June 14, 2012
Americans Gas Up at Big Boxes
New research from Market Force Information shows that consumers are driving past traditional oil company gas stations to fuel up at big box stores. In fact, ranking numbers one and two on consumers’ lists of favorite places to fill ‘er up are Costco and Kroger.
Now, it doesn’t take a rocket scientist to figure out that price is a big motivator in the purchasing decision. Gas, particularly for those in the middle and lower rungs of the economic ladder, is a major slice of household budgets. And saving money, even at five or 10 cents a gallon, is a pretty big motivator.
According to the research conducted with more than 4,500 participants across North America, 56 percent get gas at conventional oil company branded locations while 32 percent go the big box/supermarket route.
While big boxes have a pricing advantage, conventional brands still have the edge when it comes to convenience. Forty-eight percent of consumers are motivated by the location of a station compared to forty-six percent who put price first.
Market Force looked at the issue of loyalty as it related to gas purchases. As it turns out — no big surprise — there is very little loyalty there. In fact, only 17 percent of consumers said they would drive past other stations to go to their favorite brand even if the other stations had better prices.
"The battle for customer loyalty in the petro-convenience industry is fierce, and quickly becoming more complex as companies like Costco and Kroger take away more business from the mainstay brands," said Janet Eden-Harris, chief marketing officer for Market Force, in a statement. "Because it’s so difficult to differentiate on fuel prices, we’re seeing retailers roll out more aggressive loyalty programs to retain their profitable customers and attract new ones."
The Market Force research found that consumers have a lot of gas loyalty cards. Thirty-six percent own loyalty cards from retailers that offer rewards based on purchases. Fifteen percent have branded credit cards with the most frequently mentioned being the Army & Air Force Exchange Service (38 percent), followed by Sam’s Club (27 percent), Murphy Oil (22 percent), Chevron (21 percent), Walmart (19 percent) and Shell (16 percent).
Discussion Questions
Discussion Questions: Do you see more chains currently not in the business adding gas stations and/or loyalty programs tied to gas? Is there anyone doing anything out of the ordinary with reward programs or operations such as adding liquid natural gas pumps, electric charging stations, etc. that you think may pay dividends in the future if not necessarily in the near term?
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Gasoline sales is a tricky business. Just ask any gas station owner.
It doesn’t take a Stanley Marcus to attract business to a box — large or otherwise — by putting a cut rate gas station in front of it, but it may take Bernie Madoff’s accountants to determine how to make that station look like it’s running at a profit.
As the price of gas continues to rise, so will the potential of big boxes to attract customers with discounted fuel. What remains to be seen in whether the offset in increased sales can compensate for the overall margin erosion.
If I was a retailer and wasn’t already involved in selling gasoline, I’d look hard and long before I jumped into it.
Costco has it right…offer gas at the lowest price around and add a bonus when you use their American Express card. Some Kroger brands have it right…offer an instant discount at the pump when using your Kroger loyalty card.
Ralph’s, a Kroger brand that does not have on-premise gas stations, has it wrong…make a big deal about gas savings on every cash register receipt, but don’t tell consumers how to get the discount. The only way a consumer can discover this information is to ask in the store. It’s not even available on their website. And there are quick expiration dates on the availability of the offer.
Gasoline offers are welcomed by consumers. Which, if done right, with or without on-site gas stations, can drive loyalty and sales. With the intense competition faced by grocers from Costco, Target, Walmart and others, gas promotions and availability can drive business.
With gasoline, this has been going on for 20 years and I think it has largely played out. I’m sure as alternative fueled vehicles emerge, there will be many opportunities to test… but it sure doesn’t seem like a big differentiator today.
Having gas for sale has become a competitive necessity in many markets, and I see the trend continuing. A regional grocer just added gas in our area and the station is ALWAYS busy! Definitely a loyalty card enhancement.
I have not seen any new additions to the big box gas stations, but it stands to reason that improvements will come as they strive to remain competitive and retain customers.
People going to Costco to buy gas is not a news alert to me. Customers in our area shop there, and it is 60 miles away. Price is King, and I would not want to own a gas station, as they can not buy it for what a Costco or Sam’s sells it for. This is just like the problem I have buying center-store groceries, which puts us in an no win situation against the clubs every day. LOTS of fun being in business today!
Could write a book on this one. Who is doing it right and who is doing it totally or somewhat wrong — room for improvement abounds. Part of the constraint is tender based rewards tied to purchase at the pump. The credit card industry has been so dull and boring in this space for so many years that any innovation is seen as a difference maker. Question is does the price difference at a big box cause the consumer buying an undifferentiated product to turn left instead of right? The answer has always been a big fat no. A consumer will always say price matters. Convenience is the key.
