albert Chan
Introduction
Each report in our Sector Overview series analyzes a particular retail sector or consumer market. In this report, we cover convenience stores globally, with a focus on the US, Japan and China. We examine key themes and dynamics as well as the competitive landscape and sector outlook. The convenience store sector is undergoing tremendous changes as it adapts to consumers who live in an increasingly digitalized world and demand high-quality offerings and more convenience. Incumbent retailers are also facing disruption from leading e-commerce, hypermarket and supermarket operators, which are opening smaller retail formats. While the sector as a whole is seeing modest growth, top players continue to capture sizable market shares. We expect to see further consolidation within the sector as M&A activity continues.Themes We’re Watching
Convenience store operators in major markets are using technology to eliminate queues (and jobs), offer delivery options, improve services and leverage customer data. Some are also driving store traffic and growth by offering food and beverages that are prepared on-site, introducing loyalty programs to retain customers, and expanding market share through M&A. Adding More Convenience to Convenience Stores, 1: Unstaffed Stores Are Another Frontier to Be Explored Enabled by mobile payments and supported by an array of advanced technology, including facial and voice recognition, unstaffed convenience stores are one of the latest trends in retail. Amazon opened its first Amazon Go checkout-free format to the public in Seattle in January 2018. The company had opened seven Amazon Go stores as of December 14, 2018, and reportedly plans to operate 3,000 locations by 2021. [caption id="attachment_88795" align="aligncenter" width="544"]
An Amazon Go storeSource: Amazon[/caption] In China, about 70 companies, including major e-commerce marketplace operators, are currently running about 2,700 staffless/checkout-free stores. Alibaba opened its first unstaffed store, called Tao Café, in July 2017 in China. JD.com followed suit, launching its JD X-Mart staffless format in China in January 2018 and then expanding the format to Indonesiain August 2018. Some Chinese online retail players have also launched their own unstaffed outlets. [caption id="attachment_88796" align="aligncenter" width="702"]
As of April 30, 2019Source: Company reports[/caption] [caption id="attachment_88797" align="aligncenter" width="540"]
Alibaba’s Tao CaféSource: Alibaba[/caption] Convenience store players in other markets are also exploring and testing staffless, checkout-free and automated stores. Supporting the growth of automated stores are technology enablers such as artificial intelligence (AI) and computer vision and business drivers such as increased efficiencies and lower operational costs. In Europe, Alimentation Couche-Tard operates automated fuel stations. Although the stations sell only fuel, they may represent the first step in the development of further unstaffed formats. In Japan, Seven & i began testing a minimally staffed convenience store in Tokyo in December 2018. Located inside a building where an NEC group company has offices, the store is not entirely staffless, as employees are needed to place orders and stock shelves. Facial recognition technology enables quick store entry and convenient payments. The store is open only to NEC group employees who have preregistered to shop there, but it could signal the eventual debut of completely staffless stores in Japan. Another Japanese convenience chain, Lawson, announced in March 2019 plans to set up unstaffed stores starting summer 2019, with two pilot stores run as self-service stores. Similarly, in April 2019 FamilyMart introduced checkouts that use facial recognition technology in pilot stores, and will roll them out nationwide if the pilot proves successful. In Hong Kong, Alimentation Couche-Tard's Circle K convenience-store chain, managed and operated under Fung Retailing Group, unveiled an AI-powered in-store checkout solution in March 2019. The launch is a result of a strategic partnership between Fung Retailing Group and JD.com signed in 2018. The AI-powered checkout solution is the first AI checkout using image recognition technology in Hong Kong. Customers can complete the AI-powered checkout process in seconds with three simple steps:
- Place products on the smart checkout counter.
- Press the AI Recognition (AIR) button on the cashier screen to scan the products.
- Pay with an Octopus card, a stored-value payment card originally designed for use for mass transportation but which is now used for many payment types.
Source: Fung Retailing Group[/caption]
We expect more retailers to explore automated convenience store formats in underserved areas, where staffed convenience stores are unviable due to low foot traffic. Retailers are likely to provide services such as click-and-collect in these locations in addition to food and other typical convenience store products.
Adding More Convenience to Convenience Stores, 2: Convenience Stores Offering Delivery and Omnichannel Fulfillment
Digitalization has transformed consumers’ behavior and is increasingly impacting the convenience store sector. Some convenience stores now deliver orders to customers’ doorsteps and leverage store networks to integrate delivery operations with third-party delivery providers.
