franchises, many of the smaller Convenience retailers have adjusted to changing Customer needs by delivering a more valuable proposition within local markets, resulting in a better connection with their Customers. With a lower store count confined to limited geographies, these retailers are often less known nationally and are much less likely to have franchisees. As a result, these retailers are more flexible and can more easily adapt to consumer changes. In grocery, scale is an advantage because it often results in lower prices which is the most important preference driver for many shoppers. For Convenience retailers, scale can be a disadvantage because price is not as important, and size can make it more difficult to adapt. It comes back to delivering what matters most for the Customer, who is voting with his or her dollars. The c-store retailers who can meet the ever-changing needs and expectations of their Customers will earn their preference and win Share of Wallet.

1 NACS State of the Industry Report of 2018 Data, June 2019 2 NACS SOI 2019 3 dunnhumby Retailer Preference Index for the Grocery Channel, January 2019

© 2019 dunnhumby 3 Executive Summary Size really does matter. The biggest difference in the Convenience store retailers from those at the top and bottom of the Retailer Preference Index (RPI) ranking is size. In the Grocery industry, size is an advantage because scale generally translates lower costs into lower Prices for Customers, which is a key trip driver for many shoppers. That logic is completely turned on its head in the Convenience channel, where Quality, not Price, is the key trip driver. As a result, scale is not a strategic advantage and may even be a disadvantage if it impedes the retailer’s ability to understand their Customer and quickly adapt to changing needs. The data shows that smaller regional operators have been able to better adapt to the evolving needs of their Customer, resulting in a stronger emotional connection with their shoppers, stronger loyalty and superior financial performance. Store count and convenient locations are still relevant. The original growth strategy in the Convenience market was simply to have more stores than your competitor. At the time, most Convenience stores looked the same, with similar products, so with few options for the shopper, the closest store generally captured the visit. Share of Visits and consumer awareness data show minimal difference between the top and bottom quartiles. But, the strength of the Customer emotional connection and the ability to convert awareness into purchase, along with some key financial measures suggest that even though store counts capture visits today, high store numbers alone are not enough for superior growth. The “cream of the crop” excel in Fresh and Ready-to-Eat. According to the NACS SOI 2019, foodservice was the biggest differentiator between the most and least profitable retailers. Our study also finds that good quality Fresh and Ready-to-Eat items are the biggest differentiator across our performance metrics, and gained importance compared to last year’s Convenience RPI study. Supporting attributes, such as Clean Stores and Assortment variety help to amplify Customer perceptions around foodservice in the Fresh & Healthy pillar. Thus, a minimally clean store offering a few RTE and fresh items is probably not enough to deliver on this growing Customer need. Those at the top – Wawa, QuikTrip, Sheetz, and Kwik Trip – have made foodservice a priority and a key differentiator from other Convenience stores. A focus on Fresh is also positioning them to steal trips from grocery stores and quick service restaurants. The “Retail Basics” are essential. The core drivers of success include Store Experience, Quality Assortment, Fresh & Healthy, and Price, while Digital and Discounts & Rewards are amplifiers. The core pillars are the engine that drives performance, while the amplifiers are the turbo boost. Investing in amplifiers with a weak core is a recipe for a mediocre return-on-investment. In addition, Store Experience (which includes Cleanliness, Safety, and Staff in our study) is fundamental to overall Quality perceptions. For example, a clean store and clean bathrooms also impact Fresh & Healthy and Ready-to-Eat scores, so investments in Fresh categories will also deliver a poor ROI if cleanliness issues are not addressed. Thus, the key for many underperforming retailers is to start with getting the retail basics right - Store Experience, Assortment, Price. Then, develop the Ready-to-Eat, Fresh & Healthy areas, and finally, use your Digital & Rewards program to share your improvements with the world. A few bad apples can spoil the bunch (and the brand’s reputation). The larger retailers have a much higher proportion of franchisee-owned stores. Only a few of the regional retailers fall into this bucket, and those that do tend to be weaker. Simply put, it is more difficult to maintain a standard, consistently positive in-store experience with independent operators. When all c-stores were alike, an inconsistent experience didn’t matter much. But in today’s world where Customers have lots of options, a few bad experiences with a particular retailer can cost them a Customer for life. We see evidence of this in the Private Brand attribute, which is a proxy for the retailer’s overall brand and is correlated with financial performance. Private Brands are a sustainable differentiator because those items can only be found in that store, and the retailer gets the full credit — good or bad — for these products. Thus, it is a key element in building a winning brand, and the regional retailers are more successful in this area. Channel cross-shop is on the rise. There is ample cross-shop across between the Convenience, Dollar, and Drug channels, but category differences appear to buffer Convenience somewhat from the other two channels. In competition against Dollar and Drug, c-stores have an advantage in Gas, Beverages, Ready-to-Eat, and Tobacco. Drug and Dollar tend to do better in Health and Beauty and Household Supplies, and Dollar also does well in Packaged Food. However, Snacks and Candy, which are two of the larger categories, have significant overlap across all three channels so Price and Assortment are particularly important to win in these major categories. The demographics for Drug and Dollar shoppers are quite similar, compared to Convenience. Older females are a key demographic for both Drug and Dollar, while Convenience tends to attract more younger males. Drug and Dollar also do better earning preference with retirees and single-family households, while employed and multi-person households are more likely to prefer Convenience.

In this second annual edition of the Retailer Preference Index for the Convenience Channel, our nationwide study explores the evolving food retail landscape to help c-store retailers navigate an increasingly challenging market. The study focuses on: What drives preference? Who is winning and losing? Why are they winning or losing? What can Convenience retailers do to win more trips? Before embarking on our study, we examined existing store ranking methods. Convenience Store and Petroleum Magazine (CSP) and Convenience Store News (CSN) provide the most popular c-store rankings. Both focus largely on revenue size and store counts to determine success. We have a different perspective, one that focuses on the consumer and their emotional connection to the various retailers within the Convenience channel. Not that size doesn’t matter, but our focus is on how Customers perceive Quality, Convenience and Price, and how these perceptions affect both the emotional connection and financial performance. The retailers that deliver a value proposition and retail environment that aligns with Customer needs will be better positioned to grow a loyal shopper base that is connected to more than just convenient locations. And when a largely functional c-store retailer goes head-to-head against one with a deeper emotional connection, emotion will likely carry the day.

PREFERENCE EMOTIONAL FINANCIAL PILLARS CONNECTION PERFORMANCE Convenient Quality Satisfaction Sales Growth - 5yr CAGR Price Likelihood to Recommend 2018 Sales per Store Fresh & Healthy Trust Discounts & Rewards Sad if Store Closed Digital Our Methodology

To understand the Customer and their preferences, we surveyed nearly 7,000 U.S. households, evaluating 27 retailers in the Convenience channel.

