PART 2 - Facts and Fallacies

TROUBLING
TRENDS
FOR C-STORES?

KEEPING SCORE: A CRITICAL OFFENSIVE


By RICHARD A. MEYER

Many businesses don't know where they are now, so how can they know where they're going? I often preach that Chapter 11 should be Chapter 1 of the business school curriculum, because once we understand the kinds and quantity of information required in a bankruptcy filing (i.e., "list all known assets and liabilities"), we automatically begin to collect more and better data about our companies.

So where are we? Start the new year on the right foot by getting a complete picture of your company's financial position. Completing Figure 1 may help you to get a good picture of your financial position. It's designed to measure your company's performance over the last 12 months, give you a better understanding of how industry trends have impacted your business over the last two years, and provide you with the means to compare your company's results to NACS' latest State of the Industry data.

I originally developed this questionnaire to provide bankers and external board members with a "big picture" view of an often difficult-to-interpret industry. The reception to this format has been favorable. In one situation, when the data of the subject company was input, one banker commented, "This really shows the huge amount of cash that flows through the company"; an outside director said, "I wasn't aware we sell that much in money orders and lottery." In fact, many appreciate the way this questionnaire helps them highlight trends.

Many sophisticated companies have a top-level report that resembles Figure 1 with, perhaps, additional line items like net income, which I intentionally omitted. But if you're a c-store operator who hasn't enjoyed the benefits of doing a focused exercise like this, give yourself a New Year's present!

The chief goal of this exercise is to identify a c-store chain's most important business and financial characteristics, including:

* Results of operations - Trends in average merchandise sales and gallons of gas sold per store (lines 15 & 16) can often validate a company's policies related to re-investment in facilities and people.

* Employee retention - The rate of store manager and non-manager turnover (line 26) will indicate your level of commitment to effective training at the store level. Chances are good that the higher your turnover rate, the higher your shrink per store will be. (Examine this statistic on a store-by-store and region-by-region basis. Typically, the first review of these details serves as a clear indicator of why some stores prosper, while others are problem-prone.)

* Cash requirements - Most companies are ambitious about next year's capital expenditures. Looking back at actual additions over the past two years (line 32 - 35) can help you recall: (a) how long it takes to complete remodels of old stores and construction on new stores; and (b) the aggregate capital funding needed from working capital and/or new financing.

* Corporate overhead - In many companies, general and administrative expenses (lines 28 - 30) are too high on a per-store or percentage-of-sales basis. More companies are employing long-term methods to contain or reduce these costs, such as: (a) enhanced investments in modern information systems; (b) hiring additional professional management; and (c) challenging all costs that don't directly help the stores become better marketers.

* Marketing prowess - The product mix section (lines 36 - 45) shows that eight categories account for close to 80% of merchandise sales. In 1997, the tobacco and foodservice categories will remain our biggest challenges. Part I of this series (published in last month's issue of CSP Magazine) set out a number of concerns about the tobacco category. And with respect to foodservice, if your company is going too slowly to capitalize on the industry's increasing emphasis in this arena, you might be redirecting traffic to your competitors who jumped on the "brand wagon" more aggressively.


Counting customers. Traditionally, c-store operators (myself included) talk about an average of 800 customers per day entering convenience stores, and NACS reports average annual merchandise customer counts every year in its State of the Industry Report. But when we talk from that frame of reference, I estimate we're missing about 25% of our customers. The group not included in these tallies is gas-only customers. Since I recently surprised a group of retailers with this revelation, I'll quickly explain my findings to open dialogue and search for some answers.

Very simply, because increasing customer traffic is the top marketing priority of most chains, we need to refine our methods of counting customers! This may require a special NACS Task Force because the following fallacies could cause significant errors in the way we currently collect data:

* Combination customer - I recently confirmed that at least one popular POS system reports only (a) total customers (which is aggregate customer transactions) and (b) merchandise customers. The problem with the second statistic is that it consists only of customers who purchased merchandise alone. It doesn't include customers whose transaction was composed of a merchandise purchase and a gas purchase. Without the separate tally of the number of combination customers, retailers using this POS system may be presuming a higher average merchandise sale per customer.

* Lottery customer counts - I suspect that most POS terminals segregate lottery sales from merchandise sales by the use of a separate department key. What you'll want to verify, however, is how your POS system is accounting for lottery-only traffic. I recall that, over five years ago, one marketer's scanning system showed that less than 15% of their lottery customers purchased something else. We can only guess at how inaccurate customer profiles could result if our POS system is generating reports based upon GIGO (garbage-in/garbage out) data.

* Gas-only customers- Does anyone really know how many customers buy gas and something else? The operator who answers this question should get some kind of an award. A problem can arise with any automated tally of combined customers when consumers settle their gas transaction with a credit card and then pay for their newspaper and coffee (or other merchandise) with cash...and many do. When that happens, the newpaper and coffee transaction is rung as merchandise only and the gas purchase is rung as gas only, with the following inaccurate result: The POS system records two customers instead of one-- one merchandise-only and one gas-only transaction-- instead of a combination transaction.

Don't get frustrated over these data-integrity issues. We can take comfort from the fact that they've come to light only because our industry has become much more sophisticated at category management and information processing. And in the future, we can work together as an industry to improve our reporting standards. Then, as we measure ourselves versus the industry, we'll enjoy added confidence that we're using the same yardstick.

