Keep on Working to Win

Dear Don,

Great editorial (Longo's Viewpoint, Oct. 19, "Government's Crippling Effect"). I've been in the industry 30 years. I have never seen it this bad or seen such opposition to business at the state and federal levels.

You mention NACS lobbying (and by inference state organizations lobbying) and customers lobbying their representatives. Lobbying is but one step in the process and it comes on the down stream side of the process.

What I would like to bring to your attention is a partnership with a grassroots group such as Americans For Prosperity. Lobbying the current group of representatives has not proven to be hugely successful.

Grassroots groups educate and mobilize the voters. The real strength of our system is "We the people."

Just consider the possibilities if we change the legislators.

Legislation that understands the needs of business, free markets, and real reform of health care and the credit card mess.

Better legislators = better legislation.

We need to think outside the box and form new and unique partnerships if the free enterprise system is to survive and prosper.

I would enjoy the opportunity to continue this discussion with you at your earliest convenience.

Jim Zeiler

To read Don Longo's October 19 Viewpoint, go to http://www.csnews.com/csn/print/article_display.jsp?vnu_content_id=1004019005

Channel Competition: Are Convenience Stores Feeling the Heat?

A recent blog on the Nielsen Wire, http://blog.nielsen.com/nielsenwire/consumer/channel-competition-convenience-stores-feeling-the-heat/ provides some insightful commentary about the state of the convenience industry:
“If, when walking or driving around town, you’ve thought to yourself that it seems like there are a lot of new convenience stores that have sprouted up over the last few years, you’d be right.  Since December 2001, more than 20,000 new locations have opened, bringing the total to almost 145,000 such stores in the U.S.  But facing high gas prices last year as well as competition from groceries and mass merchandisers and the effects of the economy, C-stores have actually been pulling back.  Since the end of 2007, more than 1,400 c-stores have closed.
“Chain stores, such as 7-Eleven and BP, account for more than 52 percent of c-stores, while independently owned stores make up the balance.  That said, only 14 percent of c-stores are from chains with more than 500 stores; the rest of the chain stores are part of local or regional companies such as WaWa, Get Go and Nice N Easy.
“So what makes one store more successful than another? Execution.  “According to Nielsen research, consumers want convenience, obviously, but they also want a clean, organized store and the ability to check-out quickly,” said Tom Pirovano, Director of Industry Insights at Nielsen.
“C-stores dominate a number of high-volume categories such as tobacco (85% share of all channels), ice (57%) and beer (56%) and they outsell food, drug and mass merchandisers (including Walmart) combined in these categories.  C-store sales of tobacco and beverages generate more than $90 billion annually.
“A Convenience Store News/Nielsen survey found that customers want their stores to offer gas, snacks and prepared food, a category that has shown growth as the quality of those food service items has improved.  Doughnuts and muffins are the top prepared food category, followed by sandwiches and hot dogs.
“Stores that offer prepared food that looks fresh and smells good and cross merchandise those with other items are likely to hit a homerun,” continued Pirovano.
“Despite their seeming ubiquity, the challenges facing the c-store channel are numerous: rising credit card fees, competition from small format groceries, a desire for healthier foods and competition from club and mass retailers selling gas are just a few of the issues c-store owners face.
“The key to success is innovation.  C-store retailers need to constantly fine-tune their offerings in the face of increased competition from other channels while never taking their eyes off the basics of cleanliness and efficiency,” said Pirovano.
“Other c-Store Facts:
• Texas leads the nation with more than 14,000 stores, followed by California and Florida
• Nevada showed the most growth in the last year, with 31 new stores coming online
• C-stores skew to African Americans, smaller households without kids, lower-income households and single males.
• Seattle, Dallas/Ft. Worth and San Francisco lead metro areas with the most c-store growth, while Miami, Houston and Tampa showed the steepest declines.”
I think Tom Pirovano is correct in pointing out the many challenges faced by convenience store retailers, particularly credit fees, as well as rising taxes on tobacco and a leveling off of growth in fuel consumption rates as Americans drive less. But, despite all that — and the recession, c-stores are doing better than most other forms of retailing. Low ticket products like candy and snacks, as well as other tobacco products drove c-store sales during the first half of this year, and I suspect foodservice sales at convenience are up as well. A recent story on csnews.com, based on Nielsen research, seems to bear this out. See “At ‘09 Halfway Point, Candy, Snacks and OTP Drive C-store Sales” at http://www.csnews.com/csn/search/article_display.jsp?vnu_content_id=1003998033.

