Canadian c-store profitability: 6 ways to protect margins amid rising costs

Rising inflation, fuel surcharges and supplier price hikes are squeezing convenience store margins across Canada. Simply raising prices risks alienating loyal customers, while ignoring small cost increases gradually destroys profitability. To stay competitive, Canadian convenience and gas operators need a modern, data-driven strategy for margin management, smart pricing and real-time expense tracking. 

Here are six best practices to consider.

1. Establish clear margin targets

Every retailer should establish margin targets for individual SKUs, product categories and the store overall. These targets provide a benchmark against which pricing and profitability can be measured.

There are several approaches to establishing retail prices. Take regular-sized chocolate bars, for example. A retailer may decide to establish one consistent selling price across all regular chocolate bars, regardless of slight differences in acquisition costs. Alternatively, the retailer may apply a specific margin target to each individual SKU, resulting in different retail prices.

The approach will depend partly on the sophistication of the store's point-of-sale (POS) system.

If the POS system allows individual product scanning and SKU-level pricing, retailers have greater flexibility to establish prices based on individual product costs. Stores relying on open department or category keys may need to adopt a more standardized category pricing approach.

Regardless of the method, the objective is to establish clear margin expectations and consistently measure performance against them.

It is also important to understand the difference between margin and markup, as confusing the two can result in retail prices that fail to deliver the intended profitability. (see definitions and an illustration at the end of this article)

2. Monitor competitor pricing

While protecting margins is essential, retail pricing cannot be established in isolation.

Conduct regular retail price surveys of key competitors to understand their pricing strategies and identify where your store sits within the local marketplace.

Pay particular attention to high-volume, price-sensitive products that customers purchase frequently and are more likely to use when comparing stores.

Not every product needs to be priced below the competition. In fact, attempting to be the lowest-priced retailer across every category can unnecessarily sacrifice profitability.

The goal is to maintain a competitive overall price perception while ensuring individual categories contribute appropriately to the store's financial performance.

3. Establish a process for identifying supplier cost increases

One of the most important disciplines in margin management is identifying cost increases as soon as they occur.

Some suppliers implement annual price increases, making them relatively easy to anticipate and manage. Others, particularly wholesalers, pass through manufacturer increases as they become effective. These adjustments can occur throughout the year, sometimes resulting in weekly changes across multiple SKUs.

Without a formal review process, these increases can easily go unnoticed.

A best practice is to review supplier invoices as soon as shipments arrive, comparing current costs against previous purchase prices. Any significant increases should be flagged for review and potential retail price adjustments.

Retailers may choose to hold price changes until a predetermined date, such as month-end, rather than continually changing shelf prices. This can simplify store operations, but it is important to recognize that every day a higher cost is not reflected in the selling price, margin compression is occurring.

Consider a simple example:

A product with a cost of $2.00 and a retail price of $3.00 generates a gross margin of 33.3%. If the supplier increases the cost to $2.20 and the retail price remains unchanged, the margin falls to 26.7%.

That seemingly small 20-cent increase has reduced the product's gross profit by 20%.

Multiply this scenario across hundreds of SKUs, and the impact on overall store profitability can become substantial.

4. Look beyond the product cost

The unit cost of a product is not always its true acquisition cost.

Retailers should carefully review invoices for additional charges that may be impacting profitability. Fuel surcharges, delivery fees, minimum-order charges and other supplier-related expenses can increase the actual cost of bringing products into the store.

These additional costs are sometimes overlooked because they appear as separate invoice line items rather than being incorporated into individual product costs.

However, they still impact the store's overall gross profit.

Where appropriate, these expenses should be factored into pricing and margin decisions to ensure retailers have an accurate understanding of their true cost of goods.

5. Take advantage of manufacturer promotions and buying opportunities

Manufacturer promotions can provide an excellent opportunity to improve margins without increasing retail prices.

For example, a manufacturer may offer a temporary cost reduction when a retailer purchases a specified quantity of a product. If the retailer maintains the everyday selling price, the reduced acquisition cost translates directly into additional gross profit per unit sold.

However, buying more simply to obtain a lower cost is not always a sound business decision.

Retailers should consider product velocity, available storage space, cash flow and expiry dates before committing to additional inventory.

The objective is to purchase quantities that can reasonably be sold within the product's shelf life without creating unnecessary waste or tying up working capital.

When managed properly, promotional buying can be an effective strategy for offsetting rising costs and improving overall category profitability.

6. Use retail promotions to drive penny profit

Retail promotions remain an important tool for encouraging purchases, increasing basket size and generating customer traffic.

However, promotions should be evaluated based on their contribution to overall gross profit, not simply the increase in unit sales.

One effective approach is to develop multi-unit promotions that encourage customers to purchase more than one item.

For example, a product regularly selling for $2.49 might be promoted at two for $4.50. Although the gross margin percentage is reduced, the promotion may generate greater total penny profit if it successfully encourages customers who would normally purchase one unit to purchase two.

The key is to understand the relationship between promotional pricing, expected sales volume and total gross profit dollars.

A promotion that generates impressive sales volume but delivers little incremental profit may not be contributing positively to the business.

Retailers should evaluate promotional results and use that information to guide future pricing and merchandising decisions.

Managing retail margins in an environment of volatile costs requires discipline, consistency and a proactive approach to pricing.

Retailers must continually monitor supplier costs, understand the impact of additional operating expenses and make timely adjustments to retail prices. At the same time, they must remain mindful of consumer price sensitivity and the competitive landscape.

The objective is not simply to increase prices whenever costs rise. It is to make informed pricing decisions that balance competitiveness, sales volume and profitability.

Most importantly, remember that sales growth does not automatically translate into profit growth.

A store can generate higher sales and still experience declining profitability if margins are allowed to deteriorate.

By establishing clear margin targets, monitoring costs and regularly reviewing retail pricing, convenience retailers can protect their bottom line and position their businesses for sustainable, long-term success.

The bottom line: Margin management requires constant attention

Managing retail margins in an environment of volatile costs requires discipline, consistency and a proactive approach to pricing.

Retailers must continually monitor supplier costs, understand the impact of additional operating expenses and make timely adjustments to retail prices. At the same time, they must remain mindful of consumer price sensitivity and the competitive landscape.

The objective is not simply to increase prices whenever costs rise. It is to make informed pricing decisions that balance competitiveness, sales volume and profitability.

Most importantly, remember that sales growth does not automatically translate into profit growth.

A store can generate higher sales and still experience declining profitability if margins are allowed to deteriorate.

By establishing clear margin targets, monitoring costs and regularly reviewing retail pricing, convenience retailers can protect their bottom line and position their businesses for sustainable, long-term success.

Understanding the difference between margin and markup

Although the terms are sometimes used interchangeably, margin and markup are two very different calculations and confusing them can result in retail prices that fail to deliver the intended profitability.

• Markup is the percentage added to the cost of a product to establish its selling price.
• Gross margin is the percentage of the selling price that remains after deducting the product's cost.

For example, consider a product that costs a retailer $2.00 and sells for $3.00.

While the retailer has applied a 50% markup, the actual gross margin is only 33.3%.

This distinction is particularly important when establishing retail prices based on margin targets. If a retailer wants to achieve a 40% gross margin on a product costing $2.00, simply adding 40% to the cost will not achieve that objective.

The correct calculation is:

Retail Price = Product Cost ÷ (1 − Target Margin)

$2.00 ÷ (1 − 0.40) = $3.33