Jed Brewer’s quarterly economic forecast

January 1, 2010

Leading economist considers the global trading environments for convenience retailers.

Alan Greenspan titled his memoir ‘The Age of Turbulence’. This designation surely captures the essence of the past few years. For those of you selling petroleum, you probably remember 2008 as a time when your bank feared for the health of your business due to record fuel prices. Ironically in 2009, it was retailers who were afraid for the health of their bank.

2009 was a turbulent year for the global economy in many respects. In total, I would characterise it as a year in which we began the process of working off the missteps of the decades before it and the fallout from the financial crisis in September and October 2008.

Unemployment continued to rise throughout much of the year to disturbingly high levels in many countries. Asset prices remained depressed from their pre-crisis peaks. Interest rates persisted at historic lows in an effort to boost a weakened economy. Several large, notable firms who we once thought were largely invincible either closed their doors, were consolidated, bought out, merged, or saved by governments.

The public’s attitude toward business, especially toward large financial firms, shifted. Politics tended to be more rancorous and divisive than normal. Many governments engaged in massive deficit spending, offsetting private-sector deleveraging with increased government leverage. In some instances deteriorating government fiscal positions strained bond markets, most notably occurring in Dubai and Greece.

In 20 years, 50 years, and even 100 years, economists and historians will still be writing disproportionately about this period in which we have the opportunity to live.

What I find interesting about the last two years is how well convenience retailers weathered the turbulence in relation to the economy at large. Included below is a table showing the growth rate from the 12 months prior for a same-firm sample of 70 US convenience retailers operating roughly 3,750 stores. The most recent data is through October 2009. The data comes from the NACS/CSX/Study Groups Database and consists largely of my Study Group members.

Growth rate from:
First line: Nov 06/Oct 07 to Nov 07/Oct 08
Second line: Nov 07/Oct 08 to Nov 08/Oct 09

C-Store Merchandise Sales 5.3% 6.4%

C-Store Merchandise GP$ 7.2% 7.3%

Food service Sales 5.7% 5.7%

Food service GP$ 8.5% 6.2%

Inside Sales 5.5% 6.3%

Inside GP$ 7.6% 7.1%

GP$ = Gross Profit Dollars
Source: NACS/CSX/Study Groups Database; 70 same-firms operating 3,789 stores in 2009

As of October 2009 c-store merchandise gross profit dollars were up 7.3% per store from the 12 months prior; food service gross profit dollars were up 6.2% per store; and total inside gross profit dollars increased 7.1% per store. In 2008, c-store merchandise, food service, and total inside sales and gross profit dollars were up relatively similar amounts per store.

In contrast, US retail and food service sales economy-wide were down 8.5% October 2008 from October 2007 and were down 1.8% October 2009 from October 2008, according to the US Census Bureau.

I have not seen hard numbers for countries outside the US but anecdotal stories I’ve heard suggest small-format retail held up stronger than other retail and food service industries elsewhere too. This is something to be encouraged about.

As we look forward into 2010, I am not doom and gloom but I am not as optimistic about global economic advancement as some either. I expect the global economy to advance on balance in 2010 but it will be less robust than what we were accustomed to in the decades prior to the Great Recession. We will continue to work off bad debts in the private-sector and credit will remain impaired. Burdens will be placed on governments to balance budgets and some will have difficulty getting their fiscal house in order. I expect higher tax rates many places, perhaps more likely in 2011 than in 2010 as governments try to avoid stifling a muted, fragile recovery. Upward pressure may emerge on long-term rates in bond markets this year as governments issue trillions of dollars of new debt and monetary authorities ease off intervention in those markets. Short-term rates will likely remain low, which would imply a steepening of the yield curve. Consumers’ exuberance will be stronger than in 2009 but remain tempered and savings rates in the developed world will be higher than in the majority of the last decade. Savings rates in China and other relatively strong emerging countries probably will start a slow decline.

We need to be mindful in our turbulent environment that none of us knows the future and that downside risks remain significant. I am far from ready to say we have defeated the credit crisis and all our problems are behind us.

How will 2010 fare for convenience retailers? It is difficult to say with certainty. But given the performance the past two years, I am quite optimistic about its prospects. A key challenge for the industry as we move through the next decade will be to prove it is not merely counter cyclical but that it can grow at same rates or higher in more favorable general economic environments. Should consumers’ outlook and prospects pick up, determine what you need to do to continue to entice them into your store.

I wish you the best as we enter the second decade of the 21st century and meet head-on the challenges and opportunities it has to offer.

Dr. Jedidiah Brewer is vice president of FRMC, Inc. (www.studygroups.com)

Jed Brewer: optimistic about convenience