Figure 1: Your Company's Performance
LINE NO. ACTUAL
1994
ACTUAL
1995
PROJECTED
1996
EXPLANATORY
COMMENTS
1 Number of Locations:
2 Total all retail operation .............................. .............................. .............................. Equals total of locations with and without gas
3 Total gas operations at year end .............................. .............................. .............................. Excludes retail locations that do not sell gas
4 Average all operations during year .............................. .............................. .............................. Use this average for per store aggregate computations; e.g. line 15
5 Average gas operations during year .............................. .............................. .............................. Use this average for per GAS store relationships; e.g. line 16
6 Gasoline Data:
7 Total gallons sold .............................. .............................. .............................. Monitor your Gasoline Gross Profit Equalization Tables to maximize profits
8 Total gasoline gross profit dollars .............................. .............................. .............................. The person with the most gross profit DOLLARS wins!
9 Gross profit cents per gallon .............................. .............................. .............................. The 1995 industry average was 13.4 cents/gallon; up 1.4 cents/gallon from 1994
10 Sales:
11 Merchandise (line 11/4) .............................. .............................. .............................. Include foodservice sales, exclude money order & lottery sales (see note 3)
12 Gasoline (line 7/5) .............................. .............................. ..............................
13 Total Sales _______________ _______________ _______________ This total provides a "feel" of the company's aggregate financial dynamics
14 Per-store volumes (Annual): .............................. .............................. ..............................
15 Merchandise sales .............................. .............................. .............................. Industry average for 1995 = $748,000/year, $14,384/week, up 8.2% (note 3)
16 Gallons sold .............................. .............................. .............................. Industry average for 1995 = 972,000 gallons/year, 81,000/month, up 3.8%
17 Other Cash Flow Items:
18 Lottery/lotto sales .............................. .............................. .............................. Obtain data by location from Lottery Commission
19 Money order sales .............................. .............................. .............................. Number of items is informative; assume $100 per money order average
20 Depreciation & amortization .............................. .............................. .............................. Banks look closely at this major source of cash flow
21 EPA Cleanup (costs) (............................) (............................) (............................) Est cash flow used for remediation expenses, including reimbursable (note 4)
22 Store Payroll Statistics:
23 Total payroll .............................. .............................. .............................. Should be stores personnel only; Exclude G&A personnel from this line
24 Number W-2s .............................. .............................. .............................. A very revealing, informational number; i.e. to monitor turnover (Exclude G&A)
25 Average # of employees required .............................. .............................. .............................. Use average # of stores open (line 4) X average employees required per store
26 Annual turnover % - all stores .............................% .............................% .............................% Equals line 24 less line 25, then divided by line 25; industry average exceeds 100%
27 Corporate G&A Expenses:
28 Total expenditures .............................. .............................. .............................. Typically, about 60% of these costs are personnel related (salaries, benefits, travel)
29 Per-store G&A .............................. .............................. .............................. Line 28 divided by line 4; only the "lean and mean" will survive the next decade
30 Accounting + MIS cost per store .............................. .............................. .............................. Companies must commit to containing and/or reducing this cost with technology
31 Capital Expenditures:
32 New stores .............................. .............................. .............................. Include land, site improvements, building, and inside/outside equipment
33 Environmental capital coss .............................. .............................. .............................. Phase II related; Exclude remediation costs from this line
34 Other capital items .............................. .............................. .............................. Don't forget re-investment dollars for EXISTING locations
35 Total Capital Additions ______________ ______________ ______________ Evaluate if these aggregate funding requirements have been lined up
36 Product Mix - % of Purchases: IND AVG These 8 product groupings account for almost 80% of inside sales
37 Tobacco .............................. .............................. 27.4 NACS average gross margin for this category is 25%, up from 22% in 1994
38 Fast Foods .............................. .............................. 13.7 Includes fountain drinks, coffee, prepared and company-operated branded fast foods
39 Beer .............................. .............................. 11.7 NACS average gross margin for this category is 21%, down from 23% in 1994
40 Soda .............................. .............................. 10.0 NACS average gross margin for this category is 31%, unchanged from 1994
41 Milk & Milk Products .............................. .............................. 4.2 NACS average gross margin for this category is 23%, down from 25% in 1994
42 Candy and Gum .............................. .............................. 4.2 NACS average gross margin for this category is 43%, unchanged from 1994
43 Salty snacks (chips, nuts) .............................. .............................. 3.6 NACS average gross margin for this category is 34%, unchanged from 1994
44 Grocery .............................. .............................. 3.5 NACS average gross margin was 28%, and inventory turns were 8.1 vs 30% and 6.1 in 1994
45 Total - Top Eight Categories ============= ============= 78.3 Overall "Going in" gross profit was 30%, down from 31% in 1994 (see note 2)
NOTES: 1. Industry averages obtained from NACS 1996 State of the Industry Report published June 1996. 2. NACS clarified that their overall gross margin is BEFORE adding in rebates and commissions (on money orders & lottery sales) and BEFORE deducting inventory "shrink". 3. NACS confirmed that company operated branded fast food sales are included in these data; this could account for a large part of the total sales increase vs 1995. 4. For cash planning purposes, it is more conservative to include all outlays for remediation costs, with a disclosure as to the amount reimbursable from EPA funds, along with expected timing of repayment.

Article orginally appeared in Convenience Store People, vol 2 no.12, January, 1997