Our dependent variable combines both how shoppers think and feel about a retailer, with how each business performs financially in-store. The dependent variable is composed of the Customer Emotional Connection, Sales per Store (2018), and five-year compound annual sales growth (CAGR). The Emotional Connection is based on Customer Satisfaction, Willingness to Refer to a friend, Trust, and “how sad they would be if the store closed.” Sales per Store and Sales Growth focus on in-store sales and include Edible Grocery, Foodservice, Household Goods, Pet, and Health and Beauty. The Preference Pillars, which help us to explain the variation of the dependent variable, include: Convenient Quality (Speed, Locations, Store Experience, Assortment) $ Price (Prices lower than other retailers) Fresh & Healthy (appetizing Ready-to-Eat Items (RTE), Healthy Options, Fresh Meat & Produce, Private Brand) Discounts & Rewards (Rewards, Discounts on Regular Purchases, Useful Information) Digital (Mobile App, Easy Online Purchase, Discounts Easy-to-Use Digitally) The model determines which Preference Pillars are the most correlated with financial and emotional performance. For example, the financial performance and emotional connection of some retailers are very strong, while other retailers are weak. The Preference Pillars help to explain this variation across the retailers. So, where does Gas fit into the model? Gas is about 60% of c-store store revenues, according to NACS SOI. But, it is only drives 38% of Convenience store profit. The reason: c-stores are squeezed by powerful oil companies on one side and Price-sensitive Customers on the other. As such, there is not much room for Convenience retailers to set themselves apart based on their Gas offering, outside of Cleanliness. On the other hand, retailers have lots of options for differentiating themselves in-store, where 62% of their profit originates. Consequently, this study focuses more on the in-store experiences rather than fuel because that is a bigger driver of Customer Preference across Convenience retailers.

Convenient Fresh & Price Discounts Digital Quality Healthy & Rewards

Primary Primary Primary Primary Primary Components: Components: Components: Components: Components: Speed Appetizing Prices lower than Rewards Mobile App Convenient Ready-to-Eat other retailers Discounts Easy Online Locations Items on Regular Purchase Store Cleanliness, Healthy Options Purchases Discounts Customer Service Fresh Meat & Useful Information Easy-to-use Assortment Produce Digitally Variety & Quality Private Brand

Secondary Secondary Secondary Components: Components: Components: Assortment Easy-to-use Private Brand Variety & Quality Discounts Store Cleanliness Private Brand

respondents to evaluate a retailer based on their level of agreement

with the attribute statement. For example, “how much do you agree

with the statement: “Retailer A has high quality products?” These

questions were then grouped based on how correlated they are

to each other. This enables us to understand how the attribute questions roll-up into a broader Customer need. For example, the Speed, Locations, Store Experience and Assortment

attributes are all grouped into the Convenient Quality pillar. Shoppers

score these questions similarly high or low across the different

individual retailers, so this suggests that consumers see these

seemingly different attributes in a similar way. We named this

grouping of attributes or pillar “Convenient Quality” because these

are the core elements of Quality, as defined by Customers.

Fresh & Healthy 0.429

Convenient Quality 0.364

Digital 0.251

Price 0.180

Discounts & Rewards 0.080

0 0.1 0.2 0.3 0.4 0.5

The pillars that best explain the variation in financial and emotional performance are weighted more heavily. When a Customer chooses one retailer over another, this preference is generally based on a combination of needs – Products, Prices, Cleanliness, Distance from Home, etc. The model attempts to capture and isolate the drivers of preference with our analytical approach. Those retailers that scored higher on the most heavily weighted pillars - Convenient Quality and Fresh & Healthy - will have relatively higher RPI scores and are more likely to perform better emotionally and financially.

for Customers? It is all about the slope. For pillars with steep slopes on the charts below, it suggests there is

a stronger relationship between the pillar and financial and emotional

performance. Each dot represents a retailer, and you can see the

relationship between financial performance and two of the Preference

Pillars – Discounts & Rewards and Fresh & Healthy.

In the first chart, Discounts & Rewards, the line is almost flat. Thus,

as the Discount & Reward scores for the retailers go up or down,

the emotional connection and financial performance score changes

slightly – minimal correlation. In contrast, the bottom chart shows

significant correlation between the Convenient Quality score and

emotional and financial performance. A small improvement will

likely result in a much larger change in the Customer connection.

Consequently, we would expect Convenient Quality to have more

weight than Discounts & Rewards since it is aligned with our

performance variable. Emotional & Financial Performance vs. Discounts & Rewards Emotional & Financial Performance Financial & Emotional Discounts & Rewards

Emotional & Financial Performance vs. Convenient Quality Emotional & Financial Performance Financial & Emotional Convenient Quality The Convenience Retailer Rankings A Look at the Top Retailers

The retailers below represent the top two quartiles. The differences in RPI scores within a quartile are generally small, so we are less interested in whether Wawa ranks higher than Sheetz and prefer to think of the retailers in terms of their particular quartile. Our objective is to compare the different quartiles to understand how each group is similar or different. Specifically, what are the retailers in the first quartile doing differently than the other quartiles? What are those in the bottom two quartiles doing that negatively impact their emotional and financial performance? 1st QUARTILE 1st 2nd QUARTILE

© 2019 dunnhumby 17 Size Really Does Matter Most of the retailers in the top two quartiles fall into the “smaller regional Convenience store” bucket, with smaller geographic footprints and lower store counts. The bottom two quartiles can generally be classified as larger retailers, with more stores over a larger geographic area and a much higher proportion of franchisee ownership.

Average Store Counts

3008

1909

806 338

1st 2nd 3rd 4th Quartiles

Down the Marketing Funnel Marketing Funnel Methodology The Marketing Funnel can help diagnose what might be hindering a retailer’s growth; is it an awareness problem, a visit/trial problem, or a loyalty problem. We calculated each stage Each challenge needs to be addressed very differently. To capture this flow, we of the Marketing Funnel, by asked respondents to tell us: 1) which retailers they were aware of, 2) which determining the number of retailers they shopped in the last year, and 3) which retailer they selected as respondents in each retailer’s their primary choice to shop. The results are in the chart below: footprint. Then, we counted how many of those consumers in the footprint were: 1) aware of the Quartiles retailer, 2) shopped once, and 3) Marketing Funnel chose the retailer as the primary 1st 2nd 3rd 4th c-store to shop. For example, consumer Awareness of first Aware of Retailer (%) 74.9 44.7 57.4 58.8 quartile retailers is 74.9%. Simply put, this is the average percentage Shopped Retailer in Last Year (%) 45.5 23.3 22.3 21.2 of consumers who are aware of all retailers in the first quartile. Selected Retailer as Primary Shop (%) 13.0 4.2 3.1 2.4 This also holds for “shopped in the last year” and “primary c-store to shop.” The two bottom Awareness to Shop Conversion (%) 60.8 52.0 38.8 36.0 rows calculate how well each quartile does at converting Shop to Primary Conversion (%) 28.6 18.2 14.0 11.5 consumers from Awareness to shoppers and converting one- Source: Convenience RPI Survey time or infrequent shoppers to primary shoppers. For example, The top quartiles have stronger Marketing Funnels. They are more likely to have the top quartile converted 61% higher percentages at each stage and higher conversion rates overall. Moreover, (46% shopped/75% aware) of the advantage is larger as we move down the funnel. Comparing the First and those who were Aware to shoppers, Fourth quartiles, the conversion rate for “shopped in the last year” is 2x higher and 29% (13% primary and “primary shop” is 4x higher. The Second Quartile has lower awareness shop/46% shopped) of those compared to the Third and Fourth quartiles, but they capture a similar proportion shoppers are primary shoppers. of shoppers and a higher proportion of primary shoppers. Thus, the Second The higher the funnel stage and Quartile is more effective at converting consumer awareness into purchase, the higher the conversion, the then growing Customer loyalty to become the primary c-store to shop. stronger the Marketing Funnel.

