A Matter of Convenience
Convenience stores become powerful competitors in the battle for foodservice dollars.

By Deborah Silver, Senior Editor

Once the meal option of last resort, convenience stores have become a force to be reckoned with in the competition for quick-service customers.

Despite occasional truces between c-stores and quick-service restaurants in the form of co-branding partnerships, rivalry between these two industry categories is intensifying.

Almost two-thirds of c-stores now offer foodservice--food prepared on site and hot, cold or frozen dispensed beverages--according to the Alexandria, Va.-based National Association of Convenience Stores. Between 1994 and 1999, c-store foodservice sales increased 14% and according to NACS forecasts will grow 5% annually through 2004, versus 3.2% per year for total foodservice industry. Last year, c-stores took in $13.8 billion in foodservice revenues--13.3% of all in-store sales--and contributed $7.9 billion to gross profit margins, more than any product sold in house.

"C-stores are in a perfect position to take advantage of the phenomenon of the time-strapped consumer," says Louis Sheetz, executive vice president of marketing for Sheetz, Inc., the Altoona, Pa.-based operator of 261 c-stores that last year reported foodservice sales of $148 million. "We're in prime locations, we're a known entity, and we provide one-stop shopping when both groceries and a bite to eat are on the agenda."

Getting grab-and-go customers to think c-store is a logical but vital step for c-stores, which face fierce competition from other retailers, particularly grocery and drug stores. They also are anxious to reduce their dual dependence on price-volatile gasoline and on tobacco, which has a dwindling customer base.

BRAND STANDS

One of the best ways for c-stores to get fast-food customers through the door is to give them exactly what the want: food from the chain restaurants they typically frequent. In-house quick-service concepts generated $3.1 billion in c-store foodservice sales in 2000, 22.5% of total c-store foodservice revenues, according to NACS. Although that amounted to only 2% of all QSR sales last year, for the c-store operator the presence of a nationally branded fast-food chain can double total revenues, according to NACS, as well as attract women and more affluent customers.

Nearly every major QSR segment has established a c-store presence, and some large chains, such as McDonald's Corp. of Oak Brook, Ill., and Irvine, Calif.-based Taco Bell, have specifically targeted c-stores as an expansion route. A number of fast-food giants have tried to tap the c-store consumer by installing in-store kiosks to disappointing results. Consumers rejected the limited menus and were confused by the lack of signature visual cues, such as McDonald's arches.

This time around, the top chains are building units that are attached to c-stores, complete with separate entrances and familiar signage. These so-called snap-on restaurants are considered a more viable alternative because, by co-existing on the same parcel of land, development costs are held down. According to Chicago-based Technomic, Inc., average unit volumes at snap-ons come within 80% of a chain's system average per unit. McDonald's has thus far exceeded all others with its snap-ons, at $900,000 average annual unit volume. But burger chains in general perform better than other concepts in tandem with c-stores, posting a $658,000 average annual unit volume, followed by sandwiches, pizza and chicken (although sandwich concepts lead the pack in number of in-store QSR units, followed closely by pizza, chicken, burgers, snacks and Mexican).

Knowing that the presence of a chain restaurant can bolster revenues has caused some c-stores to replace or supplement their proprietary brands with name-brand fast-food. Hooper Quick Stop Inc. of Brownsville, Tenn., is in the process of replacing proprietary brand with Long John Silver's--so far the only major seafood chain with a c-store presence--and A&W Restaurants Inc., both owned by Yorkshire Global Restaurants of Lexington, Ky. A Hooper store under construction has plans to co-brand with Baskin-Robbins USA Co. of Glendale, Calif.

"The benefits of bringing in our stores are twofold," says Bryon Stephens, Yorkshire's vice president of franchise development. "Customers want foodservice operations in c-stores to operate just like the freestanding restaurants they know and frequent. And in the case of Hooper, we give its stores multiple dayparts."

Clark Retail Enterprises, Inc. of Oak Brook, Ill., a subsidiary of Clark Retail Group, Inc., has taken a different route, selling both Clark's proprietary brand and chain-restaurant brands under one roof. Its smaller c-store prototype, On The Go, is anchored by the pizza concept Original Gino's East of Chicago, as is the company's larger Oh! Zone concept. But On The Go continues to serve its own soups, sandwiches, gourmet coffees and blended beverages. Its 295 White Hen Pantry c-stores rang up $325 million in foodservice sales in 2000 without co-branding.

Smaller regional c-store operators are also counting on the appeal of name-brand chains. Rutter's Farm Stores, headquartered in York, Pa., sell an in-house brand at some of its 54 units (Rutter's Famous Express) and chain-restaurant brands at other stores (A&W and Dallas-based Pizza Hut).

