Convenience Stores & Our Slow Economy:

The turmoil of our banking system is hard to ignore, and the stock market is on everyone’s mind. 

So how does it all affect you, “Perspective Convenience Store Buyer“?

And how does it affect you, “Current Convenience Store Owner“?

This post aims to answer these big questions:

What’s going on with our economy?

First things first… lets all get on the same page with what’s going on with our economy today:

  • It all started with people going a little house crazy in the wake of the dot com recovery. 
    • Banks created new, “creative” mortgages that allowed completely unqualified people to qualify for financing. 
    • This in turn drove housing prices higher. 
    • Higher housing prices meant banks had to become even more creative in their financing in order to qualify those same people.
  • This brings us to the inevitable burst of the real-estate bubble as so many of these limited time financing deals expired and people’s interest rates sky rocketed.
    • People could no longer afford to make payments causing home prices to begin their decline.
    • Banks slowly realized that so many of their assets are not worth nearly as much as they thought they were. 
    • What followed was an exponential domino effect because the less money the assets are worth, the less money the banks have, the less money the banks can lend.
    • If the banks lend less, people can no longer afford the same house they could a year ago, so demand goes down, supply goes up, and housing prices drop.
  • The more the housing prices drop, the worst off the banks are, the the less they lend (the cycle perpetuates).
  • This isn’t the only problem however, only a short while ago did we start learning the extent of the bank losses.  It got so bad, so quickly, that:
    • The government had to take control of AIG to avoid a financial meltdown.
      • In standard accounting practices, if AIG was to value their assets down to what they were really worth as they declared bankruptcy, all of the banks would be forced by law to value their assets at the same levels, thereby forcing bankruptcy on almost every bank.
    • Next the government stepped in to rescue Freddie and Fanni.
    • Now, most recently, they brokered a deal that dissolved Washington Mutual and sold it off in pieces to JP Morgan.
  • Now as Wachovia is on the brink of following in WAMU’s footsteps (being broken apart and sold to Citigroup), the next big variable is the $700 Billion government plan that aims to absorb all of these de-valued assets from banks in order to stimulate lending and take us out of recession.

State of the Economy:

  • Banking System is on the verge of collapse.
  • Unemployment is up and it will only get worse.
  • Inflation is rising, and depending on the actions taken by our government might skyrocket by the end of the year.
  • Presidential election is coming up, but has taken a back seat to the economic crisis.
  • People have significantly less disposable income due to gas prices, inflation, and unemployment.
  • This in turn drives Retail Sales down … pretty much every company is missing earnings and sales forecasts.

 

So where does that leave you?

 

First, take a deep breath and relax.  If the banking system does collapse none of it is going to matter anyways, as we will all be broke including the US government.

If you have lost 25% of your savings in the stock market this is NOT the time to sell (as long as you’re properly diversified). 

This MIGHT be the time to buy in more!

If you have an investment time frame of at least 5 years, you should probably consider investing some of your money into the leading banks such as Bank of America and Goldman Sachs.  (Follow Warren Buffet and you won’t go wrong).  10 years from now, the people who bought in now will have substantial rewards. 

But I’m not your financial advisor so lets talk shop:

People who have lost their job wonder if this is a good time to buy a store?

 If you are recently laid off, with some savings in the bank and (typically) no convenience store experience, this is definitely a good time to learn about the business. 

However, DON’T RUSH IN just because you need a job, because you could end up regretting it for many years to come. 

Make friends with a couple of convenience store owners, or hire a consultant to give you the real breakdown of the business.  Be very weary of people that give you only positives, they probably have something to gain from you buying the store.  Check out my prior posts for how much income you can expect to have from a 7-Eleven and what are the likely start up costs.  These numbers do not equate to the numbers for an independent convenience store, but they will put you on the right track.  For an independent store, as your sales increase, your profits will increase exponentially versus linearly in a 7-eleven.  This also means that if the sales aren’t there, the profits will decrease exponentially.

