at Craver

By John Lofstock, Editor

THANKS TO AN INCREASINGLY busy lifestyle, today'sconvenience store customers regard food preparedaway from home as a necessity, and the industry'stop-quartile retailers have benefited handsomely

from meeting the growing demand for fresh foods.For the past decade, the convenience store industry

has consistently posted yearly sales gains in foodservice.Retailers are to be commended for the work they have donecultivating the demand for foodservice by enhancing theirfocus on quality, consistency, freshness and value.

While the industry has made strides, this isn't to suggestthat 2011 and beyond will be easier as foodservice is a verycomplex and competitive business. As part of the fourthannual Convenience Store Decisions /Balvor 2011FoodserviceOutlook Survey retailers demonstrated how they are takingadvantage of opp.ortunities while attempting to minimizethe threats.

"Foodservice sales grew in absolute value and contri-bution to overall sales in 2010 and the retailers' forecastindicates it will continue to do so in 2011," said DavidBishop, managing partner of Balvor LLC. "Although it'seasy to focus on a small set of retailers that do an excep-tional job with food prepared on site, it's important torecognize that there is value and profitability in other pro-grams. The key is finding the right foodservice solution foryour stores and doing an outstanding job every day."

That solution could be proprietary brands, a commissaryprogram that delivers fresh food to stores more frequentlyor an enhanced heat-and-eat offering. Each has a place intoday's market, depending on the capabilities and commit-ment of the retailer.

"Convenience retailers are employing a wide-array ofstrategies and each can be effective within an organiza-tion," Bishop said. "Successful retailers build foodserviceprograms they can effectively and consistently executeand employ strategies to reinforce the value related to thatoffering."

A total of 67 convenience retailers representing 2,082stores shared their views in an online survey between Jan.11-21, 2011 on a variety of topics, including foodservicebranding strategy, dollar sales, product mix, distributionand daypart marketing for the coming year.

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POSITIVE OUTLOOKThe one consistent theme throughout the sur-

vey is that convenience store retailers remainbullish on all foodservice segments.

The sales forecast for 2011 is ranging betweenthe mid- to high-single digits, depending on thefoodservice category. For example, top-quartileretailers believe food prepared onsite will grow11.7%in 2011,while bottom-quartile operators areexpecting a more moderate 4.2% growth. Othergrowth projections, comparing top- and bottom-quartile retailers are: ..

• Hot Dispensed Beverages, 10% to 8.3%• Commissary/Packaged Products, 10% to4.2%

• Cold Dispensed Beverages, 7.9% to 2.5%• Frozen Dispensed Beverages, 5.4% to 0.1%"Retailers are more optimistic about their food-

service prospects in 2011versus last year, partiallybecause of expected retail price inflation, easiercomparables versus last year, and because con-tinued reinvestment into growing this business ispaying dividends," Bishop said. "The top-quartilesegment appears positioned to widen their leadwith even more robust growth this year."

One of the key findings-in the 2011CSD /Balvorsurvey is that there remains a performance gapbetween convenience retailers relative to foodser-vice. For example, although the average sales perday is just under $700, 40% of the retailers gener-ate $499 or less each day in foodservice while 13%drive $1,500 or more.

"The difference among convenienceretailers' performance in foodservicecan be staggering when you realizethat top-quartile retailers generatenearly seven times the sales perstore as compared to the bottom-quartile," Bishop said. "Thenumbers illustrate and rein-force that the retailers whohave been doing this well

Convenience store retailersposted strong across-the-board sales gains in 2010and expressed optimism foran even more robust 2011 .

for a long time are fueling the virtuous cycle ofstrong sales and growth that accompanies excel-ling at and reinvesting in foodservice."

Many other retailers have only recentlyrealized that foodservice is vital to theirfuture. And, while they are starting toinvest, consumers at those stores arehesitant as the retailer still needs to dem-onstrate a consistent ability to execute aprogram that consumers can come to trust,depend on and value.

'Time, commitment, and consistencyare ultimately what these chains need tobuild consumer confidence and improvedresults," Bishop said.

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DAYPART MARKETINGThe strongest consensus retailers have

regarding daypart opportunities is withhot dispensed beverages. Interestingly, 85%believe their best opportunity in this areaduring 2011 relates to the morning daypart,even though this is generally when most sales ofhot beverages already occur.

"The morning daypart is clearlywhere retailers are dig-ging in to wina larger

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share of the foodservice dollars," Bishopsaid. "While there are opportunities dur-ing other parts of the day, morning is stillwhere most convenience retailers arebest positioned to win the food fight inthe near-term."

