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In some ways, the hypermarket splash into gasoline is reminiscent of the stir wrought by the World Wide Web in the late 1990s on brick-and-mortar businesses.
When grocers, clubs and mass merchandisers — the class known as hypermarkets or high-volume retailers (HVRs) — took to gasoline, fear grew among the traditional petroleum marketing community, much like that of traditional retailers over their new dot-com rivals.
Every time a hypermarketer opened, a gas station, the media was there, giving coverage similar to that of 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 plunk gas stations at all locations. Indeed, some HVRs have even withdrawn from some markets, while others have slowed expansion.
Don't be mistaken, 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.
State of the Hypermarket Industry
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 data, 2,242 hypermarket locations sell gas, up from April's count of 1,980. For the year, these nontraditional players will have sold 7.7 billion gallons, seizing a 5.9-percent market share, EAI estimated.
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. Further, a growing number of independents and regional grocers are jumping in or, at the least, eyeing a retail gasoline offering.
Indeed, some regions, most notably the Northeast, Pacific Northwest and Pacific Southwest, have seen triple-digit growth in big-box locations from February 2001 to April 2002. Even the Gulf Coast, the most mature market, has witnessed 38-percent growth during that time.
As a result, convenience stores are losing gasoline share. 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 market share will not continue.
Cincinnati-based The Kroger Co. just opened its 300th supermarket fuel center and by the end of fiscal 2002 expects to have 350. "It's a natural addition to our one-stop shopping strategy," said 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 company recently unveiled 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," CEO Larry Johnston said earlier this year. "New marketing and merchandising plans will be introduced during the coming months to strengthen our position as we continue to aggressively defend and grow our market share."
While Costco Warehouse Corp., 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," said Paul Latham, vice president of gasoline.
Bentonville, Ark.-based Wal-Mart Stores Inc., arguably the biggest single threat to c-stores and other traditional operators, is opening more than 100 facilities a year.
Despite incessant growth, the "drop it in and they will come" policy has given way to defined market strategies, especially as more and more markets become saturated and the cache of grocers and mass merchandisers selling gas become increasingly commonplace.
So while Albertsons forges into Austin and Tulsa, it is concurrently exiting from underperforming markets like Houston and Memphis. Likewise, Jacksonville, Fla.-based Winn-Dixie Stores Inc. recently unloaded seven stores in the Dallas market.
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 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.
Addressing Customers' Needs
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," said 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.
In such places, high-volume retailers are discovering their biggest competition to be other hypermarketers, not convenience stores.
"What we are finding is that hypermarkets are really not competing with c-stores, they are competing with each other," said John Eichberger, director of motor fuels for the National Association of Convenience Stores (NACS).
Costco's strategy revolves around price — inside and out. As with the merchandise inside, Costco looks to deliver superior prices for its bargain-hunting members, whose membership helps subsidizes 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, however. 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," said 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 recently dropped VISA and MasterCard as payment options at gasoline dispensers. "The cost of accepting those credit cards was extremely high," Latham said. "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 high-volume sales is another key. "By driving volume, we get a tremendous leverage against our operating expenses," he said. "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 clubs, Costco, BJ's and Sam's emphasize price, supermarkets and mass merchandisers tap gas to build in-store sales.
Along with pump signage touting inside specials, many supermarkets and mass merchandisers extend loyalty card programs that reward shoppers with gasoline discounts based on purchases inside the box. The tactic, industry observers say, 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 with in-store merchandise so customers buying marked brands receive a special receipt upon checkout, which can be redeemed at the pump.
Consumers using the promotion have collected more than $6.5 million in free gas vouchers during the first six months of 2002.
NACS's Eichberger, who has encouraged c-store operators to offer similar loyalty rewards, enthused, "American consumers love discounted gasoline. 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," said EAI principal Joe Leto.
Still, some companies, like Costco, distance themselves from tie-ins, instead banking their success on low prices. "We believe that loyalty programs are smoke and mirrors," said 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 in their fuel centers to pick up sales from motorists not interested in spending an afternoon 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. This person is less concerned about convenience than about multi-tasking.
This shopper prefers clubs and mass merchants. "Let's face it," said Costco's 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 said, are the on-the-go shoppers, who grab a limited number of items while fueling up. They want speed and convenience.
Convenience Stores Response
A review shows hypermarkets employing an assortment of strategies to build fuel sales. Some are constructing pumps at every new retail outlet, some are leasing out land to petroleum specialists and others are partnering with existing c-store chains in a cross-channel alliance.
With HVRs making inroads, gasoline margins and volume continue to fall. Some chains are responding by redefining the dispenser's role as revenue-builder, not profit-pumper. Chip Lavine, owner of Blue Harbor Pointe in Mandeville, La., learned the hard way how to survive in this maturing hypermarket arena.
A former Chevron dealer, Lavine lost margins — and ultimately his business — when a hypermarket opened nearby. "When I had the Chevron station, I was doing pretty decent volume and good inside sales," he said. "I had a little car wash there, and you were used to making 10 cents, 11 cents a gallon. Then the hypermarkets came in, they lowered the price on cigarettes by 6 percent, they lowered their beer prices 6 percent, and gas was selling at my cost. They did that for the first nine months while they built up volume, and it was killing me."
Lavine's response mirrored that of today's struggling class that is battling against the deep-pocketed HVRs. He made sure his place was spotless and that customer service was top-notch. "You try to do other things that do not take a lot of cash outlay, and you find out it just doesn't work."
Multiple Profit Centers
But he didn't give up. He opened another location, this time with 11 profit centers and a product mix that caters to all demographics. "I don't call it a c-store. I want to appeal to all types of people. I have a $100 bottle of wine and I have an 89-cent, 16-ounce beer. I want the lady with the $500 suit as well as the blue-collar worker with the Marlboro shirt who buys my beer and cigarettes. I have a place here that no matter what economic background someone comes from, they enjoy it, because it's clean, it's large, my bathrooms have granite marble in them. It's an experience."
The 11 profit centers include the Harbor Market, Express Lube Experts, Blue Harbor Pointe Carwash, Blue Harbor Pointe After Care (a waxing and detailing area), BJ's Coffee & Tea, Blue Harbor Pointe Gift, Harbor Pointe Cleaners, Blue Harbor Pointe Vending (for people who want to do their car care by themselves), Windshield Repair and a Quiznos Deli.
Gasoline ranks last in profit, but first in destination.
What makes the mix work, according to Lavine, is that it is composed of products and services people need on a daily basis, and will not find in a hypermarket.
Lavine also takes a very aggressive approach in hawking the different revenue points to customers. "We have our people talk about them," he said. "They may see a gasoline customer with dry-cleaned clothes hanging in the car, and will mention our dry cleaners to them, offering a discount in another area, such as the carwash, to get them to visit our dry cleaners.
"I am capturing everybody at the pump, but then pushing them to all my different profit centers, as well. Once they see what we have, it becomes a destination to them."