"It's a strange, new world where we both compete and partner with QSRs," says James Richter, vice president of merchandising for Clark Retail Enterprises.

TOP SHEETZ

Not all c-stores are interested in partnerships, choosing instead to go head-to-head with fast-food competitors. Sheetz has implemented a proprietary made-to-order submarine and delicatessen sandwich line, fresh salads as well as breakfast sandwiches and bakery items targeted at its peak morning business. In addition, it introduced a feature sandwich program earlier this year, which rotates new products, such as chicken cordon bleu, every six weeks. Feature items that generate enough sales will likely be added to the permanent menu, as will a new line of blended drinks.

"The short-term aspect of the line creates demand," says William Reilly, Sheetz vice president of sales and marketing. "Our strategy is to motivate a new sale with a new taste."

Sheetz is also hoping that the introduction of a couple of old standbys--burgers and fries--will generate sales. Those products, now offered at four units, are slowly being rolled out systemwide. Although the items are labor intensive, require a significant capital expenditure and are readily available at most quick-service eateries, the chain is willing to take the risk.

The concept has a couple of built-in advantages. It offers any item on its menu seven days a week, every day of the year, 24 hours a day, including breakfast sandwiches for dinner and sub sandwiches for breakfast, and consumers can customize orders through a touch-screen system.

With units in Pennsylvania, Maryland, Ohio, Virginia and West Virginia, Sheetz is already on its way to becoming competitive with fast-food chains in those states. Its foodservice sales are expected to rise 14% to $175 million in 2001; an additional nine stores will open by year-end, with 14 new units planned for 2002.

LUCKY NUMBERS

An aggressive move on QSRs is also on the agenda of 7-Eleven Inc. The country's largest c-store chain has introduced a line of proprietary food products that includes upscale sandwiches, portable grilled products, salads in a shaker, breakfast items such as eggs Benedict, fresh fruit and even sushi in its West Coast and Hawaii markets. Upgraded bakery items, which according to NACS had the highest sales growth rate in c-store foodservice last year, also are included.

Foodservice (foods prepared on premises) accounted for 5.7% of 7-Eleven's North American sales in 2000, with another 3.8% coming from baked goods such as bagels and doughnuts.

The Dallas-based chain hopes to garner a larger share of female patrons, who historically have made up only 30% of its clientele, according to 7-Eleven research. (Men between 18 and 35 are the primary users.) The new sandwiches and salads, in particular, are targeted at women.

Core customers not being neglected, especially teenagers, 32% of whom shopped at a c-store two to three times a week in 1999, according to a report published last year by the Franchise Finance Corporation of America. 7-Eleven is making sure it continues to draw their purchasing power, particularly during off-school summer months.

The concept debuted a line of combination meals in July, similar to those offered by top burger chains, but capitalizing on 7-Eleven's position as the leading seller of grilled hot dogs in the country. Its meal deals--priced between $1.99 and $2.49--feature various sizes of hot dogs with a selection of toppings, chips and a 16-ounce beverage.

"This is our value-priced alternative to the typical burger-and-fries bargain meal," says John Vaughan, fresh-foods category manager for 7-Eleven. "And customers get something not available at most QSRs-the ability to see their order being made before their eyes so there are no surprises when they get in the car and unwrap it."

Additional combo n meals for lunch and breakfast will be unveiled in the coming months, as will new cheeseburgers, steak-flavored hot dogs. A prototype drive-through store also is in the works.

Since most 7-Eleven stores carry more than 2,000 items, the company naturally expects to capture a share of errand purchases, such as groceries and gasoline, while customers buy their meals. According to Vaughan, demand for fresh foods and bakery items is in large part responsible for boosting same-store merchandise sales at the 5,700-unit chain, which rose to $635.6 million in June, 7% over the year-ago period.

"One thing consumers don't have enough of these days is time, and that's what our menu is all about," says Vaughan. "Once consumers realize how much time we can save them, they'll begin to see us as a meal destination."

If the attitude of the American population toward c-stores counts, 7-Eleven and other c-store companies should have no problem achieving that goal. According to a study conducted by Yankelovich Partners of Norwalk, Conn., Americans depend on the c-store, which tied for third place with CNN and shopping malls (85%) in items that the public wants to see continue in the 21st century, behind newspapers (93%) and a well-known brand-name cookie (86%), but ahead of e-mail and the Internet.

"Consumers are no longer concerned with the possibility that the guy who just changed the oil made their sandwiches," says Richter.