In Japan, 7-Eleven has offered delivery service through its Seven-Meal subsidiary since 2000, but in 2016, it expanded the program to deliver lunch to customers who face difficulty in getting out to shop, such as elderly customers and mothers with young children. Members of the program can order in-store, online or on their smartphone. In 2017, the company trialed a Net Convenience Store service in Japan that enables customers to order items by phone and have them delivered to their doorstep. 7-Eleven plans to extend the service to all stores across Japan by February 2020.
Circle K drives store traffic in Hong Kong by using its extensive network of physical stores as pickup locations for orders made through the FingerShopping.com online shopping platform. Customers ordering through the platform can pay by cash, Octopus card (as noted above, a stored-value card accepted in many retail shops) or credit card at a Circle K outlet, or pay online with a credit card or Alipay.
Adding More Convenience to Convenience Stores, 3: Digitalizing Business Operations and Leveraging Technology to Enhance Customer Satisfaction and Improve Efficiency
To keep up with consumers’ increasing preference for online shopping, convenience store operators are investing in digitalization initiatives. The key players in the sector are hiring digital talent, personalizing the customer experience and creating digital strategies to cut costs and improve efficiency.
In April 2017, Alimentation Couche-Tard hired its first CIO, Deborah Hall Lefevre, to lead efforts to consolidate the company’s diverse data sets, which are based on approximately nine million daily store visits. The company’s overall goal is to use the data to better understand its vast global customer base.
In July 2018, Alimentation Couche-Tard developed the Lift upselling program, which gives the company the ability to personalize customer experiences and “upsell” products to customers. The Lift refers to a smart display at the checkout counter that recommends products to customers based on the items they are buying, aiming to “upsell” products in the store. The company has implemented the program in about 3,500 stores, as according to President and CEO Brian Hannasch in the second quarter earnings call in November 2018. The company is planning to expand the system to the rest North America.
In April 2018, Casey’s General Stores hired its first chief marketing officer, Chris Jones, to lead its digital engagement program in collaboration with Deloitte Digital, its e-commerce integration partner. Casey’s General Stores is planning to launch a new e-commerce site during April 2019, pilot a new mobile app and loyalty program in the first quarter of fiscal year 2020, and extend these platforms to customers by the second quarter of fiscal year 2020, according to CEO Terry Handley in the company’s third-quarter earnings call in March 2019. The integration of digital platforms will help create a seamless customer experience, both online and in-store, for Casey’s customers, which would in turn allow Casey’s gain better understanding of customers and develop more effective promotions.
The major convenience store companies are collecting and analyzing customer data to market with precision. Seven & i’s digital strategy is increasingly determined by data-driven consumer insights rather than by a corporate-led, top-down approach. In June 2018, Seven & i introduced apps that enable its individual banners and stores to send product and service recommendations tailored to customers’ personal preferences. The suggestions are based on a variety of purchasing data that the company has collected and analyzed.
Convenience store operators are also using digitalization and technology to train staff and improve operational efficiency. For example, Alimentation Couche-Tard implemented a new payroll and human resources management system called Workday in late 2018. President and CEO Brian Hannasch said in a July 2018 interview with Convenience Store News that Workday “will create a better experience and training environment” for all store employees. A top Japan Franchise Association official noted in a September 2018 interview with Japanese online English-language news outlet The Mainichi that operating a convenience store requires skill in many areas, including “customer service, ordering products and managing stock.” Better training systems can help staff learn skills more quickly, thereby reducing operating costs.
In Japan, 7-Eleven has introduced an in-store system for product inspection that relies on RFID technology and a new process that distributes products to stores more efficiently. The chain started using RFID tags on room-temperature items in 2017 and expanded their use to perishable products in 2018. 7-Eleven Japan started piloting RFID-based inspections in Hokkaido, and plans to roll these out through Japan by end of 2019.
In addition, 7-Eleven Japan plans to add payment function 7pay to the existing SEJ app from July 2019 onwards, followed by rolling out 7pay to other companies within Seven & I from Spring 2020 onwards.
Casey’s General Stores has formulated a detailed digital strategy that will guide it through its 2021 fiscal year. The plan includes launching an enhanced website and mobile app, deploying in-store technology and upgrading enterprise infrastructure. The strategy should enable Casey’s to offer a seamless customer experience that includes new digital product categories and personalized marketing and rewards.
Driving Store Traffic and Sales with Food and Beverages Prepared On-Site
Convenience stores have been strengthening their prepared-on-site food and beverage offerings to drive store traffic. Consumers, particularly urban consumers, demand high-quality food and drinks as well as fresh offerings. Alimentation Couche-Tard, which operates more than 4,500 stores in North America and 2,000 in Europe under various banners, offers freshly delivered or baked-on-site doughnuts, pastries, muffins, croissants and cookies across almost 60% of its store network. The company’s bakery offerings are tailored to local tastes and complement its coffee sales through its Simply Great Coffee program, which allows shoppers to customize drinks. Alimentation Couche-Tard will complete over 1,500 Simply Great Coffee sites by end of fiscal year 2019, according to President and CEO Brian Hannasch in the company’s third-quarter 2019 earnings call in March 2019.
