Friends & Enemies
QSRs find ways to compete against, partner with and learn from c-stores

By Scott Hume, Executive Managing Editor

The official capacity of Beaver Stadium at Penn State University in University Park is 107,282, second in size only to the University of Michigans stadium (which holds 219 more). But 108,276 squeezed in on Nov. 1, 2003, when the Nittany Lions lost a 21-20 heartbreaker to Ohio State.

During half time, a sizeable portion of the overflow crowd went looking for food, and they lined up for branded M-T-O (made-to-order) Burgerz and sub sandwiches at two concession stands operated by Sheetz.

Whats a convenience-store operator doing in a college football stadium? Building its brand.

When youre the dominant gasoline retailer in your markets, like we are, you cant help it if people think of you as those big gasoline stores. But I dont want them to say that. Im out to switch their thinking, says Bill Reilly, vice president of food and beverage for the 292-store, Altoona, Pa.-based c-store chain.

I want them to say: Hey, Sheetz is in Beaver Stadium and theyre not selling gas. Theyre all about the food. And thats right, he adds. We have a food message to tell, too, and I can make a million impressions at Beaver Stadium. Im not in it to make money. If I break even [on the concessions] Id be over the moon. But is it worth it? Absolutely.

Reilly offers the same emphatic response when asked if Sheetz is considering placing similar food-only operations elsewhere on college campuses. Malls and airports also are possibilities. Anywhere there are large numbers of people where we can get the message across that we also stand for food, he says.

Gearing Up for Growth

Mallard Oil's stylish Fuel Warehouse in Kinston, N.C. exemplifies the innovative marketing and design many c-stores have adopted.

Sheetz eagerness to promote its foodservice operationeven at the expense of profitabilityunderscores both the increasing importance food sales have for many c-store chains and the seriousness of the competitive challenge this segment presents, especially for quick-service restaurants. Far from being sleepy marketers, c-store operators have invested in the latest in ordering technologies, upgraded décor and created branded food lines (often responding to trends such as low-carb foods more nimbly than have QSRs).

C-stores were a $290.6 billion industry in 2002, according to the Alexandria, Va.-based National Association of Convenience Stores (NACS). Gasoline accounts for better than 60% of revenues, and tobacco products are the biggest sales generator inside the stores. But foodservices 12.3% share of in-store sales still translates to $13.4 billion, higher than 2002 worldwide sales for Burger King, ranked No. 2 in R&Is Top 400 Restaurant Concepts.

Overall, however, per-store profits for the U.S. c-store industry declined in 2002 for the second consecutive year, NACS reports. That makes it hungry for profit-boosting strategies, and increasing foodservice revenues is a prime tactic.

Sheetz, for example, is planning stores bigger than its current average footprint, facilitating its first use of drive-thru windows and limited seating at foodservice counters. Reilly says the company is focusing on developing upscale meal-replacement foods that can increase Sheetz evening-daypart sales (when gas sales are strong but foodservice is its weakest).

Some QSR operators may underestimate the seriousness of the competitive challenge because they are unaware of c-stores efforts to upgrade exterior and interior designs as well as improve their product mixes and brand images.

One look at the stylish post-modern design of Mallard Oils Fuel Warehouse c-store in Kinston, N.C., (honored with a merit award from the North Carolina chapter of the American Institute of Architects) says that this operation is more than a gas-and-go road stop.

Foreign Affairs

Montreal-based Alimentation Couche-Tard, Canadas largest c-store operator, has been implementing its Store 2000 design strategy, creating retail spaces that look more like Starbucks or Panera Bread units than stereotypical c-stores. Wood-paneled walls, bistro tables and seating, and even overstuffed chairs where customers can read and enjoy coffee are common. Fewer than half its Canadian units have gasoline pumps.

C-stores have integrated the latest technologies. Touch-screen ordering terminals are in all Sheetz stores; other c-store operators are adding food-ordering kiosks at fuel pumps.

QSRs on this side of the border had better be ready to compete with such units: In October 2003, Couche-Tard plunked down $830 million (U.S.) to acquire the 1,663-unit Circle K c-store network from ConocoPhillips, increasing the Canadian companys system to a total of 4,630 stores. Alain Bouchard, Couche-Tard chairman, president and CEO, says the intention is to apply the Store 2000 business model to Circle K. In 2001, Couche-Tard entered the U.S. market, acquiring the Columbus, Ind.-based Bigfoot c-store chain. It followed in 2002 by buying the Hudson, Ohio-based Dairy Mart system, and last year acquired 43 units from bankrupt Clark Retail Enterprises, based in Oak Brook, Ill.

Source: Technomic Inc. research for National Association of Convenience Stores. Percentages total more than 100% due to rounding.

Couche-Tard already has ties to several U.S. QSRs. It recently secured the master franchise for Dunkin Donuts development throughout Quebec (with plans to open more than 100) and also operates licensed Subway and A&W restaurant locations.

Another foreign owner looking to raise its c-store profile is Britains BP plc, owner of the former Amoco and Standard Oil brands in the United States. Some of its gas stations have partnership arrangements with QSRs, including McDonalds, and many others have small c-store components will little or no foodservice. But in nearly 500 locations, it has opened large BP Connect branded c-stores.

