Wells Fargo: The c-store sector is entering a ‘new era of growth and sophistication’; serves as great incubator for new products

The only food retail channel to post positive growth in unit sales and dollar sales in 2012 compared with 2011, the c-store sector is also increasingly important as an incubator for new products, according to senior analyst Bonnie Herzog.

In a note produced after Wells Fargo’s first c-store forum in conjunction with the National Association of Convenience Stores (NACS) conference, Herzog said c-stores are entering “a new era of growth and sophistication”.​

She added: “We are encouraged by food industry innovation efforts and expect that the convenience channel, still small in terms of absolute contribution, can continue to deliver channel-leading rates of sales growth for US food. ​

“Further, our discussions lead us to believe that the convenience channel is increasingly important as an incubator for new products; successful consumer response here will likely translate into broader roll-outs of new products across the Food/Drug/Mass channel.”​

In terms of health & wellness, we were most impressed by Kellogg ​

So which food and beverage manufacturers are exploiting the opportunity most effectively? And which categories are growing most rapidly?

“In terms of health & wellness, we were most impressed by Kellogg​”, said Herzog.

“​2014’s innovation calendar includes K nourish hot oatmeal cereals and bars, and Bear Naked energy bars and trail mix. Also worth a note are single-serve Special K flatbread sandwiches will be rolled out and designed to move from the freezer to the microwave within c-stores.”​

Meanwhile,​ other new launches from Kellogg including Pringles tortilla chips and Krave treat bars (while less health-focused) also look poised for success in the channel, she added.

Energy drinks category returned to double digit unit growth for the first time this year​ in c-stores​

Looking at Nielsen data for the four weeks to September 28, there was strong growth from e-cigarettes, energy drinks and salty snacks in the c-store sector, she said.

“The energy category posted solid +7.2% dollar sales gains this period, up from last month’s relatively soft +4.3% growth, and returned to double digit unit growth for the first time this year.​

“This was largely driven by Monster, with +9.7% dollar sales growth up from +3.6% last period, and a significant improvement from Rockstar, which grew +9.4%, vs the seven prior periods which all had negative growth. ​

"The ongoing improvements the category​ has demonstrated in c-stores supports our continued belief in the importance of this channel to the energy category.”​

However, dollar sales of carbonated soft drinks (CSDs) excluding energy drinks were flat (+0.1%) and unit volumes down 4.8%, with growth from Coca-Cola offset by declines from Pepsi and Dr Pepper Snapple Group, said Herzog.

“The weakness of CSDs remains a major concern.”​

Mountain Dew + Doritos are found in more baskets together in America than peanut butter and jelly​

On the plus side, PepsiCo brands Mountain Dew and new Mountain Dew Kickstart continued to perform well while PepsiCo’s ability to pair these drinks with salty snacks works well in the c-store market, she said.

“​PepsiCo is clearly focused on the integrated model: Gatorade + Cracker Jack’d, Mountain Dew + Doritos – sold in the same basket to the same consumer. In fact, we learned that Mountain Dew + Doritos are found in more baskets together in America than peanut butter and jelly.”​

On a c-store mission: Morning Startup, Young & Hungry, Fuel & Hydrate?​

PepsiCo has also done a lot of work around segmenting customers and occasions in the c-store channel, she noted.

For example, the ‘Morning Startup’ customer grabs Quaker + Kickstart on the way to work; the ‘Young & Hungry’ Millennial goes for the ‘Doritos + Dew’ combo during the day; and the ‘Fuel & Hydrate’ grans a Gatorade + Cracker Jack’d on the way home.

One product we were excited to see was Coco Water Kids​

At Coca-Cola meanwhile, new Minute Maid and VitaminWater drops look promising and will serve as “a means for Coca-Cola to participate further in the fast growing water category”​, she added. 

"As long as Coca-Cola is able to limit cannibalization to existing packaged offerings, we think VitaminWater drops could be a strong new entry to the category."​

As for Dr Pepper Snapple Group, she said: “One product we were excited to see was Coco Water Kids, a juice/coconut water blend targeted at kids. We think this is a promising new product in a healthy and growing sub-category.”​