PL Buyer: Cup of Convenience
Through a special arrangement, what follows is an excerpt from a current article from Private Label Buyer, presented here for discussion.
With rising fuel prices forcing consumers to cut back on purchases at convenience stores, convenience stores have been ramping up their foodservice efforts and it’s been paying off. That’s opened up a bigger opportunity around private label food products.
"They are higher gross margin, they bring more gross profit dollars into the bottom line and they increase customer loyalty," said Benjamin Brownlow, an analyst with Morgan Keegan.
The c-store industry basically has already expanded its dollar sales in private label from essentially 1-2 percent five years ago, up to 5 percent, explains Mr. Brownlow. "So there has been a significant growth in private label dollar sales within the industry. But relative to other industries — supermarkets are north of 20 percent in dollar sales with private label, drug stores are in the high teens — a huge opportunity remains."
There are three obvious reasons that you’d look at private label as a convenience store opportunity, says Jeff Lenard, vice president, communications for the National Association of Convenience Stores (NACS).
"First, you might be able to offer it at a price that’s very competitive," he said. "Secondly, if it’s a quality that’s superior to anything on the market, consumers will have to go to your store instead of any other store for that product. And finally you tend to put a little pressure on those that are already your supplier to compete on price."
While private label presents a significant opportunity for c-stores, operators need to figure out the categories that make the most sense to get into, analysts agree.
"To the degree that private label is fresh food, prepared food, maybe even traditional private label categories like dairy, bakery and those areas, I think that makes plenty of sense for them," said Ben Ball, senior vice president for Dechert-Hampe. "Do they need a private label breakfast cereal or a private label tuna fish? No, they don’t."
Paul Weitzel, managing partner with Willard Bishop, agrees. "In some categories, I think private label makes sense. Private brand quality continues to increase. But many consumers walk into a c-store looking for the brands they trust and, if the retailer doesn’t provide those trusted brands, consumers won’t leave with a positive experience. Building loyalty is more important than ever, even in the c-store channel."
Discussion Questions
Discussion Questions: What do you think of the private label food opportunity for c-stores? What categories make the most sense? What are the challenges of developing PL programs in c-stores versus other channels?
I think the private label opportunity is limited to the foodservice and some fresh products like dairy products. One of the biggest C-store challenges is to get the gas customer to come into the store where there are more profitable items to sell. High quality private-label, ready-to-eat items for meal occasions like breakfast and lunch offer sales and profit opportunities, but people who buy those hot dogs still want Heinz ketchup in the condiment section.
Convenience stores are truly the one segment feeling all the pressures of our economy. Even the major drug store chains have increased their inventory to compete with the C-stores. Convenience stores can increase their inventory to carry more HBC items, but there is a limit on how far they can go to compete with drug stores. Another major area for Convenience stores is gas, selling gas or adding a convenience store to a gas station seems to also be a trend to get more people into the store. Private label may be an initiative for c-stores, but I do think the risk is very high in both costs and the end result may not prove to be worth a limited number of sales. There is an entire culture of consumers that would need to change their way of thinking about a convenience store from name brands to private label brands.
One area that I have seen many C-store chains succeed at is food. Not just the fast food franchise arrangements but those that set up deli and sandwich making stations. They can make a great sandwich at a great margin and compete with any number of the hamburger, pizza, and chicken fast food chains. Everyone likes a fresh made customized sandwich and I have seen several chains do a great job attracting a significant lunch crowd. Something to think about and the sandwich is also a private label item.
C equals convenience and this buyer is not discerning. They want quality and likely couldn’t care less if the hot dog is Vienna or the store’s own signature brand. Same goes for deli meats or snack items as well as standard bakery fare, house donuts vs. Krispy Cremes, to go along with your morning coffee. Perhaps HBA (health and beauty aids) would be a margin win along with cold case beverage all at a price savings advantage.
