Eastern Philosophy

Doing business where the Revolutionary War was fought, c-store operators in the Northeast can trade battle stories with the best of them. But far from battle-weary, these retailers and their trade associations are creatively and aggressively tackling industrywide challenges: tobacco regulations, new cross-channel competition, below-cost sellers, environmental issues and labor concerns.

"The overarching issue in New York is profitability, partly because of the issues every other c-store retailer in the country is facing," said Jim Calvin, executive director, New York Association of Convenience Stores (NYACS), based in Delmar, N.Y. "On top of those, we have a wave of new taxes, regulations and policies specific to New York."

The same might be said for any state in the union ? and retailers across the country could learn from their colleagues in the Northeast. In the area of tobacco sales alone, for instance, Northeast retailers are deftly handling a complex ball of interrelated problems: sales fluctuations from increasing disparities in state excise taxes, minimum pricing laws, sting operations and questionable use of state tobacco funds.

Indeed, even a quick look at the pressures on New York's tobacco retailers is eye-opening. Last March, the state doubled its excise tax on cigarettes to $1.10 per pack, now the highest in the nation. "All other things being equal, the increase would not be a problem. But in New York, all things are not equal," Calvin said.

Like retailers in many other states, New York's c-store operators face border competition charging substantially lower excise taxes (Pennsylvania's is 31 cents a pack, Vermont's is 44 cents) and Native American reservations charging and paying no excise tax at all. "We are seeing a tax-evasion stampede by c-store customers across the border, to the reservations and to the Internet," Calvin said.

Since cigarette customers frequent c-stores more often than non-cigarette customers and buy more than cigarettes, this has impacted New York c-store sales severely. "Some of our members are reporting a loss of 30 to 60 percent of their cigarette volume compared to a year ago. State policy has put them in this dilemma."

Calvin wants state legislators to recognize the severe economic harm neighborhood stores have suffered because of the tax hike, then require all tobacco retailers to collect the state excise tax. NYACS also wants the state to consider tax credits, partial exemption of cigarette-tax collection and opportunities to sell additional products.

Last year, Gov. George Pataki signed a law banning cigarette sales to consumers via the Internet, telephone or mail order. The law also prohibits common carriers, such as UPS and Federal Express, from knowingly transporting cigarettes to consumers. However, a federal judge ruled in favor of Brown & Williamson Tobacco Corp., which challenged the law, and issued a temporary restraining order blocking its enforcement. Judge Loretta Preska said the tobacco company is "likely to be able to prove that the statute discriminates against interstate commerce" and, therefore, violates the U.S. Constitution. At press time, the dispute was not settled.

Like New York retailers, operators in other states are dealing with increasing excise taxes and border issues. Connecticut, Massachusetts, Rhode Island, Vermont, Maine and New Hampshire are facing a coalition of anti-smoking groups looking for a 50-cent increase in the tobacco excise tax in each of those states, "which would then negate the cross-border sales problem as an argument against it," said Lyanne Cochi, director of government relations for the New England Convenience Store Association (NECSA), based in Norwood, Mass. "This will definitely be an issue in each of those states, but it will be handled slightly differently in each. The governor of Maine (Angus S. King Jr.), for instance, said he would not support a 50-cent increase, but might consider a 25-cent increase."

Gov. Jeanne Shaheen of New Hampshire may consider another tobacco tax increase, said John Dumais, president and CEO of the New Hampshire Grocers Association (NHGA), who noted the new state Senate president owns two convenience stores. "There also has been talk of funding for an education crisis we've had for some time, so the legislators are looking at either a sales tax or income tax. We have neither now," he said.

Meanwhile, further down I-95, Maryland retailers beat back a suggested $1.50-per-pack increase a couple years ago. The following year, a $1 increase was proposed. That was whittled down to a 30-cent increase, which passed. "Since then, we know Maryland [cigarette] sales are down," said Peter Horrigan, president of the Mid-Atlantic Petroleum Distributors Association (MAPDA). "The majority of those sales were lost to other states. Seventy-five percent of retailers in Maryland are within five miles of a border."

