The Convenience Channel Market
to the Canadian Convenience Stores Association, the Canadian Convenience Industry includes over 23,000 retail locations and,
excluding automobiles, represents 8.6% of the total retail economy; the fifth highest category.
One in every three Canadians patronizes a convenience store every day. Convenience stores with gasoline
(NAICS 44711) sell an annual average of $3.2 million in motor fuel and $820,000.00 in merchandise per site.
In the sections below, we will examine three important trends:
1. Demographics Driving Demand in the Convenience Channel
2. National and Regional Economic Performance
3. Major Challenges to the Convenience Industry
Over time, the economic performance of all local retail markets move toward the national industry
averages. So, the economic trends for the industry as a whole reflect the long-term health of the subject
Important Demographic Trends
The low growth of the Canadian population is well documented. The retail economy is especially
dependent on demographics. Population growth and personal income are the two most important components
of retail demand. The Canadian population grew by 5% during the 5-year period between 2002 and 2007, or
an average of 1% per year. However, the growth was uneven across the provinces. The
Maritimes generally lost population while Alberta and the Yukon Territory grew because of economic expansion and Ontario and
British Columbia grew because of immigration.
population is projected to grow by 4% between 2007 and 2011, with Ontario experiencing a higher than average increase of 5%
during this period.
Consumer spending growth was high in 2007 and 2008 (4.5% and 3.4,
respectively), but this rate of growth has dropped sharply in 2009 and is expected to remain much lower to 2010.
Debt as a ratio to personal income has been increasing in recent years and the savings rate is much lower.
Total growth in spending was 14% between 2002 and 2007, of which 11.5% was due to inflations and
5% due to population growth. It is apparent that except for alcohol and personal care/health care products,
other product categories seem to have reached a stage of maturity. While spending on food has grown at
the same rate as inflation, spending on tobacco and lotteries has declined sharply. For a number of products
on which stores depend for growth and profitability, household spending is stagnating or shrinking.
Unemployment is forecast at 7.8% in 2010, higher than the 6% level in 2006. Inflation
is expected to remain about the same, at 2.3% in 2010.
the overall demographic trends in population growth and personal income indicate a challenging long-term economic environment
for the convenience industry. Slow population growth and reduced personal spending will likely cause
more consolidation in the convenience industry and reduce average net profits per store. We will examine
economic performance in the next section.
and Regional Economic Performance
In the 2006-2007 expansionary period,
retail sales in Canada were largely driven by residential development (construction, renovation and household appliances).
With current slowdown in manufacturing and weaker job creation, the data suggest than 2009 and 2010 retail sales will
be much slower. In 2008, the national average growth in retail sales was 3.4%. With
an underlying inflation rate of 3.3%, this essentially means no real growth in retail sales occurred in 2008.
For the past several years, the Western Provinces have outperformed the rest of the country. Saskatchewan
and Alberta experienced double-digit growth rates in retail sales in 2006-2007 and consistently higher growth rates in the
previous decade. Ontario’s retail sales growth rate has tracked with the national average.
Growth in convenience industry sales were forecast at 8.9% in 2008,
after a 10.1% growth rate in 2007. However, most of this increase is due to increases in the price of gasoline.
The quantities of gasoline sold have actually decreased.
the nation, convenience store sales per establishment averaged $1,756,024.00 in 2008. Higher numbers are
reported in the western provinces where the number of persons per store is higher. Ontario reported sales
per establishment of $1,725,056.00, nearly identical to the national average.
Convenience stores without gasoline sell on average $700,000.00 in merchandise, while convenience
stores with gasoline sell $820,000.00. The attraction of gasoline is estimated to account for 20% to 30%
of sales and customer traffic. With gasoline totaling $3.2 million in 2008, the total per site sales in
2008 were $4.1 million.
With 23,435 store locations across Canada, the geographic distribution
of stores closely follows the population totals. For example, Ontario and Quebec account for 62% of Canada’s
population and have 63% of the total convenience stores. The average store-to-population ratio is 1: 1,417.
