Csp Outside The Box F3 0310


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Csp Outside The Box F3 0310

  1. 1. Competitive Outside Box the HVRs move from loss-leader gas to everyday low pricing and fuel-loyalty partners BY ANGEL ABCEDE AND LINDA ABU-SHALBACK ZID AABCEDE@CSPNET.COM|LZID@CSPNET.COM A s news of the closure of 10 operators, has its vulnerabilities. (Many considers himself a tough volume com- Sam’s Club stores hit in Jan- of the HVRs in this article, including petitor in his own right. “If we have uary, the owner of a station Sam’s Club, declined comment.) stores on top of them, we are just as near a targeted Houston location After dealing with some of the first aggressive as they are,” he says. reacted with delight. HVRs entering fuel almost two decades When HVRs first entered fuel with “I hate them,” says Nick—who gives ago, Bill Kent, president of the 28-store, prices 10 to 15 cents per gallon below only his first name—citing how Sam’s Midland, Texas-based Kent Cos., knows the street, supermarket and mass-mer- Club typically had the cheapest gas just what it means to stay competitive. chandising chains such as Sam’s, Wal- price in a 3- to 4-mile radius. “They In that period, he’s seen the worst of mart, Safeway and Costco posed a real ruin small businesses.” times move into more of a gray area. threat to thousands of retailers. Indus- The closures by no means signal the While HVRs still employ lowball tac- try frenzy and the emergence of below- end of Sam’s, which operates 432 fuel tics, Kent says he’s “not found them to cost selling laws were hallmarks of the sites and also announced plans to open be totally irrational.” Indeed, at times, late 1990s and early 2000s. That dust six more locations in fiscal 2010. But the he says, “They’ve appeared to be willing seems to have settled, at least for now. shuttering does show that even this high- to enjoy some margin.” Meanwhile, the latest competitive volume retailer (HVR), which a decade And although HVRs remain price weapon comes in the form of sophis- ago struck fear into the hearts of c-store leaders when it comes to gasoline, Kent ticated loyalty programs, championed Total Nontraditional U.S. Fuels Market Share Costco Walmart Kroger Sam’s Club BJ’s 3.8% 3.5% 2.4% 2.2% <1% Source: NPD Motor Fuels Index (fourth quarter 2009) 70 CSP March 2010
  2. 2. THE COST AT COSTCO: Only Costco members can fill up at this Costco, saving “4 to 7 cents per gallon” compared with nearby competitors, according to an associate. by fuel-committed grocers such as has evolved into to a more relaxed, per- in droves. “It only lasted for a couple of Kroger and Giant Eagle. Such pro- ception-based EDLP. In one case, HVRs days until [Kroger and Meijer] found grams, many of which partner with are actually giving the gas away; in the that this was ridiculous,” recalls Ed established fuel retailers, give 5-cents- other, they only appear to be. Weglarz, executive vice president of the a-gallon discounts for grocery pur- Fortunately for c-store retailers selling Farmington Hills, Mich.-based Asso- chases of $50, with the mathematics fuel, loyalty programs can also level the ciated Food & Petroleum Dealers. allowing the customer, the grocer and playing field. Fuel is the “secret sauce,” “Yeah, they were selling gasoline like even the fuel-retail partner to win. according to Nicole Walker, vice president crazy, but obviously, on every gallon Speaking specifically of a deal of marketing for MetroSplash Systems they were losing money.” between Cincinnati-based Kroger Co. Group, Dallas, which is a loyalty-solutions And he points out that gasoline sales and Houston-based Shell, Michael provider. Discounts on gasoline have a don’t always translate inside the store: Lopez, market research coordinator for compelling lure over other incentives, and “When the place is crowded and people Westminster, Colo.