“Time was when you’d build stores as cheaply as you could. Now everyone’s interested in aesthetics, in spending money now to make more money later. You want to do whatever you can to get that customer in your store.” -- Haddon Clark, president of the N. C. Association of Convenience Stores and vice president and general manager of Clinton-based Han-Dee Hugo’s. The chain's new store on Atlantic Avenue in Raleigh (left) offers TV monitors so drivers pumping gas can catch up on the latest news.

Cornering the Market

Buffeted by price swings, convenience stores
struggle to maintain appearances and profits

By Kevin Brafford

Look beyond the shiny storefronts, bright lights, uncluttered aisles and short checkout lines. Forget for a minute about the simplicity of paying at the pump for fuel with your debit or credit card. If you think your favorite convenience store is a veritable cash cow, you might want to think again. While most industry experts agree that c-stores on the whole are better off than ever, they’ve still felt the effects of a weakened economy. For proof, there’s Convenience USA, the Durham chain that filed for Chapter 11 bankruptcy protection in May, citing a profit pinch from rising motor fuel prices.

But C-USA’s bold move was rare in that it cast public light on an otherwise backburner business. Independent stores operate with small staffs, and layoffs or cutbacks among chains rarely make headlines. Indeed, many of the larger chains, while putting the brakes on planned expansions, have spent big bucks to make impressive upgrades, ranging from expanded food service options to amenities that might leave you shaking your head in amazement.

At a new Han-Dee Hugo’s store on Atlantic Avenue in Raleigh, consumers can pump gas while watching CNN on television screens. They’ll get pumped at the same time — as the news is being broadcast, streaming text at the bottom of the screen advertises in-store specials.

“It’s an evolving business,” says Haddon Clark, the president of the North Carolina Association of Convenience Stores and the vice president and general manager of Clinton-based Han-Dee Hugo’s. “Every time you turn around there’s something new.”

And every time you turn around there’s seemingly a new  convenience store going up. North Carolina boasted 4,896 of them at the end of 2000, the fourth-most of any state in the country and surpassed only by Texas, California and Florida.

It stands to reason, then, that a number of chains call North Carolina home. In addition to Han-Dee Hugo, which has 40 stores in the state, and Convenience Store USA, two others are headquartered in the Triangle: Sanford-based The Pantry and Swifty Serve, based in Durham. Each wages daily battles in what’s become a highly competitive market.

“Time was,” says Clark, “when you’d build stores as cheaply as you could. Now everyone’s interested in aesthetics, in spending money now to make more money later. You want to do whatever you can to get that customer in your store.”


Growing the Business

That’s the basic principle of Business 101. When c-stores were born in the late 1960s — Circle K and 7-Eleven are remembered as the first true franchises — they touted simply what their name implied: convenience.

They were an alternative to grocery and drug stores, generally built on street corners that afforded easy access and short checkout lines. Gasoline sales soon followed, usually with just a pair of pumps, and c-stores began to grow in number and popularity in the mid-1970s.

The industry caught the eye of John Garner, a South Carolina resident at the time and a salesman who traveled parts of the Southeast for a grocery store chain. “I looked at what convenience stores were doing, the whole concept, and it wasn’t that much different than a grocery store. I got to thinking that if I could make money for someone else traveling, I could make it for myself in one place.”

That place is Hamlet, the small Richmond County town not too far from Rockingham, and Garner’s Convenience Corner store has been a certifiable hit since he opened its doors in 1978. Sales approached $3 million last year and he notes proudly that his store has regularly been “voted best convenience store in Richmond County” by the local newspaper.

The secrets to his success? “Location, location, location,” he says. “I’m in a corner lot at a five-way intersection. I’ve got a neighborhood beside me and one behind me, and there are two schools close by.”

Garner also believes that he has an inherent advantage over the mega-chains. He sold a second store in Rockingham in 1986 “because I was up to 34 employees and it really was requiring me to try to be in two places at once. It was almost too labor intensive — not physically but mentally.” Now, with just one 1,580 square-foot store to operate, he likes his ability to react to industry trends in a quick, efficient manner.

“I’m helped as an independent in that I feel the changes in the economy and the trends as a business a lot faster because I don’t have as many layers to go through,” he says. “I don’t look at my bottom line every month; I look daily. Then I can adjust accordingly.

“I remodeled the store completely in 1989, and I’ve upgraded my pumps three times. When I started out, I had two. Now I’ve got four, and they accept 22 different credit cards.”

So how good is business? “It’s good but not as good as it was,” he says. “In 1997 or ’98, I think I had a 7 or 8 percent increase in profit margin. Right now, it’s harder to get 5 percent.”

Don’t mistake that for complaining. Garner has done well enough through the years to be courted by three prospective buyers, plus he put enough money in the bank to build a car wash across the street.

“It’s really done a lot more than I ever dreamed,” he says. “Put it this way — it’s provided me with a better-than-average living.”


Margins Are Down

The annual report produced by Convenience Store News, the industry’s trade publication, shows a 15.1 percent sales increase in 2000, but the figure is misleading in that the gain was driven in large part by inflationary pricing in a pair of key categories — motor fuel and cigarettes.