Fast-casual chain Au Bon Pain served as a consultant on creation of BP Connects Wild Bean Cafe, which features coffee-shop décor. Tables and chairs are arranged around wood-paneled counters where customers select from a variety of coffee and tea choices; baked-on-premise croissants, pastries and breads; self-service beverage stations; and branded Panini Melts sandwiches, soups and salads.

Food orders can be placed on touch screens at fuel islands, then picked up inside. Some locations have in-store kiosks that provide weather updates, maps and directions.

BP opened about 75 Connect units in 2003 and is expected to match that this year.

Expanded Menus
Such incursions havent gone unnoticed by the largest c-store operator in North America, Dallas-based 7-Eleven with 5,800 locations. It has continued its rollout of daily deliveries of fresh foods such as salads, fresh-squeezed juices and baked goods to stores and expanded its proprietary Big Eats Deli and Big Eats Bakery lines. In Southern California, 7-Eleven offers Szechuan beef bowls and California rolls.

The company still cooks hot dogs on roller grills, and it sells more than 95 million of its Big Bite dogs annually. But even this staple has been dressed up: Big Eats Griller Sausages introduced this year include spicy Italian links topped with brand-name marinara sauce. Salsa and pico de gallo have been added to the free condiment bar.

In Austin, Texas, the chain tested a partnership with the Tony Romas Famous for Ribs chain. Beef and pork ribs in branded Tony Romas sauce, cheeseburgers topped with the restaurant chains barbecue sauce and chicken strips in Tony Romas Original Sauce allowed 7-Eleven to announce that it was the first c-store to offer casual-dining fare. And it had low-carb or no-carb candy in its displays before any casual restaurant chain revised its menu to reflect the popular diet trend.

Having watched Dunkin Donuts, Krispy Kreme and others muscle in on its coffee franchise, 7-Eleven last year installed new hot-beverage stations with five coffee varieties, four flavored syrups, seven different bagged teas, an array of toppings and creamers, and regular, skim and 2% milk.

It backed the introduction with an extensive radio advertising campaign touting the more than 1,300 coffee combinations customers can blend.

And 7-Eleven isnt alone in making changes. Wawa, Pa.-based Wawa c-stores added a line of Specialty Wrap sandwiches, including such upscale combos as roasted chicken, roasted peppers and pesto spread. Ankeny, Iowa-based Caseys General Store now offers English toffee-flavored coffees with its line of breakfast sandwiches, and strawberry-cream croissants and apple fritters in its baked-goods case. Tulsa, Okla.-based QuickTrips stores sell 20 different sandwiches, including barbecued pork and a chicken, cheese-and-bacon breakfast sandwich QSRs havent tried.

Need a decorated cake for a childrens party or giant subs for a Super Bowl bash? Customers at Enon, Ohio-based Speedway SuperAmerica c-stores in Minnesota and Wisconsin can order online from the chains SuperMoms.com subsidiary and pick them up at their neighborhood location.

Shared Development

Some c-store chains dont want their foodservice to be any more complex than coffee. Sheetz Reilly notes that a fresh-foods commitment requires a more complex operational infrastructure and additional training, especially in food safety.

Co-branding with QSRs is one solution for many c-store chains. According to NACS, there were more than 12,500 c-store units with branded QSR components in 2002.

Jack in the Box's strategy combines a Quick Stuff c-store with a full-size restaurant (with drive-thru) adjacent to a fuel island. Sheetz is considering selling its M-T-O foods in units that have no fuel component.

These partnerships also benefit the quick-service brands, of course, providing presence at heavily trafficked off-highway locations and many prime intersections with no space for freestanding units. Thats why chains including Arbys, Blimpie, Bojangles Famous Chicken n Biscuits, Dairy Queen, McDonalds, Sonic Drive-in and Wendys had booths at NACS annual expo last October in Chicago.

Some, such as Oklahoma City-based Sonic, are relatively new to c-store co-branding. The chain has opened eight units in tandem with gas station locations in Texas and wants more if the right opportunities present themselves.

Were interested in units that will look like a Sonic that happens to be adjacent to a c-store, says Vice President Dave Vernon. Were not interested in doing a mini-Sonic inside a c-store. But there are highway locations where it makes sense for us to partner [with petroleum companies].

Byron Burns, director of franchise development for Charlotte, N.C.-based Bojangles, says its 30 c-store co-brand units each average $800,000 in annual sales, versus the systemwide average $1.4 million.

Oak Brook, Ill.-based McDonalds has a long history of partnership licensing with gas station/c-store sites, operating more than 650. Its small-market units average $971,000 annually, while larger, urban sites average $1.5 million, slightly below the $1.6 million systemwide average.

The strongest vote of confidence in c-stores sales-building power has come from San Diego-based Jack in the Box. Last year it unveiled its own c-store brand, Quick Stuff, and opened 14, all with adjacent, standard-size Jack in the Box restaurants as well as gas pumps from various petroleum providers. Fifteen are projected to open this year and Chairman and CEO Robert Nugent says 25% of all company-owned restaurants opened over the next five years will have Quick Stuff and fueling components. The benefits? A new revenue/profit channel with shared development costs, he says.