Tuesday, August 12, 2008

Retail Memo: Soaring Gas Prices Leading to Increased Grocery Category sales At U.S. Convenience and Drug Stores; Good For Small-Format Grocers Too

Guest Retail Memo From the Washington Post

From Soda and Chips To Grocery Staples
Shoppers Turn to 7-Eleven, CVS to Beat High Gas Prices

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, August 9, 2008

Walk into Zulfiqar Ali's 7-Eleven in Arlington and you'll find the standard stack of newspapers, rack of magazines and ATM in the front of the store. And, lately, two red grocery baskets.

Ali added them a few months ago after he noticed shoppers making multiple trips between the grocery shelves and the checkout counter, carrying cans of Goya black beans, Aunt Jemima pancake syrup and fresh fruit. On a recent evening, two elderly women who live nearby spent $150 on groceries. Ali has even expanded his stock of sugar, salt and cooking oil due to popular demand.

"It was not like that before," said Ali, who has worked at the store for six years and owned it for the past two. "Before, people just buy a couple of things and pay and leave."

Once primarily the province of Big Gulps and beef jerky, convenience and drug stores are siphoning away sales from traditional supermarkets as the weak economy and high gas prices force consumers to save more by driving less. They are stopping by not only for the quickie quart of milk, but also for pantry items normally bought at the supermarket -- and even for dinner. Some are using the stores to stretch their paychecks, buying what they need when they need it instead of stocking up.

At 7-Eleven stores in the Washington region, grocery sales were up 2 to 3 percent last month compared with last year, said Tom Gerrity, director for processed foods. Frozen food sales grew 7 percent, and ready-to-eat meals jumped 9 percent. Other regions across the country are seeing similar growth, with weekly spikes following paycheck cycles.

"Some of the products that would typically be purchased at a supermarket or club store in bulk quantities, we're seeing more customers buy those products throughout the month at a 7-Eleven," he said.

According to local trade publication Food World, 7-Eleven is among the top 10 grocery destinations in the Washington area, ranking ninth with annual sales of $469 million and 3.3 percent market share -- ahead of chains such as Harris Teeter (10th) and Whole Foods (11th). CVS ranked fourth with $941 million in sales, excluding prescriptions, and 6.5 percent of the market. Giant dominates the region with $3.3 billion in sales and 23.2 percent market share. Safeway follows with $2.6 billion in sales and 18.3 percent of the market.

Part of the strong rankings are due to the sheer number of convenience and drug stores in the region: 7-Eleven has 416 and CVS has 190. Whole Foods and Harris Teeter together have just 32 stores. But as gas prices continue to nibble away at consumers' wallets, many are finding that they can get what they need closer to home.

"It's a big number because convenience stores are everywhere," said Jeff Metzger, publisher of Food World. "They're trying to use the edge that they inherently have."

Convenience and drug stores have been ratcheting up the competition with traditional grocers over the past three years with expanded food offerings, Metzger said. CVS does not break out sales numbers for grocery, but general merchandise accounts for 15 percent of revenue, according to the company's latest annual report. CVS spokesman Mike DeAngelis said the retailer does not position itself as a grocery destination but does tailor merchandise to neighborhoods.

"Where we see a need in a particular community, we make efforts to expand our selection of staple food items (bread, milk) as well as our convenience food assortments," he wrote in an e-mail.

At Ali's store, grocery sales are up 6 percent, while chips grew 16 percent and take-home cookies and crackers skyrocketed 39 percent. Budget beers rose 15 percent. Yesterday morning, one customer bought toilet paper, napkins, Ritz crackers and Sunkist soda. Two boys walked in for a gallon of milk.

Mustafa Abdellatif, 68, stopped by for the newspaper and a Perrier mineral water. He lives nearby and shops at 7-Eleven when he doesn't feel like driving to the supermarket.

Lately, he has tried to cut back on his time behind the wheel because of gas prices. When he does drive, he said, he finds himself glancing at the fuel gauge more often. The 10-minute walk to the 7-Eleven qualifies as his exercise for the day.

"When I have a small list of groceries," he said, "then that's when I come here."

Food is an important profit-driver at convenience stores, particularly service items such as fountain drinks and on-the-go meals. Consulting firm Technomics estimates that profit margins on such items can easily hit 40 percent and may exceed 60 percent.

"A trip to the gas station may be unavoidable, but now consumers are more likely to also pick up a quick meal or a snack at a [convenience store] and avoid another stop," he said.

Pennsylvania-based Wawa, which has 30 locations in the area, recently began offering a six-item dinner menu at its convenience stores for $3.99 each or three for $9.99. Lisa Wollan, head of consumer insights and brand strategy, said the program has been a success and helped showcase the brand as a one-stop shopping destination.

"We were trying to give our customers maximum value," she said.

Still, a recent report by consumer behavior research firm TNS Retail Forward showed that the primary reason shoppers visited convenience stores was to fill up their gas tanks. Grocery shopping ranked last. Among store merchandise, cigarettes and other tobacco products make up the bulk of sales, followed by bottled beverages and alcoholic drinks.

"It's important to add destination appeal so that shoppers think of them not only as convenience," said Jennifer Halterman, Retail Forward senior consultant. "Adding that second layer can help them in the future."

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