Low Cost or Below Cost?

Also affecting the tobacco category in some states are minimum-price laws. New York's Cigarette Marketing Standards Act (CMSA), for instance, places minimum markups on manufacturers, wholesalers and retailers. Under current law, retailers operating fewer than 15 stores pay suppliers a higher wholesale price than larger chains do, Calvin noted.

What's more, last year, the state reinterpreted the CMSA, no longer allowing retailers to use manufacturer promotions to price cigarettes less than the state minimum. "Many of our members used the buydowns to price more competitively with the reservations and other states' stores," said Calvin, who is hoping for an amendment that will allow the use of buydown money to lower retails.

Questions of state-mandated minimum pricing and below-cost sales aren't limited to the tobacco category, though. Last summer in New England, beer retailing became an issue when wholesale clubs and supermarkets sold beer at a price less than a distributor's price to the average c-store operator, according to NECSA's Cochi. "When Stop N Shop or Shaw's sells a 30-pack for $9.99, and a c-store is buying it for $13 from the distributor, how can they compete?"

A bill was introduced in New Hampshire that would ban below-cost beer sales. "I have no idea how that bill will ultimately look. But below-cost beer sales in supermarkets has retailers bypassing their distributor and buying 100 cases from the supermarket. If this continues, it will destroy the three-tiered system," Cochi said.

Meanwhile, supermarkets and big-box stores' entry into the fuel market spurred talk of below-cost sales and a state-mandated minimum in the gasoline category. While not as widespread a practice as in the Midwest or South, supermarkets, wholesale clubs and other retail channels in the Northeast are testing the gasoline-marketing waters. Heating up the talk was Wal-Mart Stores Inc.'s late-October announcement of an agreement with Sunoco Inc. to operate up to 100 retail fueling facilities and c-stores at Wal-Mart properties in nine Northeast and Mid-Atlantic states.

A below-cost selling law for fuel has been proposed in New York, in anticipation of new competitors "who might be inclined to undercut pricing," Calvin said. "So far the Legislature has not been receptive to the idea. Supermarkets and big-box stores only in the past couple months have begun to infiltrate New York. We have not felt the full brunt of that trend. But they are a big concern."

While some New England fuel retailers "would love to see minimum price legislation, those who are not facing big boxes selling gasoline don't want to be told what to price their gasoline for," NECSA's Cochi said.

The Maine Oil Dealers Association is backing legislation that would clarify the definition of below-cost selling of motor fuels and make it easier for marketers to bring a case to court. "We want to lower the burden of proving intent," Guiford said.

In Pennsylvania, PCSC President David McCorkle said that recent discussion of below-cost fuel marketing and minimum prices hasn't led to any state-sponsored regulation. "We don't see the need for legislation," he said. "The current marketplace practices are providing the lowest possible prices to consumers. Federal laws control predatory pricing and while the debate will go on, we feel federal statutes are adequate to control any problems [associated with below-cost selling]."

Although Maryland has a below-cost selling law on fuels, it has no marker price to determine if a marketer is selling below cost. "We have proposed using the OPIS [Oil Price Information Service] average as the marker price," MAPDA's Horrigan said. "The issue has always been the definition of cost. We thought the lowest wholesale price in the market, which changes each week, would be a good marker."

Farther north, the fuel-marketing trend has not spread. For example, Vermont has only four Wal-Marts and one Costco in the entire state, and big-box and supermarket fueling has not caught on ? yet. "Costco tried, but permitting became an issue," noted Jim Harrison, president of the Vermont Grocers Association, based in Rutland. "Clearly, we are likely to see it at some point."

Shaw's supermarkets experimented with selling gasoline at stations in Maine and Massachusetts, but it "didn't work," noted NHGA's Dumais, who said BJ's wholesale clubs sell gasoline at "a few locations" in New Hampshire, but his members "haven't made an issue of it."

The prospect of deep gasoline discounts, however, concerns Puffin Stops' Peters. "Because of its size and population, Maine already is a difficult state in which to sell gasoline," he said. "Our investment in a retail site, with the exception of land costs maybe, is the same as one on a great corner in New York. The difference is we don't have sites selling 3 million gallons a year. We couldn't make up in volume what we lost in margins if we tried to compete with a discounter."