-- Don Longo

Snuff: A Retro Tobacco Product Making a Comeback

As tobacco use restrictions get stricter, consumers are looking for new ways to get a nicotine fix, and the popularity of some items, including inhaled snuff, is rising. mhtwrnyqp4

It's fairly common knowledge throughout the convenience store industry that as anti-smoking laws become commonplace, smokers will seek other ways to scratch their itch for nicotine.

At CSNews Tobacco Roundtable, held in May concurrently with the Tobacco Plus Expo, attendees named the many products they see smokes trying out -- snus and other pouch products were deemed entry-points, while moist snuff was not far behind.

These products are not the only ones available for tobacco consumers to use when satiating their addiction. According to a report in Wired magazine, dry snuff -- made from tobacco leaves that have been ground into a fine powder -- s making a resurgence as a new generation of hipsters trade lungs full of smoke for a nose full of snuff.

Modern snuff comes in a variety of flavors, and is used by sniffing the product quickly into the nostrils, where it produces a burn — and a nicotine buzz, the report stated. According to a Federal Trade Commission report cited by the magazine, roughly 20 million individual packages of dry snuff were sold in the U.S. in 2005.

“For most, snuff is an alternative to smoking,” Alexander Schardt, a snuff lover from Hamburg, Germany, who runs the popular Snuffhouse.org discussion board, said in the report. “People recognize cigarette smoking is unhealthy, and you can’t do it at work or a lot of other places.”

Snuff is also cheaper than cigarettes. Dry snuff costs between $2 and $5 for a pocket-size container of about seven grams, and one tin can last a regular user several weeks, according to the report.

Innovative retailers looking for the next trend may see opportunity in this niche tobacco product, especially in an environment where smokers find themselves increasingly ostracized for their habit in public places.

What do you think?

-- Mehgan Belanger

Happy Birthday Dear Bar Code

The 35th anniversary of the Universal Product Code bar code will be celebrated Wednesday by GS1 US, the developer and administrator of the UPC for more than 200,000 businesses in the United States.

The occasion will be marked by a giant UPC-adorned cake as 800 attendees at its annual U Connect Conference in Orlando. Originally developed to help supermarkets speed up the checkout process -- it was first used live by Marsh Supermarkets at a store in Troy, Ohio -- the  UPC now comprises a row of 59 machine-readable black and white bars and 12 human-readable digits and is one of the most recognizable symbols in the world.

The c-store industry can thank the UPC code for faster checkouts, more accurate inventories, speedier product replenishment, simplified product returns and rebates, better store security and a new era of retailer/supplier relations.

But after remembering the trials and tribulations many in the c-store industry went through to implement scanning some 20-25 years ago -- waiting for equipment that worked in the c-store environment, manually creating the first pricebook, working with unprepared suppliers, figuring out pricing zones, trying to maintain the pricebooks at the store level, assigning keys for the many non-scannable items -- it's little wonder that some c-store chains implemented scanning, pulled it out and then later took it on again. (Hello QuikTrip!)

I suggest the industry pioneers who took scanning on early and made it work -- NACS' Hank Armour, Ron Sissel of Kwik Trip Inc. and others come to mind -- who then freely shared their experiences with others struggling to implement the technology, to go ahead and wash that birthday cake down with plenty of champagne.

--Barbara Grondin Francella

The Far-Reaching Impact of Federal Excise Taxes

The increase of federal and state cigarette excise taxes will have a far-reaching, negative impact on the convenience store industry. With the exception of petroleum products, no other category is more vital to our success than tobacco products. Given cigarettes represent 30 to 45 percent of convenience store inside sales; the deterioration of this category will have devastating consequences.

The Federal Excise Tax (FET) will dramatically increase the cost of doing business. Inventory cost will increase by an average of $6,000 per store — $1 million dollars for a chain of 166 stores — resulting in higher interest expenses. Credit card transaction fees will increase due to soaring cigarette retails.  Internal shrink dollars will escalate due to the higher cost per carton. External theft will rise due to the value of cigarettes and the amount of inventory dollars we carry. In addition to the FET, Kentucky Legislators are proposing an incremental 30 to 45 cents per pack State Excise Tax (SET) which will compound these issues.