-based Energy Ana- c-store retailers can take charge by starting are waiting in line, I think it has actually lysts International (EAI), says the super- their own loyalty programs. By doing so, a negative effect on store sales, because market giant is extending its “umbrella” they can direct the benefits to their own a customer has already waited in line of effectiveness, reaching out to Shell margin and volume goals. for 20–30 minutes, and now he just jobbers in lieu of making the capital “We’re seeing a big shift in the con- wants to get his gas and get the heck investments in the still-coveted category venience store offering its own internal out of there.” of gasoline. “We think strongly that this program,” she says. PMAA president Dan Gilligan said is going to be the hypermarket’s new he thinks the experience was a “learn- influence,” Lopez says. DAWN OF A NEW DAY ing process,” with the retailers suffering The programs have yet to achieve So why have things changed? Many point “enormous losses on that fight.” pervasiveness, but they’re emerging to a defining moment in 2001, when Although HVRs may still tap gasoline quickly. What exists now, many Kroger dropped gas prices 10 cents below as a loss leader to make a “big splash” observers believe, is a middle place market norms in Dayton, Ohio, as part in a new market, Gilligan says they have where HVRs are employing more of an of a grand-opening celebration. A nearby “started learning the pain of how much everyday low pricing, or EDLP, strategy. Meijer location cut its price in response. money you could lose selling gas below In more established HVR fuel markets, The ensuing price war led to street cost.” And 11 states have implemented loss-leader pricing—which has an prices as low as 10 cents per gallon for “below-cost laws” to ensure those kind introductory and temporary bent— a short while, with customers lined up of tactics don’t happen. 72 CSP March 2010
  3. 3. Hypermarket Count, Growth Projections Kroger stands out in terms of sheer numbers of projected fuel sites, while Sam’s, Costco, Meijer and Giant Eagle have big commitments in terms of percentage growth. Company Store Count Fuel Count New Stores New Fuel Sites Comments Walmart 3,704 1,050 125–140 per year 0–20 per year Murphy Oil has slowed Walmart gasoline builds, possibly stopping new Walmart site gas stations. Kroger 2,469 850 15–18 per year 40–60 per year Still actively adding fuel to existing sites. Implementing extensive loyalty partnership with Shell. Sam’s Club 605 432 15–20 per year 15–20 per year Gas usually accompanies new builds. Starting 2010 with 10 closures, two of which had gas. Safeway 1,507 341 10 per year 10–20 per year Fuel rewards test program with BP/ARCO ended in September 2009. Costco 413 323 15–25 per year 15–25 per year Costco has raised growth outlook due, in part, to real-estate deals becoming more advantageous. Meijer 203 177 7–9 per year 6–9 per year Meijer also has 6 stand-alone c-stores. Supervalu 2,407 135 45–50 3–6 per year Put 50 stores on sale last year. Planning to double Save-A-Lot banner to 2,400 stores over next five years. Royal Ahold 1,038 135 Unknown Unknown Acquired Martin’s Supermarkets (20 stores/5 with fuel) and Ukrops stores. Launching a new convenience store. BJ’s Club 184 102 3–5 per year 2–3 per year None Giant Eagle 223 154 10–15 per year 10–15 per year Number includes at least 73 stand-alone c-stores. Source: Energy Analysts International LOW-PRICE PERCEPTION Fundamental to hypermarkets’ continued strength is their perception of “loss leader,” even when that’s not always the case. It’s the essence of an EDLP strategy. David Strasser, an analyst for Janney Montgomery Scott, Philadelphia, who covers BJ’s, Walmart and Costco, says that while the com- panies do take a profit on gasoline, a low-cost picture remains. “The higher the cost of gas prices in general, or oil prices in general, the more favorable people look to the clubs. It drives membership; it drives frequency,” Strasser says. “When gas prices go up, it shows up on the TV who’s the cheapest in town, and it’s usually one of them.” The TV images extend a halo effect, he says: “It just rein- forces to the consumer that they have low prices everywhere. If you’re saving money on gas, you’re pretty confident you’re going to save money on cheese.” But to the benefit of established fuel retailers, HVRs are also realizing that there’s actually not much gasoline margin to play with. In Kroger’s third-quarter 2009 investor conference call, THE CARD COUNTS: A Walmart or Sam’s Club card can mean an additional chairman and CEO David Dillon said the company earned 3-cent to 5-cent savings off already competitive prices. March 2010 CSP 75
