Co-Branding Positives and Pitfalls

Marilyn Odesser-Torpey
Apr 10, 2012
Convenience Stores Decisions

As rising gas prices continue to shrink profits at the pumps, having a strong foodservice offering can drive customers into convenience stores.

A growing number of retailers are choosing to go the brand name route, partnering with high profile quick-service chains or turnkey commissary-style suppliers. Convenience Store Decisions asked some industry insiders to offer their insights into if, when and why retailers might prefer to work with established name brands rather than developing and managing proprietary programs of their own.

Without franchise or licensing, or other costs and stipulations associated with co-branding, gross profit margins have the potential to be much higher for retailers who are able to run their own proprietary foodservice programs, said John Matthews, founder and president of Gray Cat Enterprises, an Illinois-based national retail consulting firm.

On the other hand, he said, branded programs provide the expertise, processes, procedures and name recognition that make it possible for retailers who have little or no foodservice experience to hit the ground running.

Some retailers think because they have had success selling coffee and muffins, they are ready to run a full foodservice program, Matthews explained. But receiving, storing, cooking, assembling and holding to consistently get fresh foodservice items out the door is a totally different story.
Managing fresh food costs requires a set of skills separate from the ones needed to operate a traditional convenience store. “It’s not like selling a Snickers bar, which you bring in, mark up and just put out on the shelf,” Matthews said.

For example, food costs can vary wildly (along with profits) when making a simple pizza if retailers are not specific and vigilant about every detail, from the exact number of ounces of cheese and sauce and slices of pepperoni put on each pie to keeping track of the number of napkins that are distributed.

Just as important as cost management is the fact that customers expect product consistency. Matthews reminds that nine out of 10 independent restaurants fail within the first year. Most often, it’s lack of or bad management that is the killer.

Perfect Partners
Pat Gilligan, founder of Cincinnati-based Gilligan Oil, has chosen to go the quick-service franchise route, partnering with Subway, Popeyes Louisiana Kitchen and Dunkin’ Donuts in his GOCO stores. Several locations offer multiple quick-service brands.

“We had started with Subway in 1995 and achieved great success,” Gilligan said. He explained that, from an economic standpoint, it did not make sense for him to start a proprietary brand when the company could get the benefits of the quick-service chains’ brand recognition, cost structure, operational standards, training, dynamic menu, merchandising and marketing expertise.

Gilligan noted that each store averages $600,000 per year in foodservice sales—well above the NACS average of $250,000. GOCO also exceeds average Subway franchise sales.

The only downside of partnering with any large quick-service brand he sees is it can limit the number of GOCO stores that can feature a particular food brand.

“There can be only so many Subways in a single market area, and if we’re not there first, there may not be room for us,” Gilligan said.

Matthews added that other brands may err on the side of overdevelopment, thereby taking the steam out of the convenience store as a destination for their food offerings.

To get the most bang for his franchise fees and royalty bucks, Gilligan creates a strong presence for the big brands in his stores by featuring prominent external and internal signage emphasizing the connection between his c-stores and the nationally familiar names. He also keeps the spaces occupied by the convenience store and restaurant parts of the business open to one another for natural back and forth traffic flow, even though each has a separate entrance.

The branded strategy expands well beyond food. Chevron ExtraMile convenience stores, for example, recently launched a partnership with Seattle’s Best Coffee.

“A core tenet of ExtraMile has always been to deliver convenience, quality, value and consistency—and this is where Seattle’s Best Coffee was a perfect fit for us and our current business objectives,” said Ian Noble, retail district sales manager for ExtraMile. “Seattle’s Best Coffee has powerful brand equity and an expertise within the coffee industry and their commitment to growing the coffee business is a win for Extra Mile.”

Noble described the partnership as “a natural progression” in the quest to evolve the ExtraMile experience, and said ExtraMile expects to see a growth trend with its current customer base in addition to attracting new customers.

A Game of Chicken
Of the more than 300 convenience stores across the country served by Mansfield Oil, about one-third have some sort of food offering, while the other two-thirds need it, according to Ted Roccagli, the Gainesville, Ga. company’s retail marketing manager and business coach.

After a long and thorough search for a foodservice solution that met its dynamic needs, Mansfield agreed to partner with Chester’s & Piccadilly Circus Pizza. The company secured financing for equipment and startup costs with GreatAmerica Financial Services, Roccagli explained.

The co-branding package requires zero down and no payment for 60 days. It includes free equipment delivery (lease to own) and the opportunity to work with a preferred financing partner at rates that can be well under 10%, depending on the retailer’s credit history.

“For as low as $15,000 in equipment [convenience store retailers] can get into the foodservice solutions business,” Roccagli said. “And there are no franchise or royalty fees.”

So far, 15 convenience store locations have signed on to feature one or a combination of both brands.

At Zarco 66 Earth Friendly Fuels’ eight Kansas stores, the coffee service is a Scooter’s franchise, but the rest of the fresh foodservice is strictly its own proprietary brand, Sandbar Subs.

“Quick-service and other nationally branded foodservice programs tend to be too restrictive and expensive,” said Zarco 66 president, Scott Zaremba. “We wanted to be able to do our own thing, not try to fit into a small box.”

However, Zaremba admitted, providing the highest quality coffee products was more than the stores could handle.

“Quality coffee is an art, not just a matter of following simple instructions,” he said. “We need to make sure we have access to the best beans, consistently roasted just the right way, as well as the techniques and training necessary to handcraft each cup instead of relying on machines as other coffee franchises do.”

At Zarco 66, buns for its Sandbar Subs and quarter-pound Surf Dogs are hand formed on site from a proprietary recipe. The company is also looking at expanding its bakery program, Zaremba said.

His one wish is to find a single supplier that could deliver everything he needs for his foodservice operations. To expedite the situation, Zarco 66 has started its own central distribution system for twice-a-week delivery to all its locations.

“With our infrastructure and delivery processes in place, we’re also planning to begin franchising our Sandbar Subs concept within the next couple of months,” Zaremba said.