Are C-Stores Recession-Proof?

Are C-stores Recession-Proof? Not completely, but smart retailers will make bold moves to take advantage of opportunities in a slowing economy.

The combination of rising gas prices, falling home values, and tightening credit markets has many economists predicting recession, or worse, for the U.S. economy.

One Wall Street hedge fund manager was quoted recently as saying he was “worried about a recession. Not a normal one, but a very bad one. The worse since the 1930s.”

The technical definition of a recession – two consecutive quarters of negative growth – hasn’t been reached yet – but that milestone could occur at the end of June.

For convenience and petroleum retailers it’s important to know how reduced consumer spending will affect their business. First, virtually no business or industry is totally recession-proof. Most goods and services will feel some impact from a slowing economy. “Generally, a good business in a recessionary period is one that has a good balance sheet with minimum debt loads, high gross margins, good cash flow, and is selling goods and services that are considered consumer staples,” economist Maureen Maguire, president of ThinkResearch, told us recently.

C-stores are somewhat recession-proof because gasoline is considered an “inelastic” good – demand for it is not highly responsive to changes in price. “People need gas to get to work, to drive the kids to school, to do errands. They may conserve in the number of miles they drive by combining shopping trips, or switching to the car that gets better gas mileage, but people are still going to buy gas,” said Maguire.

Retailers have already seen a trade down at the pump to lower grades of fuel due to price sensitivity. What’s yet to play out, in a big way, is the impact on in-store product categories.

According to consultant David Bishop, managing partner, Balvor, consumer purchasing intent will determine the degree to which various categories are affected by recessionary times. “Categories with high purchase intent, like cigarettes, are already feeling the impact of down-trading by the consumer,” said Bishop. But, the categories that will be most affected by tighter consumer spending are impulse categories, like snacks and candy, he said.

Tobacco is almost as “inelastic” as gas. Consumers will look for value-priced multi-packs of premium brands or consider trading down to discount brands. Carton buyers will also be forced to down-size their purchases to single or multi-packs, which could result in more frequent visits to the store and higher margins for the retailer.

Coffee is another planned purchase that should perform well at convenience stores during a recession. “With Starbucks raising prices, this may be a good time for c-stores to promote their coffee more heavily,” noted Maguire.

Foodservice at c-stores should also perform well during a recession. Restaurants are already suffering as consumers cut back on eating out. In most cases, c-stores’ foodservice is priced lower than quick service restaurants. “Relative to other foodservice retailers, c-stores are not as exposed as Starbucks or even McDonald’s,” said Bishop.

Crafts and imports have dominated the buzz in the beer category the past couple of years, but Bishop pointed out that beer drinkers have already begun trading down. “We’re already seeing a shift back to mainstream beers, which are showing positive growth compared to the previous year,” he said.

In contrast, the snacks and candy category is highly impulsive. “The higher price of gas takes money right out of the pocket of these cash and carry consumers,” noted Bishop, who added that there are not as many opportunities for down-trading in these categories either.

The most important thing to remember is that during a recession, consumers are extremely price-sensitive. Sacrificing a little margin now for increased sales will pay off in the longer run. Difficult economic times are a golden opportunity for a strong retailer to expand market share, increase total sales and position itself at the customers’ first-choice when the inevitable upturn occurs.

-- Don Longo, editor-in-chief, Convenience Store News

Comments

[Mark Hawtin, KSS]

At first glance C-stores may seem recession-proof, but they won’t go unaffected in an economy facing tough times. As discussed above, consumers will cut their in-store spending. Impulse buys such as mints, chewing gum, sweets, and chocolate are likely to be affected as consumers become more price sensitive. But at the end of the day fuel is essential. Purchasing habits may change during a volatile market, but people still need to put gas in their car even if it’s in smaller quantities.

C-stores should address in-store and fuels pricing by exploring the relationship between fuel and store purchases and perfecting the balancing act between revenue and volume. They would be wise to identify their true competitors and use this information as a starting point for reviewing pricing policies, predicting competitor behavior in given scenarios and choosing the best course of action.

It’s not about putting prices up – it’s about maintaining volume and revenue while retaining customer loyalty.