  4. 4. A Look at Loyalty Loyalty programs at big-box retailers and c-stores really aren’t all that different. Retailer Program Name Gas Rewards Per Gallon GPM Investments Inc. FastBack Rewards Points accrued as 20 points per dollar in-store on most purchases, and 10 points per gallon at the (Fas Mart/Shore Stop) pump: Silver, 0-499 points: 0; Gold, 500-1,499 points: 2 cents; Platinum, 1,500+ points: 4 cents Speedway SuperAmerica LLC Speedy Rewards Points accrued as 20 points per dollar on most in-store items and 10 points per gallon at the pump: 1,750 points, 10 cents; 4,375, 25 cents; 8,750, 50 cents Flash Foods Inc. Rewards in a Flash Simply apply for the card; 2 cents The Kroger Co. Fuel Saver Rewards Spend $100 and earn one 10-cent fill-up discount, spend $200-$299.99 and earn two 10-cent fill-up discounts, spend $300-$399.99 and earn three 10-cent fill-up discounts Ukrops Super Markets Inc. fuelperks! 5 cents per every $50 single-transaction purchase Giant Eagle fuelperks! 10 cents per every $50 spent, and 1 cent for every drink purchased an average 11.9 cents per gallon, com- tory that it ends a fiscal year with fewer way to grow the category, according to pared with “exceptionally strong mar- stores than it started with, according to Scott Wetzel, vice president of market- gins” of 23.9 cents in the same quarter Walmart Today. While Strasser says the ing for Excentus Corp., Irving, Texas, a of 2008. warehouse business does continue to loyalty-solutions provider with the “And I can tell you that there’s little, expand, he says, “It’s probably seen the fuelperks! program. if any, profit on gasoline,” Weglarz best of its growth.” One national supermarket client he says. “When you take the amount of Lopez of EAI says, “A lot of them are declined to name started to partner with margin and you take out the credit- holding back on some of the big builds, established fuel retailers where they card-swipe fees, there’s very little left just because they’ve got to rein in some could not build themselves, because of to cover payroll, insurance, utilities, all of their growth estimates until the econ- deed restrictions on land and other rea- those other items you would think a omy kind of shakes out.” sons. Wetzel says, “They saw little drop- merchant has to cover.” EAI reports that hypermarket/fuel/ off in effectiveness in terms of attracting Undercutting HVRs’ price-cutting retail site growth greatly moderated in and keeping customers.” appeal is a simple fact: People are driv- 2007 through 2009. And Lopez points Another reason to court established ing less. High unemployment levels out that some forays have not come to fuel retailers, especially when an HVR translate to fewer commuters driving fruition, such as Vinings, Ga.-based The has limits on building its own facilities, to work. Also, today’s fleet of cars, from Home Depot’s growth from its pilot c- is the compelling nature of fuel as a loy- traditional to hybrid, are more fuel-effi- store program, Lakeland, Fla.-based alty incentive. Simply put, gasoline cient, thus requiring fewer fill-ups. After Publix Super Markets Inc.’s slowdown trumps all. years of annual increases, EAI forecasts and Boise, Idaho-based Albertson’s Another of Wetzel’s HVR clients pit- gasoline consumption to be flat in 2010, pulling out of fuel altogether. ted the same promotional item against with continued declines of 0.5% to 1% “There are some real cracks in the itself, offering it in two forms: a coupon per year. And some observers are sug- bullish foundation that we might have and in fuel rewards. Sales volume for the gesting fuel consumption could fall by seen earlier, because some things never item rewarded via fuel discounts did as much as 2% to 3%. came to light,” Lopez says. 300% better. With that knowledge, the There is another factor: Slumping HVR client set about turning most of its retail has also translated to a slowdown FUEL IS KING temporary price reduction (TPR) strate- in warehouse growth. In the case of Hypermarkets’ infatuation with fuel gies, such as coupons or buy-one-get- Sam’s Club, the store closings mark the may be experiencing a turning point as one-free offers, into fuel-based rewards. first time in the company’s 26-year his- HVRs begin to court fuel partners as a Walker says one of MetroSplash’s March 2010 CSP 77