In Japan, the proportion of people who smoke decreased from 36.1% in 1989 to 17.9% in 2018, according to a survey by Japan Tobacco. This has adversely affected foot traffic at convenience stores in the country, and Lawson, FamilyMart and 7-Eleven are among the chains pushing freshly brewed coffee to counter falling traffic due to shrinking cigarette sales. 7-Eleven is adding latte machines in its Japan outlets and has already seen sales increase at stores where the machines have been piloted, according to a November 2018 Bloomberg Intelligence report.
Seven & i Holdings, 7-Eleven’s parent company, reported on its fiscal third-quarter 2019 earnings call in January 2019 that sales growth across foods such as sandwiches, noodles and deli products had contributed to same-store sales growth at its convenience stores in Japan. In the company’s fiscal 2019 earnings call in early April 2019, the company also announced its plan to convert 6,000 convenience stores in Japan to new layouts by the end of February 2020. The company said the redesigned outlets will feature expanded counters, expanded refrigerators and expanded frozen food sales areas in a bid to boost food sales.
Though freshly prepared food offerings cater to consumers’ needs, striking a good balance between freshness and speed is challenging for convenience stores. Companies must be agile and strategic when choosing between made-to-order and grab-and-go approaches to ensure that stores in bustling areas don’t overly compromise freshness as they seek to keep checkout times short.
Deciding which prepared foods to offer is also a challenge. Consumers are increasingly health-conscious, so convenience stores need to offer some healthy and organic options as part of their on-the-go ranges. To meet growing demand for vegetarian products in Sweden, Alimentation Couche-Tard launched a new offering of on-the-go cold vegetarian dishes in its Swedish convenience stores. The line increased traffic and drove sales of non-vegetarian products, according to the company’s 2018 annual report. Seven & i has worked to develop products that appeal to the health-conscious and is testing out wellness products in a new “lab store” concept known as Laredo Taco in Dallas, an in-store restaurant including gluten-free and keto-friendly (low-carb) products.
Loyalty Programs
In the convenience store sector, customer retention is as important as customer acquisition. A 2018 report from loyalty program operator Excentus found that 43% of shoppers visit a convenience store because it offers a loyalty program and 51% would shop more frequently at stores or chains where they are loyalty members than at other convenience stores where they are not loyalty members.
In 2016, Alimentation Couche-Tard subsidiary Circle K introduced a digital loyalty program called OK Stamp It in Hong Kong in collaboration with the city’s Octopus contactless payment card. The OK Stamp It app allows members to automatically load loyalty stamps to the app when they pay with the Octopus card. In the first 18 months post-launch, the app registered 1.1 million users, around 14% of Hong Kong’s population, and succeeded in driving more traffic to participating Circle K stores.
[caption id="attachment_88799" align="aligncenter" width="458"]
Circle K’s OK Stamp It appSource: Google Play[/caption] In North America, Alimentation Couche-Tard has various loyalty programs in place for different business lines, including Kroger loyalty, Air Miles and FRN for Shell, and PC Optimum for Esso, according to President and CEO Brian Hannasch in the company’s third-quarter 2019 earnings call in March 2019. 7-Eleven launched its 7Rewards points program in 2015, enabling customers to receive points for selected purchases and then redeem them for products in participating stores. The company expanded the loyalty program in 2017 and then ran a Million Points Sweepstakes Giveaway in the US in early 2018 to promote it. During the promotion, customers who scanned the 7Rewards app five times when shopping at 7-Eleven were entered into a drawing to win one million points, which could be redeemed for food and drinks at selected stores. 7-Eleven also awarded exclusive weekly prizes such as tickets to sports and music events and even overseas trips during the promotional period. “Our strategy to make every customer’s interaction with 7-Eleven valuable and delightful just got bigger and better. The enhanced 7Rewards app gives customers more ways to earn and redeem points in order to get free stuff,” said 7-Eleven Chief Digital Officer and CIO Gurmeet Singh in March 2018. US convenience store operator Casey’s General Stores does not currently have a loyalty program, but plans to pilot a loyalty program in the first quarter of fiscal year 2020, followed by expanding to customers in the second quarter of fiscal year 2020, according to CEO Terry Handley in the company’s fiscal third quarter of 2019 earnings call in March 2019. CFO William Walljasper said on the company’s fiscal second-quarter 2019 earnings call in December 2018 that the program will cover three areas: fuel; grocery and general merchandise; and, prepared food. M&A Activity Continues M&A deals are one of the key ways convenience store operators have expanded market share, and we expect this trend to continue. In January 2018, 7-Eleven acquired around 1,000 of Sunoco’s convenience stores in 17 states across the US for approximately $3.3 billion. 