Gasoline pricing in 2007 is as uncertain as ever, but supermarkets see this as an ideal environment in which to aggressively expand their fuel programs.
Motor gasoline consumption in 2007 is expected to increase 1.1%, according to the U.S. government's Energy Information Administration.
With fuel promotions and a growing number of freestanding gas stations, food retailers are poised to take advantage of heightened demand and pricing sensitivity, while strengthening their position in the fuel industry.
Even chains that don't have gas locations are touting fuel programs, using the pump sites of traditional petroleum companies as convenient places for customers to redeem fuel rewards.
Price Chopper Supermarkets, Schenectady, N.Y., has agreements with select Sunoco stations throughout the Northeast to honor gas discounts earned in its supermarkets. The chain currently offers an accumulative points program that enables customers to earn up to 20 gallons of free gas during a single fill-up at any participating Sunoco location. Shoppers who use their Price Chopper Advantage cards can earn 10 cents off each gallon of gas for every $50 of groceries purchased in the chain's stores, 20 cents off for every $100, and so on.
With the average family of three to four people spending around $106 on groceries each week, according to the Food Marketing Institute's 2006 U.S. Grocery Shopper Trends, customers can accrue points quickly.
“Having a program like this offers consumers yet another commodity that is desirable at a savings,” Price Chopper spokeswoman Mona Golub said. “This effectively connects the dots between groceries, which people want and need, and gas, which is also a necessity.”
The link between the groceries and gas is so strong that many oil companies are putting up additional convenience stores just to compete, said Ted Zittell, partner, McMillan/Doolittle, Chicago.
“The actual selling of fuel doesn't generate profit. Things like motor oil, maps, hot dogs and other products do, which is why gas stations are adding c-stores.”
Publix Super Markets, Lakeland, Fla., packs its Pix convenience stores with a large variety of general merchandise and food items, creating a quick-stop shopping option for time-starved customers.
“Our convenience stores carry an assortment of top-selling items, including some of our own branded products and fresh products from the stores like premade subs and doughnuts,” spokeswoman Maria Brous said.
Publix has opened seven Pix fuel sites in its store parking lots since 2001, ranging in size from small, 160-square-foot fuel islands to convenience stores approaching 2,000 square feet.
“We offer two fuel promotions that can be redeemed at any of our Pix locations,” Brous said. “Customers can bring in a Publix receipt with $30 or more worth of groceries and receive 3 cents off per gallon, or they can get 3 cents off per gallon if they pay with a Publix gift card.”
While many retailers center their fuel promotions on total dollars spent in their stores, some are leveraging existing technologies to get much more specific.
K-VA-T Food Stores, Abingdon, Va., has tied fuel promotions to the purchase of private-label products.
“One of our Fuel Bucks promotions gave customers $1 off at any of our fuel stations when they bought $10 in private-label merchandise at our stores,” said Tom Hembree, senior vice president, marketing, K-VA-T. The chain relied on Catalina software to track and tally private-label purchases during the event.
Food retailers are also making headway in the industry by keeping price points low on food and general merchandise sold at their fuel outlets, Zittell said.
“C-stores have always jacked up their retail prices, because their customers are in a constrained shopping situation, and when people are strained for time, they are willing to pay more for the convenience,” he said. “But retailers are breaking this pricing-penalty paradigm by offering the same prices for products in their c-stores and grocery stores.”
Meanwhile, some supermarkets have taken their investment in the fuel industry to a whole new level.
Giant Eagle, Pittsburgh, has been rapidly expanding its number of freestanding gas stations, a proposition that, coupled with its numerous store-adjacent fuel sites, is giving major oil distributors — who can't effectively absorb the cost of gas discounts — a run for their money.
Giant Eagle currently has 119 GetGo gas stations and convenience stores, 68 of which are stand-alone locations.
“Our GetGo fuel and convenience store locations allow us to bring our high-quality food offerings to a smaller, more convenient setting and add redemption sites for customers' fuelperks! rewards,” spokesman Dan Donovan said. “We opened 12 more of these [stand-alone locations] in the past year and a half, and we plan to open at least 10 new GetGo locations by the end of summer 2007.”
