The c-store paradox


 

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Above: Kizer Couch tends bar at his Bend mini-mart, which boasts 47 taps of beer and other beverages.
Below: Couch plans to sell franchises of the “Growler Guys” portion of his store.
// Photos by Joe Kline
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Soda Shaq, the new line of cream sodas from Shaquille O’Neal and iced tea maker AriZona, is a health nut’s nightmare. Each Shaq-emblazoned, 23.5-ounce can contains 72 grams of sugar — the equivalent of 17 teaspoons.

In health-conscious Portland, one would think the sodas, sold primarily through retail partner 7-Eleven, would go over like a lead balloon. But one month after the product release this summer, Portland sales weren’t just good — the city’s 7-Eleven stores were selling more Soda Shaqs per location each day than any other store group in the country.

To hear the New York Times tell it, Portland is a foodie’s land of (organic) milk and (local) honey, where every denizen shops at a co-op, tends a garden and contemplates buying a goat. Evidently, though, more than a few of us don’t fit into that paradisaical portrait; instead, we patronize 7-Eleven and sneak swigs of sugary soda.

There is a disconnect here, and perhaps nowhere is this gap more visible than through the lens of that ubiquitous peddler of instant gratification: the convenience store.

Nationally, the convenience store industry is a powerhouse.

The 149,000 “c-stores” in the United States handle 160 million transactions per day. They grossed sales of $700 billion in 2012 — more than either grocery stores or restaurants. Both the number of stores and total sales increased, albeit modestly, last year.

Despite the state’s slow-food reputation, Oregon’s c-store industry is no exception to national trends.

Our store count went up every year between 2009 and 2012, and our homegrown chain, Plaid Pantry, was among the 5,000 fastest-growing private companies in the country last year, according to Inc. magazine. As the media portrays us — and as we collectively see ourselves — Portlanders wouldn’t be caught dead at a convenience store. The status of Oregon’s c-store industry, its strengths and the hurdles ahead, however, complicate the Portlandia picture.

Despite strong performance in Oregon and around the country, the c-store sector faces several challenges. Health consciousness is rising. Gas profits are falling. More and more businesses are encroaching on c-stores’ primary proposition, selling convenience in the form of a self-checkout stand or an express espresso. Though it may be an unexpected source for convenience store innovation, our idiosyncratic state offers the industry some distinctly Oregon solutions.


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Above: Plaid Pantry CEO Chris Girard has a background in engineering. “I’m the numbers guy,” he says.
Below: Consumers say in surveys they want health offerings, but c-store industry spokesman Jeff Lenard calls such responses “aspirational.”
// Photos by Eric Näslund
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The convenience store industry in Oregon encompasses a diverse array of businesses, from Idaho-headquartered Jacksons to fuel-based mini-marts such as ampm and the countless independent retailers located along the state’s intersections and thoroughfares. The field is dominated, however, by two players: Plaid Pantry and 7-Eleven.

The former was founded in Portland in 1963 by convenience retailer John Piacentini. Over the course of two decades, Piacentini built Plaid Pantry into a regional empire. In the late ‘80s, however, that empire suffered severe financial difficulties, and the company filed for Chapter 11 bankruptcy.

Enter Chris Girard, Plaid Pantry’s current CEO.

Initially joining the company as a workout/turnaround consultant, Girard helped pull Plaid Pantry from the wreckage. As it celebrates its 50th anniversary this year, the chain is the 41st largest private company in Oregon. It boasts 109 stores (approximately matching 7-Eleven in the Portland area), $203 million in annual revenue and average yearly nonfuel sales growth of 8% since 2009.

Assembled in a conference room at the company’s unassuming Beaverton headquarters, Plaid Pantry’s management team agrees the chain owes its success in large part to its local roots.

Although 7-Eleven has 190 stores in Oregon, the convenience giant, with more than 51,000 locations and 2012 sales of $84.8 billion, is owned by a Japanese company and is based in Tokyo. (Its American subsidiary is headquartered in Dallas.) Plaid Pantry vice president of marketing Tim Cote, whom Girard calls a “guru” for his ability to land extraordinary deals with suppliers, says being based in the Portland area enables Plaid Pantry to work more closely with local businesses than 7-Eleven, and, thus, to take advantage of opportunities the multinational corporation can’t.

“There are lots of opportunities in the market we get exposed to because we’re here,” he says. “By the time you have found the person you need to talk to at 7-Eleven, the opportunity would have come and gone.”

For an example, Cote points to the dramatic increase in sales of craft beer in recent years. “We saw it coming,” he says, “and why we saw it coming, probably, is that most of the major craft brewers live within 40 miles of this office. We know them by name. 7-Eleven hardly knows they exist.”

Having 96 of its 109 stores in metro Portland (the others are in Salem and Seattle) also lets Plaid Pantry tailor its product assortment more closely to the local market. For instance, the chain noticed that Natural American Spirit, a cigarette brand that markets its tobacco as “100% additive-free” and is popular among young, hip smokers, was selling well in the tricounty area. “We gave it display space before anybody else, because that brand and the Portland customer are a perfect fit,” Cote says. Plaid Pantry is now among American Spirit’s top 10 accounts.

