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    Crossing the Channel

    Convenience store chains are developing innovative strategies to ward off big-box retailers.

    By John Lofstock

    As retail worlds collide the market has become a blur of expanding choices for consumers and a whirl of confusion for convenience store operators, who find themselves engaged in a complex game of dueling formats, reformatted brand identities and overlapping product assortments.

    In the convenience store and petroleum marketing industry, retailers are faced with mounting competition from mass merchandisers, supermarkets and drugstores. The battle to offer convenience and one-stop shopping is so great that competitors are partnering with each other to exploit their synergies and capitalize on the market's fertility.

    The perfect example would be Wal-Mart's partnerships. The retail giant forged strategic alliances with oil companies eager for additional outlets such as Sunoco Inc., Murphy Oil Corp. and Tesoro Petroleum Corp. Los Angeles-based Atlantic Richfield Co. (ARCO), now a subsidiary of London-based BP plc, has a gas rewards program on the West Coast with supermarket retailer Albertson's Inc., which also happens to be a leader in the Midwest among supermarket motor fuel retailers.

    The trend in gasoline shows every sign of expanding. "The big retailers are going to continue installing gas outlets and targeting fuel customers to drive volume into their stores. This trend is spreading to smaller, regional chains, and soon I would expect the one-store supermarket operator to have a growing fuel business," said Scott Dawson, president of New Orleans-based Shanickat Consulting Inc., a specialty group focusing on convenience store and petroleum operations.

    Convenience store retailers should be resigned to the fact that if a mass merchandiser or supermarket begins selling gas in their market, they are going to lose fuel volume. Total volume could get worse as big-box operators figure out how to buy gas more efficiently, Dawson said.

    To minimize the volume lost, Dawson said retailers should not invest in new programs that may not bring an acceptable return on investment (ROI). Instead, he recommended enhancing a few basic operational procedures.

    Keep the gas island neat and clean. "You've heard it said over and over, but a dirty presentation drives customers away," Dawson said. When you have a poor presentation and the supermarket down the street is 10 cents less per gallon, you are going to lose a customer for good."

    Target new customers. Dawson estimates that 75 percent of supermarket customers are women. Convenience stores historically have done little to appeal to the female demographic, he said. Improving lighting, creating easier ingress and egress and having an employee available at the pumps for assistance helps make the store more appealing.

    Be a good marketer. The allure of convenience stores has always been good locations and quick service. Dawson said retailers should use foodservice programs and staples such as milk and cigarettes to attract customers in a hurry. While the big-box chains aren't going to go away, they have done little to improve speed of service. "Run promotions and cross-merchandise items in your own store to hold onto your core customers," he said.

    Still, in markets such as Dallas, San Antonio and Scottsdale, Ariz., convenience store operators find themselves competing with hypermarketers, as well as supermarket chains, as much as they do other traditional c-store chains.

    Busy and highly mobile consumers are driving these changes. Consumers, who have less and less time for traditional visits to retail stores, are scrapping long shopping lists and making fill-in shopping a major driver of sales of packaged goods and general merchandise.

    "Who'd have thought that milk and basic groceries would become an impulse buy? But that's just what it is at a place like Target or Wal-Mart," said ACNielsen senior vice president Todd Hale, who directs the Schaumburg, Ill.-based research company's annual Channel Blurring study. "There's a lot more fill-in shopping going on these days, and what's happening is the number of trips being made to grocery stores is being nibbled away at."

    ACNielsen, a sister company of Convenience Store News, tracked more than 10 retail channels of trade to produce its Channel Blurring study.

    Howdy, Partner

    Partnerships between competitive trade channels constitute a growing phenomenon among convenience store and petroleum retailers. No company is regarded as suspiciously by the convenience store and petroleum industry as Wal-Mart Stores Inc. Yet, the Bentonville, Ark.-based retailer's strategic alliances are great business moves for the petroleum chains — they increase fuel volume exponentially, help build brand awareness and merchandise sales — but not so good for smaller chains trying to compete with them and their aggressive pricing strategy.

    An alliance last year between Philadelphia-based Sunoco Inc. and Wal-Mart calls for Sunoco to build and operate fueling facilities and convenience stores at Wal-Mart parking lots in nine Northeastern and Mid-Atlantic states.

    Sunoco and Wal-Mart said the companies are working together to develop a new fuel brand exclusively for the mass merchandiser. Sunoco expects to build as many as 40 new co-branded sites over the next six months and add up to 100 sites per year over the next few years.

    Sunoco is not content to sell gas only at its 600 APlus Mini Markets. The oil company said the sites would also be equipped with a selection of convenience store merchandise, including cigarettes, snacks and beverages.

    The agreement for Wal-Mart is similar to the one the discount retailer has in the Southeast with El Dorado, Ark.-based Murphy Oil Corp., with one exception. Murphy currently operates more than 300 Murphy Mart fuel facilities on Wal-Mart properties with plans to build 50 more over the next year. Sunoco and Wal-Mart, however, are working together to develop a joint brand exclusively for Wal-Mart stores in the Northeast.

    For Sunoco, the deal is a major coup. The oil company owns a significant refining and marketing portfolio that includes five refineries with a total throughput of approximately 730,000 barrels per day. The real benefit, though, is that the alliance would provide Sunoco with hundreds of additional distribution points over the next few years.