  5. 5. “very progressive” clients is developing they’ve figured that formula out.” “And in turn, they started seeing basket mobile-phone applications wherein Loyalty programs today are able to size increase,” Wetzel says. fuel is pivotal. In one scenario, a mobile track what people buy, what they get Eventually, the focus becomes iden- ad would go out to customers for a 2- along with certain products (also called tifying which promotion items people cent-per-gallon discount on gas for market basket purchases), the frequency respond to the most. From this analy- buying a certain fountain drink within of visits and other helpful data. Over sis, retailers can offer numerous types the hour. Why is gasoline so important? time, such tracking also gives compelling of rewards, ranging from promotions “If you’re in a car and got a text that pictures of how consumers respond to sponsored by vendors to a flat 5-cents- said come into [our store] and get a promotions. “With a loyalty application, off-per-gallon for every $50 in gro- fountain drink for 50 cents, you’re [retailers] are able to slice up their audi- ceries purchased. immune to it because you get those ence according to demographic factors, “What we’re finding now is a blend,” kinds of offers all the time,” she says. age, sex, income, frequency of visits,” Wetzel says, “a basket reward on $50, “With fuel, it’s different. People seek Meyers says. “And when they run a pro- then offering bonus rewards on specific out the opportunity to earn it.” motion, they can watch distinct groups items that they’ll fund off a [consumer to see if it had an impact.” packaged goods] discount or a promo- SOPHISTICATED LOYALTY Typically for HVRs, demographics tion they fund out-of-pocket.” Loyalty programs help companies are all about total amount and frequency Fortunately for c-store operators, loy- make decisions based on measured of spend, Wetzel says. The game is about alty programs aren’t exclusive to big box, results, as often shown by their signif- how to make the most loyal, highest- and in some ways are helping to level the icant investments in new fuel sites and spending customers buy more and the playing field. “Convenience retailers major-oil ties. “Kroger, with its state- least loyal, low-frequency customer didn’t just roll over; many of them have of-the-art [loyalty] system, knows increase visits. Case in point: Grocers dis- now created their own loyalty programs down to the penny what a loss-leading covered through basket-sales analysis that with their own rewards,” Gilligan says. gallon does to the inside of the store,” they were losing customers to big-box And many prefer to operate the pro- says Al Meyers, senior vice president of retailers on items such as paper towels grams on their own, rather than partner Columbus, Ohio-based Kantar Retail and canned goods, not on perishables with a grocer. Wetzel of Excentus says, (formerly TNS Retail Forward). “My such as fresh meats. Fuel rewards got “When you’re in control, you can pro- guess is that if they’re adding fuel, them back in to buy the non-perishables. mote high-margin, high-waste items like coffee, you can try to stimulate sales in particular areas of store, you can Hypermarket Gasoline Market-Share Outlook promote unique brand characteristics.” In addition, some c-store retailers In 2000, EAI predicted hypermarket gasoline market share would be 16% by 2004 [CSP—June ‘01, p. 45]. are discovering the value of their own 15% data, and angling to sell vendors move- 12% ment and basket information. Walker 12% 10.8% 11% 9.5% 9.9% 10.2% of MetroSplash says one 40-store client 9% 9% 9.2% 9% 8.3% is approaching vendors to fund dis- counts based on the value of the infor- 5.8% 6% mation they can gather. Convenience retailers may also be 3% catching a break in that the grocery-fuel loyalty programs may be limited to the 0% supermarket channel. Based on discus- 2002 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 sions with retailers who work with big Source: Energy Analysts International boxes and empirical (though nonscien- 78 CSP March 2010
