C-store foodservice: an untapped and complicated opportunity.

Jonathan DeVito, Managing Principal | jdevito@pivitasresarch.com

Mathew Mandeltort, Senior C-store Foodservice Operations Authority

 

Seeking growth and high margins.

The convenience retailing industry has long been dominated by sales of fuel, salty snacks, tobacco, and lottery tickets. However, faced with declining customer traffic and sales driven by decreases in adult smoking, increased fuel mileage, pay at the pump (one less reason to enter a store) and razor thin fuel margins, many operators are turning to foodservice in an effort to drive profits.

It shouldn’t be a surprise that foodservice is viewed as a major industry opportunity. Analyzing data from the National Association of Convenience Stores (NACS), foodservice growth was slightly above 6% per year from 2008-2018. According to the USDA, limited service restaurants (LSR), typically viewed as convenience stores’ (C-stores’) biggest source of foodservice competition, grew at just over 5% during the same period. In addition, traditional C-store foodservice offerings, like dispensed beverages and handhelds, command incredibly high margins. In theory, an operator can accrue 90%+ gross margins across products like fountain soft drinks and hot beverages.

However, despite all of the benefits of foodservice, often trumpeted by various industry organizations and media outlets, the picture of actual opportunity becomes a bit murky upon closer examination. Refering to the same data sources listed above, C-Store foodservice market grew from $29bn in 2008 to $55bn in 2018. By comparison, LSR, a much more mature segment, grew from $203bn to $340bn during the same period. This represents an increase of $137bn, or an increase that is 376% lager than that of C-store foodservice.

Our opinion is that the full potential of C-store foodservice still hasn’t been realized. Some of the factors holding back C-store foodservice are based in marketing and quality perception. However, other factors are more fundamental and are based in operations and management culture.

The following dives into the headwinds and  tailwinds affecting C-store foodservice along with key recommendations surrounding what operators and suppliers can do to accelerate industry growth.

 

Setting the stage: how do C-stores stack up against restaurants?

Setting the stage for driving growth in C-store foodservice requires taking a closer look at C-stores’s key advantages and disadvantages versus restaurants. In doing so, one can hone in on ways to emphasize strengths while mitigating risks and weaknesses. Below are key factors outlining C-store operators’ advantages and disadvantages in foodservice:

C-store advantages:

A multitude of adjacent purchase opportunities: As the name would suggest, C-stores are often catch-all location where consumers can find various convenience items. A person may stop at a C-store to get gas, cigarettes, lottery tickets, or a myriad of other items. There are an infinite number of other scenarios to visit a C-store from needing toothpaste after hours to stopping by for gas during a morning commute.

By comparison, traditional restaurant operators typically have a very small number of functions, almost always directly related to food away from home purchases. For example, a person may visit a limited service location to buy lunch, but that same person would never stop by to buy toothpaste or chewing gum.

The functionality of C-stores means that operators can cross-sell and cross-market across customer opportunities in ways that traditional restaurants can’t. A customer that is purchasing gas can be enticed to buy coffee. Or a late-night customer seeking a bottled beverage can be directed to buy a sandwich.

Operating during non-traditional key dayparts: Many C-stores operate during late-night segments where they may face diminished competition for restaurant operators. The importance of this opportunity should not be overlooked. According to one NACS report, 15% of American workers are evening shift workers and 68% of C-store operators mention that serving late night first-responders alone justifies staying open overnight.

C-store disadvantages:

Operational identity: C-store operators have long relied on selling things that require little to no labor and are shelf-stable (like beef jerky, gum, or non-food items). This “retail mentality” comes through in C-store foodservice operations: roller grill items and products kept under a heat lamp are fairly ubiquitous. The problem is that consumers are increasingly demanding increased quality and freshness from foodservice operators. For example, in the video below at 17:55, the individual says, before biting into a personal pizza, “It would be nice to know when they make it… so that you can get it fresh.” Shifting from retail models to foodservice models, where perishability and the need for active inventory management are high, is no easy tasks. Some operators will need to challenge who they fundamentally are in order to succeed in foodservice.

Space challenges: Many stores simply aren’t set up to accommodate sophisticated foodservice operations, which often require extensive refrigeration, dry storage, and food preparation spaces. For some operators, retrofitting may be an option, but this is often complex, time consuming, and expensive.

Culture: A very large proportion of the C-store industry is comprised of independent operators with an “if it ain’t broke don’t fix it mentality”, especially among small, independent operators.

Distribution: Picking the right distributor often isn’t clear. Some C-store distributors do offer robust foodservice offerings, but many don’t. Many operators may not be aware of foodservice possibilities because their distributor carries products that are more aligned with traditional convenience retailing. Moreover, having a foodservice distributor, C-store distributor, and DSD supplier dropping products off at a single store can be confusing and distracting.

Perception: C-stores often suffer from the perception that their food is unhealthy or of low quality. Although there is not a  large amount of data on the percentage of consumers that express a distinct aversion C-store store food, it is almost common knowledge that the idea is widespread. For example, a man named Frank Beard wanted to prove that what a person eats is more important than where a person eats. He chose to eat 30 days of “gas station food” to prove his point. He experienced health benefits after making thoughtful food choices. It appears that he believes his point was strengthened because he was able to achieve positive health outcomes despite eating at a gas station.

 

Predictions and perspectives.

