C-store foodservice is a silver lining in today's market

Times are tough in the restaurant industry. In January 2024, Restaurants Canada released the results of a survey of members that reported: “53% of restaurants are operating at a loss or barely breaking even, compared to 10% pre-pandemic.” Restaurants are challenging to operate at the best of times, with an average pre-tax profit for foodservice operations in Canada of 3.7% (from Restaurants Canada Foodservice Operations Report 2023).  

The Canadian restaurant industry’s challenges are likely to continue through 2024, as the two biggest expenses (cost of sales and labour) continue to increase. While overall inflation is decreasing (3.4% year-over-year December 2023), food inflation was 4.4% in the same period, indicating the price of food is still increasing greater than all items. Also, restaurants are challenged in recruiting and retaining labour, more so than other service industries, and, as a result, are paying more for labour than they have in the past. 

Coming out of the pandemic, consumers’ pent-up demand for entertainment and “revenge spending” benefitted restaurants, with people willing to pay more when dining out and accepting menu price increases. The most significant indicator of foodservice spending is consumer confidence and, unfortunately, Canadian consumer confidence recorded its second-lowest score in history in November 2023, the most recently released data. People are cutting back on their spending on away-from-home food, which is adding to restaurants’ challenges. 

What’s worse, these restaurant operating pressures are not expected to improve in the short- to mid-term by even the most optimistic prognosticators. Tough times will continue for a while.

Consumers are dining out less and, when they do, are spending less. People are seeking value when patronizing foodservice operations.

Cost advantages

As discussed in my previous columns, there’s a significant cost advantage that convenience store operators have with respect to foodservice. In most cases, foodservice can be provided using little, if any, incremental labour. One of the two biggest expenses in a foodservice operation is labour, the other is cost of sales, which is (almost) 100% variable. The next biggest cost in a typical foodservice operation relates to occupancy expenses, which, in most cases, are not significantly incremental for convenience store operators. All other expenses are minimal. 

There are several ways to take advantage of these benefits.

• Maximize the labour cost advantage. Ensure that menu items are not labour intensive, but rather purchased ready-to-serve or ready-to-heat-and-serve. 

• Products should hold well (to minimize waste) without compromising quality. 

• Foodservice should be located close to the cashier so that any service required can be done by existing employees. 

• Cleaning and closing the foodservice area at the end of the day should be considered: Choose less labour-intensive menu items.

• Limit foodservice space to maximize the occupancy cost advantage: i.e. No seats (in many jurisdictions having seats requires offering public washroom facilities). 

• Select menu items that are portable and easy to consume while walking or driving.

TIP: If you can, use a Merrychef-style oven to heat your product, as these tend to produce great quality menu items. Before investing in equipment, determine the return on investment (make sure your sales of heated product is significant enough) and, given the challenges in the traditional foodservice industry, consider used equipment, which is plentiful and priced attractively.

Pricing

Consumers are seeking value, and, with cost advantages, c-stores can set lower prices than traditional foodservice operators. Do a survey of prices at fast-food restaurants in your area and set your prices below, while still ensuring a healthy profit margin. Traditional foodservice operations mark up menu items by 65% to 70%. A convenience store can afford a lesser mark-up—50%—resulting in lower prices and greater value for the consumer, as well as a healthy profit.

TIP: When determining mark-up and pricing, consider the full cost of the menu item, including packaging and condiments. Add more value by offering combos with other products already in your store, such as bottled beverages and potato chips.

Remember, the recommendation is lower prices for menu items of similar quality to your fast-food competitors. In most cases, I would not recommend using low quality products to minimize prices.

The challenges faced by traditional foodservices are significant and ongoing. In the wake of fast-food competitors being forced to take price increases at a time when consumers are seeking value, convenience stores are well-positioned to take advantage. Every cloud has a silver lining.