PUMPING UP

Consumers may soon fill up their gas tanks as well as shopping bags during supermarket trips.Larger supermarket chains, such as Albertson's and Kroger, have been adding fuel centers steadily, using the service as part of in-store tie-ins, while smaller chains and independents have been moving more slowly.Mass merchandisers Wal-Mart and Costco have also been active in the fuel center category, adding

Consumers may soon fill up their gas tanks as well as shopping bags during supermarket trips.

Larger supermarket chains, such as Albertson's and Kroger, have been adding fuel centers steadily, using the service as part of in-store tie-ins, while smaller chains and independents have been moving more slowly.

Mass merchandisers Wal-Mart and Costco have also been active in the fuel center category, adding hundreds of fuel centers to their parking lots that offer highly discounted prices.

But challenges and obstacles to adding pumps, such as complex zoning laws and rising fuel prices, face all of the players in this game.

Still, industry analysts told SN that in the long run these obstacles will be speed bumps, not road hazards, and pumping gas should help food retailers boost traffic, build sales and fuel profits.

Albertson's, Boise, Idaho, one of the first supermarket chains to enter the gasoline business, has been aggressively adding fuel centers to its store base. The number of stores with fuel centers has grown from 32 in 1998 to a current count of more than 160 units. And that number is constantly growing, according to Jeanette Duwe, Albertson's spokeswoman. "We are constantly evaluating our options, and whatever makes sense for us, we will do," Duwe told SN.

Last week, at a conference sponsored by Bank of America Securities in New York, Michael Rueling, Albertson's co-chairman, said the company plans on adding more than 100 fuel centers in the next year at locations across the county, with some units featuring a convenience store attached.

"We have seen a significant increase in comparable-store sales at units with gas stations. It makes sense. It's just another thing to sell," Rueling said.

Previously, Albertson's had concentrated its fuel center expansion mostly in California and the Pacific Northwest, having introduced two years ago the Albertson's Express fuel center format at stores in Washington and Oregon.

Rueling also said Albertson's plans to increase traffic at its pumps, and possibly at its stores as well, by offering gas at a discounted price.

Kroger, Cincinnati, has also been increasing the number of fuel centers at its stores.

In February, Joseph A. Pichler, Kroger chief executive officer, said, "We currently operate 77 fuel centers at supermarket sites and plan to have 150 to 170 sites open by the end of fiscal 2001. Gasoline is a natural addition to Kroger's one-stop shopping strategy, adding convenience and value to our customers' shopping trips."

Pichler noted that Kroger can enter the gas/grocery business with less trepidation than other retailers not only because of its size, but because it operates 787 convenience stores under six banners in 15 states. Most of these units pump gas, and the distribution synergies and operations expertise the company has gained from its c-store business should enable it to introduce fuel stations rapidly and efficiently at its supermarket locations, Pichler said.

An Ahold company, Giant Food, Landover, Md., has said it is also looking to get into the business of pumping gas. Barry Scher, Giant spokesman, said the company currently has no stores that pump gas but is actively seeking to add fuel centers.

"We feel it is a great opportunity. In concordance with our aim to offer one-stop-shopping to our customers, we feel that adding gas provides for sensible synergies. It has worked for convenience stores, and just as adding pharmacies has become the norm for supermarkets, gasoline pumps in store lots may become commonplace as well," Scher said.

He also said the company has a new ventures department with a team solely looking into adding gasoline, although there are no plans for any Giant stores to offer gas in 2001.

However, Stop & Shop Supermarket Co., a Quincy, Mass.-based Ahold operating company, has been adding gas stations on a steady basis. The company now operates 23 fuel centers, all opened in the past three years.

Randall's Supermarkets, Houston, which operates 26 fuel centers, has said that it is continuing to identify new locations for fuel centers. A company official declined to comment whether the company, owned by Safeway, Pleasanton, Calif., would continue to offer discounts on gas or in-store tie-ins with fuel purchases, as it has in the past.

The smaller chains and independents have also been getting into the fuel business, but at a considerably more deliberate pace.

Don Marsh, CEO, Marsh Supermarkets, Indianapolis, told SN fuel sales at Marsh-owned Village Pantry convenience stores were up last quarter due to a promotion offering Marsh customers price reductions of 10 to 12 cents per gallon.

The H.E. Butt Grocery Co., San Antonio, has nearly 100 fuel centers, and has been offering gas at a discounted price to its customers.

Other smaller retailers have come into the business by acquisition, like Bruno's Supermarkets, Birmingham, Ala. The company acquired two fuel center-equipped Jitney Jungle stores in Mississippi and Alabama in recent months, and said it is still getting used to the business.

"We are still learning the ropes of the business," Marcy Stipp, Bruno's spokeswoman, told SN. "We have no plans to open any stores with gas pumps or market any tie-ins or cross promotions with gasoline until we get better acquainted with operations."

A spokeswoman for IGA, Chicago, said there are no plans for IGA operators to cut back on the rollout of gasoline pumps at IGA stores. However, she declined to highlight any specific plans or reveal any prospects for numbers of stores opening in 2001 that will offer gasoline. The source also did not comment on the total number of IGA stores with pumps, or how many have been added in the past year.

Independents and smaller chains can also benefit from adding gas pumps in one other way. The National Grocers' Association released findings that suggest gasoline sales can provide an increase in operating cashflow. The NGA pointed out that there is usually a long delay between when gas is sold to the consumer and when the retailer must pay the oil distributor.

Mass merchandisers have also announced aggressive plans for adding fuel pumps to store parking lots.

