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R&IEditorial Archives2005April 15 — Business

Filling Up
Convenience stores’ new menus match or exceed QSRs’ quality and variety. It has the makings of a long, rough battle.

With drive-thru windows and indoor and outdoor seating, Sheetz’ Convenience Restaurants are 10,000-square-foot operations that also sell gasoline.

Menued at $3.69, Big Eats Wraps from 7-Eleven are designed to stand upright and fit into car cup holders.

White Hen’s Last Minute Gourmet menu includes Lemon Herb Chicken & Pasta and Penne With Vodka Sauce.

It isn’t often that what happens in Altoona, Pa., has national implications. But in June 2004 when Sheetz Inc. opened its first Convenience Restaurant operation in its headquarters city, the $337 billion convenience-store (c-store) industry won a round in its fight with the $153 billion limited-service restaurant business. Their battle for consumers’ foodservice dollars is increasingly fiercely fought, and rising gasoline prices promise to make c-store operators such as Sheetz, 7-Eleven, Wawa and others even more aggressive.

Sheetz long has been a significant regional foodservice player. With more than 300 c-stores in Ohio, Pennsylvania, Maryland, Virginia and West Virginia, the chain serves branded MTO (made-to-order) hot foods such as burgers as well as sandwiches and other grab-and-go options. What sets apart its Convenience Restaurants (a second opened last month in Raleigh, N.C.) is a shift in emphasis: Rather than c-stores that sell food they are 10,000-square-foot restaurants—complete with drive-thru windows and 62 indoor and 46 outdoor seats—that also sell gasoline, cigarettes and assorted nonfood merchandise. Food items can be ordered via sophisticated touch screens (allowing customization of toppings and condiments) at gasoline pumps.

“It takes 2 1/2 minutes to pump 10 gallons of gas. What are you doing for that 2 1/2 minutes? You’re standing there doing something you hate to do. How can we give customers back 2 1/2 minutes?” asks Bill Reilly, Sheetz executive vice president of sales and marketing. “We said we’ll get the food order going right at the gas island so they can come into the store and, boom, their order’s ready. Get a latte or doughnut or pizza and you’re out the door. That makes customers loyal to us.”

Shedding the Stereotype
Sheetz executives spent three years brainstorming the Convenience Restaurant concept, talking to customers and researching c-stores, restaurants and retailers around the world. The impetus was an ultimatum delivered by Chairman Steve Sheetz. “He said, ‘It is time to change. We have to create a business that will put the business we operate today out of business,’” Reilly recalls.

The new concept retains the core Sheetz commitments to convenience, choice and customization: Its stores never close and sell a full menu (including breakfast) throughout the day. Burgers can have any of two dozen toppings; salads have two dozen add-on and dressing choices. Diners can select a fountain drink or choose from the chain’s 350 branded bottle or can beverage options, and any can be ordered at the drive-thru.

The Convenience Restaurant ratchets up variety and, more importantly, perceived quality with such display-kitchen elements as carved-to-order roast beef and turkey, a salad-tossing station and brick-oven-baked pizzas and panini sandwiches.

“We’ve got baggage. We’re a convenience store and people will ask, ‘How can I get food this good at a c-store?’ We’ve had to learn to live with the stereotype that there’s no way to get quality food at a c-store,” says Reilly. “But we’ve got to fight that, so we have to get customers to try our food. And we make sure they have a great experience when we get a trial. Sheetz has things our competitors don’t: We’re 24/7; we’re 100% customization. No fast feeder can say that.”

John Matthews has fought for both sides, serving as vice president of marketing for Oak Brook, Ill.-based c-store operator White Hen before joining Champaign, Ill.-based Jimmy John’s Gourmet Sandwiches as president. Now head of Gray Cat Enterprises, a North Barrington, Ill., consulting firm, Matthews sees c-stores’ negative stereotypes fading.

What Sells in C-Stores
Cigarettes $304,209

Foodservice $115,400

Packaged beverages (nonalc) $114,799

Beer $96,627

General merchandise $39,490

Candy $32,762

Source: National Association of Convenience Stores 2004 State of the Industry Report.

“Actually, I believe if c-stores approach food differently and attempt to capture the marketplace that Subway owns—fresh, healthier sandwiches—they can create a higher-quality perception than can the quick-service restaurant industry, which built its business on burgers, pizza and chicken,” he says. “In that sense, c-stores can bypass the ‘fast-food’ baggage associated with those concepts.”

Wraps in the Cup Holder
Taking on not only Subway but also Panera Bread, Quiznos and other fast-casual sandwich chains, are the 5,800 North American units of Dallas-based 7-Eleven, the largest single c-store brand.

