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    Supermarket NONFOODS Business: Older and wiser

    After the initial rush to get into the gasoline business, supermarkets and other high-volume operators have entered a more mature stage of market development.

    In some ways, the hypermarket splash into gasoline is reminiscent of the stir wrought by the World Wide Web in the late 1990s among brick-and-mortar businesses. When grocercy supercenters, clubs, and mass merchandisers--the class known as hypermarkets or high-volume retailers (HVRs)--took to gasoline, fear grew among traditional petroleum marketers, much like the worry that traditional retailers felt when facing their new dot-com rivals.

    Every time a hypermarketer opened a gas station, the media was there, giving coverage similar to that accorded the online boom. And, much like online retailers, hypermarkets offered customers deep discounts in order to build traffic.

    A big difference is that the hypermarkets' bubble has not burst the way the Internet's did. However, the HVRs' maturation, like that of the surviving dot-coms, is evident: High-volume retailers are getting smarter about the way they run their fuel operations.

    Big-box operators no longer indiscriminately put gas stations at all locations. Indeed, some HVRs have even withdrawn from some markets, while others have slowed their expansions.

    Hypermarkets are not going the way of the dot-com. Rather, like brick-and-mortar businesses employing the Internet as a complement, HVRs are tapping fuel as an additional channel, further molding their entire retail package.

    The number of big-box operators selling gas continues to grow. According to Westminster, Colo.-based Energy Analysts International's September 2002 U.S. Hypermart Petroleum Market Outlook Study, 2,242 hypermarket locations sell gasoline, up from April's count of 1,980. For the year, these nontraditional players were projected to sell 7.7 billion gallons of fuel, seizing a 5.9-percent market share.

    The big eight

    Of the 40 or so big-box chains retailing gasoline, eight titans—Wal-Mart, Kroger, Albertsons, Meijer, Costco, H-E-B, Sam's Club, and Safeway—dominate with more than 80 percent of hypermarket gasoline sales. A growing number of independents and regional grocers are jumping in or, at the least, eyeing a retail gasoline offering.

    Some regions, most notably the Northeast, Pacific Northwest, and Pacific Southwest, saw triple-digit growth in big-box locations from February 2001 to April 2002. Even the Gulf Coast, the most mature market, witnessed 38-percent growth during that time.

    Much of the business is being siphoned from the convenience store channel. In 2000-2001, total gallons sold at c-stores dropped 1.6 percent, the first decrease recorded since 1985, according to the CSNews 2002 Industry Report. And considering projections that gasoline sales will remain relatively flat, there is little reason to believe the slow drip in c-store market share will not continue.

    Cincinnati-based Kroger Co. topped 300 supermarket fuel centers in 2002 and was expecting to have 350 by the time its fiscal year ended earlier this month. "It's a natural addition to our one-stop-shopping strategy," says spokesman Gary Rhodes. "It's a way to draw more traffic to the stores, and it allows for us to have some cross-merchandising opportunities where we can offer discounts, like a couple of cents off each gallon of gas if you use your loyalty card from the store."

    Albertsons, Inc. of Boise, Idaho is rolling out fuel centers at a rapid clip. The chain plans to pump more than $100 million into new store and fuel center construction, as well as existing store remodels in the Austin, Texas market during the next four years. "Austin is a strategic growth market for Albertsons," c.e.o. Larry Johnston said when the plan was announced last year. "New marketing and merchandising plans will be introduced ... to strengthen our position as we continue to aggressively defend and grow our market share."

    While Costco Warehouse Corp., headquartered in Issaquah, Wash., doesn't cross-merchandise at its 163 gasoline locations, fuel is still a consideration in all new store openings. "We are expanding that as quickly as we can, with the intent of putting a gasoline station at every Costco where land size and zoning restrictions permit us," says Paul Latham, v.p. of gasoline.

    Bentonville, Ark.-based Wal-Mart Stores, Inc., arguably the biggest single threat to traditional operators, is opening more than 100 fueling facilities a year.

    Despite incessant growth, the "drop it in and they will come" approach has given way to defined market strategies, especially as more and more markets become saturated and the idea of grocers and mass merchandisers selling gasoline becomes increasingly commonplace. So while Albertsons forges into Austin and Tulsa, it concurrently exited underperforming markets like Houston and Memphis.

    This is not to say traditional operators have won the battle or will suddenly recapture lost share. Rather, it means the hypermarket gasoline craze is entering a more sophisticated stage, one that recognizes not only that the novelty is wearing off in some markets, but also that big-box chains enjoy economies of scale and other inherent advantages that virtually guarantee their long-term presence in the retail fuel business.

    Put another way, HVRs enjoy a foothold, but not a stranglehold, on gasoline.