I don’t see expansion of private label being a motivating draw to the gas customer, thus encouraging them to change their habits as a gas n’ go visitor. However, C-stores with pumps do have the advantage of reward programs that can heighten interest in these expanded categories to encourage sampling as well as draw the moderate to high frequency member into the store and thus lift average ticket.
Several c-store companies have established strong private label offers. However, before doing so they established a strong store brand. They then extend that umbrella over selected products. In some cases the PL brand was the same as the store. For example Tedeschi’s in New England has an extensive PL offer that includes soda, chips, candy, bread, nuts, bread, and pastry. In other cases, the company established a PL brand but created a separate identity for it such as SSP in Texas with their highly successful Laredo Taco Company. Other c-stores have introduced PL cigarettes such as Circle K’s Crown brand.
One issue that c-stores face that grocers and others who have created PL brands didn’t is the narrow number of SKUs carried. With a total of 3,500 SKUs the ability to create brands is limited. Of those many are very slow moving items in the center store area. That with the fact that the brand loyalty is very strong for key categories such as beer, cigarettes, candy, and carbonated beverages makes it very difficult for c-store retailers to create successful PL brands.
I would think that the possibilities for private label in a convenience store setting is almost without limit. The story cites other channels with triple or quadruple the store brand ratio that now pertains in convenience stores, and notes that PL is growing very rapidly. Private label has huge acceptance with shoppers, especially in an era of stunted economic growth. Moreover, given the elevated prices of many of the items on the shelves of a typical convenience store, the availability of a national brand equivalent at a much lower price could be a game changer for the convenience channel. While quotes in the article suggest a pick-and-choose approach to which categories are best, I think any category in a convenience store would benefit from a private label option.
I am having a problem grasping private labeling as an opportunity for the C-store industry. The C-store customer is usually the gas buyer looking for a fast food type item like soda, chips, etc. Yes, there are many buying the hot dogs and donuts. But do we think for a minute they care if those items are quality or simply filling. Is the beer buyer the walk up business or the gas purchaser? My guess it is the gas buyer. The walk up business is the neighborhood the store services.
I have owned a Convenience Store and thus hold bias from experience. It is an operation of convenience and limited assortment. If you have a choice between Private Label and Branded, you tend to oversku. If you only have Private Label, you risk losing the sale.
The primary customer draw for most convenience stores is Private Brand gasoline. You can only buy one brand of gasoline at a location. The problem for many convenience stores is in the supply chain. Most are supplied from wholesalers and they don’t have the volume for a good Private Label program. Some of the chains do have the volume and they can expect to expand their own labels. The greatest opportunity is for the two largest wholesalers to create good private label product, even though their customers have Shell or BP on the marquee.
The best opportunity for PL in the c-store is a branded cup of quality coffee at the 99 cent price point. Did I mention quality?
Beyond smokes and Cokes the best item is coffee. Having a great one that is branded to your store and of good quality makes the location a destination.
Sure, most have their name on the cup. I’m suggesting something more. I’m suggesting not only what’s in the cup being better, but what’s on the cup being more of an identifier.
The c-store coffee stop is a regular for so many and the market is not a compare or compete to Starbucks or others. It is a separate market that wants a ‘good’ cup and doesn’t wish to spend $3, and never will.
“Easy pickins’” — C-stores could quickly hit private label milk, over the counter meds, and beauty items.
Not sure if I would dive into coffee or other items, but they may be worth a test.
Here in Los Angeles, there are actually relatively few C-stores that sell gas. So those stores have been challenged since their inception on how to get consumers in their stores. PL is always a great way to demonstrate value and selection. Key categories, like snacks and soft drinks, would be the obvious choices. Merchandise the PL varieties next to the brands, and watch them fly! 😉
Whoever figures out the quality aspect of this first will win big (just ask Wawa). Having said that, there has been a LOT of brand damage in this sector over the last 30 years that will be tough to overcome. I would not look for instant results because of that.
Has anyone ever been to a 7-Eleven in Japan? That’s the easy emulator from a brand and product perspective.