Store owners wonder if this is a good time to sell their store?

It could very well be the time to sell if you are considering retirement or another business.  There are many people looking to buy themselves a job right now, and there are a lot of opportunities to make long term profits in the stock market.  If you are trying to “time” your exit, this is a good time.

That being said, if you aren’t retiring, and you don’t have another business in mind… by all means keep your store as the job market right now is slowly getting worse and profitable businesses are in great demand.

Everyone wonders how do convenience stores perform during economic slowdowns?

Generally speaking, convenience stores will experience a drop in sales similar to most other retailers when the economy slows down, but there is a great deal of variation from one store to the next.  Here are the key factors:

  • Location
    • Is the store really convenient for the neighborhood?  or do customers have to travel extra to get there … gas has gotten pretty expensive and people are reluctant to drive farther then they have to.
    • Are you near a business park where companies are undergoing massive layoffs?  Don’t be surprised if you lose many of your regular customers.
  • Competition
    • Is your competition thriving off of your customers or are you putting them out of business?
    • Do your customers have a viable 2nd option to get the products you sell somewhere else?
      • Most stores do, but if you’re lucky enough to be the only store in the area you will not experience a significant decline in sales).
  • Pricing
    • Is the store competitive with the Safeways/Albertsons/Lucky’s/Ralphs etc?? or is it still charging customers extra for convenience?
      • In a normal economy it is very good to charge more because you offer customers a convenient place to purchase the products they need. 
      • In these times, customers will change their buying habits if they feel they are paying unreasonable prices… penny pinching is at an all time high.
  • Sin Sales
    • If a large portion of your sales are cigarettes you’re in luck.  Research shows that during economic downturns cigarette sales will actually increase as people smoke more.
    • I don’t have data for Alcohol or Coffee sales during economic downturns, but I would guesstimate that if you are priced competitively, you won’t experience a significant drop in either.
      • In fact it wouldn’t surprise me if you saw an increase in:
        • Beer sales, as customers make less visits to the bar and spend more time at home in front of the tv.
        • Coffee sales, as customers forgo the $3 cup of Starbucks in exchange for a $1.50 cup of your fresh brew. 

So which categories decrease more than others? – Basically any “elastic goods” (products that customers could do without) will lose sales in an economic downturn.  You won’t be seeing a sales drop in toilet paper, but you might see a sales drop in your high priced wines.  Sin Goods are the exception to this rule.

If you are considering purchasing or opening a convenience store, or if you’d like to increase sales & profits by maximizing the opportunities in your existing store: 

 

Contact me at: c-store-expert@greatconsult.com for a FREE e-mail consultation.

I will provide unbiased answers to all of your questions.

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12 Responses to “Convenience Stores & Our Slow Economy:”

  1. Lizzie Says:

    I was asked to supply a local convenience store with my baked goods, and offered to give the owner 20% of each item sold.
    He is hinting that 20% is not enough.

    I feel it is just right, and may be to much!
    He will only provide counter space, and ring up the sale.

    I have toproduce/pacgake and distribute the product.

    He is also asking if I can do some food items in the back of the store. They have no ventalation but we can cook in microwave, slow cookers, etc. He is saying that he will not charge rent, just want a percentage of what is sold, and he also wants me to place a label on my product that says the product was purchased at his store.

    The store is located in anexcellent location.

    Please advise, and thank you so much!

  2. cstoreguru Says:

    Lizzie,

    It’s difficult for me to give you advice, because I would need a lot more information about your particular situation, but let me give you some info that should guide you in the right direction.

    A typical convenience store sells fresh-baked goods at around 30% GP, meaning if they buy a pastry for $0.70 from a vendor, they will sell it for $0.99 to the customer. This obviously varies depending on many factors, but generally not more than 10% in either direction. So the percentage that you give to the store owner should depend on your costs (including the time it takes you to prepare and bake), and your profit.