Hot dogs turning on heated rollers still have a place in its stores, but in recent years 7-Eleven has significantly upgraded the variety and quality of its foodservice. Like many major QSR chains, it has a corporate culinary team—headed by Executive Chef Phil Butler and Director of Product Development Kulsoom Klavon—that continues to take the chain’s food upmarket.

Last month, it introduced the first two items in a new Big Eats Wraps line that refutes the low-quality stereotype. The Turkey and Capicolla Ham Club is wrapped in a sun-dried-tomato tortilla; Chicken Breast With Southwestern Mustard uses a spinach tortilla. And that classic hot dog has been joined by the quarter-pound Southwest Jalapeo and Cheese Big Eats Griller Sausage.

“Consumers are more adventurous in the flavors and foods they will try,” says Joanne DeLorenzo, 7-Eleven vice president of fresh-foods merchandising. “We want to appeal to that demand for more variety. We want to set out to create wraps that combine bold flavors with a variety of interesting ingredients.”

17 million
Number of different ways Sheetz claims it can create a breakfast sandwich given the breads, toppings, meats and condiments available.

Even with drive-thru windows in few of its stores, 7-Eleven knows its customers eat on the run. The chain developed packaging for Big Eats Wraps that allows the food to stand upright and fit into standard car cup holders. The wraps menu for $3.69 is comparable to QSR prices but below that of many fast-casual sandwich concepts. “Both QSRs and c-stores will go where the opportunity is, and if c-stores develop a credible atmosphere for food, they will not limit themselves to low-price products,” says Matthews.

Wawa, Pa.-based Wawa c-stores also have rolled out a line of wraps. Wawa Express sandwiches—Italian, Smoked Turkey Supreme, roast beef, veggie and turkey—join a menu that includes branded Shorti Hoagies, salads (including Chicken Cherry Walnut), Bagel Melts, soups and packaged fruit bowls.

White Hen c-stores, which do not sell gasoline and so always have emphasized in-store foodservice, compete with Boston Market and other meal-replacement concepts through their recent introduction of Last Minute Gourmet meals. Lemon Herb Chicken & Pasta or Penne With Vodka Sauce are ready to take home, heat and serve.

Fueling Growth
Gasoline sales accounted for 65.5% of the $337 billion in total c-store revenue in 2003 according to the Alexandria, Va.-based National Association of Convenience Stores’ 2004 State of the Industry Report. Gas pumps can be double-edged swords for c-stores that operate them. On one hand, they draw customers who might not otherwise have opted to buy food, giving c-stores an edge over QSRs in the number of people who come through their doors. But when gasoline prices rise, as they have been doing, discretionary spending drops. QSRs feel that pinch too, but not as directly as do most c-stores.

C-Stores’ Foodservice Sales
Hot dispensed beverages 32.8%

Food prepared on site 26.1%

Commissary/packaged sandwiches 17.3%

Cold dispensed beverages 14.4%

Frozen dispensed beverages 9.4%

Source: National Association of Convenience Stores 2004 State of the Industry Report.

“When it takes $35 to $40 to fill a tank, it’s about disposable income. Instead of throwing $4 on the counter for a sandwich, a customer might splurge for a $1 candy bar,” says Sheetz’ Reilly. “It’s about limited resources. The majority of the population lives paycheck to paycheck. We can’t forget that. If it costs $20 more for a fill up to go to work, that money comes from somewhere else.”

On average, c-stores’ gross profit margin on fuel was 8.8% in 2003; on in-store merchandise it was 30.8% and foodservice trails only cigarettes in revenue among inside items. “The gasoline marketplace in the last three to four years has been very challenging for c-stores,” says Matthews. “The margins on foodservice items are terrific for the c-store operator. If they can capture the foodservice customer, they have an excellent opportunity to upscale core c-store products without incremental pressures on their labor model.”

That, he says, helps explain not only c-stores’ increased interest in foodservice but also the industry’s efforts to improve the product that is its grab-and-go staple: coffee, which was a $3.6 billion product for c-stores in 2003. Foodservice rings up an average of $115,400 per c-store; coffee alone adds another $27,744.

Starbucks, Dunkin’ Donuts and Krispy Kreme have stolen some of the c-store industry’s hold on the coffee-to-go market, and c-stores want it back. Almost every major c-store chain has branded its coffee program. Houston-based ExxonMobil, for example, has invested in its Bengal Traders coffee program at the On the Run and Tiger Market c-stores it operates at some gasoline stations, while pushing less hard to broaden foodservice.

QSRs’ addition of bottled water, bagged chips and other items also reflect restaurant-chain efforts to counter c-stores’ incursions, Matthews says.

Sheetz’ Reilly knows he’s in for a protracted tug of war. With what his stores have to offer, “I can look any fast feeder in the eye and say ‘Bring it on.’ I think our team can execute,” he says.

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