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    COVER STORY: Fancy Footwork

    Cramming higher quality, fresher foods, and better shopping into efficient footprints -- today's best c-stores are proof that good things come in small packages.

    Fortified by a diet of new product lines, layouts, and technologies, the best of America's convenience store operators are raising their channel's profile as a contender for food dollars. From ever-growing fresh-cut sections to entirely new formats, the emerging food-heavy concepts being tested and rolled out by c-store innovators are becoming increasingly inconvenient for supermarket operators.

    Many consumers might still consider the convenience store option a last resort for anything remotely resembling decent meal options, but times are changing. Food is a strategic hot button for many operators, and they're doing an impressive job of altering perceptions, attracting a broader base of food customers in the process. Their tools are functional and efficient store design concepts, and diversified menus highlighting freshness and trendier flavors.

    Historically c-store companies leaned heavily on cues from other retail channels for inspiration, according to Jeff Lenard, spokesman of the Alexandria, Va.-based National Association of Convenience Stores (NACS). "Today we're seeing the opposite, with other channels looking at c-stores for ideas," he says.

    Increasingly, convenience is being defined by prepared foods. A full 80 percent of c-stores now offer prepared foods on-site, making it one of the fastest-growing segments of the foodservice industry, according to the Washington-based National Restaurant Association. C-store leaders remain focused on trends such as healthier offerings and higher-quality foods -- the same objectives that supermarket operators have been chasing with their prepared food program offerings in recent years.

    It's therefore no surprise that the efforts are producing solid returns for the channel, whose sales climbed 18 percent, reaching a record $467.4 billion in 2005, the third straight year of double-digit revenue growth, according to the annual Convenience Store News Industry Report, set to be published later this month.

    The more than $70 billion increase in sales dollars over the $396.2 billion reported in 2004 continues three strong years of industry sales growth. In 2002, industry sales stood at $290.6 billion, and industry motor fuel sales were $181.3 billion as gasoline prices averaged $1.40 per gallon. In 2005, gasoline prices averaged $2.25, according to Convenience Store News, Progressive Grocer's sister publication, which also found in-store sales up by a strong 9.3 percent to reach $142.3 billion.

    Moreover, the 9.3 percent in-store sales jump surpassed that of virtually every other competing channel, according to U.S. Department of Commerce data, which found that the only other channel with growth surpassing that of c-stores was warehouse clubs/superstores, which grew 12 percent.

    One thing hasn't changed: Motor fuel sales continue to dominate overall revenues for c-stores, which sell an estimated three-quarters of all the fuel purchased in the United States. Record-setting prices have triggered substantial volatility in profits. Soaring per-gallon prices are expected to remain for the indefinite future, and gasoline sales represent a superpremium opportunity for entrenched c-store players to tout "absolute minimum" price calling cards.

    The newer dynamic is the variety of supermarket operators that have jumped aboard the speeding gasoline tankard in the past year, however, threatening to siphon off c-stores' traditional captive audience, with one-stop deals in many markets. To offset further petroleum profit losses, c-store leaders are acting on the premise that while pennies at the pump are nice, dollars inside the store are far better -- and that's where more sophisticated merchandising and services come in, including customized food, next-generation kiosks, Web access, and sit-down eating.

    Says CSN Editor-in-Chief Don Longo, "The volatility of gasoline prices is forcing retailers to focus back on their stores, and, in fact, that's where they derive 64.2 percent of their gross margin dollars." In comparison, convenience store margins on motor fuel are only 35.8 percent. "Those in-store gross margin dollars are derived from a disproportionately low share of total sales," adds Longo. In-store sales make up 30.4 percent of a convenience retailer's sales, compared with 69.6 percent that comes from motor fuel, according to the CSN Industry Report.

    When it comes to the foodservice category -- a $16.4 billion piece of c-store sales representing 12 percent of in-store sales, second only to cigarettes -- a steady shift has been occurring as more are choosing branded proprietary programs, according to the most recent Convenience Store News Foodservice Study. CSN specifically surveyed operators that offer some type of foodservice program in their stores, and found that while unbranded proprietary still leads, the gap is closing.

    Branded proprietary is now the choice of 48 percent of c-store retailers with foodservice -- the only segment to increase over five years. With gross margins averaging close to 50 percent for foodservice (compared with 26 percent for merchandise), the sales increase of this food segment is particularly tasty for c-stores.