The chain's fuelperks! program allows shoppers who pay for groceries with their Giant Eagle Advantage Cards to earn a 10-cent discount on each gallon of gas at GetGo pumps for every $50 spent at its supermarkets or GetGo locations. During the holiday season, the reward, which is cumulative, was doubled to 20 cents off per gallon on gift card purchases.
“When Giant Eagle launched fuelperks! they caused a lot of pain to others in the market,” said Brandon Logsdon, executive vice president at Excentus, Irving, Texas, a technology firm that facilitates Giant Eagle's fuel program. “As a result, other retailers are trying to get into the fuel business. Aside from Giant Eagle, we're currently working on gas marketing programs with Ahold, Tops, Supervalu, Spartan Stores, Piggly Wiggly, Buehler's, Coborn's and several other chains.”
Most of Giant Eagle's gas stations are new facilities, but some are conversions. The retailer recently picked up 15 northeast Ohio supermarket locations from Tops and converted three existing gas stations to GetGos, Donovan said.
Safeway, Pleasanton, Calif., is doing the same thing. Along with putting up new fuel outlets, the retailer recently announced plans to turn one store in the Washington, D.C., area into a Safeway supermarket and convert an unused corner of the parking lot into a Safeway gas station.
Many retailers are also effectively integrating messages about their fuel rewards into existing promotional programs. Giant Eagle currently runs television, radio and print ads promoting fuelperks! and frequently highlights the program in weekly circulars. Price Chopper also uses a mix of media to spread the word about its Fuel AdvantEdge program, including radio and billboards.
Bumps in the Road
With retailers rapidly encroaching on their turf, oil companies have two choices: Buddy-up or fight back. Some have chosen to partner with retail chains, but a select few are making it difficult for supermarkets to continue offering their steep fuel discounts.
Last November, two gasoline distributors in Colorado sued Kroger Co., Cincinnati, claiming that the chain's extreme fuel discounts violated the state's fair trade practices. The jury sided with the gas companies, forcing the defendants, two of Kroger's grocery subsidiaries, to stop selling highly reduced fuel in Colorado. The distributors were also awarded $1.4 million in damages.
A year before the Colorado ruling, Giant Eagle faced a similar legal dilemma in Pennsylvania. However, that state's attorney general ruled in favor of the supermarket chain since Giant Eagle paid full price for its fuel and “ate” the discounts.
“It's unfortunate when antiquated laws are used to subvert the benefits of a free market economy, as appears to be the case with Kroger in Colorado,” said Lou Scudere, vice president, research and site development, K-VA-T Food Stores, Abingdon, Va. “Fortunately, in our area there are few laws, if any, which could be forced into such a radical, anticompetitive interpretation as happened in Colorado.”
Gas for the Environment
Retailers like Kroger Co., Meijer and H.E. Butt Grocery Co. were some of the first supermarkets to get into the fuel business. Now they're pioneering the trend to alternative fuels. The fuel of choice for all three chains is E-85, a domestic blend of 15% gasoline and 85% ethanol.
Cincinnati-based Kroger began offering the renewable fuel in Texas in June of last year. In the following months, E-85 pumps were also installed at some of the chain's gas stations in Ohio and Kentucky.
Kroger plans to continue adding E-85 sites as the markets warrant them, spokeswoman Meghan Glynn told SN. “We haven't decided anything definitive in locations, timing or numbers, but there is a growing interest in expanding our E-85 program,” Glynn said.
Like Kroger, H-E-B also began selling E-85 in June of last year. The San Antonio-based retailer started with five stations in central Texas that were chosen for their strategic locations along a major roadway, Interstate 35.
In July, Meijer in Grand Rapids, Mich., opened its first E-85 fueling station in Michigan, and as of last week, the company's website listed 22 such stations.
Offering E-85 or any alternative fuel has great value for food retailers, said Jim Wisner, president, Wisner Marketing Group, Libertyville, Ill. “It shows an environmental commitment and has conversational value, particularly in the Midwest states.”
However, while some retailers are willing to lead the way with new fuel options, E-85 isn't for everyone, at least not yet, said Bill Bishop, president, Willard Bishop, Barrington, Ill.
“In a lot of instances, alternative fuel only makes sense if the retailer is on an incredible sustainability kick, if environment was one of its major banners,” Bishop said. “The margins are so low that a lot of retailers will probably wait to see what consumers buy before they commit.”