    "Our agreement with Wal-Mart provides us with an excellent cost-effective way to grow its retail market share in the center of its refining system," said Robert Owens, senior vice president and general manager of Sunoco Northeast Marketing. "Participation in this venture strengthens our position as the leading refining and marketing company in the U.S. Northeast and add substantial built-in growth to our retail business for years to come."

    The nine states covered under the agreement are Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont and West Virginia. Sunoco already has a strong branded presence in these states and the company expects to leverage its experience in the retail business there with Wal-Mart's high-volume locations.

    "We will market significantly more of our own gasoline production directly to the consumer," Owens said. "These should be high-volume sites that will serve a growing segment of the retail gasoline market."

    Wal-Mart's deal with Murphy Oil helped the refiner reap record profits over the past two years by significantly increasing throughput throughout the Midwest. The companies plan to add as many as 100 new stores a year over the next five years. Murphy expects to have more than 600 fuel stations with small convenience store kiosks at Wal-Mart stores by 2003.

    Tesoro's alliance with Wal-Mart is just as profitable, but not as fast-paced. The two companies are building fuel operations at the rate of 40 to 50 sites per year, which are also combination gas stations and c-store kiosks.

    Representatives for Wal-Mart, Murphy Oil and Tesoro declined comment for this article.

    A year after its initial launch, Albertson's expanded a pilot program that converts supermarket food purchases into discounts at BP's ARCO am/pm chain.

    After a test in nine Albertson's grocery stores and 23 am/pm stores in Bakersfield, Calif., the retailers' Gas Rewards program, which gives Albertson's shoppers cents-off-per-gallon vouchers redeemable at am/pm stores, has been extended to 30 Albertson's supermarkets and 33 am/pm c-stores in the Las Vegas area.

    More than 700 grocery items are tied to discounts of 2 cents to 20 cents off per gallon each for purchases of up to 10 gallons made at ARCO stations. The purchase of paper towels, for example, can earn the shopper 10 cents off each gallon of gasoline. A box of fabric softener sheets may earn 20 cents off each gallon. The more Gas Rewards items shoppers buy, the more they can save. Shoppers may earn a total discount as high as the posted street price at the participating locations.

    "Customer response to this program has been very favorable," said Chris Noble, BP's West Coast retail business unit leader. "We are not only seeing our long-time customers participating in the program, but also new customers are using the rewards to buy ARCO gas."

    Gas Rewards also allows am/pm stations to make full margin on the discounted gasoline purchases. In-aisle signage alerts grocery shoppers to the cents off per gallon on each featured item. The program is considered a "long term" venture for the company, Noble said. The program also is running at some of Albertson's own 125 fuel centers.

    Partnerships crossing channel lines are becoming commonplace, but at least one c-store operator has discovered a whole new kind of partner. Chevron added fuel pumps in Orlando to a building owned and operated by the Central Florida Convention and Visitors Bureau. The site, which has four multiple-pump dispensers (MPDs), features a small convenience store offering c-store standards such as cigarettes, milk and snacks, along with information for tourists visiting the Central Florida area.

    Another new partnership is that of Smith's Food & Drug Stores, an 18-store operation in Salt Lake City, and Salt Lake City-based WebMiles Corp. Smith's will add WebMiles to its Fresh Value loyalty card program. WebMiles rewards are redeemable for free or discounted travel on all airlines without the restrictions common to traditional frequent-flyer programs, such as blackout dates, a limited number of available frequent-flyer seats and cost caps. Members earn one WebMiles reward for every dollar spent at participating locations. Redemption levels for discounted or free round-trip travel start at 8,000 miles, which entitles the consumer to $100 off the price of any airline ticket.

    "We are continually seeking new ways to reward our most loyal customers," said Jim Hallsey, Smith's executive vice president. "WebMiles allows us to provide our customers with the maximum amount of flexibility when traveling. The low threshold for redemption makes it easier for our customers to actually receive their reward, so they receive good value. We strongly believe that our customers — both new and existing — will enjoy this new benefit to our Fresh Values program."

    Still other programs utilize sophisticated interactive video technology in couponing or cross- merchandising effortrs. Interactive monitors at gasoline pumps, tested by convenience store and petroleum chains such as BP plc and Chevron Corp., allow motorists to view advertisements or print coupons from touchscreens.

    As part of the couponing program, retailers partner with other local businesses to offer discounts and promotions in cross-merchandising programs that drive traffic to each location.

    However, a leading provider of gasoline dispenser video technology, San Francisco-based Ten Square, closed its doors recently.

    The concept may be ill-conceived for the petroleum marketing business, according to Dawson of Shanikat Consulting, who said customers often overlook the interactive system while they're filling up.

    "Interactive video screens involve a lot of work and upkeep, with little reward for retailers or consumers," he said. "Customers have an extra two or three minutes while they're getting gas and they don't want to spend it touching buttons on a dirty gas pump. Likewise, retailers have enough to worry about all day without having to worry about why a store down the road won't accept a coupon printed out at one of his gas pumps.

    "Conceptually, the whole idea was sold by great salesmen who had a not-so-good idea."

    By John Lofstock
    • About John Lofstock

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