18 © 2019 dunnhumby In the chart below, Awareness is on the x-axis and Shopped is on the y-axis. Each dot represents a retailer, and the broken line represents the average conversion from Awareness to Shopped in the Last Year. Each quartile is represented by its respective color as noted. If a retailer is above the line they are outperforming the average, and those below are underperforming. We can see that the First and Second Quartiles are consistently above the line while the bottom two are consistently below. Just one retailer from the top two quartiles is below the line and a single retailer from the bottom two quartiles is above the line.

Awareness to Shop

70 1st Quartile 60 2nd Quartile 3rd Quartile 12 ppt gap 50 4th Quartile Retailer B 40 Retailer A 15 ppt gap 30

10 Shopped(%) in Last Year

0 0 10 20 30 40 50 60 70 80 90 100 Awareness (%)

Picking out two individual retailers, we can see that Retailers A and B have similar “Shopped in the Last Year” numbers (around 40%), but their Awareness numbers are vastly different. Retailer Y is able to convert 40% of Aware consumers into Shoppers with an Awareness level of just 60%, while Retailer A is only converting 40% into Shoppers with a whopping 90+% Awareness level. Thus, Retailer B is much more effective at converting consumer Awareness into Shoppers. And as expected, Retailer B is above the average line and Retailer A is below average. This shows us that Retailer B is about 15 points above average, while Retailer A is about 12 points below.

© 2019 dunnhumby 19 Looking across the retailers in the study, Kwik Trip has the strongest Marketing Funnel in the study. Within its footprint, it captures 92% of consumer Awareness, with 63% having Shopped in the Last Year, and 29% of respondents say Kwik Trip is their primary c-store to shop. On comparison, the industry average is: 63% for Awareness, 32% for Shopped in the Last Year, and 6% for Primary shop. The numbers demonstrate Kwik Trip is doing something right to win Customer preference as one of the top performing c-store retailers.

Kwik Trip vs. The Industry

Awareness 92% 49%

Shopped 63% 29%

Primary Shop 29% 16%

Industry Average

The Elements of Financial Performance Digging into financial performance, which is sensitive to outliers, we rolled the retailers into two groups – the Top Two Quartiles and Bottom Two Quartiles.

Top 2 Bottom 2 Quartiles Quartiles Share of Visits are the same Mean Mean across both groups. For Store Count 2018 572 2,459 five-year compound annual growth rate (CAGR), the top two quartiles consistently outper- MGD Net Sales 2018 1,362,936,912 3,745,340,448 form the bottom two. These sales numbers include Edible Sales per Store 2018 2,272,430 1,402,262 Grocery, Foodservice, Health and Beauty, and Household Share of Visits (Trailing Twelve Months) 14.4 14.4 items, but not fuel.

CAGR 5 Year Sales 6.2% 3.9%

Sales per Store Growth CAGR5 3.1% 2.0%

Sales per Square Foot CAGR5 2.5% 1.4%

Store Count Growth CAGR5 3.0% 2.0%

Emotional Connection (std score vs. mean) 0.70 -0.75

Source: Planet Retail and Factual Share of Visits

As mentioned above, the average store counts differ significantly across the top two and bottom two quartiles. On average, the bottom two quartile retailers have about five times more stores. With the higher store counts, it is not surprising that the total revenue is significantly higher for the bottom two quartiles.

20 © 2019 dunnhumby The Connection between the Preference Pillars and Emotional Connection The chart below illustrates the strength or weakness of the four quartiles across the drivers of Customer Preference. This data comes from our nationwide survey which asked respondents to rate individual retailers on the attributes listed in the preference driver table above.

Preference Pillars by Quartile

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Fresh & Healthy

Convenient Quality

Digital

Price

Discounts & Rewards

-2 -1 0 1 2

There are clear and consistent differences across the quartiles. The First Quartile is strongest in Convenient Quality, Fresh & Healthy, and Digital. The Second Quartile flexes its muscle in Discounts & Rewards and is relatively strong in Fresh & Healthy, compared to the bottom two quartiles. The Third Quartile is above average on Discounts & Rewards and Price. The Fourth Quartile is below average across all pillars, but is significantly lower than average on Price, Fresh & Healthy, and Discounts & Rewards. Looking at the individual attribute questions, the Fourth Quartile only scores above average on Convenient Locations.

Emotional Connection by Quartile

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Emotional Connection

Sad if Closed

Trust this Retailer

Recommend

Satisfaction

-2 -1 0 1 2

The Emotional Connection is an array of four questions - Satisfaction, Recommendation, Trust, and “would you be sad if this store closed.” We then build a composite to capture these correlated elements into one variable, which you see as Emotional Connection in the chart above. The gap between the quartiles is consistent. The gap between the First and Fourth quartiles extends over two standard deviations, which is significant.

© 2019 dunnhumby 21 To gain additional insight into the quartiles, we positioned the retailers on a map to visually reinforce the position of each quartile on the most important dimensions. The y-axis combines the Convenient Quality and Fresh & Healthy pillars, representing overall Quality. The x-axis is simply the Price pillar. By combining Price and Quality, we can begin to understand how each retailer generates value for their Customers, driving Value Perception. The First Quartile retailers are somewhat above average on Price but have differentiated themselves based on their overall Quality experience. The Quality dimension includes Store Cleanliness, Customer Service, Assortment, Healthier items, and Prepared Food. We can also see there is greater variation along this dimension compared to the Price dimension. Price is important in any retail channel, but less important in Convenience than Grocery. This group is comprised exclusively of regional retailers with few, if any, franchisees. Casey’s General Stores is by far the largest in the First Quartile with over 2,100 stores. Wawa is the next largest with approximately 850 stores. The Second Quartile retailers are positioned below the top quartile on the Quality dimension, but Price perceptions are similar. Most are about average on both Quality and Price, so there is room to grow Quality perceptions. They are also exclusively regional retailers and the average store count is even smaller than the first quartile. Cumberland Farms is the largest retailer with 558 stores. The Third Quartile is perhaps the most interesting quartile. All retailers have similar Quality, but there are sizable differences in Price Perception; four are above average on Price Perception and three are below average. Of the four retailers with above average Price Perceptions, three do not have any franchisees. For the three with below average Price Perceptions, all have franchisee owners. This takes us to the Fourth Quartile, which are all in the bottom left quadrant. It would also be easy to include the three Third Quartile retailers in the lower left corner, because they exhibit many of the same characteristics of the Fourth Quartile retailers. Large store counts, franchisees and low scores across the Preference Pillars cause a weak emotional connection and poor Value Perception. It is also interesting to see a notable gap in the map - between the First, Second and Fourth Quartiles. For those on either side of the gap, the characteristics are clear and help to tell the story between the smaller regional retailers and the larger national brands. Store counts used to be enough to capture largely functional visits and perform well in the market, but will that be enough in the future? As the regional retailers expand and go head-to-head with the national incumbents, one would expect the Convenient Location advantage to dissipate which will make Quality and Emotional Connection much more important for long-term success. Value Perception Map

