April 19, 2012
Big Box Stations Fuel Growth
Americans are very sensitive to increases in gas prices. So, what better way to get them to a big box lot than offer them a way to save some money when they fuel up their cars and trucks? Costco, Kroger, Walmart and many others have dangled gas savings in front of consumers with great effectiveness.
Last June, Walmart announced a rollback at the pump to get it publicity and reinforce its image as a low price leader. At the time, the company’s CMO Stephen Quinn said, "Our customers have told us that high gas prices are a top budget concern, nearly as large an expense to their households as food and groceries. We listen to our customers and because we know they are feeling squeezed by gas prices, we’re implementing this gas rollback to help them save, especially during high travel summer months."
A recent report from across the Atlantic shows that big box merchants in the U.K. are following the same path. In fact, according to The Telegraph, roughly 46 percent of all gas sold there comes from pumps located in supermarket lots. Tesco has become the leader in the "petrol" market with a 15.5 percent share.
Smaller stations in the U.K. have maintained they are being victimized by predatory pricing and have taken their case to the government. One estimate, cited in The Telegraph report, had up to 300 independent stations in the U.K. going out of business as the result of being unable to compete with Tesco and others. Ultimately, the argument goes, consumers will be hurt as access to gas becomes more scarce, particularly in rural areas.
Discussion Questions
Discussion Questions: How important is gas to supermarkets and other big box operators in the U.S.? Will we see big boxes put independent and small chain gas stations out of business in large numbers in the years ahead?
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The combination of auto repair service coupled with pumps and a decent c-store environment was the “gold standard” for service stations. Without mechanics on site and limited number of pumps, we may indeed see corner stations go the way of the dinosaur. EPA guidelines relative to underground storage tanks and the need to upgrade caused many stations to shut down rather than invest in the significant expense of excavating the tank, replacing it and re-surfacing the pad.
Offering gas at a discount as a preferred member (Costco) or coupling grocery spend and other purchase behavior (gift cards) has been a solid win for chains such as Kroger and Giant Eagle. It all comes back to convenience, service and selection with a commodity product not having the ability to influence retention. Those chains with strong credit portfolios can retain customers and their affinity to the corner station by offering rebates off of seasonal spend, but this tactic can only sustain a weak location due to poor c-store footprint and competitive in-roads for only so long.
This is the age-old issue of how an independent survives the onslaughts of the big chains, no matter what the channel. This is normally done by effective customer outreach, better service, unique products and better wholesaler support. That might be tougher in this channel since price is even more of a factor than anywhere else, and self-service dispensing in near universal. Independent gas station owners have a challenge, and it will be very interesting to see how they meet it this summer.
If selling gasoline is profitable to supermarkets and big box stores, the practice will continue and increase. If many more outlets for gasoline become available, there will be some outlets that go out of business because the growing number of outlets cannot be supported without a big increase in the amount of sales. If consumers are just switching where they buy rather than increasing the amount they buy, constant demand can not support a big increase in outlets.
Simply said, as long as gas is more than $3 a gallon, the sensitivity to saving at the pump will be a key “driver” for consumers. (All puns intended).
Thus, savvy retailers with companion fuel programs own a tool to cross promote food and soft goods with fuel that provides a true competitive advantage. This advantage will undoubtedly put additional pressure on independent retailer without fuel programs, as well as the independent gas stations.
Independent gas stations, who once relied on parity pricing and convenient locations, will need to reach out to other retailers for partnerships and programs that will allow them to compete. If they are unable to do so, given the already tight margins on gas and other operating expenses, they will likely become a casualty to the increasingly competitive marketplace.
The threat of the HVR (High Volume Retailers) to the traditional c-store industry is very real. The only question is the extent of the threat. In some areas of the country (especially areas of TX) the percentage of HVR fuels sales have had definitely impacted c-stores. However, c-stores offer more than just fuel, are far more convenient, etc., so an HVR entry in fuels sales in a market does not mean that all or even a majority of c-stores will fail.
One limiting factor for some of the HVRs is that Sam’s, Costco, and BJ’s all require buying a membership before someone can buy fuel. Also several of the supermarket chains that got into the fuel business found while it might seem simple, it took more effort than they anticipated and have since sold off their fueling operations.
When your budget is tight
And your pockets feel light
You drive to the big box
Where gas prices seem right.
Small stations are now entrapped
Their business has been kidnapped
They will offer car repairs
But their future has been snapped.
In this economy, cheap gas is a powerful draw, but gas alone does not a big box make. I don’t see big boxes becoming the major gas suppliers. Too many people fuel up just as they are running on fumes, so location is still critical.
Since gas stations are generally situated in front of retailers’ big boxes, they are a powerful “lure” to what sits behind. One retailer recently stated that they create the “first value impression” for the main store. This is particularly true since many consumers follow gas prices down to the penny. When retailers’ gas prices pass muster, it immediately transfers value credibility to the main store. That is reason enough for big boxers to operate gas stations as a loss leader if need be, and if they do, the independents won’t have many places to go.
No wonder they are scrambling to make their non-fuel offerings and shopping environments more compelling.
Local corner gas station — $4.18 per gallon. Safeway about one mile away — $3.99 plus discount for “loyalty program” down to $2.99 per gallon on a full tank for the minivan! Now I know that somehow Safeway probably made the profit on food and is likely selling gas at cost or with the discount might have even lost. Not always worth the drive, but it was on that day! How can the local single-unit compete with that? I wish I had the magic bullet, but hopefully their mechanic shop is doing well.
This is an expensive leasehold improvement. If gas and oil prices tumple as many expect the ROI is going to take much more than most 5 year plans allow. They would be smarter to buy gas and gos close to volume stores and provide coupons instead of stamps. If things don’t work out as planned, set them adrift.
With gas prices at a level that was unthinkable only some years ago, there is less loyalty to brands than ever before. If a retailer offers gas at a value price, shoppers will continue to take advantage of the convenience of the location that they are shopping anyway. Why not buy gas at the store you need to go to?