Wal-Mart Stores, Bentonville, Ark., currently operates more than 400 gas stations, with a distinctive strategic approach. Unlike most food retailers, Wal-Mart has not built its own centers and does not buy gasoline from a distributor. Instead, the company has been leasing space on its lots to gasoline companies like Murphy Oil, El Dorado, Ark., over the past few years. Companies like Murphy Oil operate fuel centers on the lots independently from Wal-Mart, assuming all profit and loss risks, according to Kevin Fitzgerald, director of investor relations for Murphy Oil.

"The pricing risk is totally ours," Fitzgerald said. "We now have stations operating at more than 300 stores, and look to add over 100 stores a year. In 2000, rollout was expected to involve 150 stores, but the permitting process has been problematic, resulting in the company opening slightly more than 130 units."

Fitzgerald said Murphy Oil, which operates Murphy USA stations in Wal-Mart lots in 21 states, has opened units in all of the locations where gas pumps are permitted by zoning laws, and plans on opening new stations in every new Wal-Mart location where gas pumps are permitted.

Costco Wholesale, Issaquah, Wash., currently operates 125 stores equipped with gas pumps, but unlike Wal-Mart, the Costco controls all gasoline operations.

"Costco has always felt that it is better off controlling all aspects of our business ourselves," said Franz Lazarus, Costco spokesman. "We feel we can serve our customers best, and thus take all liability in offering added features like gasoline to our customers."

To maximize efficiency in distribution and pricing, Costco has cut deals with several oil distributors across the country, Lazarus said.

Kmart, Troy, Mich., has rolled out mini-marts equipped with gasoline stations at two of its stores -- one in Ohio and one in Virginia -- as part of a pilot program. The units feature small convenience stores with gas pumps in Kmart lots. Kmart has not announced a national rollout of the prototype format.

Though nearly all retailers have said they are positive about the future of fuel centers, many have agreed there are several obstacles to rolling out fuel centers on a national level.

In particular, they noted that retailers must consider the environmental and safety zoning laws when searching for new store locations they wish to equip with gas pumps, and large portions of an existing store base may be ineligible for a fuel center for a variety of reasons.

Giant has found building fuel centers a complex, lengthy procedure, according to Scher. "When it comes to adding gasoline, it is always a difficult procedure," he said. "It takes much longer to finalize plans for a store with gasoline pumps than a store without them. At times, you have to deal with zoning and environmental laws on a federal, state, county and township level all at the same time."

Retailers and industry observers also noted that zoning laws vary greatly from region to region. In the Southwest and Pacific Northwest, retailers have not had much trouble getting permits to add pumps to store designs, said Mark Husson, analyst with Merrill Lynch, New York.

Another potential obstacle, the recent increase in gasoline prices, does not seem to have deterred retailers from building gas stations. According to Scher, gas prices should level off in the coming months, as fuel price fluctuations can be seen on a larger, cyclical level. He also said that petroleum price is not much of a factor in Giant's plans to move forward with strategies that include gasoline.

Costco is not bothered by rising prices either, according to Lazarus. He also said the company sees petroleum prices as cyclical, and that looking at the price fluctuations on a long-term basis, there is no reason to hesitate moving forward with adding pumps to stores.

Analysts told SN that adding gas stations to supermarkets should add significantly to food retailers' bottom lines.

Husson told SN he believes adding fuel centers to supermarkets "is a very, very good idea for a number of reasons. One is that nearly 50% percent of the population, men, know nothing about the price of goods except for gasoline.

"If you can make male shoppers aware that you have lower prices all around by luring them in with discounted gas, you can get them into the stores by getting them at the pumps first. If you discount a few cents a gallon, you can also make up the difference by cross promoting gas with high-yield items.

"Also, it goes to reason that supermarkets are supposed to meet the needs of every family in the areas they operate. Americans love their cars; they are like additional members of the family, and supermarkets should supply the food for this member of the family as well."

Debra Levin, analyst with Morgan Stanley Dean Witter, New York, noted that the incremental revenues, though small, are an added bonus to retailers, who can increase consumer loyalty through the addition of fuel centers.

"With clever promotions that will increase traffic at stores, supermarkets can profit regardless of high gasoline prices," she said.

Adventures in the Fuel Trade: A Timeline

October 1998

Randall's adds first gas pumps to stores in Houston and Dallas.

December 1998

Kroger opens first gas pumps at two stores in Indiana and Virginia; begins offering "frequent fueler" card promotion to customers.

January 1999

Giant-Carlisle opens first gas pumps at its Mechanicsburg, Pa., store; announces plans for six more units in the year.

April 1999

Albertson's announces plans to open seven fuel centers at stores in California.

July 1999

Tops announces plans to add gas pumps to three existing stores.

August 1999

Albertson's brings its first gas pumps to Washington state with Albertson's Express fuel center at its Richland store.

October 1999

Bill Koch opens first PW Petro in the lot of his Piggly Wiggly store in Warrensburg, Mo.

January 2000

Roundy's announces it will add above-ground self-contained gas centers at its stores.

March 2000

Wal-Mart says it will have 150 gas stations at its stores by the end of the year.

Albertson's announces plans to build 600 gas stations at stores in the next five years.

June 2000

In Tampa, Publix opens its first store with a fuel center.

July 2000

Albertson's, Costco and Safeway announce plans to add gas pumps to stores in Eugene, Ore.

August 2000

Ingles Markets says it will begin adding fuel pumps to stores over the next 12 months.

September 2000

Costco enters Texas market with two fuel center-equipped stores.

January 2001

Kroger announces it will add 13 gasoline stations to Dillon stores in Kansas.

Albertson's begins testing coupon promotions for cents-off gas at its stores.

March 2001

Kmart opens its first fuel centers.