By combining Price and Quality, 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile we can begin to understand how each retailer generates value for their Customers, driving Value Perception. Fresh & HealthyFresh

Price Share of Visits: The Functional versus Emotional Shop

Capturing visits is one of the most important retail KPIs today. With the internet and channel and media fragmentation elevating competitive pressures, growing or even maintaining visits is becoming increasingly difficult for many brick-and-mortar retailers. In our analysis, Share of Visits does not differ much across the top two and bottom two quartiles. In fact, they are the same at 14.4%. How can this be with almost every other performance measure favoring the top quartiles? This is the first year we have had access to Share of Visits data, which was provided by our location data friends at Factual, so definitive answers will be few, but we can begin to generate hypotheses that we can test moving forward. The first and biggest hypothesis is that the Convenience channel has a dual nature. Meaning, patterns in Preference are split across emotional and functional drivers. In Grocery, this dualism is minimal so the patterns between what people think and feel aligns nicely with what they do/how they shop. In Convenience the patterns are simply less clear, as is why some retailers capture visits through a connection with the Customer and yet others mainly attract functional shoppers and quick trips with their store counts. In other words, emotion wins the day for some, but the number of stores can also be effective at capturing trips for gas, a cup of coffee, or getting milk for your morning cereal. A shopper does not need to love the retailer to satisfy this trip mission. When we look across the 21 individual attribute questions, the only meaningful positive correlation is with Convenient Locations and Store Count. Looking at Assortment, Store Experience, Ready-to-Eat, Private Brands, or Price, there is no correlation with Share of Visits. Examining the performance metrics, there is some correlation, particularly with the Marketing Funnel. All stages and conversion rates are significantly correlated with Share of Visits. Thus, we see minimal connection to emotion, but some connection to size and the Marketing Funnel. We also believe that advertising is playing a role. Although we don’t have data to support this notion, the larger retailers have likely spent more money on advertising and brand building over decades. This is likely part of the reason why the Marketing Funnel is correlated with Share of Visits.

15 Share Visitsof

0 10 20 30 40 50 Funnel Strength The data supports the hypothesis that shoppers do not need to love their retailer to pay it a visit. But it does raise the question: if the retailers who have more emotional connection continue to grow their footprint, will it place increasing pressure on the more functional retailers? If we filter on just the regional retailers and group them into two buckets (More Convenient and Less Convenient), do they have a higher Share of Visits?

Functional vs. Emotional Shop

15 Share Visitsof

More Convenient Locations Less Convenient Locations Convenient Locations We find a difference and it is statistically significant. The Share of Visits mean for the Convenient group is 15.6% and 12.7% for the Less Convenient group. This is simply association and not causation but does suggest that as regional retailers grow and improve their geographical footprints, they could pressure the larger incumbents. This also makes intuitive sense. If Convenient Locations become less of an advantage for the larger retailers, then emotional connection will begin to play a larger role in determining Customer Preference. We are beginning to see this happen as smaller retailers continue to expand, winning both the emotional and financial battle. We also expect Share of Visits will be more aligned with the emotional connection as Customers and the market continue to evolve.

© 2019 dunnhumby 25 Wawa started as a dairy over 100 years ago. In the 1960s, sales started to soften as more people purchased their dairy products in stores rather than home delivery, so they opened their first retail outlet in 1964. Researching Wawa there are four clear themes - a clean store, great coffee, great sandwiches and great dairy products. In fact, they still own the dairy which helps fill the shelves with the Wawa private label, ranging from iced tea and coffee to breakfast sandwiches, hoagies and ice cream.

26 © 2019 dunnhumby Their consistently clean stores received headlines in 2018 when GasBuddy ranked Wawa’s bathrooms number two in the U.S. GasBuddy’s coffee research by state found Wawa and QuikTrip capturing the most individual states. Wawa’s Hoagies were rated number one in the nation according to Market Force’s annual survey in 2018. It was the first time a Convenience retailer won, going up against QSRs like Jersey Mike’s and Firehouse Subs, who specialize in sandwiches. And they provide this surprising c-store Quality at a reasonable price.

With their solid Quality bona fides, they have developed technology that allows Customers to order items online or with touch screen kiosks in the store. They also have a Wawa Rewards program that is delivered solely through a mobile app. Participants get a reward for every $50 spent and bonus rewards throughout the year to keep them guessing.

They also put a focus on keeping their employees happy. After a year of service, employees have access to a profit-sharing program which, according to Wawa, accounts for more than 40% of the company’s stock. The company’s Wawa University provides on-site and off-site training for employees.

It is not surprising that Wawa ranks near the top of our study. Out of the 21 attribute questions included in the model, Wawa was ranked in the top three for twelve areas. They ranked in the top five for each of the five pillars, and for each of the Marketing Funnel measures. Of the categories considered, they were in the top three for Coffee, Dairy, Produce, Meat, and Ready-to-Eat.

Wawa has built a business based on the core drivers of success – Cleanliness, Assortment, Customer Service, Convenience, Prepared Foods, Perishables, Private Brand, and reasonable Prices. They then amplified their value delivery with a rewards program and their “Built to Order” digital touch screens that allow shoppers to more easily customize their award-winning sandwiches and other items. There are few weaknesses for competitors to attack. Wawa is well-positioned to win visits from other Convenience retailers, as well as supermarkets, Dollar stores, Drug stores and QSRs.

1 NACS State of the Industry Report of 2018 Data, June 2019 2 NACS SOI 2019 3 dunnhumby Retailer Preference Index for the Grocery Channel, January 2019

This pillar captures the various elements that make up the Quality dimension of a Convenience store. In last year’s study, Convenience and Quality were separate pillars, but consumers viewed them more similarly this year, so they merged into Convenient Quality this year. These areas are the “bread and butter” of Convenience stores, delivery of these Retail Basics differentiate a good retailer from a not-so-good retailer. As we showed, this is the one of the most important preference drivers at explaining the variance in emotional and financial performance.

