Title: Will grocers profit from convenience store ills?

Sub-title: A new report indicates show that convenience stores are going through a rough period. Grocers better not laugh – they face many of the same challenges.

 

Many Canadian consumers drive past one or more convenience stores on their way to do their weekly grocery shopping. So at first glance, a new report that says convenience stores are having trouble keeping and building traffic into their outlets would seem to herald good news for grocers. But not so fast. A lot of the challenges besetting convenience stores, including lost sales from contraband tobacco, rising sales and other taxes, credit card fees and minimum wages are all also plaguing grocers.

 

The Canadian Convenience Stores Association’s 2010 State of the Industry Report, released last month, paints a grim picture. Close to 2,300 outlets were shuttered last year, an average of six closures per day, leaving just over 23,000 still standing. As if that was not bad enough, profitability among those remaining is pitiful, with average net income working out to just 1% of sales. And things are not likely to get better soon. Industry sales are expected to grow slower than inflation plus population rises during the coming years.

 

Independents take a beating

Hardest hit are the independents. “The report does not paint a rosy picture for mom and pop-type operations,” said Dave Bryans, president of the Canadian Convenience Stores Association. “Many are closing or aligning themselves with national chains. There is a danger that over the longer term the small-town family-owned convenience store could go the way of the old family-owned drug store.”

 

While the CCSA report offers excellent generalities, the picture can vary from province to province, and even from district to district. For example according to Jay Choi, a recent Korean immigrant, who  bought a convenience store in  Dorval last year, business has been quite good, with profits far above the industry average. “It’s a lot of work,” admits Choi. “But we are lucky, because here in Quebec we are allowed to sell beer and wine in the stores so that keeps traffic up.”

 

According to one marketing expert the plight of convenience stores could be good news for other channels, though not necessarily just for grocers. “If consumers no longer stop off at their local corner store to buy cigarettes, due to the contraband tobacco issue, then those stores will also lose a lot of the ancillary sales,” said Michel Laroche, a professor at Concordia University’s John Molson School of Business. “For example pharmacies and drug stores have really expanded their food offerings in recent years, and in many neighborhoods such as mine in Town of Mount Royal (an upscale Montreal district) all of them have shut down.

 

Similar industries similar problems

Although the convenience and grocery stores operate different business models, the two industries face broadly similar challenges. This is particularly true on the regulatory front. For example the introduction of new sales taxes in some provinces and municipalities (tobacco, gas, lottery) overall tax increases and stricter and regulations, hurt profits in both industries.

 

Both industries are also hurt by constant increases in the minimum wage rate, which the report estimates costs convenience stores $100 million each year. The recent hike in credit card fees alone cost convenience stores $50 million last year, a move that spurred the CCSA to align itself with the Canadian Council of Distributors and others to pressure the large credit card companies to ease up on their skyrocketing fees. That said, while the problems facing convenience stores and grocers are broadly similar, the impact of shooting a pellet in a squirrel and shooting one at an elephant are quite different.

 

In fact many of the problems that spurred the shuttering of convenience stores will only mildly impact grocers. Furthermore, according to Laroche, in the long run, the disappearance of a significant portion of a competitor distribution channel should be a net plus for grocers. “Whatever consumers once bought in those closed convenience stores, they will have to buy somewhere else,” said Laroche. “At least some of that business will work its way to the grocers.”

 

Peter@peterdiekmeyer.com

 

 

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