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Friday, February 7, 2020

Gerald Lewis On Amazonization
and Other Future C-Store Disruptions

Source: Observations from the Executive Suite
By Jeff Kramer, Managing Director, NRC Realty & Capital Advisors

Kramer: Gerry, you have written extensively about what you call "Amazonization" - the impact of Amazon and similar internet companies on retailing in general. Companies such as Blockbuster, Barnes & Noble, Circuit City, etc., have been greatly impacted, but so far, the convenience store industry has not seen many direct affects - yet. Why is that, and are changes possibly in the wind?

Lewis: Borders could not compete with Amazon. Circuit City was just poor management - they could not compete with "newcomer" Best Buy - and now Best Buy is having to compete with Amazon online. Blockbuster failed due to the obsolescence of VCRs which were supplanted by online streaming - originally from Netflix, but now also from several others, including Amazon Prime. So far c-stores have not been much impacted by Amazon because they largely serve immediate needs that can't be satisfied by delivery, no matter how fast it is. AmazonGo is not yet a threat because there are so few of them so far but could be a harbinger of things to come.

Kramer: Amazon's new "Touch and Go" technology is here, and other companies are developing similar technologies. These technologies may be available for purchase or licensing. If true, might they be economical for all sized convenience store companies that might not be able to develop the technology offer themselves?

Lewis: When technology comes to scale its cost always plunges. I bought my first flat-screen 42 inch TV 19 years ago for the then bargain price of $6,000.00. Last year I bought a much better 56 inch one at Costco for $500.00. The same will happen with "Just Walk Out" technology, which may well become the price of entry for all mass market retailing, including convenience stores. It will probably ultimately become available "off the shelf" from software and hardware vendors who will make it under license from Amazon and others who will develop competing systems - in the same way as such things as pay-at-the-pump or touch-screen ordering systems are now available.

Amazon is learning the food retailing business from its purchase of Whole Foods and the c-store business from AmazonGo and will presumably put this all to work in the 30,000 square foot supermarkets it is now about to introduce. This is all still a learning process for Amazon, in my view.

Kramer: Do internet related companies like Amazon have a significant cost advantage through their distribution system, Artificial Intelligence programming, etc. that will give them a noticeable price advantage compared to convenience stores, or is it mostly about Convenience? Are they redefining "Convenience"?

Lewis: Amazon invests very heavily in logistical robotic technology and distribution systems, in order to enable faster (1 or 2 day) "free shipping" delivery to its Prime customers. Amazon also operates "Prime Air", its own fleet of 30 (soon to be 40) Boeing 767 freightliners which operate out of 20 airports to service its largest markets, leaving the lesser ones to Fedex and others. There are four results from this. First, great customer service. Second, reduced cost of shipping that others can't compete with. Third incomparable data on Amazon customers' buying patterns. Fourth, the shipping is not actually free. It is paid for by the 100 million Amazon customers who pay approximately $119.00 annually to be Prime members, generating nearly $12 billion of annual revenue for Amazon. It is why I was recently able to buy a $5.00 money clip online and get it delivered "free" in 2 days. (Amazon's cost of delivering it was probably $7.00, excluding the cost of the item.)

Kramer: You have stated recently that for Amazon in particular, the key is in the "Offer". Companies like 7-Eleven and many others use customer data mining extensively, plus many companies have excellent foodservice programs. Many of our industry strongest companies do not even require fuel to draw customers, except perhaps for highway travel. How and especially why will Amazon stand out from these outstanding companies?

Lewis: First let me explain that when I talk about the offer, I am actually talking about the total customer experience. It starts with the merchandise itself - desirability and value (price/quality relationship), but includes basic things like easy-to-find, easy-to-buy, always in-stock and great customer service. But, in order to stand out, retailers have to develop an offer that makes them become a destination for something. They have to be able to answer the question "What do you want to be famous for?" Think of Wawa's Hoagie Fest and coffee programs. 7-Eleven's Slurpee, Sheetz's MTO and Royal Farm's fried chicken. At AmazonGo the answer at the moment is "Just walk out", but this is supported by a really good merchandise offer, which appears to be focused on unique self-service ready-to-eat or heat-and-eat foods, tailored to the needs of the communities the stores serve. As time goes on and Just Walk Out becomes standard, I am sure AmazonGo will project an offer more focused on the merchandise and less reliant on the wow of the technology which enables and enhances it. Great technology alone may attract customers once or twice, but, without a great offer, is bound to fail.

Kramer: Finally, what would you recommend to convenience store companies to survive and perhaps even thrive in this fast changing environment?

Lewis: First they need to be aware of how fast the environment is changing. The emergence of electric vehicles and technologies that will enable them to be charged while they are in motion will ultimately virtually eliminate refueling as a reason for stopping at a convenience store. Shorter term, the rise of services like Uber, and lesser ownership of cars by young people will reduce the need to stop at a c-store for a break, so c-store operators may need to review their location strategies and even think about going back more heavily to urban centers and being less reliant on refueling and competing with gas pricing to cause customers to shop their stores.

Companies like 7-eleven, Circle K and Wawa became successful without gas. It was the oil companies, needing to optimize the value of their great locations in order to keep their dealer networks viable, that were forced into the convenience store business. This ultimately made it imperative for the traditional c-store operators to compete on gas. It started with oil companies having a "High-Low " profile (High volume gas and low volume c-store), and the traditional c-store companies having a "Low-High" profile. Then everyone had to adopt a "High-High" strategy. In fact it was Dick Jensen, who made SuperAmerica probably the most successful High-High operator in the industry, who introduced the "Net Operating Cost" concept, which assigned a plus or minus number to each site that represented the amount in cents at which the site could sell gasoline above or below its rack cost and still break even. His aim was for SuperAmerica to have a negative number at each site, so that gas could be sold below cost and the site could still break even. This accounting system, now often referred to as "Margin need", has been widely adopted.

It will become even more important in the future, when convenience stores will have to be less and less reliant on motor fuel sales so that making the store cover the full site cost will become vital. This is likely to have quite a negative impact on some convenience store acquirers who have recently paid large multiples for companies whose results have been temporarily boosted by unusually high gas margins. These operators will have to find ways to make their stores more profitable to compensate for the disappearing gasoline margins. They, and everyone in the c-store industry, will only be able to continue to survive by understanding their customers and their competition, by being or becoming famous for something their customers want and by developing the tools to do it better.

Nobody said it would be easy!

Gerald Lewis is a semi-retired consultant who has served more than 300 convenience-store and oil companies at board level on five continents for over 40 years. He can be reached at (646) 215-7741 or [email protected].

JEFF KRAMER

Managing Director
[email protected]
(303) 619-0611

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