Convenient Quality Top Retailers

Easy in-and-out

Fast and Easy Checkout

Safe and Comfortable

Friendly/Welcoming Staff

Clean/Well Maintained stores Primary Convenient Locations

Right Product Variety

High Quality Products

Beverage Variety

© 2019 dunnhumby 29 There is a lot in this pillar so let’s unpack it a bit. As we mentioned earlier, the factors are made up of individual questions that are grouped together because they are correlated. Simply put, this means that survey respondents tend to answer these questions in a similar way, high or low, across the different retailers. Rolling up the questions allows us to paint a more nuanced picture for the different Customer needs. This is represented in the graphic below:

CONVENIENT QUALITY OVERALL NEED OVERALL CUSTOMER NEED CUSTOMER PRODUCT ASSORTMENT CONVENIENCE STORE EXPERIENCE & QUALITY

Easy in-and-out Safe and Comfortable Product Variety

Fast and Easy Checkout Friendly Staff Beverage Variety

SURVEY Convenient Locations Clean/Well Maintained Quality Products QUESTIONS

30 © 2019 dunnhumby In the chart below, you can clearly see the difference between how the Top Two Quartiles delivered on the Retailer Basics, compared to the Bottom Two Quartiles. Retail Basics by Top Two and Bottom Two

Top Two Bottom Two

Beverage Variety

High Quality Products Product Product

Assortment Right Product Variety

Clean/Well Maintained Stores

Friendly/Welcoming Staff Store

Experience Safe & Comfortable

Convenient Locations

Fast & Easy Checkout

Convenience Easy In-and-out

-2 -1 0 1 2

Digging into this further, the First Quartile retailers significantly outperform the other three quartiles in getting the Retail Basics right, while the Fourth Quartile significantly under-performs. The Fourth Quartile underperformance, especially in the areas of Quality products, Store Cleanliness, Friendly Staff, and Safe, closely aligns with the c-store stereotype we described earlier. Retail Basics by Quartile

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Beverage Variety

High Quality Products

Right Product Variety

Clean/Well Maintained Stores

Friendly/Welcoming Staff Store ExperienceStore Assortment Product Safe & Comfortable

Convenient Locations

Fast & Easy Checkout Convenience

Easy In-and-out

-2 -1 0 1 2

Clean/Well Maintained and Safe and Comfortable stores might not get as much attention as other attributes, but they are fundamental to success. GasBuddy’s most recent “From Canopy to Store” study found that store design, upkeep, and cleanliness of the fuel area are the biggest factors for getting people from the pump into the store. This conversion is important because over 60% of gross profit dollars come from in-store purchases, even though in-store sales make up less than 40% of top line revenue.

© 2019 dunnhumby 31 According to CSN, the gender gap is closing, and women are a growth opportunity. Eighty percent of women cite safety as “very important” when deciding to make in-store purchases versus only 53% for males, according to a TrendSource report. Women are also more impacted by cleanliness than men. Over 70% have visited a Convenience store with the intent of using the restroom but decided to leave and go elsewhere when they saw the conditions. The GasBuddy study goes on to say that Restrooms are fundamental in how people assess overall Quality. If a retailer fails on this attribute, it has a halo effect across the store, particularly on Perishables and Foodservice. Our research has also found that retailers, both Grocery and Convenience, who do well in Perishables and Ready-to-Eat and Prepared Foods, also do well in Store Cleanliness. It is difficult to win in the higher profit margin Perishables without a Clean Store. Data from our survey clearly shows the association between Cleanliness, Safety and financial performance. The “Safer” or “Cleaner” retailers tend to be smaller retailers with lower total sales but are generating more Sales per Store and are growing overall Sales and Sales per Store faster.

Safe & Comfortable Top Half Bottom Half

Store Count 2018 563 2,299

Sales 2018 1,320,170,899 3,579,299,959

Sales CAGR5 6.6% 3.7%

Sales per Store 2018 2,188,835 1,580,161

Sales per Store Growth CAGR5 3.3% 1.9%

Clean Store Top Half Bottom Half

Store Count 2018 575 2284

Sales 2018 1,398,849,267 3,486,316,432

Sales CAGR5 6.4% 3.8%

Sales per Store 2018 2,295,327 1,454,307

Sales per Store Growth CAGR5 2.7% 2.5%

This Preference Pillar is the “bread and butter” of running a successful Convenience store, so it is not surprising most of these retailers fall into the top two quartiles overall. Each of these regional retailers are consistently above average across most of the individual Preference Pillars questions. QuikTrip, Wawa, Sheetz, and Kwik Trip stand out among all other retailers and are likely the best run Convenience stores in the United States. QuikTrip’s Sales per Store are twice as high as the industry average of $1.9 Million (Planet Retail), with the second highest Emotional Connection. Wawa wins the highest Emotional Connection, is second just behind QuikTrip in Sales per Store, and is in the top 10 across all the Preference Pillars. Sheetz is third highest in Sales per Store and Emotional Connection and ranks in the top three for each pillar, except Price. Kwik Trip has the strongest Marketing Funnel in the study, leads the pack in Share of Visits, and is in the top 10 for four of the five pillars.

Fresh & Healthy works in conjunction with Convenient Quality to round out overall Quality perceptions. Fresh & Healthy had the largest jump in importance from last year, moving from a mid- to top-tier pillar. Retailers that did well on this pillar also consistently perform better emotionally and financially, and this level of correlation or explanatory power is the reason why it has such a strong weight. If we ask why Retailer A is outperforming Retailer B financially and/or emotionally, there is a good chance that they have stronger scores in Fresh & Healthy.

Fresh & Healthy Top Retailers

Appetizing Ready-to-Eat

Healthy Food Options Primary Freshest Meat, Fruits & Vegetables

Private Brands

Product & Beverage Variety

High Quality Products Secondary

Clean/Well Maintained Stores

The biggest drivers of this dimensions are Ready-to-Eat, healthier items and fresh Meat and Pro- duce. Secondary contributors include Private Brand, Assortment, and Cleanliness. Like above, those who do well on this dimension also do well in the overall ranking. This pillar is negatively correlated to Store Count and positively correlated to Sales per Store and overall Sales growth. Also, it is positively aligned with Emotional Connection and Marketing Funnel metrics. Charlie McIvaine, chairman and CEO of Coen Oil, stated, “The bottom half is using the same model, while the top quartile has evolved.” He is referencing the NACS SOI data that broke out the Convenience retailers into quartiles based on financial metrics. The NACS report found the biggest gap between the top and bottom quartiles was Foodservice. In our model, this pillar also has the largest deviation in scores across retailers. McIvaine’s quote captures the idea that some retailers are evolving to meet Customer needs, while others are not. Those focusing on Quality and Fresh are breaking from the old Convenience stereotypes (think days old hot dogs on rollers) and are more profitable in the NACS data, outperforming across most of our emotional and financial measures.