    Market saturation

    Limited by space and land use restrictions, hypermarkets are increasingly finding themselves vying in the same market. "At least two-thirds of our stores are in an environment where we compete directly with another hypermarket," says Costco's Latham. "This has been happening at the core business level for years."

    Consider the tumble in Texas. According to EAI, 127 gasoline hypermarket sites operate in the Dallas/Ft. Worth area and wield a market share in excess of 12 percent.

    "What we are finding is that hypermarkets are really not competing with c-stores, they are competing with each other," says John Eichberger, director of motor fuels for the National Association of Convenience Stores.

    Costco's strategy revolves around price—inside and out. As with the merchandise inside, the club operator looks to deliver superior prices for its bargain-hunting members, whose membership fees help subsidize lower-cost goods.

    Gasoline, while often a dime or so less than street price, has never been a loss leader in Costco's business model. To deliver the most competitive pricing, the company instead relies on driving volume and being a low-cost operator. "In order to exist long term in this business we have to be the low-cost operator," says Latham.

    "Eventually, when margins stabilize and people realize they are going to have to make money in this business, we are going to be left standing with a few of our competitors who have figured out how to operate at a lower cost than everybody else."

    To further drive out costs on its gasoline offering, Costco dropped Visa and MasterCard as payment options at gasoline dispensers. "The cost of accepting those credit cards was extremely high," Latham says. "We lost a little volume, but definitely less than we expected. We have certainly cut our bank fees significantly and believe that, long-term, it will be a good decision."

    Maintaining sales volume is another key. "By driving volume, we get a tremendous leverage against our operating expenses," he says. "We are able to drive our cost per gallon down to well below what the rest of the industry is operating on. We have to do anywhere from 500,000 to 700,000 gallons a month at each location to leverage our costs."

    A third element Latham lists is consistency. Regardless of region, the club's fuel operation changes little. "We are able to keep central staff down to a minimum and are able to operate sites with very little infrastructure."

    While Costco, BJ's, and Sam's emphasize price, supermarkets and mass merchandisers tap gasoline to build in-store sales.

    Building loyalty

    Along with pump signs touting inside specials, many supermarkets and mass merchandisers extend loyalty card programs that reward shoppers with gasoline discounts based on purchases inside the store. The tactic allows these retailers to reward loyal shoppers without lowering the street price.

    Cross-merchandising specialist Fuel Marketing Solutions of Dallas offers such programs, and counts Brookshire Grocery Co., H-E-B, Kroger, Safeway, Meijer, and Winn-Dixie among its participating retailers. Its Fuel Rewards program ties gas to in-store merchandise so customers buying marked brands receive a special receipt at checkout that can be redeemed at the pump.

    Consumers using the promotion collected more than $6.5 million in free gas vouchers during the first six months of 2002, according to the company.

    Eichberger of NACS, who has encouraged c-store operators to offer similar loyalty rewards, is enthusiastic about the approach. "American consumers love discounted gasoline," he says. "Three or four cents off a gallon of gasoline has more perceived value than three or four dollars off a car wash."

    In many cases, HVRs are exploring new cross-merchandising technology that eliminates the need for receipts or other paper verification. "Customers receive gas discounts by processing a voucher through an attendant or keying in a code at the pump," says EAI principal Joe Leto.

    Still, some companies, like Costco, distance themselves from tie-ins and bank on low prices for success. "We believe that loyalty programs are smoke and mirrors," says Latham. "If we are giving consumers a great value on gasoline, we are taking it away from them on something else. I think consumers are smart enough to understand that. We are very straightforward with our members. We won't conceal from them what the real price is, or tell them that they will pay a different price than the person next on line. We don't do it on ground beef, we don't do it on Ritz crackers, we are not going to do it on fuel."

    Some HVRs—Albertsons, for one—are tucking full-size convenience stores into their fuel centers to pick up sales from motorists not interested in spending time inside the supermarket.

    According to George Rosenbaum, chairman of Leo J. Shapiro & Associates in Chicago, shoppers who buy gasoline define convenience in two ways. The first is the destination shopper, better known as the one-stop shopper, who is less concerned about convenience than about multi-tasking.

    This shopper prefers clubs and mass merchants. "Let's face it," says Latham, "you are walking into a Costco building that is doing over $100 million in sales, the parking lots are going to be crowded, the building tends to be crowded. It's going to take you some time to get in and out. It's definitely not like running into a 7-Eleven for a couple of items. It is a destination shop."

    The second group, Rosenbaum says, are the on-the-go shoppers, who grab a limited number of items while fueling up. They want speed and convenience.

    This article originally appeared in Convenience Store News, a VNU sister publication of Progressive Grocer.

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