    In analyzing the foodservice category, c-stores stores upped their per-store foodservice sales by 10.8 percent in 2005. Moreover, operators continue to finesse their programs to balance operational challenges with new menu offerings designed to entice customers away from the competition and generate repeat business. Prepared foods, including items prepared both on- and off-site, remains the largest segment, bringing in just over half of the category's sales, with variety being key to success, according to the CSN report.

    The long-range implications for this upsurge in c-store fresh food program activity are profound for stakeholders in the c-store world; for suppliers, which will be expected to assist operators in driving traffic into the stores and helping them establish a stronger position as immediate-consumption providers; and for supermarkets that are also contending for retail foodservice dollars. It could affect product development, marketing, and merchandising techniques across the board.

    The trend certainly bears closer scrutiny, and in a widely fragmented industry, a relatively limited number of trendsetters in the channel are doing quite a bit of the trailblazing. While Texas alone boasts nearly one-tenth of all U.S. convenience stores, Pennsylvania is a hot bed of c-store innovation. It's the home base of two of the industry's most widely acclaimed pioneers: Wawa, which rules in the eastern part of the state, and Sheetz, Inc., which hails from the western part.

    Pennsylvania is also home to other solid c-store concepts, many of them owned by top grocery chains: Pittsburgh-based Giant Eagle's flourishing GetGo hybrid; The Quick Shoppes run by Reading, Pa.-based grocer Redner's Warehouse Market; The Kroger Co.'s Turkey Hill Minit Markets; York, Pa.-based Rutter's Farm Stores; and Swiss Farm Stores, a 10-store suburban Philadelphia drive-through dairy/c-store.

    "Pennsylvania is certainly better than most in terms of what's going on in the industry," affirms NACS' Lenard.

    Good for the goose

    Suburban Philadelphia-based Wawa, Inc., named for the Lenape Indian word for the Canadian goose, has long been known for hoagies, dairy products, and modern, clean, well-lit facilities. The format is akin to a delicatessen. It reports selling 54 million hoagies and 165 million cups of coffee last year. Operating in five states, the 546-store chain now offers gas in more than 150 units, and has had surcharge-free ATMs in stores for years.

    But with an estimated $4.3 billion in annual sales, Wawa also offers a wide variety of fresh foods. Its custom-made hoagies are buttressed by freshly brewed coffee, Sizzli breakfast sandwiches, and a complete line of branded dairy products, juices, and iced teas. All Wawa stores also feature many types of wraps and salads, as well as an outstanding array of fresh-cut fruit and vegetables and a healthy selection of loose produce items.

    Wawa provides a great template for expanding fresh produce offerings. The format employs a variety of refrigerated cases, including a central Express case and another grab-and-go case arrayed around the store core -- a setup that really gets the fresh product out in front of customers.

    The chain has been offering fresh produce "from day one, with a commitment to fresh, perishable products that makes us unique," says Wawa spokeswoman Lori Bruce.

    Having a range of healthy options has clearly helped the chain become a principal food retailer for consumers in the Delaware Valley. An early adopter of ready-to-eat fresh produce, Wawa currently offers about 50 fresh-cut SKUs in its typical store. Availability and variety fluctuates seasonally, increasing during the summer. Bruce notes that fresh-cut fruit and bowl salads are its highest sellers. "The offer has transitioned away from bulk produce to a strong desire for value-added alternatives, with regard to both fruits and vegetables," she says.

    Wawa has also been an early adopter of cutting-edge technology, employing foodservice touchscreen kiosks and new inventory and demand management applications.

    Most recently, Wawa said it would aggressively expand its private label offering with 100 new products throughout its stores, adding to the 300 items already available under its own brand. The initiative is part of Wawa's strategy to continue to extend the red-and-white label with the golden goose, which first appeared on a bottled water line in November 2004. The latest line extension, featuring 17 kinds of bagged candy, aims to create a "holistic brand experience," according to the company.

    Wawa will also continue focusing heavily on fuel sales. Company officials say that all of the 30 new stores proposed for the near future will feature gas.