© 2019 dunnhumby 33 Exploring the categories considered, the retailers scoring higher on Quality (Convenient Quality and Fresh & Healthy) are much more likely to win in Ready-to-Eat and Produce. The second-tier categories include: Beverages, Meat, Dairy, Snacks, and Coffee. These categories tend to have higher profit margins that retailers can use to continue to deliver superior product. Retailers looking to improve their Quality perceptions should start with these categories.

Categories Considered

Ready-to-Eat 0.7935

Produce 0.7025

Non-alcoholic Beverages 0.561

Meat 0.542

Dairy 0.5325

Snacks 0.5165

Coffee 0.4885

Frozen 0.3355

Packaged Food 0.324

Gas 0.269

Cosmetics 0.1165

Household Supplies 0.1075

Candy 0.063

-0.024 Personal Grooming

-0.0715 Persona Hygiene

-0.0825 Baby

-0.207 Gambling

-0.207 Alcohol

-0.5065 Tobacco

5.00

4.00

3.00

2.00

1.00

0.00 Performance -1.00 Emotional and Financial -2.00

-3.00 3.60 3.70 3.80 3.90 4.00 4.10 4.20 4.30 Private Brand Private Brand Although Private Brand does not load into any one particular pillar, does not mean Private Brand is not important. It simply does not fit nicely into one, in part, because Private Brand also reflects the retailer’s overall brand. There is a feedback loop between a retailer’s Private Brand products and the overall brand reputation. For example, a strong overall brand will help a retailer develop a Private Brand, and a strong Private Brand also helps to build the overall brand. In part, because the product has the retailer’s brand on it, so the attribution goes solely to the retailer rather than the CPG manufacturer or another third party. It also differentiates a retailer because that item can only be found in a particular c-store. In Grocery, we also see a correlation with Price Perception, but the relationship is not quite as robust for Convenience. In part, because Price is less important in general for c-stores. The chart below shows how associated Private Brands are with the Customer Emotional Connection. It is one of the strongest associations across the individual attribute questions and is a key driver of success for many retailers.

Price was a stand-alone contributor because it was less correlated with the other individual questions. In a market focused on Convenience, Price plays a secondary role because Customers don’t expect great value at c-stores, although Prices need to be decent. In Grocery, where consumers spend a much larger share of the household budget, Price plays a much bigger role.

Price Top Retailers

Prices Lower than Other Retail- ers Primary

There is also only one real standout on Price and that is Murphy USA. Until recently, Murphy USA had a relationship with Walmart and often placed their stores near a Walmart. Murphy USA’s tagline is “Low Prices, Friendly Service.” Few c-store retailers lead their branding with Price. Murphy USA’s score stood out as the leader in Price, while Cumberland and RaceWay were in the second tier, with the remaining retailers in the Top Quartile for Price receiving similar scores. Looking at Price across the quartiles and in the value map above, the top three quartiles have similar Price perceptions, while scores drop off significantly for the Fourth Quartile. This also suggests that Price is a secondary preference driver, but it does need to be managed carefully to not alienate shoppers and stay in the black. Rather than winning at Price, like Murphy USA, it might be sufficient to aim for reasonable Prices given the Quality delivered.

This preference driver is comprised of Discounts, Rewards, and Useful Information. This pillar is significantly less important compared to the two Quality pillars. The Quality pillars are more fundamental to the success of a c-store retailer, whereas Discounts & Rewards is an amplifier. It does not mean that this pillar is not important, it just needs to align with other pillars to be effective. Looking at the other variables, Discounts & Rewards is correlated with lower Prices and the Quality attributes. Thus, Discounts & Rewards could be valuable for an individual retailer as an amplifier when bundled with other core elements, like a Clean Store and Quality products, but it is probably not enough to drive success on its own. Consequently, investments in Discounts & Rewards should take into consideration Price and Quality variables. It may be more effective to address the Quality issues first and then consider implementing Discounts and/or Rewards.

Discounts & Rewards Top Retailers

Rewards Me

Discounts on Items I Buy Regularly Primary Useful Information

Discounts/coupons are Easy to Use

Private Brands Secondary

Another reason this pillar is less important is because there is simply not much variation across the retailers. There is very little difference across the top 12 retailers. Shoppers do not realize that Retailer A’s rewards program is much better than Retailer B’s, particularly for the top-tier programs. Rewards programs have become much more common and their implementations similar, so the underlying core Quality halo plays a role in how Customers evaluate the different retailers on this pillar. And it is a bit surprising that the Mobile App, which is the primary delivery tool for Discounts & Rewards, is less correlated with this pillar than the Quality attributes. Besides the top 10 in the First Quartile for Discounts & Rewards below, one could add Maverik and Kwik Trip to this list because their scores are similar. There is a substantial drop off in scores after the first twelve.

The last preference driver is Digital. This pillar has the third highest weight, just above Price. The primary elements include the Mobile App, Easy to Buy Online, and Discounts/coupons are Easy to Use and Redeem Digitally.

Digital Top Retailers

Mobile App

Easy to Buy Online Primary

Discounts/coupons are Easy to Use

Private Brands Secondary

One might expect Digital to be highly correlated with the Discounts & Rewards pillar. It is highly correlated with Discounts are Easy to Use, but less for Useful Information and Rewards. Thus, the Mobile App is primarily seen as an easy way to get and use discounts. Ready-to-Eat and Private Brands are also highly correlated with the Mobile App which suggests that Ready-to-Eat, which is a Private Brand, is one of the key categories for Discounts & Rewards. This also suggests that any retailer improving their Ready-to-Eat perceptions can use the Mobile App as an effective channel for trial. Rewards programs have become more common and less differentiated, so the more differentiated pillars like Fresh & Healthy play a bigger role in how Customers evaluate the various retailers. If looking for opportunities to improve, Royal Farms and Maverik, which rank 17th and 25th on their Mobile Apps, could bolster their RTE sales with a better Mobile App.

38 © 2019 dunnhumby For the Top Quartile retailers in Digital, we see little variation in scores from Sheetz to Casey’s General Stores, but there is a meaningful drop-off for Holiday Stationstores and the rest of the retailers, which can be seen in the chart below.

Correlation between Mobile App and Ready-to-Eat

Sheetz

Wawa Race Trac Casey’s

Turkey Hill Minit Markets Quik Trip MobileApp

Ready-to-Eat

Convenience Visiting Other Channel Other Channel Visiting Convenience

Grocery 99%

55%

Dollar 64%

69%

QSR 63%

73%

Drug 48%

77%

0% 20% 40% 60% 80% 100%

Finally, over the past 15 years the Convenience market has seen fundamental changes. Capturing that next visit or next dollar has become increasingly difficult for many retailers, consumers have more buying options across channels. For example, Mass, Warehouse, Discount, and Digital have left many Traditional Grocers weak in Center Store non-perishables. As such, more supermarkets are looking to leverage their Perishable categories to capture more quick trips, which will increasingly compete directly with the Convenience channel. Moreover, Dollar channels are continuing to grow store counts and allocating more space for Perishables. Added to the mix are Drug stores which have large store counts and the trust of many Customers because of the long-standing prescription business. Finally, Quick Serve Restaurants have been bolstered by food delivery (think Uber Eats), which is cutting into Ready-to-Eat for both Convenience and Grocery retailers. Trying to gauge the level of cross-channel shopping, we asked survey respondents which channels they visited in the last four weeks: The above chart measures the Convenience shopper’s propensity to shop other channels, and the propensity of shoppers of other channels to shop Convenience. There is a sizable imbalance between Grocery and Convenience. Almost all Convenience shoppers have shopped at a Grocery store in the last four weeks, while only about half of Grocery shoppers have visited a Convenience store. Convenience has a small advantage over Dollar Stores and Quick Service Restaurants (QSRs) but has a significant advantage over the Drug channel.