I’m sorry, but I am not driving 8 miles to save 4 cents per gallon on my Costco gas placed on their AMEX card unless I am actually on the pad and shopping the store that very same trip. Let alone the fill up takes 2-3 times longer to complete because you have to wait in line to save $1.00!
It is all about frequency of visit and total spend, not what was shared in generic response as to whether price matters. What does matter is smart marketing and loyalty program benefits that do differentiate, for example in the case of Speedway/Speedy Rewards or Giant Eagle/Get-Go programs vs. the pretenders at Phillips 66, Shell, Mobil, BP, Conoco and Valero. You offer a clean, safe environment coupled with outstanding food quality, friendly service and lots of choices in hot/cold beverage — give me free coffee or a bagel in return for my affinity to the brand.
Jumping into a new program should take careful thought about the pros and cons of attracting customers, keeping customers, and profitability.
I did not understand the comment about Ralphs. My Ralphs is very clear about about using your Ralphs reward card and points to receive, right now, a discount of 20 cents per gallon. That is an attractive discount.
I would like to take this opportunity to air my grievance with this very practice: our local Costco now sells gas. Great right? No! The car line ups are so long that it actually impedes the flow of traffic and and out of the parking lot, especially on weekends. Big box retailers: if you hare going to sell gas, make sure the design and placement does not impede access to your stores (you MUST be losing some sales to this problem today).
It’s no surprise that consumers display scant loyalty when it comes to filling their rides — a gallon of unleaded is a gallon of unleaded wherever it’s pumped. And that’s why I expect even more merchants to launch gasoline rewards programs. It’s a clear driver in getting consumers to more often shop the brand to accumulate cents off the gallon. I switched gas station brands within the past year, based solely on getting cents off at the pump for shopping the brand’s grocery store.
I haven’t seen anything related to an alt fuels reward program in my neck of the woods. But for merchants that already dispense gas rewards, one idea may be forming a partnership with retailers or CPGers that offer no gas rewards, like small/local indie retailers or larger chains like department stores, drug chains and home improvement stores. Also, it may be worth noodling a way to accumulate cents off for shopping online merchants.
As the Market Force findings indicates, merchants offering gas rewards need to keep in mind that simply offering gas rewards doesn’t pump up shopper loyalty. Cents off the gallon may score points, but getting the lead out of other areas of the operation — like customer service, product selection and cleanliness — can also keep consumers coming back to get their fill of shopping and gasoline.
This fits right in with my oft advice to retailers — define your business by the needs of the people who come to your business, not by the suite of merchandise you have willy nilly assembled over the years. This is the strategy that created the C-store industry, all the while supermarkets were refusing to play in that space “because our target demographic is the stock-up shopper.” Tsk, tsk. So big box or other retailers offering gas is an obvious move. IT’S THE TRAFFIC THAT MATTERS, NOT YOUR MERCHANDISE! Retail principle number one.
HVRs (High Volume Retailers) selling fuel is not new. Sears sold fuel many years ago, but like others found the effort was not worth the reward. Time passed and with changes in technology, fuel supply, and customer perceptions regarding private label fuel made it possible for HVRs to reenter the fueling business. Several have learned that it is more complicated that anticipated and elected to outsource the operation of the fueling on their pots to third parties.
Those that continue to sell fuel have found that it can be a destination driver if offered at a discount. These discounts can be linked to items purchased within the location, to a loyalty card or in the case of Costco to their membership card.
As Ryan pointed out, the sale of fuel has margin implications. When this trend first reinitialized I, along with others, said, it’s great for Costco and others to add fuel — Wall Street will love the impact on sales, but may not like the margin impact. The annual reports of these companies now break out the impact the varying fuel margins have as fuel sales have grown to be a larger portion of sales.
Looking at the study itself produces some interesting (to me at least) observations. The answers to “Where do you most frequently fuel your car?” indicate that 69% did not select a grocery store or a mass retailer. Some of those who do purchase their fuel at a grocery store may or may not know that the grocery company does own and/or operate the out lot fuel location. For example, Murphy owned and operated the fueling at Walmart locations for many years. The information is also appears to conflict with the National Association of Convenience store statistics that indicate the 80% of all fuel is purchased in the U.S. is at a convenience store.
Retail chains are in the business of selling consumer commodities at the lowest possible price. The largest chains have tremendous purchasing power, that give them a pricing advantage over the traditional oil company dealer structure. Selling gas for many chains is a no-brainer, logical extension of their business model and their brand.
Nothing new. I remember my Dad gassing up the family car at Sears Auto Service “Sears Town” locations for years. I even fill-up back in the day when Montgomery Wards had gas pumps installed next to their auto service centers located on an out parcel near their department store.
Ironically Costco is fighting to install 20+ gas pumps at the same location Montgomery Wards had three pumps for years in Wheaton, MD.