The industry should look at driving C-store growth as a team effort. Attention from manufacturers (food and non-food), operators, and distributors will be needed. Key suggestions for industry players are below:

Re-engineering operations to support better food quality: As pointed out above, one of the key challenges for C-store foodservice has been quality perception. It should also be noted that poor quality perception among guests is somewhat of a North American phenomenon. In various Asian countries, C-stores actually offer high quality and respectable food options, particularly in Japan. Operators will need to explore how they can move beyond roller grill items and pre-made products that sit on shelves. And while scratch cooking may not be possible due to labor and space constraints, exploring commissary operations and value-added items that support speed-scratch preparation may ease the transition for C-store operators seeking to become true foodservice operators.

Operators shouldn’t play follow the leader: In order for C-store foodservice to succeed long term it is necessary for operators to carve out their own unique space in the foodservice continuum. Mirroring QSR offerings is a flawed strategy which puts c-store foodservice in direct competition with QSR industry giants like McDonalds, Domino’s, KFC and Taco Bell to name but a few.  A successful C-store foodservice strategy would position C-stores to leverage their innate competitive advantage (speed, proximity and convenience) while offering food which features attributes that appeal to today’s discerning foodservice customer. This strategy can be described as the development of  “Road Food” (the vehicular version of “Street Food”). This entails developing menu ideas that are compatible with the transportation industry. For example, boneless wings are probably more amenable to C-store environments because a consumer, that might be traveling in a car, isn’t required to dispose of chicken bones. Hand-helds are also a key component of Road Food since they do not require extensive packaging or eating utensils (which again, require a garbage receptacle for disposal). Examples include pepperoni roles, empanadas, and calzones.

Labor management: Labor is a key challenge for the foodservice industry as a whole (for more information. C-stores have traditionally been labor-light retail operations, but if C-store operators want to accrue foodservice’s high margins, they will have to get used to dealing with the associated labor. The need to hone training programs is self-evident. Beyond this, new technologies should also be leveraged to reduce labor burden and risks. A myriad of smart coffee brewers, ovens, and microwaves are available and operators should make a concerted effort to leverage these technologies to maximize consistency and minimize waste. New systems can also help to alleviate food safety risks association with dealing with perishable inventory and fresh items. For example, remote monitoring systems like Digi allow operators to accurately monitor elements like refrigerated foods, hot foods, and equipment functioning. For further reading, check out this article on how automation will change the foodservice industry.

Aside from equipment and training, operators can take steps to structurally optimize their food preparation strategies. For example, many operators face space and layout constraints. Consolidating food preparation across commissaries may be a solution for operators that are not able to retrofit locations or rollout foodservice across new stores.

Adjacencies and bundling: The “bundle” is an essential piece of foodservice. C-store Operators will need to become more sophisticated in assessing how to increase their sales. For example, a breakfast sandwich may garner a 50% margin, but operators should find ways to position breakfast sandwiches to maximize the possibility of guests also buying a hot beverage, which can garner 90%+ margins. Also, as previously pointed out, cross-marketing to translate non-foodservice customer visits (like gas, gum, etc.) into foodservice purchases will also be key.

Filling gaps that may not be served by traditional restaurants: C-stores are unique in that many are open 24 hours a day. Generally, traditional restaurants, aside from some QSRs, are not. Put simply, C-stores can generate sales by taking advantage of the fact that they operate during hours with diminished LSR competition.

Suppliers have an opportunity to drive growth: Suppliers have a vested interest in insuring their customers are successful. Sysco, the largest broadline foodservice distributor, already offers consulting services to restaurants in an effort to ensure their success. C-store distributors, including DSD suppliers, should explore doing the same. As an example, a DSD salty snack supplier may want to invest in data or services that help C-stores more effectively bundle chips with sandwiches. Another example might be a C-store distributor helping operators to ensure coffee program success by helping operators to better cross-market pastries and hot beverages.

Food manufacturers also have an opportunity to support C-stores. Developing products amenable to C-store environments, and helping operators see the value of these products, will be essential. Some C-store operators may need high quality, pre-prepared or frozen items to begin developing a foodservice offering. Others that are more advanced or operate commissaries may benefit from speed-scratch products, mixes, or sauces that hold well and can be cross-utilized across multiple applications.

 

Conclusions.

Despite the attention that C-store foodservice has received in recent years, we believe that opportunity is still not being full realized. While the category has been growing, it still has not been growing fast enough to change the overall foodservice landscape.

However, we do believe that the industry has the ability to accelerate growth. Operators  need to play to their strengths, such as focusing on late night departs and maximizing adjacent sales and marketing opportunities. They also need to place a bigger emphasis on fresh, high quality offerings. This will likely require notable operational and paradigm changes since, unlike shelf-stable retail, quality foodservice requires substantial labor, equipment, and active management of perishable inventories.

It should also be noted that growing C-store foodservice should be viewed as an industry effort. Suppliers and distributors have a tremendous opportunity to support C-store operators by offering relevant products and services.

Overall, we believe that the C-store foodservice opportunity is there for the taking. Now it’s time for players to make the right investments in the category so that they can stand up and take it.


 

About the authors

Jonathan DeVito: Jonathan is the Founder Managing Principal at PIVITAS. As a believer that there is no substitute for hands-on experience, he maintains tactical food industry expertise by picking up restaurant shifts in the Chicago area.

Mathew Mandeltort: Mathew is a recognized convenience store foodservice operations expert. He has held numerous culinary and business leadership roles, most recently serving as Vice President of Foodservice Strategy for Eby-Brown, one of the largest convenience store distributors in the United States.  Mathew received is JD from the Chicago-Kent College of Law at the Illinois Institute of Technology, his MBA from the Lake Forest Graduate School of Management, and his BA from Macalester College.

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