Ontario closely follows the national average with one store for every 1,443 persons. In contrast,
the West has fewer stores. Alberta, for example, has only one store for every 2,157 persons.
So, industry growth opportunities are greater in the West than other areas of the country and stores in the West are
achieving higher sales and profits than stores in the Maritimes.
store size is 147 square meters. The average rent paid per store is $21,335.00 per year.
Sales per square meter of store area averaged $5,620.00 in 2008. Gasoline accounts
for about 72% of total sales for those stores that sell gasoline. While tobacco, lotteries and beverages
(excluding milk) account for the three largest merchandise sales categories, the three categories of tobacco, beverages and
confectionary account for 45.2%, or nearly half, of profitability. These products that contribute most
to profitability are declining or only growing slightly. To offset this decline, stores today must expand
by offering food service, or other products and services.
Gross margins for convenience stores with gasoline have been declining since 2004. As shown in Figure
1 below, gross margins for convenience stores with gas stations was 17% in 2004, 14.7% in 20066, and 12.7% in 2008.
The average gross profit per store was $66,129.00 in 2008.
Industry Gross Margins in Canada: 2004, 2006 and 2008
Source: Canadian Convenience Store Association
Net margins have experienced a decline also; 1.0% in 2004, 0.9% in 2006, and 0.9% in 2008.
However, the decline is not as pronounced as that of gross margins. The reason for this is the increasing
number of self-serve installations and point-of-sale (POS) technology which has reduced labor expenses. Labor
expense is the single-largest operating expense. In 2002, labor accounted for 79 of sales, and in 2006
was reduced to 6.1% of sales.
According to M.J. Ervin & Associates, throughput efficiency averaged 3.11 million litres per
year per site. The highest average throughput was in Ontario with 4.5 million litres per site while the
lowest was the Yukon Territory with an average of 285,000 litres per year per site. The contrast between
Ontario and Quebec is significant, with Quebec pumping only half the average volume of fuel per site as Ontario.
Even within Ontario the difference in throughput between metro and rural areas can be striking.
It is common for an outlet in Toronto to average 6-7 million litres per year, while a typical outlet in a small town
might have an annual average 1-2 million litres.
The number of gas stations in Canada peaked in 1989 at 20,360. A steady decline
has occurred since that time, averaging a loss of 2% per year, as shown in Figure 2 below. In 2008, 12,694
gas station locations were operating in Canada. This represents a 38% drop in number from 1989 to 2008.
Number of Retail Gas Stations Operating
in Canada: 1989-2008
Source: M.J. Ervin & Associates
Major Challenges to the Convenience Industry
The Canadian Convenience Store Association identifies three current issues as the most challenging for the
industry. These three issues are: Illegal Sale of Tobacco, Cost of Credit Card Transactions,
Tobacco accounts for 23% of the gross profit of a convenience store
and has the largest impact on profitability. Illegal sales and smuggling of tobacco are thought to cost
the average store a loss of in gross profits of $11,094.00 per year and a loss of 45 store visits.
Credit card transactions are growing in number and as the price of gasoline rises, the cost to the
convenience store operator goes up. Credit
card fees that the operator pays to the credit card companies, such as Visa and MasterCard, are based on a percentage of gross
sales. When wholesale costs increase, the total credit card fees rise even though the gross profit often
does not increase. This increased operating expense is reflected in lower net profits. Credit
card fees are usually in the top three highest operating expense categories (labor, utilities, credit card fees) paid by the
The third major challenge facing the convenience industry is hyper-regulation.
This applies to both national and local regulations, since each province adds its share of laws and regulations.
In some cases, certain high-potential products such as beer and prepared food are prohibited in convenience stores,
while allowed in competing retail channels. The convenience industry in Canada is also regulated by as
to business hours, minimum employee levels and sales to minors. The convenience industry believes its sales
potential and competitive position relative to other retail channels is limited by these regulations.
Every day one convenience store in Canada closes its doors. For non-growth markets,
such as Ontario, Quebec and the Maritimes, the demographic trends and challenges for the convenience industry will preclude
any substantial growth in sales and store profits over the next five years.
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