Bloomberg Businessweek August 31, 2020 pp10-11 |1 BUSINESS| “Can Direct-To-Door Slushees Beat Amazon?” “Covid pushed convenience stores online. But delivery costs and new rivals could hit profits”
Facts presented in chart.
U.S. Convenience store sales in 2019 were about $650B with fuel accounting for 66% of sales but only 40% of profit, followed by Tobacco 13% of sales, Packaged Beverages and snacks 8%, Food Service 6%, Alcohol 4% and other 5%.
With Covid and the rise of working and schooling from home, work- and school-related trips have fallen dramatically creating declines in both gasoline and in-store sales. Leading into the pandemic “Convenience shops were retail’s last big e-commerce holdouts. Now that the pandemic has cooled their gasoline sales, they’re rushing to expand their delivery sales.” According to Chris Tanco, 7-Eleven’s COO, “Delivery expansion is here to stay.” He notes that “The definition of convenience has rapidly evolved during the pandemic.”
The biggest advantage of convenience stores is simply being in every neighborhood. Prior to the pandemic, convenience stores overcame falling gasoline sales by upgrading their food and beverage menus creating a competitive offering of higher margin coffee and beer. These moves resulted in more in-store traffic and more impulse buying. Will location and a better offering still be a compelling in an era of rapid delivery from all forms of retail? After all, third-party delivery firms like DoorDash, Postmates and Uber Eats have enabled delivery of a large inventory of groceries and an expanding menu of fresh-meals emanating from grocery stores and restaurants.
By joining the delivery era how will convenience stores with an average sale per in-store visit of only $9 convenience stores compete? Shelling out 15-30% of each sale to third-party delivery services will challenge profit margins and consumers may seek alternatives if having to pay a flat delivery fee on a small ticket.
John Nelson (Founder of Vroom Delivery e-commerce platform) says “outsourcing delivery will eventually become too expensive” for convenience stores consequently resulting in lower margins or less competitive pricing. Are there niches that convenience stores can still dominate? Three types of sales come to mind. First, orders after 9PM are a strength when other retailers have closed and folks are even more reluctant to venture out. Second, in many locales third-party delivery is prohibited for restricted items like alcohol and tobacco. Third, stores in small towns without as much delivery and retail competition may thrive with a combination of the old and new business model.
What are other potential upsides for convenience stores? While in-store sales may be “cannibalized” by delivery some report a “net sales boost” albeit at a lower margin.” New tricks for old dogs may help as well. By adopting e-commerce technology-algorithms and data science, sales can potentially be optimized.