The FET is a direct tax on the middle-class, as 80 percent of cigarette smokers are in lower-income brackets, and in Kentucky the average annual household income for cigarette smokers is less than $32,000 dollars. During these difficult economic times, it is impossible for the average
cigarette smoker to assume a higher tax burden.  As a result, increased cigarette taxes will significantly alter the purchase behaviors of our core consumers. 

The cigarette industry is rapidly declining at three to four percent annually. Excise taxes at these levels are unprecedented, and it is difficult to project the potential sales loss. Nonetheless, many industry experts are predicting additional 6- to 10-percent declines on top of the current 3 to 4 percent trends.  In addition to the reduction in cigarette sales and gross profit dollars, retailers will also lose the sales and gross profit dollars associated with affinity purchases (other product purchased with cigarettes).

If the convenience store industry experiences double-digit sales declines in its largest inside-sales category, it will have an epic impact on the way we do business — an impact that influences our total retail strategy. With unit sales predicted to decline by more than 10 percent, retailers will need double-digit percentage increases in average retails to make up the loss in revenue dollars. While retail increases associated with the FET will make up the revenue short-fall, they will not make up the deficit in gross profit and net income dollars.

With retailers facing reduced gross profit dollars, reduced affinity sales, increased interest expense, and increased cigarettes shrink dollars; retailers will be forced to look to this category and others to make-up the loss in net income.  It is unfortunate that consumers will most likely absorb additional increases above and beyond the excise taxes. 

This daunting economy has already made it difficult for most retailers to maintain shareholder-value, and the impending FET and SET will place an additional burden on the convenience store industry. This burden will challenge us to evaluate our cigarette categories and possibly re-engineer our overall strategies. In time, prudent retailers will overcome this adversity and will prevail with a much stronger business model.

Tony Miller
Senior Vice President of Sales and Marketing
Thorntons Inc.                                                          

Kids vs. Smokes: Why C-stores Will Always Lose

It’s like déjà vu for a second time -- Congress is preparing to pass a bill to increase the federal excise tax on cigarettes. Except now, with President-elect Barack Obama waiting in the wings to take over the Oval Office, it seems this undeniable nightmare for c-store retailers will turn into a stark reality.

The House voted and passed a bill two weeks ago to expand the State Children’s Health Insurance Program (SCHIP) by levying a hefty 61-cent increase on the federal tax on cigarettes. The Senate, meanwhile, passed a similar bill through a financial committee. That bill is currently in debate before the full Senate, with published reports stating a vote could come later this week.

But wait -- hasn’t this happened before? Twice, in fact. In August 2007 the Senate approved an SCHIP expansion bill in the face of veto threats by President George W. Bush, following approval in the House (See "A Bad Week for Tobacco," CSNews Online). However, President Bush vetoed that bill in early October 2007, stating it was flawed and would raise taxes, and allow adults and higher-income families onto the plan. And after a similar measure (with the same flaws) was crafted and passed by Congress, he vetoed that bill in mid-December.

Under an Obama administration however, it appears the third time will indeed be the charm. An Oct. 18, 2007 statement on Obama’s campaign Web site -- issued after the first veto by President Bush -- declares his disapproval of the veto and how he, as President, would sign a universal health care bill by the end of his first term. It is clear that Congress will see no more vetoes of this measure come Jan. 20, 2009.

There’s a reason why Congress is determined to pass a bill that would put the business of all tobacco retailers in jeopardy -- especially those c-stores who rely heavily on the traffic and profits that cigarettes generate. It’s the children. In the height of debate on this issue, when the House tried to get a veto-proof majority for the bill, advocates for the bill vilified opponents by ostentatiously alleging they were against the innocent, uninsured children of this nation. One SCHIP supporter at the Rockridge Institute presented an interesting image of a classroom full of sick children.

C-stores and other tobacco retailers don’t have much of a chance with lawmakers when they are put alongside a grade school child with the sniffles. In some lawmakers’ eyes, convenience stores sell those deadly cigarettes, the obesity-causing soft drinks and trans-fat-filled hot dogs, and, of course, reap serious chunks of change by gas-price gouging each time the threat of a hurricane in the Gulf Coast makes news. So SCHIP-supporting lawmakers probably think higher tobacco taxes don’t matter that much to this industry.

The realities of this issue -- and this bill -- are warped. But it’s a reality c-stores are going to have to face, and sooner rather than later, it seems.

What do you think?

-- Mehgan Belanger