    Sheetz is happening

    With 330-plus units in six states, Sheetz, Inc. builds its innovative food strategy on a foundation of hands-on experience and fine-tuning at its own "convenience restaurants." The Altoona, Pa.-based operator prides itself on a well-designed multi-daypart foodservice bill of fare including a made-to-order sandwich program and heavy proprietary branding, which is held up as a benchmark for c-store food merchandising nationally.

    Last September family-held Sheetz raised the bar on convenience with a new 7,000-square-foot store in Harrisburg, Pa. Described by company officials as a "fun, high-energy restaurant-style atmosphere," the flagship store sports a red-brick exterior, a bright interior with high ceilings, seating for more than 40, and digital menu boards showcasing food selections that can be easily and quickly ordered via sleek touchscreen kiosks.

    Generating $2.8 billion in sales last year, Sheetz recently opened a $23 million distribution facility, and now employs three registered chefs. The company plans to open 20 new units while continuing to remodel and rebuild many of its older stores.

    Customer feedback helps to inform Sheetz's broad menu. The selections, prepared in an open-kitchen environment, include a variety of made-to-order items, many of which were first introduced at the company's "convenience restaurant" concepts in Altoona and Raleigh, N.C.

    In Harrisburg, customers find cold and toasted subs (or "subz," as Sheetz uses a "z" in place of an "s" at the end of the names of many menu items), paninis, hand-tossed salads, and brick-oven pizza. It also offers a Fryz menu, including onion rings and chicken fingers; a Kidz menu; and the signature Sheetz Bros. Coffeez Espresso Bar, staffed by a professional barista.

    Among its newest programs are a self-serve bakery, bulk candy and peanut dispensers, a cold grab-and-go case, Teazzer iced tea, and self-serve milkshakes.

    Technology also factors heavily into the Sheetz strategy: While they fuel up on Sheetz's 100 percent-guaranteed petroleum products, shoppers can place their food orders from touchscreen terminals located at the gas island. The initiative, based on technology from Radiant Systems, Inc., is intended not only to improve service level, but also to advance the chain's credibility as a food brand. The order-at-the-pole program allows fuel customers to order everything from specialty coffees to custom-made sandwiches and burgers.

    They've also got the option of payment in cash or credit at the pump. The chain has installed MasterCard PayPass systemwide, eliminating the need for customers to hand over their cards to a clerk or swipe them through a reader.

    7-Eleven hedges its bets

    The top-line vision of the nation's largest c-store player, Dallas-based 7-Eleven, is currently focused on promoting its proprietary fresh food strategy, and on increasing sales via higher-quality sandwiches, bakery lines, and salads.

    After testing an urban format in Boston, Philadelphia, and Chicago, 7-Eleven is emerging as "dramatically different from the kind of operation that we ran in 1982," said the company's former president, Jim Keyes, before he retired late last year. (Keyes was replaced by Joe DePinto.) Keyes' assertion is being put to the test with 7-Eleven's newest such store, in New York.

    The inspiration for the retailer's urban format comes from its success in Asia, where it learned to deal with the challenges of extremely high-density markets. "The No. 1 need for convenience in the urban environment is portable, high-quality fast foods," says Keyes. It's clear from the store's design that the company wants consumers to see how much thought has gone into the foodservice offering. The store's 1,497 SKUs, excluding magazines, include fresh and fresh-packaged bakery items, fresh fruit, chips and snacks, nutrition bars, ice cream novelties, and beef jerky.

    A streamlined distribution system, meanwhile, has equipped 7-Eleven to execute a fresh food program package that can compete in a town famous for its delis. The New York store gets daily deliveries from a corporate commissary on Long Island, as well as daily delivery of fresh bakery products from a Long Island bakery.

    7-Eleven has been rolling out its own next-generation fresh food products since the start of the year, beginning with the national launch of Pick Smart sandwiches, grilled items, and packaged baked goods with lower fat and calorie content. Fresh foods carrying the Pick Smart label must contain no more than 10 grams of fat and 420 calories, and are priced on a par with similar items that retail for between $1.59 and $3.69.

    "Portable, easy-to-eat foods are changing the way Americans eat," says Kathy Hasty, 7-Eleven category manager for fresh sandwiches.

    Ciabatta bread is the new star of 7-Eleven's latest line of fresh-made-daily sandwiches, a program under development for more than a year by the chain's food development team.