Although retailers expect increasesin coffee prices in 2011 due to risingcommodity costs, fierce competition isforcing a thoughtful response so as toprotect volume. According to Balvor's2011Convenience Retail Outlook Survey,52% of retailers surveyed indicated thatthey'll likely raise retails in 2011; how-ever, only a quarter of these (14%) we'reextremely certain prices will go up. Ofthe other retailers that are less likely to beconsidering an increase, 11%already exe-cuted price increases during 2010.

Regardless of price, the ongoinggrowth in fast-casual restaurants andcoffeehouses will have a significantimpact on the overall breakfast market.Fast-casual restaurants tend to do theirhighest sales volume during lunch, butthe breakfast daypart remains a corefocus for these chains, as well as fast- "food marketers like McDonald's andBurger King.

Coffee chains like Starbucks andDunkin' Donuts are expanding menus tomove beyond breakfast to capture moresnack and fill-in daypart sales. The resultis a convergence ofmenu offerings, which

thrusts convenience stores in a precariousposition. C-store operators must have awell-defined foodservice strategy so theyare catering to their core customers andahead of the trends, not chasing them.

BRINGING FOOD TO MARKETMore consumers are also becoming

value-conscious, a reflection of currenteconomic conditions. Consumers are nowexpecting better value in terms of pricepaid, service consistency and food qual-ity. Consumers are also more interestedin using technology and many woulduse self-service terminals if available,according to Eric Giandelone, directorof foodservice research at Chicago-basedMintel and author of Mintel MenuInsight's Foodservice Trends for 2011.

"Fierce competition in the industrywill continue and proper menu, serviceand concept planning must be ongoingto prevent business failure," Giandelonesaid. "Restaurant-goers value menutransparency, but still want the occa-sional indulgent dining experience."

The complexity of foodservice isevident by the fact that the dominantbranding strategy employed by retail-ers varies as much as the subcategoriesoffered in the store. For instance, pizzais dominated by franchise or licensedbrands, roller grill by manufacturerbrands and bakery is spread across even

others, including proprietary brands. Thebrand equity manufacturer brands pos-sess is evident with roller grill, as overhalf of the retailers surveyed leveragethese in what is typically the largest foodprepared on site subcategory.

"Among the keys for retailers is under-standing just which branding approachwill help them the most today," Bishopsaid. "Just as retailers are different, so arethe reasons for using various brandedoptions. Over time, as their programsevolve, so will their branding strategies'potentially."

The CSD /Balvor survey also showedit's fairly common to find that retailersare adjusting the brands offered in theirstores. More retailers have focused onthe largest subcategory (sandwiches androller grill) in each category over the lastfew years.

Interestingly, the survey revealed thatover half of the adjustments during thelast three years occurred in 2010, suggest-ing possibly that retailers took the downturn as an opportunity to re-evaluatetheir offering in order to improve theircompetitive positioning.

"Given that consumer taste and needscontinue to change, it's only naturalthat retailers adapt their product mix toensure that they stay in step with currentand emerging trends," Bishop said. "Insome instances, the changes may simply

Circle No. 62 on the Inquiry Card.

"JUST 60~DAYS~TODOUBLE~ ~R BUSINESS!"

· "And up 30%for 2010!"

Tony, Omaha, NE

26 Convenience Store Decisions I February 2011 CSDecisions.

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reflect the entry of new product seg-ments, such ethnic wraps and egg rolls."

Packaged sandwiches have longbeen a staple of many c-store foodser-vice offerings and the survey confirmsthis is still the case. Bakery goods, whilemaybe not actually prepared on site, arethe second most prevalent item offered inconvenience stores today, typically con-sisting of bagels, cookies, doughnuts andmuffins.

"Although retailers have sold pack-aged sandwiches for a long time, a lothas changed relative to the quality ofthe ingredients, packaging and labelingavailable today in convenience stores,"Bishop said. "These improvementshave been driven in part by technol-ogy, logistics and a stronger foodservicementality."

The industry also appears to be see-ing an increase in commissary programs.The CSD /Balvor study found that 52%of retailers surveyed increased the num-ber of commissary-prepared sandwiches

and wraps in 2010. Thirty-six percentmaintained their current offering, whilejust 12% reduced the offer.

Sandwiches generally drive the com-missary category, so it's understandablethat this is where retailers are most likelyto invest in branding. However, a pro-prietary approach makes more sense forretailers who've already established asolid base business as the branding willhelp further differentiate their offering.

Given the infrastructure of most con-venience retailers currently, the surveyfound wholesalers remain the leadingsource for commissary products (seechart on right).

According to Bishop, "Top-quartileretailers, in terms of total foodservicesales, are more than twice as likely toleverage a proprietary branded sandwichas compared to bottom-quartile retailerswho rely more on manufacturer brands.In either case, each branding strategy hasits place, depending on the strengths andcapabilities of the retailer."

