The convenience retail channel is getting hit with a one-two punch unlike anything seen before. A fearsome combination of elevated gas prices and consumer goods inflation has affected all of retail, and it has created a unique set of challenges for convenience retailers and highlighted the important role of forecasting and replenishment.
As noted in our March 31 blog, “A Convenient Truth: How C-Stores Can Make Every Trip Matter,” gas price volatility is a familiar operational challenge for convenience retailers. In the U.S., about 80% of motor fuels are sold by more than 116,000 convenience stores, according to NACS, the Association for Convenience & Fuel Retailing. Fuel is central to the convenience retail business model accounting for roughly two-thirds of sales and serving as an important trip generator.
As gas prices steadily hit new highs during the first quarter, people altered driving behaviors and grew cautious about spending even in non-fuel categories. As fuel and product inflation worsened in the second quarter, making every trip matter by driving overall basket size became a more pressing issue for convenience retailers.
The Forecasting and Replenishment Imperative
High fuel prices and inflation have served as catalysts to increase the importance of data-driven forecasting and replenishment systems to drive future growth. The situation is analogous to what happened to grocers at the onset of the pandemic. Many had made moves in online grocery, but it wasn’t until the pandemic hit and demand for e-commerce surged that those digital efforts were greatly accelerated and became part of core operations. Today, high fuel prices and inflation are accelerating convenience retailers’ pursuit of advanced forecasting and replenishment capabilities to support an evolving business model and the flawless execution needed to make every trip matter.
This is especially true for larger convenience retailers who may operate thousands of locations of varying sizes across multiple jurisdictions or even countries. The geographic and format diversity combined with varying consumers preferences across large trade areas adds to the forecasting and replenishment challenge, as do seasonal weather patterns, promotions, and an increasing emphasis on fresh and prepared foods. This latter point is key because convenience retailing is changing in profound ways.
Even if fuel prices declined tomorrow and inflation subsided, it wouldn’t change the trajectory of convenience retailing’s evolution. For years, the channel has been pivoting to increase sales of categories such as foodservice, coffee, grocery, and on-trend general merchandise items. 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. As we noted in March, that is uncomfortably large exposure to a category with negative usage trends. Cigarette smoking among adults has declined 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, leading C-store operators are transitioning to serve a broader range of needs. As more food, consumables and short shelf-life products enter the mix, the use of advanced forecasting and replenishment systems becomes a key competitive differentiator. Today’s more robust solutions leverage AI to manage the complexity of evolving assortments with new product attributes and incorporate a broader range of variables that affect demand to yield more accurate, timely predictions.
Parting Thoughts on Prices
The value of advanced forecasting and replenishment will continue to be highlighted in the months and years ahead give the somber outlook for fuel and inflation. The U.S. Energy Information Agency (EIA) forecasts that a variety of U.S. energy prices will remain historically high through 2023, including oil, natural gas, coal, and electricity, according to EIA’s June 2022 Short-Term Energy Outlook.
“Although we expect the current upward pressure on energy prices to lessen, high energy prices will likely remain prevalent in the United States this year and next,” according to EIA administrator Joe DeCarolis.
Adding to the dour energy outlook and fuel-related challenges for convenience retailers is the potential of surging gasoline prices caused by hurricane season-related refinery disruptions. EIA reports that the Gulf Coast region is home to more than half of the refining capacity in the United States and during the third quarter is expected to operate at a 94% utilization rate, a figure close to the highest levels of the past five years.
The third quarter is also the peak period for hurricane activity, which is forecast to be higher than normal this year. Storms in the Gulf Coast region are known to disrupt refinery operations that cause supply issues and price spikes. The likelihood of such a scenario appears high based on forecasts from The National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center.
On May 24, NOAA forecasters predicted this year would mark the seventh consecutive above-average hurricane season with 14 to 21 named storms, 6-10 of which could become hurricanes. On June 2, the Colorado State University Tropical Meteorology Project team released a forecast calling for 20 named storms, of which 10 would become hurricanes and five would become major hurricanes with sustained winds more than 111 miles per hour.
Regardless of how hurricane season plays out or the trajectory of fuel prices and inflation, future-focused convenience retailers know one thing is certain. Now is the time to be focused on improving forecasting and replenishment capabilities to ensure they make every trip matter.
Want more insight on winning supply chain strategies and demand forecasting and replenishment solutions built for a disrupted world? Speak with one of our solutions experts. Or, get The Grocers Guide to AI.