  6. 6. tific) site visits, the relationship between November, Wetzel says BP signed on to [HVRs], particularly when it’s part of fuel and in-store purchasing behavior at be the national redemption site for Excen- the grocery stores and part of Wal-Mart. mass merchants such as Walmart and tus’ fuelperks! program. BP’s philosophy It must be a volume driver. We don’t Costco doesn’t go beyond EDLP. A few is to partner with others, he says; to that know how to compete against that.” retailers, who spoke on condition of end, the company is enabling its jobbers, And while Kent says that competing anonymity, say many of the big boxes dealers and retailers to easily and inex- grocery discounts haven’t hurt his vol- focus on price, encouraging foodservice pensively opt into the loyalty program. ume so far, he knows it’s something to and fuel partners to offer discounts or But it won’t stop with groceries or watch: “Someday that may change; we promotional deals, but don’t link the gasoline. Wetzel says coalition-type rela- may have to change our philosophy. … rewards back to how much people spend tionships with other, noncompeting busi- We have to protect our customer base inside the larger store. nesses are forming, with Excentus even and do what we can.” developing an online mall. MAJOR OIL MOVES For retailers, the future may be one HOW TO COMPETE Undoubtedly, big players are moving into of competing with loyalty-discount So going into the future, how do loyalty specifically to take advantage of pricing. “We don’t try to chase that c-stores keep that base? the grocery-fuel relationship. Major oil piece of it,” says Kent of Kent Cos., who According to David Portalatin of companies have sent request for proposals says he focuses only on his competi- Port Washington, N.Y.-based customer to loyalty providers, actively seeking deals tion’s street posting vs. the additional researcher The NPD Group Inc., similar to Kroger-Shell and BP-Excentus. rollback on groceries purchased. “It c-stores have a few of ways of compet- Speaking to the announcement last probably drives a lot of business for ing. “There are others going to market 80 CSP March 2010
  7. 7. in the convenience channel with a private brand, for example, on the low-price offering,” he says. He also points out that price is not the only differentiator in gasoline: “Consumers may be motivated to purchase a product that they feel is going to be better quality, and that quality can be defined a number of ways. Maybe it’s performance in their engine, or cleaning power, or better for air quality, or it could be a lot of dimen- sions to that.” Differentiation can also be achieved through customer experience, foodservice and other retail offerings. “So it’s not as if these guys are just a gargantuan steam roller, that because their low price squashes out everybody else in the market,” he says. “I think that [HVRs] appeal to specifically low-price consumers, which leaves room for a lot of other value propositions in the marketplace as well.” Weglarz points out that a convenient location and good lighting can go a long way toward making a customer feel safe. Little touches, such as having gloves that customers can wear while pumping gasoline or stocked windshield service equipment, also help. “And many times there’s still a segment of the customers that wants to know the owner or the manager,” he says, “and that is totally lost when you go the big-box stores.” All in all, the industry has the wherewithal to endure. Emily LeRoy, executive director of the Tennessee Fuel and “We think strongly that [loyalty ties to established gas stations] is going to be the hypermarket’s new influence.” Convenience Store Association, Nashville, Tenn., says that c-stores are used to new, untraditional competitors coming into the marketplace, and are “exceptionally good at rolling with the marketplace, of seeing what the consumer in that particular market wants, and delivering it.” Innovative retailers can focus on getting fueling customers into the store. “The industry is woefully behind in encouraging [customers to go from the pump to the store]. Where are the big [high-definition] screens? The pizza smells?” says Meyers of Kantar Retail. “There’s a lot that could be done while I’m standing there pumping fuel, so why aren’t we marketing it to death?” I March 2010 CSP 81