Sunday, September 26, 2010

A Brief History of Convenience Stores

Some of you may have arrived here from the Convenience Store News Magazine discussion. I want to be clear that it is not my intention to sell any product or service through these discussions, nor will I tolerate anyone else using our discussion to sell anything.

This is a discussion of ideas revolving around the possibilities of utilizing Cloud Computing in retail industries. Personally I've had some experiences in other retail types of businesses, but the convenience store industry is where I have gained most of my knowledge.

I bring to the table thirty-two years of experience in working with oil marketers and convenience store operators; a few with one or two stores, some with twenty to thirty stores, and some with several hundred stores. I have performed almost every task that can be done in the convenience store environment. I have cleaned toilets and swept floors when employees have refused to do so, ordered inventory, managed employees and provided functioning computer systems in the stores and at the stores' headquarters.

As a result, I have had a great many experiences in the market of c-stores. I know where they are making mistakes and I know where they're not. My emphasis is on inventory control, because from where I sit, the lack of inventory control and merchandise marketing is killing the convenience store industry for the smaller to midsize retailers – those with 1,000 stores or less, and some even larger.

When I started working in this industry in 1978, 7-11's success prompted many oil marketers to get serious about entering the convenience store market. Mostly they were small service stations— selling oil, bulbs, batteries, cigarettes, chewing gum and gasoline. Very few sold grocery items as did 7-11.

Gasoline is what brought their customers to their stores. Putting the bathrooms inside the stores created opportunities to display a limited number of retail items for sale. The retail prices were much higher than the same items sold in conventional grocery stores. The employees that worked at these stores evolved from gas station attendants to cashiers. Most of the inventory came from the oil marketer's own stock. Markups were generally done by raising the cost of items to produce a 30% profit. Many made the mistake of multiplying the costs by 1.3 instead of 1.43, realizing a much smaller profit than they expected.

As stores began to stock more and more non-fuel and less automotive items, operators were reluctant to hire new employees to manage the grocery stock. Stores were commonly laid out over a 100 mile radius, and managing inventory from a central location was difficult if not impossible. They went to their suppliers who agreed to keep the stores stocked. Finding an excellent outlet to sell their stock, suppliers became more aggressive and set up programs to expand the market and bring on new outlets. At first the system worked fairly well, but the sheer volume of inventory being transferred and logistics lessened the suppliers' ability to keep up.

During the late seventies and early eighties, the convenience store industry experienced tremendous growth. Fortunes were made through fuel margins, in some areas as much as 40 cents a gallon.

Then something happened. The major suppliers of gasoline products to the stores began to open up more and more company operated stores, infringing on the independent convenience store operator's market. If you were branded, you were forbidden from competing with the majors. In 1986, Congress closed many of the loopholes in the tax system, and the industry began to experience a downhill slide that continues through today. Walmart exploded in size and developed the world's most efficient inventory control system and then they stepped into the fuel market.

Grocery suppliers began to experience problem of their own. Wholesale prices of groceries to retailers began to rise. Inside the stores, margins which once were much higher began to shrink to 28% then 22%. Today, a convenience store has to be very creative to see a 20% gross profit on overall grocery sales. Organizations, in many cases heavily financed by suppliers with deep pockets, began to exercise influence over struggling retailers, guiding them in directions that served their own agendas.

To compensate, convenience stores were forced to explore other avenues of making up for lost profits. One of their remedies included an expansion into deli. They began to focus on food services- fried chicken, pizza, hamburgers and french fries; even leasing parts of their stores to food franchisees like McDonalds, Wendy's and KFC.

But their troubles were far from over. As costs continued to accelerate out of control, reducing costs became the primary concern of everyone in the industry. The largest controllable costs being salaries and store maintenance, smaller, less profitable stores simply closed up shop, or sold out to Mom and Pop's and competitors. Government mandated wage hikes forced stores to lay off employees, prompting them to maintain a skeleton crew of minimum-wage workers who lived from paycheck to paycheck, unsatisfied with their pay and always looking for a better job.

The downward spiral continues, and today the average convenience store is lucky to see a 2% net profit before taxes. It makes one wonder why someone would invest a quarter-million dollars to realize a profit slightly higher than that offered by banks on CDs. Knowing the history helps us to understand better. If the convenience store industry was suggested today, it would probably never get off the ground.

Retailers throughout the world are facing the same problems. The current economy notwithstanding, the convenience store industry was already in desperate need of reinvention. If we look back into the history of how we evolved, we can see where we got off track and maybe these clues point a way to solutions.

If we look around and see others who continue to be successful, we have no alternative, but to come to the conclusion that they are doing something right and we obviously are doing something wrong. In my view, from my knowledge and experience, the answer lies not only in inventory control, but in other factors involving marketing techniques and attitude.

Henry Ford wrote in his autobiography, "The moment one gets into the 'expert' state of mind a great number of things become impossible."

We must thoroughly examine the techniques employed by other, more successful enterprises and ignore the knee-jerk reaction that they seem impossible in our situation. We must do the opposite, figure out ways to employ their techniques in our operations. We must realize that we are NOT experts. The market changes daily. We are constantly learning and there are infinite opportunities to change for the better.

2 comments:

  1. I like the way it is writen and definitely that comes from your experience about the Convenience Stores. Very interesting. Like to read more of yours.

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  2. Older, but very interesting and informative article. A good example of a long life tsykla information)
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