Operating in a city with a bumper-sticker campaign to preserve its weirdness also gives Plaid Pantry leeway to be less conventional. “We’re not afraid to be a little weird,” Cote says.

Just go into any of the company’s stores and compare it with a typical 7-Eleven. The former, Cote admits, is a visual cacophony of promotional displays, presided over by an eccentric-looking cashier; the latter is an ordered tableau, overseen by a clean-cut salesclerk.

Girard, who has an ex-pilot’s haircut and a straight shooter’s manner of speaking, doesn’t disagree with that characterization. “You go into a gasoline-based store or a 7-Eleven, everything’s kind of perfect — they’re kind of sterile,” he says. “You go into a Plaid Pantry, you’re exposed to more promotions. It’s organized, but it looks kind of chaotic.”

Despite their differences, 7-Eleven and Plaid Pantry, along with their competitors, are faced with the same looming challenge: finding new revenue sources as their old cash cows, gas and cigarettes, become less reliable.

About 80% of convenience stores pump gas, and fuel sales comprise approximately 70% of the average store’s revenue. Gas, however, has long been an extremely low-margin and volatile product. And as the price has gone up, demand has declined. Meanwhile, credit card companies have continually increased their transaction fees, taking an ever-larger cut of profits. The result is that convenience stores earn, on average, just three cents per gallon of gas they sell. In Oregon, the labor cost associated with the state’s ban on self-service narrows this margin even further.

“Gas has become a product you need to sell, but there are an awful lot of challenges associated with it,” says Jeff Lenard, spokesperson for the National Association of Convenience Stores (NACS).

The same could be said of cigarettes. They currently make up 10% of the average convenience store’s revenue, but that share is shrinking as taxes push up the price of a pack and the smoking rate declines. At Plaid Pantry, cigarettes are the largest product category. Girard is optimistic about the potential of e-cigarettes, but he acknowledges tobacco’s issues. “It’s a decreasing category,” he says. “People are looking at it and saying, ‘We ought to figure out how to replace some of those sales in the future.’”

For much of the industry, becoming less reliant on gas and cigarettes has meant focusing more on prepared food. 7-Eleven has led the way, building an infrastructure for the delivery of prepared food to its stores on a daily basis and steadily expanding its fresh-and-hot product selection. Margaret Chabris, 7-Eleven’s public-relations director, says the company’s research shows there is demand for grab-and-go meals like sandwiches and pizza — “and, of course,” she adds, “the sales of these products indicate customers want these kinds of foods.” That holds true even in Portland, where, as in other urban areas, receipts from prepared food have been high.

Increasingly, customers also want something healthy. 7-Eleven’s consumer research has found shoppers are becoming more conscious of their diet, and the company has responded with more healthful offerings, such as sliced fruit and yogurt parfaits. Meeting the rising demand for fresh, healthy food is also part of the industry’s necessary shift away from challenged traditional profit centers like fuel and tobacco, says NACS’s Lenard. He’s not convinced, however, that convenience store customers truly want healthier products.

“We’ve done countless surveys, and there’s a general sense customers want more healthy food,” Lenard says. “But people tell you what they would like to be, not what they are. You have to pay attention to the food they put into their mouths, not the words that come out of their mouths.”


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Lisa Sedlar stands in front of the under-construction location of her new convenience store chain, Green Zebra. Each store will create about 40 jobs, Sedlar says.
// Photos by Adam Wickham
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Lisa Sedlar is running a few minutes behind. The diminutive short-haired woman hurries into her makeshift office apologizing, explaining she slept through her alarm. She’s easy to forgive; the former New Seasons CEO has been working 15-hour days as she prepares to launch her new grocery chain, Green Zebra. She looks a little tired, naturally. But fortified by coffee, Sedlar seems remarkably unstressed: She’s been sleeping the deep sleep of someone who knows she has a good idea.

Sedlar’s elevator speech for Green Zebra goes like this: It’s a mash-up between a 7-Eleven and a Whole Foods. The stores will sell convenience-store fare such as candy and soda, and, at approximately 6,000 square feet, they’ll be closer in size to a Plaid Pantry than New Seasons. But Green Zebra will also sell organic and local products, and will feature a produce section and a deli. If the concept sounds familiar, it’s because the idea is a time-tested one: the corner store. “This is how people used to shop,” Sedlar says.

Sedlar got the idea for Green Zebra before she was headhunted by New Seasons in 2005. During her seven-year tenure as CEO, the grocery chain opened eight stores, added about 1,650 employees and tripled its revenue. But the much-lauded executive still had a “burning desire” to open a small-format grocery store.