“Our margins are down,” says Clark. “Ten to 15 years ago, a pack of cigarettes cost us $1 and we could sell them for $1.39 — that’s nearly a 30 percent gross profit. Now we’re having to pay about $2.50 for a pack, and there’s no way we can get away with raising that by a dollar.”

Gasoline is similar. Consumers have been understandably angry and frustrated by fuel prices during the past eight or nine months, but Clark says they can get in line behind the c-store owners.

“Whether the price is 75 cents a gallon or $1.50, it doesn’t matter that much to us,” he says. “In truth, the higher it is the more it hurts us, because we feel like we have to buffer the higher cost.”

Ideally, owners of c-stores and traditional gas stations hope to make 10 cents per gallon. “If we can make that, we’re profitable,” Clark says. “You try to find a optimum price point, and a lot of it depends on the competition around you.”

C-stores also are feeling the effects of supermarkets and other retail outlets that are getting into gasoline — this summer, for example, Kmart opened a store in Garner that sells gas.

It’s a trend that’s soon expected to saturate a market near you — in fact, retailers in Dallas, Texas, report that high-volume retailers have taken hold of a 30-percent share of the gasoline market.

And gasoline isn’t the only c-store category that’s causing stress to owners. The Convenience News report reveals that while operating expenses went down in 2000, the cost of goods and interest expenses went up, bringing a reduction in pretax profit. Further, in-store gross-profit margins decreased to below 30 percent, a drop fueled by slower sales of fountain drinks, one of the impulse items that consumers tend to buy when they pay for their gas inside. Industry-wide, profits were down 4.1 percent overall, falling to $4.6 billion before taxes.

That’s led some to wonder if c-stores have become too convenient for their own good. Six years ago, only 17 percent of c-stores had pumps equipped with card-reader machines that allow customers to use debit or credit cards to pay outside. By the end of last year, that figure had risen to 65 percent and is expected to grow to 80 percent by 2003.

As Clark points out, gasoline sales have low margins, while sales of soft drinks, bottled water, beer and snacks have much higher ones. “Fountain drinks and coffee are where you have your best margins, along with food service, if that’s available,” he says. “Bottled drinks, sweet and salty snacks, things like that, they’re all around 25 percent.”

Some believe card-reader machines that allow customers to pay outside lead to lost business from the missed impulse buy. But Garner says that’s not the case at his c-store in Hamlet, and others point out that data says otherwise.

“I spent $18,000 on the Crind System a couple of years ago,” Garner says. “It accepts every major card and connects to a satellite link in Atlanta. They told me it would increase my outside sales by 10 percent and not decrease my inside sales. But my outside sales have actually gone up by 20 percent and I haven’t lost anything inside.”

There’s a reason for that, according to Peter Sodini, president and CEO of The Pantry, which, with nearly 1,500 stores is one of the largest chains in the country. “The pumps broaden the appeal to consumers,” he told the News & Observer of Raleigh. “They appeal more to a younger crowd, the female shopper. A lot of them don’t want to come into the station. There are a lot of people who say they want to buy gas only, and if you don’t have the luxury for them to use the card reader, then they will pass you by.”

Clarke says the effects run even deeper. “People who are going to stop and get something to drink are going to come inside anyway. You do gain customers who are interested only in gas, but the big thing it does is clear your lot off quicker. It’s frustrating waiting behind someone at the pump who has to go inside and pay. With the card readers, they get in and get out.”


Get Customers Inside

Card readers or not, the goal of c-stores is to get customers inside, so the industry is quick to hop on a fancy new display case for snacks or a new drink or a better way of serving prepared food.

To many chains, that means partnering with a brand name, such as Taco Bell, KFC, McDonald’s and Wendy’s. In such an arrangement, the c-store and fast-food store franchises operate separately.

“They run their business and you run your business,” Clark says. “It is a way to cut real estate costs, and the two franchises can feed off each other. And it’s attractive to families on the road because you can get gas and eat at McDonald’s in one stop.”

The downside, Clark notes, is that you lose a measure of control. “If you serve prepared foods yourself, then it’s all yours,” he says. “But if you co-brand with another franchise anything you do operational has to be agreed upon, which means that there’s a consideration on every decision that you make.”

Once the economic outlook brightens, the growth in c-stores likely will resume. Last November, Swifty Serve bought 39 Sav-A-Ton stores from Camp Oil of Rome, Ga., bringing the company’s number of Southeast stores to more than 600.

Two months earlier, The Pantry purchased 26 Fast Lane c-stores, the last of 140 new stores it acquired during 2000. Sanford’s own economic picture also got a boast when The Pantry announced it would add about 100 jobs in the Lee County town during the next year as it further slims an administrative office in Jacksonville, Fla.

Overall, the shiny storefronts and bright lights should continue to glisten as stores hawk new products, add ATMs, attempt to keep their restrooms cleaner and offer greater varieties of food.

“We’re just like everyone else in the business world in that we’re constantly looking for new ways to make a profit,” says Clark. “In this industry, you can’t relax because there’s so much competition, but if you take care of things, they’ll always be a demand for what we offer — fast, friendly, efficient service.”

And a good cup of coffee.

Return to magazine index