© 2019 dunnhumby 41 Although the strategic focus of each channel is quite different, Customers heavily cross-shop the channels. Convenience 7 of 10 Dollar/Drug/QSR Customers: Regularly shopped C-store each month 5 of 10 Grocery Customers: Notably, just 5 of 10 have also shopped C-store Dollar 6 of 10 C-store/Drug/Grocery/QSR Customers: 6 of 10 cross-shop Dollar each month Drug 4 of 10 C-store/Dollar/Grocery/QSR Customers: 4 of 10 shop Drug each month

Grocery 100% C-store/Drug/Dollar/QSR Customers: Nearly 100% have shopped Grocery Quick Service Restaurants 5 of 10 C-store/Drug/Dollar/Grocery Customers: 5 of 10 eat at QSRs each month

42 © 2019 dunnhumby We did capture Dollar and Drug stores in this study, but not Grocery or QSR. As such, we can only make comparisons between Convenience, Dollar, and Drug. For Dollar, we tracked Dollar General, Dollar Tree, Family Dollar and Fred’s. For Drug, we tracked CVS, Rite Aid and Walgreens.

Preference Pillars by Channel

Dollar Drug Convenience

Discounts & Rewards

Digital

Price

Convenient Quality

Fresh & Healthy

-2 -1 0 1 2

Starting with Dollar, they have a clear advantage on Price but are at a significant disadvantage on Digital, Convenient Quality, and Fresh & Healthy. These are the three most important pillars for Convenience shoppers. Looking at categories considered, Dollar stores have an advantage in the more commodity, non-perishable categories – HH Supplies, Personal Grooming, Personal Hygiene, Packaged Food, Cosmetics, Baby and Frozen. Convenience has an advantage with Gas, Gambling, Beverages, Coffee, Ready-to-Eat, and Tobacco. The categories with the most direct cross-shop include Snacks, Produce, Dairy, Candy and Meat. In these categories, Convenience stores should carefully consider Prices when going head-to-head against Dollar stores. Dollar stores rate poorly on Store Cleanliness and Quality, so clean Convenience retailers should have a Quality advantage in most Perishable categories like Meat, Dairy, Produce and RTE, which can be priced at a reasonable premium. The Quality advantage will be smaller with most non-perishable categories, so Price will likely need to be more aggressive in these areas. The most compelling categories are Snacks and Candy. These are very large categories for both channels and the products are largely commodities, which gives an advantage to lower prices and the Dollar stores.

Gap Convenience Dollar 100%

80%

60%

40%

20%

-20%

-40%

-60%

Gas Baby Meat Dairy Frozen Candy Coffee Produce Snacks Tobacco Gambling Cosmetics Ready-to-eat Packaged Food Personal Hygiene HouseholdPersonal Supplies Grooming Alcoholic Beverages

Non Alcoholic Beverages

Looking at Drug, Convenience has an advantage in Price and Fresh. The gaps in Digital, Discounts & Rewards, and Convenient Quality are not that different. For the categories considered, it is largely split as one would expect – food versus non-food – with large advantages for Drug in Healthy and Beauty, and large advantages for Convenience on gas, perishables, and the “sin” categories.

Convenience vs. Drug Category Consideration

Gap Convenience Drug 100%

80%

60%

40%

20%

-20%

-40%

-60%

Gas Baby Meat Dairy Frozen Candy Coffee Produce Snacks Tobacco Gambling Cosmetics Ready-to-eat Persnal Hygiene Packaged Food Personal GroomingHousehold Supplies Alcoholic Beverages

Non Alcoholic Beverages

Drug and Dollar appear to compete more across categories compared to Convenience. Overall, the key Convenience categories are somewhat isolated from the other two channels, except for Candy and Snacks.

44 © 2019 dunnhumby Looking at Demographics, it also appears that Dollar and Drug cross paths more compared to Convenience. Convenience is near the average across most demographics because of the diverse set of retailers. Drug and Dollar stores all look very similar within the channel. This results in a more distinct Customer base than Convenience.

Customer Demographics

Dollar Drug Convenience

Rural

Suburban

Urban

Income $100k+

Income $50k - $99k

Income LT $50k

Retired

Full Time Employment

Gender Female

Age 55+

Age 35-54

Age 18-34

Pet in HH

Roomate in HH

Child in HH

Parent in HH

Spouse/Partner in HH

-2 -1 0 1 2

Drug tends to target urban and suburban areas, while Dollar is more likely to win in Rural areas. We also see that Drug does better with higher income households and Dollar does better with lower income households. Looking at employment, both Drug and Dollar tend to attract more retirees, while Convenience is more likely to capture employed shoppers. For gender, females lean toward Drug and Dollar while Convenience attracts more males. Convenience also differentiates itself on age. The Convenience shopper is more likely to be younger versus the other two channels. Lastly, Drug and Dollar tend to do better with single person households while Convenience does somewhat better with multi-person households. The top-level analysis does suggest that Dollar and Drug compete more with each other compared to Convenience. Of course, the elephant in the room is Grocery. Unfortunately, we do not have data to directly compare, but we do know that both Grocery and Convenience will be competing more directly than in past years. Supermarkets are looking to capture more quick trips and RTE visits, while many Convenience retailers are improving their Quality and Fresh offerings to go after the supermarket shopper.