    In addition to recently inking a deal with Citibank to offer free ATM access in more than 5,500 stores, 7-Eleven is also launching a national Hispanic program in partnership with Inca Products, LLC, an Indianapolis-based company that creates authentic Hispanic product solutions for c-store retailers and distributors. The program will roll out first in California, Arizona, and Colorado.

    The 7-Eleven program combines a complete three-foot display featuring over 80 dry grocery and HBC products, along with 10 beverage offerings in the refrigerated section. The program provides the most popular brands and flavors from various recognizable, authentic Hispanic brands, among them Jumex, Jarritos, La Costena, Hershey Lorena, Nestle, and El Azteca. The rollout is expected to expand into 7-Eleven's Central and East Coast divisions in the second quarter of this year.

    In addition to supplying customized product displays and a wide range of more than 300 popular Hispanic products, Inca also provides consolidated shipment programs and VMI services to help its customers manage their inventories and reduce their costs.

    Kwik reflexes

    Also recognized as one of the nation's foremost c-store operators is La Crosse, Wis.-based Kwik Trip, Inc., which operates 320 locations in Wisconsin, Minnesota, and Iowa, offering a full spectrum of proprietary food, dairy, and bakery items.

    Kwik Trip's vertically integrated supply chain includes its own bakery, dairy, and commissary. As such, the chain is driving sales and reaping higher profits on a wide variety of high-quality prepared foods, signature baked goods, fresh produce, coffee, and other high-margin food items.

    The chain's strategy is to build up its equity as a primary convenience destination with a set of signature programs that includes Cafe Karuba coffee, Hot Spot grill items, Kwikery Bakery, and Nature's Touch dairy items.

    Kwik Trip also recently bowed "The Glazer," a proprietary Krispy Kreme-type doughnut that company officials say is extremely successful.

    With a steady growth rate of 10 to 15 new stores per year, the company also runs Cafe Karuba and Hearty Platter restaurants, and Tobacco Outlet Plus (TOP) cigar stores.

    In February Kwik Trip unveiled plans to build a new $14 million commissary adjacent to its existing distribution center, set to be completed by spring 2007.

    Of late, Kwik Trip is pushing a major rollout stressing a guarantee on the quality of its fuel offering. Because the company retails its own branded gasoline, Kwik Trip is able to offer a proprietary Kwik Card credit card that acts as a loyalty card as well. Customers who pay with a Kwik Card receive an instant rebate of three cents per gallon on all fuel purchases, as well as a 3 percent rebate on anything they buy inside the store. Customers also have the option of donating rebates to charity, and the company adds another 1 percent to whatever that amount is.

    A super response

    To retain market share and enhance their one-stop positioning, meanwhile, several national and regional supermarket chains are volleying back at c-stores with gasoline-based c-store concepts of their own. One such retailer is Pittsburgh-based Giant Eagle, which has enjoyed great success with the GetGo gasoline/c-store hybrid concept.

    The chain runs two types of GetGo stores: small units placed adjacent to existing Giant Eagle supermarkets, and standalone units as large as 4,500 square feet. The GetGo Kitchen, which functions as a major department in most of the stores, offers gourmet salads, sandwiches, wraps, and baked goods, all made to customer specifications.

    Touchscreen kiosks let shoppers custom-order fresh sandwiches and other food. The kitchen also prepares items merchandised in a grab-and-go case.

    Building on its already strong brand recognition, Giant Eagle has created an aggressive, tightly focused marketing strategy to get gas customers inside the GetGo stores, inclusive of multiple marketing efforts, sophisticated sampling programs, and signage that communicates the high-quality food offering.

    Giant Eagle also heavily promotes some corporate brand items inside GetGos, including a relatively new Market District line that now features more than 10 freshly brewed coffee blends.

    As a means of rewarding -- and retaining -- its supermarket customers, Giant Eagle continues to court them with its wildly successful cross-promotional "fuelperks!" program, which gives customers 10 cents-per-gallon discounts for every $50 spent inside stores. More than 1.5 million Giant Eagle customers redeemed fuelperks! rewards at GetGo locations last year.

    The chain says it will continue to seek ways to build on the success of the popular fuelperks! customer loyalty program as it awaits the opening of its 100th GetGo fuel and convenience store in the coming months.

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