Industry Confidence Flat in Fourth Quarter

Convenience store retailers and petroleum marketers reported a slight increase in confidence in the fourth quarter of 1999 compared to the third quarter, according to a quarterly index compiled by Franchise Finance Corporation of America (FFCA) exclusively for Convenience Store News. The industry Confidence Index for the fourth quarter was 126.8, up negligibly from 126.0 in third quarter.

The Index is scaled from 0 to 200, with 0 indicating all respondents answered the questions negatively, while 200 indicates all responses were positive. An index of 100 would represent an overall weighted neutral response to the survey. This quarter, 302 retailers participated in the telephone poll, with 81.5 percent having both c-store and retail gasoline operations.

Overall industry confidence began slipping noticeably in the third quarter of 1999 compared to prior quarters. With unemployment low and the economy entering its 107th month of expansion, consumer demand for convenience is high. However, gasoline margins remained tight in the fourth quarter, which contributed to a flat confidence index.

Current business conditions. Operators' confidence regarding current business conditions is only slightly positive, dropping to 115.9 in the fourth quarter from 126.5 in the third quarter. High oil prices contributed to lower gasoline margins in the fourth quarter, which decreased confidence, with gasoline prices increasing 3 percent in the fourth quarter. In addition, the cold winter, which started out mild, has increased demand for heating oil, decreasing supply available for motor fuel, further pushing up gasoline prices. With low unemployment, labor continues to be a concern, and wages at gasoline stations increased 4.3 percent in 1999. On a positive note, the Conference Board's Consumer Confidence Index was strong in November and December, and reached an all-time high in January 2000. Overall consumer spending increased 6.9 percent in 1999.

Expected business conditions. Operators were more positive regarding expected business conditions over the next six months than they were in the third quarter, with the index increasing to 130, compared to the third quarter's 112.9. The increased confidence is most likely related to the booming economy. Other economic factors contributed to the increase ? retail sales at gasoline stations increased 4.1 percent over the third quarter of 1999 (seasonally adjusted), and inflation increased only 2.2 percent in 1999.

Expected same-store sales. As in previous quarters, the majority of operators expect same-store sales to increase within the next six months. The index for this category increased slightly to 143.1 compared to the third quarter's 141.2, but is still down from the high expectation expressed in the first and second quarters of 1999. Most operators expect to improve their sales in part because of their positive outlook for future business conditions, which differs from previous quarters. Gasoline and cigarette price increases are significantly contributing to expected same-store sales increases. According to the Bureau of Labor Statistics, gasoline prices increased 9.3 percent in 1999, while cigarette prices increased 31 percent. However, margins have not increased proportionally.

Expected operating earnings. Retailers showed a slightly positive stance toward expected operating earnings, indicating they are beginning to be cautiously optimistic after the third quarter's margin squeeze. Operators are less confident in an increase in operating earnings for the next six months than for an increase in same-store sales. The outlook for expected operating earnings increased to 107.6 this quarter, from the third quarter's all-time low of 99.7. Many operators are attempting to reduce their reliance on gasoline margins and lower their breakeven-cents-per-gallon margin. For the 35 percent of operators that expect higher operating earnings, the majority (77 percent) anticipate the increase will come from existing operations rather than new stores.

Expected expansion. C-store operators' optimism about expansion dropped noticeably in the fourth quarter to 137.4 from the third quarter's 149.7. Only 43 percent of operators expect to expand this year, of which 66 percent will do so through new construction and 34 percent primarily through acquisitions. The industry continues to consolidate, with stronger operators purchasing weaker operators or other operators' non-strategic assets. Notably, nearly 46 percent of operators planning expansion in 2000 anticipate doing so through combined c-store and gasoline operations, while 44 percent anticipate expanding through combined c-store, gasoline and fast-food operations.



Based in Scottsdale, Ariz., FFCA is a specialty finance company for the chain restaurant, convenience store and petroleum marketing industries.