We also asked survey respondents to select the product categories they would consider for each retailer. From the chart below, the size of the bar represents the percent of consumers who would consider purchasing that category from a Top Two Quartile or a Bottom Two Quartile retailer. The grey area represents the percentage point gap between the two groups. We can see that the bottom two quartiles have an advantage in Tobacco and Alcohol. For example, 40% would consider buying tobacco at a Bottom Two Quartile retailer versus 32% for a Top Two Quartile retailer. It also appears that the lower quartiles do not have an advantage on gas, which is surprising because many retailers in the lower quartiles are branded or co-branded with a gas and oil company. The Top Two quartiles have small advantages across most of the remaining categories, but the differences become significant in the Perishable categories. Fifty-one percent of respondents would consider purchasing a Ready-to-Eat item from the Top Two Quartile retailers, while just 31% would consider RTE items from the Bottom Two quartiles. The gap grows further to 57% versus 31% when comparing the First and Fourth quartiles. Gas is also interesting because there is no difference in consideration between the Top Two and the Bottom Two Quartiles. Gas is a key trip driver for many Convenience stores but because the battle centers largely on Price, it is not much of a differentiator unless scale provides a sustainable cost advantage. According to NACS (Price Per Gallon), 95% of gas is sold by independent operators and regional c-store retailers, so scale does not likely play a meaningful role for many retailers. Consequently, things like Convenient Locations, Lighting, Safety and Cleanliness become increasingly important when choosing where to buy gas. We would also hypothesize that people choosing a Convenience store based on Gas will be less important as more retailers connect emotionally with Customers. Rather than visiting a store to get gas and possibly buy something inside, what is inside will increasingly influence gas trips, assuming gas prices differentials are minimal. With that said, Gas is very important to the Convenience channel. Less because it drives preference between Convenience retailers, but because it is a clear differentiator across channels. Obviously, Drug, Dollar, QSR, and most supermarkets do not have the same assets or focus on gas as the Convenience channel, which makes gas a key advantage across channels. Category Consideration Gap - Top Two vs. Bottom Two

Gap Top 2 Bottom 2 100% 50%

80% 40%

60% 30%

40% 20%

20% 10% Consideration (%) Consideration

0% 0% (%) Gap Consideration

-20% -10%

Gas Dairy Meat Baby Coffee Frozen Candy Produce Snacks Gambling Tobacco Cosmetics Ready-to-eat Packaged Food Personal Hygiene Household SuppliesPersonal Grooming Alcoholic Beverages

Non-Alcoholic Beverages

What really drives Customer preference in Convenience? It is clear that the Quality elements drive preference more than Price, Discounts, Rewards, Digital and mobile apps. The move toward healthier, fresh options will be crucial to winning for the foreseeable future. In addition, the Store Experience, particularly Store Cleanliness will play a role in Quality perceptions. Investing in fresh salads to attract more female shoppers but not investing in clean, updated bathrooms will be money flushed down the drain. Capturing more female shoppers also requires a well-lit, safe environment. Once these fundamental Customer needs are addressed, then retailers can look to invest in mobile apps, rewards, and discounts to amplify their voice. Without a solid Quality core delivered at a reasonable Price, it will be a challenge to capture positive ROI on a rewards program or eCommerce offering. Who is winning and losing? And why are they winning or losing? Unfortunately, this question is not as clear. Smaller, regional retailers are winning the emotional battle, but the financial results are less clear. Regionals are growing Overall Sales, Sales per Store, and Store Counts faster, but the Nationals continue to hold their own with Share of Visits. This lack of clarity is due, in part, to the functional nature of many Convenience visits. When making a quick trip, Drive Time and Store Location play a prominent role, even if the Customer is not particularly happy with the Store Cleanliness, Quality of the prepared food, or the Prices. What can retailers do to win more Convenience trips? Regional retailers focusing on a higher Quality of product and Store Experience appear to be effective. They are growing stores and topline revenue faster than the nationals. When they go head-to-head with a National convenience retailer, they should be able to win the battle most of the time. If the major reason they lose to National retailers is Store Count, then more locations can be a pretty good strategy for most regional players. The key is to grow in markets that contain consumers who look like their current loyal shoppers. For regional retailers with low Quality scores, they are likely the most exposed. They neither have an advantage with Quality, nor Store Count. For most of the National retailers, their only advantage is Store Count. This is not a sustainable advantage as regional retailers and other channels like Dollar and Drug build more stores. They don’t have to win at Quality, but they do need to reduce the Quality perception gap which is significant at this point. This journey, for National and Regionals with poor Quality scores, will likely start with updating stores and improving cleanliness and safety perceptions. This investment likely comes at the expense of store expansion, which some National retailers have already started to slow. These core infrastructure elements must be rectified before building on the other Quality elements. This could be a challenge with franchisees, so figuring out the proper incentives and policies to help deliver a more consistent experience to present the brand will also be important. Another key challenge for the Nationals is the brand equity that has been built up over the decades. It took many years to build those perceptions and it will take many years to change them. This generally requires significant in-store changes, a carefully crafted branding/communications program, and the discipline to stick with it.

This raises interesting questions that we’ll address over the next several months in our Convenience Store channel content series, including:

Which Convenience retailers are best positioned for a rapidly changing market?

Scale is an advantage in the grocery market where price is a key trip driver, but is it in Convenience where price is less important?

Do the large store counts and high proportion of franchisees make the larger retailers less adaptable?

The smaller regional players are closer to their Customers, but how will that translate into trips and dollars?

Are the resources and scale of the big retailers an advantage? Because of technology, consumers and retailers have more options than ever before. This fragmentation and cross-channel competition will continue to amplify the competitive threat and pressure financials.

Dallas, TX Irving, TX National Grand Rapids, MI Altoona, PA National Regional – Midwest Regional – Mid-Atlantic

La Plama, CA Pittsburgh, PA Irving, TX Regional – West Regional - Mid-Atlantic National The Hague, Netherlands National

Enon, OH London, UK El Dorado, AK National West Bloomington, MN National Regional – West & National Midwest

Louisville, KY Regional – Midwest & South Ankeny, IA Tulsa, OK Regional – Midwest West Des Moines, IA Regional – Midwest Regional – Midwest & Southwest

La Crosse, WI Lancaster, PA Regional – Midwest Atlanta, GA Regional – Mid-Atlantic San Ramon, CA Regional - South Regional – West

Atlanta, GA Regional – Southeast Wawa, PA Tempe, AZ Regional – East Coast National Findlay, OH Regional – Midwest & East Coast

Baltimore, MD Regional – Mid-Atlantic Framingham, MA Regional – New England Salt Lake City, UT and FL Regional – West

If your business is one of the retailers included in this report and you would like a custom analysis of your profile, please send your request to info.dunnhumby.com/RetailerProfile

© 2019 dunnhumby 51 THE WORLD’S FIRST CUSTOMER DATA SCIENCE PLATFORM dunnhumby is the global leader in Customer Data Science, empowering businesses everywhere to compete and thrive in the modern data-driven economy. We always put the Customer First. Our mission: to enable businesses to grow and reimagine themselves by becoming advocates and champions for their Customers.

With deep heritage and expertise in retail — one of the world’s most competitive markets, with a deluge of multi-dimensional data — dunnhumby today enables businesses all over the world, across industries, to be Customer First.

The dunnhumby Customer Science Platform is our unique mix of technology, software and consulting enabling businesses to increase revenue and profits by delivering exceptional experiences for their Customers – in-store, offline and online. dunnhumby employs over 2,000 experts in offices throughout Europe, Asia, Africa, and the Americas working for transformative, iconic brands such as Tesco, Coca-Cola, Meijer, Procter & Gamble, Raley’s, L’Oreal and Monoprix.

Connect with us to start the conversation dunnhumby.com