    Once you tally all of your costs, that is your starting point. Then you can play around with the retail price to see if this bakery line makes sense.

    If we use a Muffin as an example. Lets say the cost of all your ingredients per muffin is $0.50 and you add on another $0.25 for your time, it’s great if you can keep it at a $0.99 retail, but if the store owner says that split is not acceptable, rather than cutting the cost you’re charging him and barely scraping by, you will be much better off making your muffin $1.39 (and maybe make it slightly bigger sized, marginally increasing your ingredient cost, but making it seem like a better value).

    Basically, I’m saying, don’t be scared to charge more once you cross the .99 line.

    Counter space is great. You pretty much can’t ask for better placement than that, because almost anything will sell off the counter. As far as other foods you might prepare in the store, again, I would need to know a lot more specifics before I can give you advice. If he wants to put his store label on your products, it sounds like a good way to get your foot in the door. I’m sure that eventually you would want to have your own brand, official company (with liability insurance) so you can pitch your product to other stores. Make him pay for the label and packaging.

    So bottom line, when determining the split, don’t share a percentage of sales… figure out your costs and profit and then play with the retail.

    Also, what happens to product that doesn’t sell? Is that your expense, his, or are you splitting those costs? Generally when a store sells “fully guaranteed” baked goods, meaning their losses are covered… the baker charges a higher cost per unit.

    Good Luck!

  3. adamchris Says:

    Thanks for sharing the information. Do you keep updating the latest on convenience stores on your blog frequently?

  4. Francis. Says:

    Dear Sir,
    I lost my job and would like to open a convenient store around a densely populated medium cost apartments area. What name is best for my store ?
    Thanks,
    Francis.

    • cstoreguru Says:

      Francis,

      Sorry to hear that you lost your job. As far as names go, I prefer names that are as simple as possible, but generally with convenience stores, the name is not all that important.

      It’s all about location, and after that its about how you operate the store.

      Good luck.

  5. Murat Says:

    Hi
    Found your blog while searching information on c-store chain operations.
    I am from Russia. I own 3 convenience stores in 2nd tier city.
    Thinking to scale up the business similar to the model of western retail chains. But having trouble finding information on the scientific approach of estimating a performance potential of retail unit or location. In the past I used buy just through my gut feeling.
    I would appreciate if you share some thoughts or web links regarding that.

  6. Danny Says:

    Good day my parents have just finished payment on a c-store and is now theirs, the only problem is through the years the business has taken a nose dive. The store is really bare with no stock what so ever and I just see so much potential. Having been raised in these types of businesses I feel its my calling to bail out my parents and pay them back for the great opportunities their stores have given us. My parents have told me the store is mine if I want it rent free, now being that its an established store but the reputation of it not having what the customer wants scares me. We have a drive thru window and we are on the corner of a busy intersection. We are about the size of your typical 7-11 if not a bit larger. Now the question is do you think given the little info that i have provided, would it be worth my time and effort to re-establish the reputation this store once had, and what kind of money do you think i would need to invest in the store. thank you

    • cstoreguru Says:

      Danny,

      It’s impossible for me to answer your question with so little information. Ask yourself, if you weren’t doing this, what would you be doing and how much would you make doing it?

      Generally, if the store is in a great location but has been run down over time, it should be a worthwhile investment.

      It doesn’t take a lot of money to clean up and fully stock a convenience store. It does however, take quite a bit of money to get new floors, new lighting, frp, paint outside, redo the asphault, new sign, advertising/marketing, grand re-opening, etc etc

      On top of that, this is a significant time commitment. It might be years before the store is in full swing (or as little as 6 months if you’re both good and lucky)

      Hope that helped,

  7. Tony Says:

    Hello,
    Are you still in available for consulting? I am looking at a 7-11 in Texas and need help with the business plan. Is there a phone number I can contact you.


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