Down on the corner

Many Canadians drive past one or more convenience stores on their way to do their weekly grocery shopping. So at first glance, a new report that says convenience stores are in trouble seems to be good news for grocers. Not so fast. A lot of the challenges besetting convenience stores, including lost sales from contraband tobacco, rising taxes, credit card fees and minimum wage hikes, are also plaguing grocers.

The Canadian Convenience Stores Association’s “2010 State of the Industry Report,” released last month, paints a grim picture of the nation’s corner stores. Close to 2,300 outlets were shuttered last year, an average of six closures per day, leaving just over 23,000 standing. As if that weren’t bad enough, profitability amongst those remaining is pitiful, with average net income working out to just 1% of sales. And things are not likely to get better soon. Industry sales are expected to grow slower than inflation during the coming years.

Not surprisingly, the hardest hit corner stores have been the independents. “Many are closing or aligning themselves with national chains. There is a danger that over the longer term the small-town, family-owned convenience store could go the way of the old family-owned drugstore,” says Dave Bryans, president of the CCSA.

While the CCSA report offers excellent generalities, the picture can vary from province to province. For example, according to Jay Choi, a recent Korean immigrant who bought a convenience store in the Montreal suburb of Dorval last year, his business has been quite good, with profits far above the industry average. “It’s a lot of work,” admits Choi. “But we are lucky because here in Quebec we are allowed to sell beer and wine in the stores, so that keeps traffic up.”

According to one marketing expert, the plight of convenience stores could be good news for other channels, though not necessarily just grocers. “If consumers no longer stop off at their local corner store to buy cigarettes, due to growing competition from contraband tobacco, then those stores will also lose a lot of the ancillary sales,” says Michel Laroche, a professor at Concordia University’s John Molson School of Business. “For example, pharmacies and drugstores have really expanded their food offerings in recent years, and in some neighbourhoods, such as mine in Mount Royal , many convenience stores have given up.”

Although convenience and grocery stores operate using different business models, the two industries face broadly similar challenges. This is particularly true on the regulatory front. For example, the introduction of new sales taxes in some provinces and municipalities (on tobacco, gas, lottery), overall tax increases and stricter regulations hurt profits in both industries. Both industries are also hurt by increases in the minimum wage rate, which the report estimates costs convenience stores $100 million each year. The recent hike in credit card fees alone cost convenience stores $50 million last year, a move that spurred the CCSA to align itself with associations in various other business sectors to pressure the large credit card companies to ease up on their high fees.