7-Eleven said it will stock these stores with proprietary products, including its Slurpee, Big Bite and Big Gulp items, healthy and indulgent fresh food options, and selected other brands. In its 2018 annual report, 7-Eleven indicated it had acquired Sunoco’s stores to achieve its goal of reaching average daily merchandise sales of $5,000 per store, operating 10,000 stores by the end of February 2020, strengthening its merchandising capabilities, expanding its store network and improving profitability. President and CEO Joe DePinto said in an October 2018 interview with Convenience Store Decisions magazine that he liked the Sunoco stores’ assets and operations. In June 2017, Circle K parent Alimentation Couche-Tard closed a $4.4 billion merger with CST Brands, giving Alimentation Couche-Tard an additional 1,300 stores in the US and Canada and helping the company shift toward in-store sales of fresh food. In December 2018, Circle K acquired four convenience stores in Illinois from Carls Oil Alimentation Couche-Tard has been able to expand its market share, penetrate new markets and increase economies of scale through acquisitions, and the company considers them a significant part of its growth strategy, as well as a means of consolidation in the fragmented convenience store sector. It also claims acquisitions will create value, not just increase store count at the expense of profitability. In February 2018, Casey’s General Stores acquired five convenience stores in Wisconsin from Frawley Oil. Casey’s said it aims to acquire at least 20 stores and build 60 new ones by the end of April 2019. CEO Terry Handley said in an August 2018 interview with Retail Merchandiser magazine that Casey’s sees smaller acquisitions, such as single-store operators, as appealing targets because it’s easier to assimilate them into the company’s overall operations. Casey’s has reserved $318 million for acquisitions and new store construction in its 2019 fiscal year, according to its 2018 annual report. Increased Competition from Retail Players in Other Sectors Many retailers that are dominant in other formats are trying to enter the convenience store space. Meanwhile, we’re seeing a trend toward smaller store formats, as shoppers increasingly seek convenience and do not want to spend time navigating large stores. In January 2017, Walmart opened a 2,500-square-foot convenience store in Crowley, Texas. The store offers hot dogs sizzling on a roller, beer stacked in a walk-in refrigerator and a counter where pizza is sold whole and by the slice. In addition, the store sells six types of coffee and a range of healthy foods, including fruit cups and yogurt. French supermarket retailer Carrefour opened its first Carrefour Easy store in China in 2015 and followed it with nine more openings in Shanghai in the first nine months of 2017. These stores range from about 1,000 to 2,700 square feet and offer daily food items and services such as on-site catering, mobile payment, Wi-Fi, lottery tickets and photo printing. Carrefour says the shopping experience “combines convenience, practicality and freshness.” Subsequently, Carrefour teamed with Zaitt to open a 24-hour, cashierless store in São Paulo, Brazil, which utilizes QR codes and RFID.
Sector Dynamics
The US convenience store market reached $25.7 billion in 2017, according to data from Euromonitor International, and grew 3.4%, to $26.6 billion, in 2018. The firm estimated that the market reached ¥93.0 billion in China in 2017 and grew 18.0%, to ¥109.7 billion, in 2018. [caption id="attachment_88800" align="aligncenter" width="700"]
Source: Euromonitor International/Coresight Research[/caption]
Headwinds and Tailwinds
Sector Headwinds
The convenience store sector currently faces headwinds in the form of trade tensions between the US and China, Brexit uncertainty, and currency and economic crises in markets such as Turkey, Argentina and Italy. These will continue to rumble on this year, weighing on consumer sentiment and spending. Although convenience stores focus on nondiscretionary categories, store traffic could be impacted if wary consumers cut back on discretionary shopping trips or switch to lower-price grocery channels.
For convenience store operators in North America and Japan, national stop-smoking campaigns and increased regulations on cigarettes, e-cigarettes and vaping products have cut sales volumes and, to some extent, store traffic. Increased regulation of these products has also led to price increases.
