By Marek Polonski, senior vice president, Applied Predictive Technologies
Over the past 12 months, the industry has been abuzz with M&A activity, new in-store technologies and oscillating fuel prices. As the rate of innovation continues to increase, there will be a number of opportunities for convenience retailers to gain a competitive advantage, but only if they navigate the industry shifts correctly. In 2016, here are the top five trends to watch:
- Loyalty Program Enhancements
Convenience retailers have traditionally been challenged with loyalty as even single cent changes in the price of gas can cause customers to go to nearby competitors. Increasingly, however, convenience retailers are viewing loyalty programs as a means to stand out from the pack. As a result, we’ve seen a proliferation of loyalty initiatives in recent months, ranging from Speedway introducing in-store loyalty kiosks to BP revealing its revamped program, now offering three unique loyalty card options for drivers to earn rewards.
While these programs can help bolster loyalty and grow customer relationships, they also have the potential to destroy margins if executed incorrectly, by subsidizing shopping behavior that would have occurred anyway. This fundamental challenge, coupled with the sheer volume of ways c-stores can change and refine a program (e.g., points versus dollar rewards, frequency of communication, promotional discount level, etc.), can make it difficult to design a winning loyalty strategy.
To effectively determine which loyalty offers work before rolling them out, convenience retailers should experiment with different creative promotions, marketing campaigns and pricing strategies. By trying an idea in some locations or with some customers and comparing their performance to a similar group that does not receive the initiative, executives can glean the insights necessary to inform profitable loyalty decisions—ensuring each initiative delivers value to customers and to the company’s bottom line.
- Dealing with Regulations
Convenience retailers are no strangers to regulations, with fuel, cigarettes and alcohol being highly regulated products. However, 2016 could be a monumental year with FDA menu-labeling and tobacco regulations going into effect. Each of these regulations creates unique challenges and opportunities for operators. The FDA’s menu labeling rules, which require caloric information to be listed for prepared foods in chains with at least 20 locations, will likely necessitate installing new menu displays. Similarly, as the FDA continues to work toward a final “deeming rule” on e-cigarettes, cigars and pipe tobacco, operators need to refine their assortment, pricing and training to avoid legal violations.
In addition to conforming to FDA regulations, executives will need to have labor strategies top-of-mind in 2016, as minimum wage debates move from Capitol Hill to city halls. For an industry where many operators have traditionally paid what the market requires for labor and no more, the stepwise increase in minimum wages, and the associated increase in payroll taxes in cities like Seattle, will pose an interesting challenge. Some convenience retailers will likely try to compensate for the increased costs by increasing prices of items or services, like car washes and ATM withdrawals. Others may refine their labor strategy or invest in technologies that make current employees more efficient, limiting the need for additional staff.
However, initiating any of these changes haphazardly can lead to unnecessary losses and hurt employee relations. Before implementing any change, like increasing prices or training staff, operators should first mine their data for instances where they shifted pricing or labor strategies in some locations and not others and analyze that natural variation to ascertain which types of stores respond most profitably. Executives can then use these insights to target the particular action to the right locations.
- New Flavors of Foodservice
Increasingly, convenience retailers are pumping money into their proprietary foodservice programs in an attempt to differentiate themselves from competitors. Some of them are investing in developing healthy lines, such as 7-Eleven’s Tony Horton Kitchens products and Enmark’s FreshOne initiative. Others are spicing up their offering with international foods, such as RaceTrac’s Speedy Avocado concept and sushi at Sheetz. However, with more c-stores following suit and competition heating up with fast food restaurants, grocers and other competitors vying for customers’ share of wallet, how can convenience retailers increase foodservice success in 2016?
For one, convenience retailers need to mitigate the risks inherent in introducing additional foodservice offerings. Adding foodservice counters, kitchens and refrigerators comes with a hefty price tag and will likely cause a sales disruption during the construction period. These changes also require re-allocating valuable store space and determining which categories to shrink and which SKUs to rationalize. Add in the fact that food preparation is highly labor-intensive, building a great menu is challenging and profits can erode quickly from spoilage–and optimizing the program becomes a feat.
Growing a foodservice offering profitably and sustainably requires a delicate balance between the factors above. Many of the most successful and sophisticated convenience retailers stagger rollout and level of investment in these new offerings. This enables operators to identify any issues with implementation and understand which types of stores respond best to the offering, so that they can then address any issues and refine investments before spending broadly across the network.
- New Store Formats
From CST introducing a full-fledged grocery department in its recently rebranded Corner Store Market to adding drive-thru lanes at Parker’s and Express Convenience Centers, convenience retailers are ramping up their efforts to turn stores into destination spots. Some have added seating areas and free Wi-Fi to attract new customers and further engage existing ones. Others, including Sheetz and RaceTrac, have added espresso bars and frozen yogurt stations to directly compete with restaurants.
However, getting the most out of these investments can be a complex task, as all transformative additions bear risk of not paying back, or even tarnishing a brand. To minimize the risk of these projects, operators should test these initiatives in a subset of their network to understand the true incremental impact, taking into account potential gains and losses to other categories. They can then prioritize rollout to the most profitable locations and identify opportunities to tailor the offering to further improve ROI.
- Mobile Technology at the Pump
Partly due to the proliferation of loyalty programs, there has been an increased focus on mobile initiatives in convenience retail. For example, 7-Eleven launched its 7Rewards loyalty platform on its app, and Flash Foods recently presented at the NACS Show about their use of beacon technologies. While most of this activity has been confined to the store to date, we expect to see more companies join industry leaders, like Exxon, MAPCO and Shell, in exploring mobile technologies at the pump. MasterCard and P97 recently announced that they are partnering to build a solution that empowers fuel companies to develop mobile apps that enable mobile payments at the pump.
While these investments can pose a significant opportunity for convenience stores to draw customers to their stations, they often do not come with a small price tag. The NFC panel systems on Chevron’s new mobile payments-enabled pumps in California can cost between $10,000 and $100,000 per site. Given that there are still many outstanding questions about the true value in offering these services, convenience retailers should closely monitor their immediate impact on fuel and in-store sales, as well as longer term impacts on customer satisfaction.
With these trends rapidly shaping the industry, it is critical that convenience stores truly know which of these ideas is right for their business. The most successful operators have learned that in-market testing is the best way to see through the noise and accurately understand which of their innovative ideas will be effective and how they can be tailored and targeted to maximize impact. Companies that adopt this Test & Learn approach will not only increase the profitability of their decisions today, but will unlock the ability to try bolder ideas in the year to come.
Marek Polonski is a Senior Vice President at Applied Predictive Technologies and has extensive experience applying Test & Learn in-market experimentation principles across a broad variety of functional topics in convenience retail. He advises leading convenience retailers and Fortune 500 corporations on enhancing the profitability of capital investments, pricing optimization, labor allocation and training, merchandising initiatives, advertising and operational optimization. He has also helped retailers institutionalize the rigor of using analytics to drive business decisions. Polonski’s experience spans retail, CPG, restaurant and other industries.
Polonski holds a BS in Computer Science and a BS in Economics from Massachusetts Institute of Technology.