In Rhode Island, "all of the new Stop N Shops are being built with gasoline," said Anita San Antonio, president of the Rhode Island Food Dealers Association (RIFDA) in East Providence, who added there has been "no talk" of below-cost-selling legislation.

Other fuel-related issues across the Northeast include drive-offs, the sale of MTBE and local State II compliance programs. Both PSCS and MAPDA, for instance, are seeking new drive-off laws, which would further penalize fuel thieves. "The Maryland Motor Vehicle Administration has the authority to suspend drivers' licenses," Horrigan said. "We'd like a judge to recommend a suspended license for someone who has been convicted of driving off three times."

One Pennsylvanian legislator wants to reduce, then prohibit, the sale of MTBE fuels. "This is a nationwide issue," said PCSC's Walker, "and we hope the federal government will deal with it."

In Massachusetts, c-store retailers have been placed in an untenable position regarding Stage II compliance, charged Joe Tomaino, president of the Independent Oil Marketers Association of New England, based in Newport, R.I. At issue is the state's Department of Environmental Protection upgrading its regulations to satisfy its commitments to the EPA.

Rather than inspecting service stations on a regular schedule, as most states do, the Massachusetts DEP has decided "a responsible official" for each gasoline retailer should certify each location's compliance, Tomaino explained. "He must certify the location was in complete compliance ? day in and day out ? and would be in compliance in the coming year," he said. "How do you do that? Particularly if the location is operated by a lessee/dealer or if someone owns a location and a supplier owns the [gasoline facility]."

Exacerbating the problem: EPA guidelines assume a regulated community hits a compliance rate of 86 percent if each location is inspected by the enforcing agency at least once a year. "But Massachusetts' plan is to have 95 percent of their facilities operating at 95-percent efficiency ? which is the certification efficiency at the time the system is installed," Tomaino said. "That means if you have a station with 12 fueling positions and there is one defective nozzle, as far as Massachusetts is concerned, you are at zero efficiency ? forget that you spent $30,000 installing Stage II and another $10,000 maintaining it.

"But we have some members of the Massachusetts Legislature who understand our problem and would like to limit enforcement actions to federal guidelines."

One bright spot: In Vermont, often a bellwether on environmental issues (it was the first state with a bottle law, and required Stage II containment before the federal government did), few changes are expected in the new year. "Given the dynamics of our newly elected legislature, we don't anticipate a lot of changes potentially harmful to our industry," VGA's Harrison said.

No One in the Pool

While retailers wrangle with state-specific conundrums, there is one topic about which all Northeast retailers are cringing: the shallow labor pool and associated costs.

Staffing is "extremely challenging" at Downeast Energy's 22 Puffin Stop stores, Peters said. Indeed, the chain has closed some stores from midnight to 5 a.m., attempting to re-deploy those third-shift employees to other locations during the day.

In Vermont, a number of stores have cut hours, closing as early as 9 p.m., while others have had to close when a scheduled employee is absent, noted VGA's Harrison. "Someone calls in sick and there is no one to replace him ? and the manager or assistant manager has already worked a double shift," he explained, adding that the ever-increasing cost of health insurance has added to the staffing burden.

Exacerbating the hiring problem in Vermont: c-store associates who are caught selling tobacco or alcohol to minors face criminal charges. "That makes it very difficult in a very, very tight labor market to attract people who know they could be cited criminally for an offense," Harrison said. "A clerk could face a $100 civil penalty for a first offense, up to a $500 criminal penalty and criminal record for subsequent offenses. A potential negative like that does not make a c-store an attractive place of employment."

Rhode Island retailers, meanwhile, are adjusting to a 50-cent increase in the minimum wage, now $6.15. "I don't know if the legislature will bring it up again," said RIFDA's San Antonio. "We think because we held it to a 50-cent increase, they might. We want to keep it down so that retailers can stay in business."

As NYACS puts it: Mission: Survival.