Although convenience stores may pass those costs on to consumers, they may in turn see reduced sales volumes. In California, the cigarette excise tax rose from $0.87 per pack to $2.87 per pack on Apr. 1, 2017. The tax hike led to a 0.9% increase in all cigarette sales but a 4.4% decline in sales volume over the four-week period ended Nov. 4, 2017. In Japan, the tobacco tax went up one yen per cigarette on Oct. 1, 2018, which led to a year-over-year sales decline for 7-Eleven in Japan that month.
In North America, the convenience store sector is also facing increased costs for food commodities such as cheese and coffee. In addition, rising minimum wages have led to increased operational costs and pricing pressure across the sector. Hurricanes in Texas and Florida last year led to volatility in consumer demand and product prices, impacted fuel and merchandise supplies, and led to large populations moving away from affected areas, all of which impacted convenience stores in the two states. Starting on January 1, 2020, the specialized agency of the United Nations responsible for regulating shipping, the International Maritime Organization, will require fuel contain no more than 0.5% sulfur content, a reduction from 3.5% currently, which will increase pricing for global transportation fuels and diesel prices.
Weather can also impact sales for convenience stores. In Europe, unfavorable weather in early 2019 caused growth deceleration for Alimentation Couche-Tard, according to President and CEO Brian Hannasch in the company’s third-quarter 2019 earnings call in March 2019.
Sector Tailwinds
Globally, the convenience store sector continues to be supported by the urbanization trend, as consumers in densely populated areas are highly receptive to the convenience store format. Consumers in urban areas shop more often than do their peers in other areas, but for fewer items at a time, and they prefer shorter trips and smaller stores. This preference for convenience stores and smaller retail formats is brightening the outlook for the sector, as is the global trend toward smaller households. The number of single-person and two-person households is growing, and these households tend to buy smaller amounts at higher frequency instead of buying in bulk.
In China, growing consumption among younger consumers aged 18-35 will continue to underpin convenience store sales growth. Boston Consulting Group’s China 2015 Consumption Survey predicted that urban consumption in China among those ages 18-35 will rise from $1.5 trillion in 2016 to $2.6 trillion in 2021, representing an 11% CAGR, compared with a 5% CAGR for consumers ages 36 and older.
Competitive Landscape
Market Shares Although top players capture the bulk of the convenience store market, the sector remains relatively fragmented and there is room for further consolidation and new entrants. In the US, Seven & i holds the largest market share, 31.3%, and is well ahead of Alimentation Couche-Tard, which holds only a 1.1% share, according to Euromonitor International. In China, the top players are also capturing sizable market shares, but not dominant shares, according to Euromonitor. Seven & i accounts for 5.4% of the convenience store market in China, lagging Dongguan Sugar & Wine (with 11.8%), FamilyMart Uny (8.4%), Chengdu Hongqi Chain (6.2%) and Lawson (5.7%). [caption id="attachment_88801" align="aligncenter" width="700"]
Source: Euromonitor International/Coresight Research[/caption]
Innovators and Disruptors
Innovation in the convenience store sector shows no signs of slowing. Amazon is leading the charge into automated convenience stores in the US, while other dominant players are executing a variety of innovation strategies. Several startups and companies from other retail sectors are also striving to innovate in the sector, as highlighted in the table below.
[caption id="attachment_88803" align="aligncenter" width="696"]
Source: Company reports/Coresight Research[/caption]
In Japan, Seven & i is striving to make not only shopping, but also emergency alert systems and even reconstruction efforts more convenient and efficient. Japan often experiences earthquakes and severe weather events, and in April 2018, Seven & i launched a system called Seven View that provides disaster information via web-based maps. The system collects information, including disaster updates and road traffic information, from public agencies, business partners and Seven & i subsidiaries, enabling the company to build social infrastructure and restore supply chains in the aftermath of disasters.
7-Eleven is innovating work structure in Japan, allowing full-time employees to choose their preferred starting time. In March 2019, 7-Eleven Japan launched a pilot program of shortening business hours at selected outlets to assess revising its policy of operating stores around the clock. The chain has also introduced a diversity and inclusion project in Japan to attract talent from different backgrounds to ensure fairness in hiring and encourage employee engagement. According to the Japan Franchise Association, the convenience store industry faces a serious labor shortage, and initiatives such as these can help alleviate that shortage.
In China, online retail giants are working to transform the convenience store landscape. Alibaba has rolled out a retail management platform named Ling Shou Tong that offers sales analytics to help store owners modernize layouts, optimize product procurement and boost sales. To access the platform, operators must agree to use their storefronts as fulfillment and delivery centers and provide customer shopping data to the platform. Alibaba rival JD.com plans to open one million convenience stores in China by 2021, half of them in rural areas. The company also set a target of opening 1,000 convenience stores per day across China, including checkout-free formats.