Convenience store growth competitive quandary for Sam’s Club

The nation’s convenience stores continued to grow last year creating a peculiar blend of competitive challenges and sales opportunities for Sam’s Club.

The convenience store industry set new sales records in 2011 thanks to the addition of new stores, a ninth consecutive year of merchandise sales and a hefty increase in the price of fuel. The National Association of Convenience Stores (NACS) in its 2011 state of the industry report said total industry sales increased 18.5% to $682 billion from $576 billion. The gain consisted of a 2.4% increase in inside merchandise sales that grew to a record $195 billion and fuel sales that increased 26.4% to $487 billion on top of a prior year increase of 17.2%.

“Extremely high motor fuels prices contributed to yet another year of sales growth for the convenience store industry in 2011,” according to the report, which notes that C-store sales advanced despite an economic backdrop of sluggish growth and persistently high unemployment rates in the second year of a less than robust recovery. The big gain in fuel sales was the result of an increase in the average price paid per gallon as total gallons sold were relatively flat.

A portion of the industry’s sales growth also was attributed to continued unit growth. The number of units grew 1.2% to a record 148,126 outlets, according to the NACS/Nielsen Convenience Industry Store Count, which shows C-stores now account for 34.6% of all retail outlets.

“While foodservice gained in importance, motor fuels and tobacco continued to drive sales and profits in 2011,” according to the report. “The convenience industry is unchallenged as the principal retail supplier of motor fuels, accounting for approximately 80% of the sales. As for tobacco, the convenience industry has been the preferred channel of choice for decades and this did not change last year; the industry enjoyed pretax profits of $7 billion, up 7.7% from $6.5 billion in 2010.

The ongoing growth of the C-store channel creates an interesting dynamic for Sam’s Club. One the one hand, C-store owners are an important customer segment for Sam’s as nearly 63% of the nation’s nearly 150,000 C-stores are single-store operations. In fact, the ranks of single-store operators has been the fastest growing segment for the past decade, growing to 93,200 units last year from 78,400 units a decade earlier.

Sam’s sells these operators a wide range of such products as cigarettes, candy, snacks and business services. However, while Sam’s caters to the C-store owners merchandise needs, it also presents a huge competitive challenge for C-store owners who operate in close proximity to one of Sam’s roughly 600 U.S. locations as there is no way Sam’s Club is going to be undersold on gas. Consequently, every time someone fills up at Sam’s it is a trip and sales opportunity lost for a C-store owner who may have purchased items for resale at Sam’s. The same situation would hold true at Costco.

The NACS report doesn’t address this situation, but it is worth noting that despite its growth in 2011 the C-store channel underperformed other key retail segments. Based on information from the U.S. Department of Commerce and NACS State of the Industry data, changes in annual sales performance for six key competing retail formats show that while the convenience channel has done well for the past six years, relative performance lagged in 2011. Total retail sales were up 7.7% in 2011 versus a rise of 7.0% in 2010 after two years of negative growth in 2008 and 2009. For 2011, the convenience industry, as measured by in-store sales, grew 2.4% after two back-to-back years of very strong performance. On a relative basis, other retail formats recovered and enjoyed relatively better results compared to convenience stores in 2011, according to the report. By format, restaurant sales improved most dramatically, up 8.2%, warehouse clubs were up 5.7%, and grocery was up 5.6%. Dollar stores had a great 2010, up 10% as consumers strived to save money. For 2011, dollar stores grew 5.2%, still strong but a much lower growth than in 2011. Drug store sales growth averaged 5.6% from 2006 to 2008, but only 3% over the last three years, finishing up 3.2% in 2011. Convenience in-store growth grew the most in 2009 at 4.9% but by 2011 incurred the lowest growth of these six key retail formats at 2.4%.