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The National Association of Convenience Stores (NACS) reports that despite a slight increase in overall sales for the U.S. convenience store industry in 2002, per-store profits plunged for the second consecutive year.

NACS' 2003 State of the Industry (SOI) Highlights report shows an overall 2.7 percent increase in sales in 2002, hitting new records for both in-store and motor fuels sales. As a result, industry sales hit a new high - $290.6 billion.

Despite the record sales, convenience store industry profits were $2.615 billion, down 24.3 percent from 2001. On a per-store basis, the drop was even greater - 27.9 percent. Profits in 2002 fell to $20,400 per store, the lowest in a decade.

Among the other results cited in the report:

  • Even with new competition from non-traditional fuel retailers, the convenience store industry, the dominant motor fuel retailer in the U.S., largely held its sales. Overall, the industry's motor fuels sales increased 6.0 percent to a record $181.3 billion, and gallons sold increased 3.9 percent to a record 129.3 billion. Despite a slight decrease in margins-from 9.2 percent to 9.1 percent - yearly gross margin dollars for motor fuels remained the same as the prior year, $165,200.

  • Margins were not a significant factor in the drop in overall industry profits even though gross margin dollars for cigarettes per store dropped 7.9 percent. Per store gross profit decreased slightly, from $384,800 to $380,100, but overall margins increased 1.2 percent for the year. In-store margins in 2002 settled at 29.4 percent. However, motor fuel margins continued to trend downward, dropping from 9.2 percent to 9.1 percent.

  • Higher wages, insurance, and rent were the primary drivers behind an overall 4.1 percent increase in direct store operating expenses that ultimately squeezed profits in 2002. Credit card fees constituted 4.8 percent of gross profit dollars in 2002 and remained a significant piece of the expense pie. Total direct store operating expenses increased $13,200 per store in 2002. Labor costs were a major contributor to higher expenses, increasing from 6.4 percent to 7.1 percent of total revenues.

With three straight years of declining industry profits, the report found that an increasing number of stores are exiting the industry. Stores closed or sold by survey respondents reached 7.4 percent of all stores in 2002, the highest figure since industry shakeout of 1990, when it also reached that level.
KC's View:
The c-store industry has what Bob Murphy would call "nine miles of bad road" in front of it -- tough competition, slowly declining margins, and the likely need to rethink the traditional definition of "convenience" as it positions itself for the future.

More than ever, it would appear that it will be the non-traditional thinkers -- the companies that develop aggressive new strategies and initiatives -- that will survive in the battle with supermarkets, supercenters, dollar stores, drugstores, membership clubs, and everyone else who is angling for a piece of the convenience pie.

Just sitting back and protecting turf simply won't cut it.