Kroger’s Gas Rewards Program Shifts Into Overdrive
A RetailWire poll in January found that 27 percent
thought that gas prices would have to hit $3.50 a gallon to seriously hurt
the recovery seen in retail sales. Forty-three percent put the tragic number
at $4 a gallon. With prices within the basic range of those two price points,
there has yet to be a major drop-off in purchasing, but there is already evidence
that consumers, particularly those from the middle-class down, are altering
behavior to stretch dollars.
With rising gas prices as the backdrop, in rides
the white knight of fuel rewards. Retailers have been using free or discounted
gas for years as a means to drive store traffic, and there’s nothing like spiking
prices at the pump to make these programs appealing to consumers.
A case in
point is Kroger. It’s new fuel rewards program gives consumers credits for
up to $1 a gallon on gas for purchases made in the chain’s stores. Kroger shoppers
have the option of redeeming their fuel rewards at the chain’s Fuel Centers
or at Shell stations.
The program gives shoppers 10 cents off a gallon for every
$100 spent at Kroger locations, 50 cents off for $500 and $1 off with purchases
of $1,000. The chain’s previous program capped the rewards at 10 cents a gallon
for fill-ups.
Discussion Questions
Discussion Questions: How big a draw are fuel reward programs? Will we see an increase in the numbers of retailers adding pumps at store locations?
We have become gassed on the retail battlefield lately. The value of fuel reward programs today are in direct proportion to the rising cost of our gas. Programs such as Kroger’s make a 10 cent discount of gasoline seem larger than the price comparisons of products on the shelves.
Gasoline is an interesting product. It is a non-emotional purchase–except for price. The typical consumer is not truly rational.
The average fuel purchase is 10-15 gallons. At a $.05 per gallon difference driving out of you way to save the nickel would save you $.50–$.75, not even enough for a 12 oz. cup of coffee.
However, people do it all the time. That is why programs like Kroger’s work so well. There is a magical moment when the customer sees the price per gallon in the pump “rolling back” to a lower price. Programs such as Kroger’s have proven to be winners for supermarkets and the price clubs. They drive transactions and transaction size. With the price of gas (based on my fill up yesterday) at over $4 per gallon here in Chicago, these programs are here to stay. You can expect others to implement them as soon as they can.
Up here in the wilds of Vermont and New Hampshire, these programs are not always so warmly received. It could be our collective imagination, but it seems that the gas stations you have to go to in order to get cheaper gas are always about 5 to 10 cents more per gallon than their competitors across the street. We talk about this at the general store, or while out tapping our maple trees.
This is a timely program with gas prices at current levels. It’s a great story for shoppers and a clever move for Kroger.
Both BJ’s and Costco recently reported increased store traffic as drivers took advantage of the club stores’ bargain per-gallon pricing. Kroger can further benefit from this trend.
Kroger is managing its liability. It has increased the funding rate while setting a cap of 35 gallons. With the average fill up slightly below 15 gallons (as Steve notes), the max cost is below 1.5% of spend, which is presumably shared by Kroger and Shell.
Kroger need not build any pumps. The goal is to get shoppers to buy groceries, not gas. On-site pumps make store trips more convenient, but at a cost. This program is designed to get shoppers to spend more, and Kroger’s growing partnership with Shell saves it the capex.
It’s a nice gift to consumers. But it’s also notches another victory for Shell, which recently added a rewards programs with Stop & Shop, and counts Winn-Dixie and BI-LO as partners.
We know that shoppers will drive WELL OUT OF THEIR WAY to save a few cents a gallon…burning through whatever savings they may have had on the trip itself.
We have also seen the success of grocery programs, where shoppers who are texted before a gas price increase, flock to the pump to save a few dollars.
Gas is a “grudge purchase.” It is not fun, like buying a Wii. It is not a badge, like a new pair of Prada shoes. It is like paying a utility bill–a necessary evil. In fact, I believe that the irrationality around shopping for cheap gas reflects a certain resentment around the necessity itself.
Can gas drive retail traffic–a big honking yes!
Steve Montgomery is right. The purchase of gasoline is irrational. Why would someone go to Kroger and purchase $1,000 worth of groceries to save $20 to $25 on gas when they can do some smart shopping at other retailers and save considerably more than 2%?
Should grocery operators expand into the gasoline business? Not unless their gasoline business can stand on its own. To suggest that having gas pumps will drive the grocery business is a foolish thought. One can not sustain the other.
It’s a good deal for cherry pickers but not regular shoppers. Typically shoppers are better off shopping at Walmart and Aldi and paying the regular price for gas.
Some stores let you count the purchase of gift cards. So if you are doing a $10,000 project at your house and you go to a store and buy $10,000 in gift cards, if it gets you some free tanks of gas, go for it.
Such “cross-market promotions” that transfer benefits from purchasing in one category to another category will always work well, and will work especially well when the discounts are in fuel. Here is a paper I wrote recently that studies the advantages of this type of promotion.