Customer SatisfactionIncreases Store Trafficand Generates MoreConsistent Sales!

28 Convenience Store Decisions I February 2011

Circle No. 64 on the Inquiry Card.

Primary Supplier of Commissary& Other Packaged Products(Percent of Retailers Selling)

Source. CSD;8aivor 20 II Foodservice Outlook Survey

Gus Olympidis, president and CEOof Family Express in Valparaiso, Ind.,opened a new distribution center andcommissary at the company's headquar-ters in September 2010 to help managecosts as it boosts its food sales. The centerproduces baked goods, sandwiches andwraps for now, but its potential is seem-ingly limitless.

"A commissary system gives you theopportunity to reduce waste, test prod-ucts and operate much more efficientlythan when food is prepared on site,"said Olympidis, who operates 52 stores.''When it's done right, central distributionis a cost-effective system that puts morecontrol back in your hands, and that's theway we want it because no supplier orfoodservice brand can run our stores bet-ter than we can."

The central distribution modelrequires other challenges, such as a truck-ing fleet, training foodservice employeesand a research and development team tofocus on new items. Still, the upside hasbeen worth it for Family Express.

We are building brand equity,"Olympidis said. "You can't convince methat flying someone else's banner is goodfor my brand. Our customers expect out-standing quality and great service fromFamily Express, and that's what theyget. It's who we are and what we workat every day. When a customer leavesour store I want them to remember theFamily Express brand experience, not anational foodservice chain."

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Daypart Growth Opportunities(Percent of Retailers by Segment)

Food Commissary Cold Frozen HotPrepared & Other Dispensed Dispensed DispensedOn-site Packaged Beverages Beverages Beverages

Products

• Morning (6am-lOam)

• Mid-Day (1Oam-2pm)

Afternoon (2pm-6pm)

• Evening ( 6pm-1 Opm)

Source. CSO;Balvor 20 II Foodservice Outlook Survey

SNACK OCCASIONSFeeding the human proclivity to

indulge in dayparts outside the tradi-tional breakfast, lunch and dinner hours,retailers are reporting solid sales gainsin coffee and frozen beverages. Thesedispensed treats are becoming crucialdrivers at top-quartile chains. ConsiderThorntons Inc. The Louisville chain hasa strong focus on hot and cold dispensedbeverages to improve the offering andmeet consumer demand for uniqueproducts. Some Thorntons stores haveas many as 15-20frozen beverages whenyou include milkshakes and frozen car-bonated drinks.

"The demand for all dispensed bever-ages-hot and cold-is overwhelmingin our markets," said John Zikias,Thorntons' vice president of market-ing. "Our customers can't seem to getenough. That gives us a chance to intro-duce new flavors and keep the offeringfresh. The result is that the demand isconsistently high."

30 Convenience Store Decisions I February 2011

Circle No. 66 on the Inquiry Card

Seventy-eight percent of retailerrespondents to the survey said the big-gest growth opportunity for frozenbeverages lies in the afternoon from 2p.m-6 p.m. (see chart on left).

Loyalty programs and social mediaare natural tie-ins for these snack occa-sions and fill-in daypart offerings.Facebook, Twitter and YouTube can helpoperators mitigate the economic envi-ronment as "word of mouth" advertisinghas moved online.

More consumers are also usingthe Web to browse menus, makereservations, order ahead and get rec-ommendations from other diners.Restaurants' use of e-mail, Internet andtext messages in marketing efforts is alsoa growing trend.

BEYOND THE MENUWhile meeting the customers'

demands for fresh foods is an integralpart of success, 2011 will bring a hostof challenges and regulations that gobeyond the kitchen. For example, in lightof the recent healthcare bill that requiresrestaurant operators with 20 or moreunits to list calorie counts on the menu,o~e-{"~torsare now tasked with balanc-ing federal regulations with the differingdemands of their customers.

"Both the government and consum-ers want healthier menu options, butrestaurant-goers are also very concernedabout value and how their food tastes,"said Giandelone, of Mintel. "Keepingboth parties satisfied might be a chal-lenge as we move into 2011."

Giandelone went out of his way topraise the efforts of convenience storeswhen it comes to delivering a qualityfood program.

"It's no secret that the industry hasstruggled to convert fuel customers tofoodservice customers, but the successof the market leaders has helped changethe consumers' perception of the indus-try and its ability to execute a top-notchfood program," he said. "The bar hasbeen raised very high so now it's up toconvenience store operators to continueexecuting at a high level-to diversifytheir offerings and drive traffic with-out sacrificing quality and value. Fromeverything we've seen, the industry isembracing the challenge." CSD

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