Foodservice is an increasingly important segment for convenience stores. In some cases, a separate, branded or unbranded, quick service outlet is created. In others, foodservice is provided on a smaller scale, served by the store’s cashier. Regardless of the scale, foodservice provides a welcome incremental revenue stream for businesses and enhanced product offering for customers.
Currently, many challenges are facing foodservice operators. These include supply chain challenges, food inflation, labour challenges, COVID-19 related operating restrictions to name a few. Convenience stores offering foodservices can turn some of these challenges into opportunities.
Supply chain challenges
Just like convenience stores, many foodservice operators are dealing with supply chain challenges. These challenges stem from COVID-19 related closures at manufacturers and distributors and are related to the labour challenges discussed below (i.e., warehouses and distributors are challenged recruiting and retaining employees). These issues have forced restaurateurs to modify menus as they deal with regular short deliveries.
Convenience stores have an advantage in this regard. Most of the foodservice product comes through the same distribution chain as the rest of the goods served. Further, except those with branded foodservice operations, convenience stores are able to freely adjust the menu to respond to product shortages. Having food available when customers are hungry is more important than what the menu offering is—as long as it is something they crave.
Food inflation is a challenge for foodservice operators. The University of British Columbia’s Food Price report forecasts the cost of food to increase 5% to 7% in 2022, after increasing 3.8% in 2021, and I believe the projected inflation may be understated. As a result of this and other inflationary pressures, restaurant operators are forced to increase menu prices. Prior to the pandemic, restaurant visits in Canada had been flat for many years, forcing revenue growth to come through price increases or taking market share from competitors. With changing traffic patterns and decreased spending, this does not bode well for foodservice revenues. Recent research shows that, with increased menu pricing, consumers are not seeing value for restaurant meals.
Convenience store operators have an advantage when it comes to menu pricing. Many of the costs restaurant operators face have already been absorbed by the store itself. The two greatest costs are cost of sales, which is 100% variable, and labour expense, where convenience stores have an advantage, as discussed below. This operating cost advantage also includes occupancy expenses (though foodservice sales must justify the retail space provided for these items) such as rent and utilities, typically the third greatest expense for restauranteurs. Given the operating cost advantage, convenience stores are not required to increase their menu prices by as much as restaurants to maintain the same margin. This can provide convenience stores with a pricing advantage.
Many businesses, including convenience stores, have historically been challenged in attracting and retaining employees. One of the most challenged industries from a labour perspective has been the restaurant industry. These labour challenges have been exacerbated as the economy recovers from the pandemic. Restaurant employees were furloughed in March 2020, and many found other work and don’t plan on returning to the industry. Restaurants are responding by reducing operating hours and menu offerings. The competition for staff is significant and has driven up labour costs, as restaurants compete by increasing hourly wage rates, offering signing bonuses and other benefits.
The convenience store foodservice model provides significant advantages from a labour perspective. Essentially, foodservices are provided without incremental labour. As most convenience stores utilize prepared foods, which just have to be heated, food production is minimal. The cashier is able to serve the food or it is self-serve. With no seating area, labour is not required to maintain tables, etc. (though condiment stations require maintenance). So, while convenience stores may struggle to find staff, they have a tremendous advantage over restaurants from a labour perspective, which results in greater margins, even when offering menu items at lower prices.
Throughout the pandemic, restaurants have been subject to among the most significant restrictions on their operations, the greatest being restrictions on indoor dining. Such restrictions have had a dramatic effect on restaurant revenues as increases in takeout and delivery sales have not kept pace with the reduction in indoor dining. Increasing off-premises consumption of food and beverage from restaurants was a trend prior to the pandemic and has accelerated ever since. Restaurants known for takeout and delivery, especially those with drive-thru, fared much better during the pandemic than those relying primarily on customers consuming meals on premises.
The convenience store foodservice model has an advantage in this regard as well. In almost all cases, food and beverage is consumed off-premises. As a result, the foodservice operations have not been impacted significantly.
Provision of foodservice is an excellent way to enhance convenience store revenues. Foodservice is typically a challenging business, with low margins. The convenience store foodservice model, however, has many built-in advantages. With sound quality and cost control procedures, it can generate incremental profitability and enhanced product offering for customers.
Jeff Dover's column originally appeared in the March/April 2022 issue of Convenience Store News Canada. Not a subscriber? Get these insights and more delivered to your inbox by signing up for the digital edition.