Actionable Insights From APT's Retail Practice

Convenience Stores Becoming Convenience Destinations

April 21st, 2017 | Posted by APT in Retail

Convenience retailers are increasingly challenging the notion that customers should only visit their stores to fuel up and grab snacks, especially in light of the rise of car-sharing and hyper-efficient cars. Some, like Kum & Go, are adding features like growler stations. Others are investing in services to drive customers into the store, like USPS goposts, which have been popping up in numerous convenience store locations. These innovations are no longer just nice to have. They are becoming necessities for profitable brick-and-mortar retailing.

Some convenience stores are also emulating restaurants to draw traffic, adding outdoor seating areas, free Wi-Fi, or drive-thru windows. For example, Duchess designed a prototype store concept with a greater focus on foodservice, including made-to-order menu offerings, an in-store dining area, and touch screen ordering options. Similar to kiosk ordering, some convenience retailers are also adding at-the-pump food order screens.

Taking on these types of capital-intensive projects presents both great opportunity and great risk for executives. If managed correctly, they can drive significant profit growth. However, some of these programs may not pay off. With each new initiative comes questions regarding their implications. For example, which categories should retailers downsize to create space for self-service lockers? Will introducing a made-to-order foodservice concept drive enough incremental transactions and add-on purchases to cover the associated costs? And which locations will respond best to at-the-pump ordering screens?

The best way to answer these questions is to first pilot each concept in a subset of representative locations, then closely monitor their performance. This approach allows convenience retailers to ascertain whether the initiative warrants further investment, based on incremental traffic and sales. Overall, there are three key questions executives must answer before making decisions on broader rollout.

What is the incremental impact of the initiative?

As many executives know, simply answering the question of, “Are sales up year-over-year?” following implementation isn’t enough to accurately understand overall financial impact. Imagine a case where there is no year-over-year, same store sales increase after a store design. Based solely on this method, the investment appears to be unsuccessful; however, there are many other factors unrelated to the program – like competitor actions, demographic factors, and weather – that could be impacting the store’s performance.

The most accurate way to pinpoint the incremental impact of an initiative is to implement it in a subset of stores, then measure their performance against a similar group of stores that do not receive the program. This process of in-market testing takes the ambiguity out of program assessments by isolating the direct cause-and-effect relationship between the initiative and key performance metrics.

What is the ROI of each element of the initiative?

Most innovations have many moving parts. For example, new in-store restaurants require investing in new kitchen equipment, changing prepared food strategy to minimize cannibalization, and designing marketing campaigns to drive traffic.

With so many elements contributing to each program, it is inevitable that some pay off better than others. To determine which components are driving the most value, convenience chains need to put each element to the test. By strategically designing modifications of various elements among test locations, executives can understand which elements to prioritize. They can also determine where there may be opportunities to reduce investment with no effect on sales.

How will returns vary by location and market?

Just as certain elements of any given program will likely pay back faster than others, it’s common for certain stores to provide significantly higher returns than others. For example, convenience stores offering USPS goposts may find that these offerings drive a greater profit lift in stores located in areas with a heavy concentration of apartments, while they have little impact in more suburban areas. In this case, shifting from a chain-wide rollout to a more targeted deployment may mean the difference between incurring unnecessary losses and generating positive returns.

As convenience retailers take steps to transform their stores into local destination spots, they must be able to innovate quickly and effectively. However, haphazardly implementing any new initiative can negatively impact a company’s bottom line and reputation. To optimize their investments and maximize ROI, convenience chains should first test each new strategy on a smaller scale to determine its true incremental impact. As convenience stores innovate to become convenience destinations, making data-driven decisions will be critical to future success.

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