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increasing convenience store net profits

Updated on August 4, 2015

Introduction

The ability of a convenience store to grow the net profit or bottom line is dependent on managements ability to do a better job in one or more of the following areas.

  1. increase profitable sales

  2. Increase the gross profit on existing sales

  3. Reducing expenses at the store

Most convenience stores work the most on reducing expenses for the store. The problem is that you can only reduce expenses so far, where the ability to increase sales is much broader. Increasing the gross profit for the store requires a lot of creative imagination. You need to start first where you have the most ability and proceed from there. However you need to keep all three areas in mind as you progress.

Increase sales

The ability to increase sales is probably the best way to increase net profits. When you are building a new convenience store one of the easiest ways to increase gross sales is by adding a drive thru. A drive thru will increase sales over the longer term, because it is what the younger crowd is used to. In their hurried lifestyle they are very used to getting their food from drive thru's. Over a period of time you can increase the items served by food service, and the drive thru is very important to continued growth in food service sales.

The second way to keep increasing sales is by allowing customers to order online. Again this fits in both with the younger crowds hurried lifestyle, and as the years go by will keep increasing sales. When customers order online they can pick up at the drive thru in a hurry without leaving their car. Also when they are filling up at the gas pumps they can place their order online, and then pick the order up at the drive thru as they leave without getting out of their car. There is now an application called open store by gas buddy that offers the convenience of ordering through a mobile app for convenience stores.

The third way to increase sales over a period of time is by creating a hyper convenience store. This store would have about 5,000 sq ft, and would include many popular grocery items.

This idea is based on the fact that most grocery shoppers spend about 40 percent of their grocery budget during the week picking up the spare grocery items needed. The problem that most of them incur is that they don't want to go into a 50,000 sq ft supermarket to pick up one or two items. It would be much easier to order the items online and pick up the items at the drive thru, or go into a 5,000 sq ft store and quickly grab the items at the checkout area.

Some of the items are already carried in the convenience store such as milk, beer, packaged soft drinks, and salty snacks. To this you would add other top ten selling grocery items such as hot and cold breakfast cereals, laundry detergent, frozen foods, cheese, eggs, bread, and peanut butter and jelly. The store would also include an assortment of canned goods some paper goods items and other necessary items. This would make the store convenient for shoppers during the week when they only need a couple items.

When we talk about increasing sales we purposely avoid items like cigarettes and gasoline because they are items that will decrease in use over time. Next we will look at ways to increase profi




Increasing profits

The first way we will consider for increasing profits is by using cross merchandising. This is where you take a higher profit item and merchandise it along with a lower profit but popular item. For C-stores this could include buying a higher profit car wash, and then getting a discount on the price of gasoline. You could also tie the sale of higher profit items inside the store to a discount per gallon on gasoline. There are many others that could be used in cross merchandising, but you get the general idea.

The second way to increase the gross profit at a convenience store is by placing the major emphasis on higher profit areas in the C-store. The food service area is the highest gross profit area in the convenience store. Yet when we look at major sales areas for convenience stores they are concentrated in low profit sales areas. Fuel sales are 75 percent of total sales at most C-stores, and cigarettes are another 10 percent of sales. That means that 85 percent of total sales are concentrated in low profit areas. Yet they continue to offer low prices in these areas to try to get more customers into the store.

We need to change our merchandising to where you are offering discounts on gasoline only when it is tied to the sale of higher priced items in the store or the sale, or to a savings on the expense side. We will look at this further under reducing expenses.


reducing expenses

Reducing expenses is one of the most popular ways to increase profit for most small businesses. The two biggest expenses for most convenience stores are the labor costs, and the debit/credit card processing fees. So these two expenses are where we can retain the most net profit by reducing these two costs.

The first one to consider is the labor costs. What we need to combat is the high turnover in labor at convenience stores. The average turnover in labor is over 100 percent each year at most convenience stores. The idea is to get rid of the worst producing employees, and then figure out ways to retain the good producing ones.

You need to be a lot more careful in your hiring practices to only obtain personnel that can be trained to be good workers. They are then placed on a probationary period to further scrutinize their abilities to do the work required. Do they have a personality that is well accepted by most customers, do they work steady without excessive watching, do they actively watch customers to prevent shoplifting, or are they to busy talking to do the jobs required. When you have a good crew of workers you then need to figure out how to compensate them to keep them as happy employees.

The second area to consider is the debit/credit card processing cost, which is the second largest expense behind labor costs. At the start there needs to be a difference in cost per gallon between sales by cash and sales by debit/ credit card. Since about 75 percent of your gross sales are fuel this is where you can make the most difference in the processing fees. It is all to easy to quickly run to the gas pump, insert your card, pump gas and then leave. You need to break this cycle by first charging extra to buy gas by card, and second installing cash receptors so customers can pay by cash at the pump. There then needs to be about a five cent discount for paying by cash.

The longer term solution would be to offer customers the ability to pay by ACH payment mode. The cost is much cheaper and there are now companies that offer ACH payment, and the ability to tie this type of payment to the stores loyalty cards. Over the longer term you would be able to offer your customers the ability to pay three ways. They could pay with the loyalty card or cash and get the cheaper price, or pay with a debit/credit card and pay about five cents a gallon more. This offers your customers a choice based on your costs.

Other ways to reduce costs are by reducing your electricity bill which for most stores are high cost. This is caused by the large amount of lighting, and the very large amount of refrigeration. When building a new convenience store the lighting needs to be by LED bulbs as much as possible to save money on your electric bill. For new convenience stores you need to seriously consider installing solar photovoltaic panels on the roof, and the canopy to lower your electric costs. When considering refrigeration you need to look for the most efficient models even though they may cost a little more, because of the saving on electric costs. These are just a few of the ways you can reduce expenses an bring more of your stores gross profit to the bottom line.


Summary

As we have examined there are three different means of increasing the net profit of your convenience store. As an owner you need to closely study all three. The best chance for increased net profit comes from the first two. However reducing expenses can also add to the bottom line. All three can add to the bottom line and need to be carefully analyzed.

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