“I could see there was a market need,” she says, “and I could see that if I didn’t do it now, someone else was going to do it.” Sedlar left New Seasons last fall; her former employer is a minority investor in her new venture. The first Green Zebra, located in Portland’s Kenton neighborhood, opened in September, with two more stores, in Woodstock and Richmond, to follow next year.

Sedlar projects sales of $5 million to $6 million per store in year one. She calls that forecast “robust,” but when she needs a confidence boost, she looks to convenience-industry trends. “Their growth is coming in large part from expanding their food offerings,” she says.

In stocking her stores, Sedlar says she’ll follow an 80/20 guideline: 80% Whole Foods-style products, 20% 7-Eleven-style. Her concept reinforces what the strong performance of Oregon’s convenience industry suggests — that Oregonians want health and convenience. They want to have their gluten-free cake and eat it too.

“To us, convenience means not sending you to more than one store,” Sedlar says. “Natural-food stores: All they do is natural food. So if you drink Diet Coke — which a lot of people do — you have to go to another store to get it. We don’t see ourselves as the food police; we do carry Diet Coke and Coke and Cheerios. We just don’t carry a lot of that stuff.”

Green Zebra may be a whole different animal than your average convenience store. And, though Sedlar says she’d like to eventually open stores beyond Portland, the concept may be too crunchy for most of the country. Even so, this contemporary corner store does take convenience-industry trends to their logical conclusion. If Sedlar is successful, Green Zebra could offer a model for the less gas- and cigarette-dependent and more health-focused convenience store of the future.

As the markup on mini-mart products indicates, convenience itself is a commodity, and these days, it’s a hot one. Supermarkets, with the introduction of self-checkout stands, are trying to become more convenient. Starbucks and Subway have turned coffee and sub shops into convenience-based businesses. Even retailers that don’t sell food, such as Best Buy and Old Navy, are hawking convenience products like soda and candy at their registers.

This convenience creep means that for actual c-stores, differentiation is more important than ever. “Those are the same products you sell, so how do you add that ‘wow factor’?” Lenard says. “You’re seeing an evolution away from packaged items toward something else.”

Lenard was in Oregon recently to shoot a video featuring a local convenience store that exemplifies that evolution: Bend’s Stop and Go Mini Mart. The store’s “wow factor?” Beer on draft. The Stop and Go boasts 30 beer taps, not to mention six cider and wine taps, 11 kombucha taps and one root beer tap, selling the beverages in the large glass jugs known as growlers.

The Stop and Go’s owners, father and son Kent and Kizer Couch, installed the first dozen taps in 2011 after watching demand for craft beer rise throughout the recession. “I think people found craft beer was a way of indulging themselves when they couldn’t afford to go to the movies as often, or whatever it was,” Kizer Couch speculates. “We couldn’t keep enough craft six-packs and 22-ounce bottles in our store to satisfy the demand.”

Beer enthusiasts, excited about being able to take home varieties brewers don’t bottle or can, responded positively to the Stop and Go’s new offerings, and the Couches rapidly expanded their tap selection. Draft-beverage sales now make up roughly 10% to 15% of the business’s total in-store revenue, without affecting sales of packaged beer and wine. “You can’t put a value on differentiation,” Kizer says. “That’s the only reason we dominate in our area. We’re constantly asking, ‘What’s the next thing?’”

Across the state, at his immaculate mini mart in the Coast Range town of Vernonia, Matt Carlough agrees convenience stores must be adaptable. A board member of the Oregon Neighborhood Store Association, a convenience-industry trade group, he also believes the c-store remains a fundamentally sound business.

Whether supermarkets have self-checkout stands or not, he argues, their very size prevents them from truly competing with convenience stores. “At a Safeway, you’ve got to park 50 feet away and hike all the way to the back of the store to get a six-pack,” Carlough says. “That’s not convenient.”

Speed-metrics studies by NACS bear him out: Car door to car door, the average duration of a convenience-store trip is about three minutes. “There are plenty of stores where that’s the time you spend walking from your car to inside — let alone what it takes to navigate the aisles,” Lenard says.

Plaid Pantry’s executives aren’t worried about the industry’s sustainability, either, and not only because of c-stores’ speed advantage. To Girard, the idea behind the convenience store is too simple to fail. “It’s a box,” he says. “Is there a place for a 2,400-square-foot box surrounded by people? Of course.”

Perhaps the Portlandia picture isn’t so complicated. Yes, Oregonians are different. We drink a lot of craft beer, as the flowing taps at the Stop and Go attest. We buy a lot of local and organic goods, a trait Green Zebra’s investors are banking on. Apparently, we smoke a lot of American Spirits.

But maybe we’re not as different as we’d like to believe. Food-conscious Oregonians might not be among convenience stores’ core customers, but that doesn’t mean they never pass through those chiming glass doors.

Girard believes Plaid Pantry serves foodies “for their needs other than upscale fresh foods” — and why not? Be it a bottle of microbrewed beer or a can of celebrity-endorsed cream soda, “people are always going to have needs they want filled immediately,” Cote says. “That’s what we do.”