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In a market where competition is stiff, convenience stores - relatively small stores offering a limited range of products and operated by a small staff - are portrayed as a solution to eroding profits. The big supermarket chains are planning to set up such stores in city centers in order to improve their competitiveness against large private discount stores.

Meanwhile, the convenience store chains run by the gas stations are planning rapid expansion of their outlets, since they are more profitable than the gasoline they sell.

"Most of the gas stations in Israel are not big enough to accommodate true convenience stores," says John Ibbotson, one of the partners in Retail Vision, a British consulting agency that came to Israel to advise executives of Yellow, the convenience store chain run by Paz Oil. Ibbotson, who has advised the large supermarket chains in Britain, differentiates between convenience stores and "impulse" stores.

Convenience stores at gas stations or in city centers, says Ibbotson, are designed for "supplementary shopping." The average size of the stores is 200 square meters (2,160 square feet) and they offer a variety of products similar to that of supermarkets, but with a smaller selection. This means they sell breakfast cereals and toothpaste, but not every brand.

Convenience stores stock about 3,000 products, whereas impulse stores, usually located at gas stations, are smaller and stock about 600 products. The decision to buy products at such stores is spur-of-the-moment and covers such items as cigarettes, candy, beverages, sandwiches, coffee, and abroad, even non-prescription drugs.

Ibbotson notes that his work with Paz tries to focus on the needs of the Israeli consumer in order to formulate the right combination of products. The growth of convenience stores at gas stations developed after the advent of self-service stations, which saved on labor costs. "People in Britain found it difficult to get used to paying for gas beside the pump," he explains, "and preferred to go into the kiosk and pay a salesperson rather than a machine."

Ibbotson believes that the critical stage in the development of convenience stores at gas stations is the transition to self-service. He notes that convenience stores were set up at gas stations after the gas companies realized that they have an opportunity to sell other products to customers, and that the profitability of consumer products is higher than that of gasoline. This was at a time when the large supermarket chains began opening outlets outside the cities, with more space and at lower rents.

The opening of large supermarket branches led to a change in consumer habits. Many shoppers frequented the large stores once a week and then needed a solution for their "supplementary" purchases. The cities now had smaller branches of the supermarket chains and privately owned stores. Since the expansion of the supermarket chains outside the cities was limited by the planning and building laws, the chains reexamined the cities as a parallel source of revenue. That is how chains of urban convenience stores, such as Tesco Metro (owned by the Tesco supermarket chain) sprang up in Britain at the same time the company developed a chain of Tesco Express stores at gas stations.

Today convenience stores in Britain, including those at gas stations, account for 20 percent of all grocery store sales. The stores at gas stations alone account for some 3 percent of the market, but they are expanding fast. In 2002 their sales grew by 8 percent, compared to 4 percent in the other convenience stores and 3 percent in the market in general.

Ibbotson says that lately some Tesco Express stores have been expanded at the expense of the gas stations. Some stations have even closed their pumps because the profitability of the stores is so much higher.

Ibbotson has no doubts that convenience stores could be developed at gas stations in Israel. He says that whoever understands that the retail food market is driven by marketing and not by supply will lead the market. He notes, however, that the decision to focus on marketing and to figure out what the consumer wants in each category of items can only be made by a big chain that has substantial resources. Indeed, Supersol and Paz are considering cooperation in this area.

Mellow Yellow

This week Yellow inaugurated its 50th outlet at the Paz station in Tivon. Setting up the store cost NIS 1.5 million. About six months ago Paz made a strategic decision to expand its Yellow operations and is currently focusing on fresh foods, coffee, baked goods, prepared meals, sandwiches and basic grocery items.

Uzi Fried, vice president of retailing at Paz, says that by the end of 2003, Yellow will expand to 65 stores, and will add 25 more during 2004. Some 70 percent of the stores will be small, with their inventory based on impulse shopping (coffee, fast foods and items that run out at home). The other stores will be larger but with the convenience store format. Fried notes that Paz has an advantage inside cities due to the placement of its gas stations and views the urban gas stations as potential locations for convenience stores.

Dor-Alon to open more stores

The Super-Alonit chain will have 100 convenience stores up and running by 2005, claims Dudi Weisman, CEO of Dor-Alon, owners of the Blue Square retail chain. The chain operates some 57 stores at Dor-Alon gas stations today, which is expected to grow to 65 by the end of the year. Its annual revenues range from NIS 150-200 million a year, Weisman says. The first of its convenience stores was opened in 1993, at the site of Alon-Dor's first gas station by Kibbutz Hagoshrim.

Weisman says that the convenience stores allow Dor-Alon to undercut its competitors on the price of gasoline by up to 5 agorot a liter. "Fifteen agorot is almost the entire operating profit of the gas station. As most of those filling up at Dor-Alon also buy from the stores, we can give a discount on the gas as the retailing profits are much higher."

Weisman argues that in order to help the stores succeed by having drivers buy more products from them, the gas station layout should be such that the driver faces the store. Many of Dor-Alon's stores have seen changes in recent years, he added; the first store resembled more a minimarket with little connection to the gas station.

Later, the chain built much larger stores of up to 1,500 square meters, serving not just drivers but local residents, too. Finally, the two are brought together, so that drivers have to enter the store to pay, and, while they're there, they often buy a coffee or a snack.