Convenience retailers know how to cope with gas price volatility. It’s a must-have skill for operators in a retail segment where roughly two thirds of sales come from fuel. Even so, with gas prices reaching record levels, it has become both more important and more challenging to grow in-store sales. When people drive less they make fewer trips to convenience stores for gas. When they do fill up, the elevated prices mean they have less money left to spend on other merchandise categories, many of which also happen to be experiencing high rates of inflation.
It’s an extremely challenging combination and the situation with gas prices is expected to get worse in the short-term. War in the Ukraine has sent prices higher in Europe with the price per gallon now above $8 USD in France, Germany, and the United Kingdom. The price surge comes at a time when fuel prices are expected to increase further in the U.S. because refiners convert production to summer fuel blends and are performing maintenance. Anticipated increases would come on top of a roughly $1 a gallon increase since the beginning of the year when the price was already more than $1 higher than the average price per gallon of $2.30 at the beginning of 2021.
Gradual increases like those that occurred in 2021 are less noticeable and more readily absorbed by consumers. That’s not been the case so far this year, and shopper price sensitivity is heightened as fuel costs continue to rise. Meanwhile, convenience retailers find themselves in the crosshairs of frustrated consumers because in the U.S. 80% of motor fuels are sold by the 116,641 convenience stores that sell gas out of an industry total of 148,026 locations, according to NACS, the Association for Convenience & Fuel Retailing.
A Pivot to the Future
The situation with gas prices comes amid the convenience channel’s ongoing pivot to increase sales of categories such as foodservice, coffee, select grocery categories and on-trend general merchandise items. These efforts at diversifying the sales mix also stem from ongoing pressures on the tobacco category which accounts for roughly 30% of the U.S. convenience store channel’s in-store sales. That is uncomfortably large exposure to a category with negative trends. Tobacco usage is declining with cigarette smoking among adults down to 12.5% of the population in 2020, compared to nearly 21% in 2005, according to data from the Centers for Disease Control and Prevention.
With traditional trip drivers of gas and tobacco under pressure, some leading C-store operators have successfully transitioned to serving a broader range of needs. They have effectively become destinations for morning coffee, a quick meal, or fill-in items between visits to a grocery store. They have also made store planning and category optimization a priority, recognizing that the traditional concept of a C-store is evolving to fit a new definition of convenience based on lifestyle trends and evolving shopper preferences. A select group of C-store operators have ascended to a new place in the consumer psyche where their stores are destinations for a broader range of needs, but they also happen to sell gas.
Trips Matter More Than Ever
The changing dynamics of the convenience channel require retailers to leverage technology in new ways to make optimal decisions about store layouts, category space allocations, and assortments. Doing so will ensure that the convenience store of tomorrow is a destination for multiple reasons beyond gasoline while encouraging those whose trip was motivated by the need to fill up to venture inside and make additional purchases.
It is a challenge of significant proportions because of the space constraints in a typical convenience store. Retailers have to create enticing store layouts that are easy to shop. They must stay true to the convenience value proposition but provide compelling merchandising presentations of spot-on product assortments and intelligent promotions that make convenience stores an important destination. Such an environment requires great agility on the part of retailers whose processes must accommodate dynamic and continuous planning to move with the market.
Advanced AI-based systems for planning and category optimization are key for realizing the maximum value from the available space. This is especially true given the recent surge in fuel prices in the U.S and globally.
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