Excuse me for being pessimistic about Kroger’s program. I know pessimism does not become me. But I can’t see where saving 10 cents a gallon on $100.00 worth of groceries is going to excite or determine where I shop. Our average grocery spend per trip is around $100.00. My average fill up is around $40.00 as of yesterday. That was around 10.5 gallons. So my savings would be $1.05 on the fill up? I have now spent $100. 00 on groceries and $40.00 on gas and have saved one dollar and five cents. Am I missing something here?
Those who drive a huge SUV with a 30 gallon tank get far more value from such programs than those who do not drive much and/or drive higher mileage cars with smaller gas tanks. I find the Giant Eagle program to be easier to understand and more useful to the average consumer than the Kroger model.
Gas is a necessity purchase and having it available near a store I’m already shopping at is convenient. Some consumers feel the same way and may select a retailer that has both products. This promo wants to influence some consumers to spend to a threshold in the store to get a discount at the pump. A small number probably will. Will this increased traffic (both at store and pump) pay for the gas margin giveaway? They will need the right predictive software up front building the promotion (and predicting the effects) and the right analytical software reviewing the sales data to determine if things play out like they wanted. Anything short of that is just guessing. That said, I hate buying gas after I’ve bought my food with the ice cream melting and beer warming up. (AZ resident 🙂 )
Interesting psychology at work: I remember one time giving someone a gift card to Saks–I think it was $50–and the reaction was as I had hoped “Oooo…Saks!” Of course I had really given them $50, and if it had been a card to the Salvation Army, it would would have amounted to $50 as well; same here: $1 off @ $3.50 a gallon is no better than $1 off @ $1.25 (in fact, it’s probably LESS meaningful since higher prices mean people will likely drive less). But of course the question wasn’t whether it makes sense, but whether it’s effective…probably yes.
The best way I can make sense of the growing enthusiasm for fuel rewards is to recommend that all readers buy a copy of Predictably Irrational by Dan Ariely.
Here’s why:
I have a colleague in the UK who worked with global fuel retailers in EU and shared the story that offering fuel as a reward was a big “no-no.” The reasoning was that people never see it unless it spills in the forecourt, it is consumed quickly, and there is exactly *zero* emotional attachment achieved by redeeming for fuel.
Steve Montgomery’s commentary makes an excellent companion point, that the amount actually earned is much less than the satisfaction gained by the consumer in the purchase.
If fuel prices in the US continue to be in the current range or creep higher, fuel rewards will continue to be popular as consumers will enjoy a perceived opportunity to “stick it to the man”. Over time, the caps will either have to be lifted or other options added to the programs to keep them interesting, in particular if fuel prices soften.
It may be a big win for Shell. Sure. But keep in mind that as of January, 2011, Kroger has 1,000 fuel stations. Yes, 1,000! This is a really big deal for Kroger. Fuel is a large segment of their business. Some statistics show that on average, a stand-alone fuel station averages in sales about 75-90K gallons per month. Those same studies show that a fuel station associated with a supermarket or retailer averages in sales over over 125K gallons per month. If Kroger fuel stations were doing just ‘average’, this would mean that they are potentially selling–well–it’s to many zeros for here. Isn’t it 1.5 billion gallons a year? At a current $3.75 a gallon, isn’t that $5.625 billion in sales just in fuel?
Combine that with the same studies that show the combination drives sales up in the retail store from 5-8% on average. It’s very powerful win win. It’s convenient. It’s a great addition to the overall offer.
This is likely the most watched and most price conscious commodity there is–period. Consumers will go across the street to save a penny a gallon. No, they don’t calculate that is was a savings of likely a dime. They do it anyway. Offers like this are a great marketing tool as they take the price lower from the street sign and create offers that many of their stand-alone competitors cannot.
Fuel programs like this are a very powerful tool for Kroger and other partners that join with them, like Shell. As fuel prices begin to rise even higher daily, these tools give them an advantage–a real advantage. In a high fuel price market, this program alone is a fabulous way of driving loyalty and increasing both the fuel business, but even more importantly, the store business.
I get just 13 miles per highest-octane gallon of fuel, so I follow local gas prices closely. My tank is 25 gallons and fill-ups require a defibrillator on standby. Always the best are Safeway, where I also save 3 per gallon with my frequent shopper card, and Raley’s, where I save 10 per gallon by buying $50 or more in qualifying items inside the store. Great programs, and highly competitive with each other since they’re only a short distance apart. Plus, they’re just down the street and regularly beat the local Shell and Chevron on regular price even before the discounts kick in.
To those who are skeptical about high supermarket purchase requirements just to save a dollar or two on gas for which one has to drive out of their way, perhaps my situation is ideal. I shop both stores all the time, there is no purchase requirement for Safeway and a low one for Raley’s, and they’re very close to my neighborhood. Buying their gas at discount is a no-brainer for me and I see no reason to buy anywhere else.
I buy 100% of my gas from Costco saving about $0.09/gallon. Over the course of the year I save $150. This pays for my Costco membership and I feel like I’m getting a “good deal” on gas. As such, I would not be interested in gas reward programs–one more thing to keep up with.
Another way to look at it is I’m already in a gas reward program with Costco and am very happy with it.