Hyper Inflated

While HVR dominance never happened, c-stores still battle some big boxes for fuel dollars.

By  Melissa Vonder Haar, Tobacco Editor

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Fuel Success and Failure

Some of those weaker players who either got out or scaled back their fuel business include Home Depot, Albertsons and a number of local supermarkets. For his part, Nelson believes the reason fuel works for some retailers but not others could simply be a matter of customer base.

“Walmart and Costco are large general-purpose retailers that drive huge customer volumes through their locations with frequent repeat same-customer visits,” he says. “A specialty retailer like Home Depot or Lowe’s has a much smaller core customer that shops there frequently (like contractors) and a larger population of folks that are occasional visitors for a specific home project. People in general do not form a habit of regular shopping at a home-improvement store.”

This may explain why gas programs didn’t work for the home-improvement channel, but what about the mixed record among grocery chains? While Kroger’s fuel program has been wildly successful, others—such as Albertsons—have dwindled. The answer may lie in a fundamental understanding of how to run a successful fuel program. After all, it’s about more than just adding in pumps and underpricing the competition.

“Some companies weren’t really ready to run a fuel program; I don’t think they understood fuel loyalty very well,” says Lopez. “Nowadays, if you’re going to have a hypermarket fuel program, that’s got to be a really serious part of it and it has to work really well.”

However, perhaps the biggest reason some fuel programs succeed is location.

“Unbranded gasoline tends to thrive where there’s room for it,” Lopez says.“In markets like Chicago or New York, there are lots of barriers, such as the cost and availability of land, in addition to already being very integrated with major oil companies.”

In markets such as Dallas, however, where land and regulations are less an obstacle, hypermarkets are another story. Texas, in fact, has been so good for fuelselling HVRs, Kent estimates that hypermarkets now account for 65% to 70% of the state’s unbranded-fuel sales.

“Maybe it’s the business environment in Texas. Zoning laws are pretty favorable for businesses,” Kent says. “It may be the access and availability of unbranded supply: Between the Gulf Coast and the pipelines, Texas has been a market that’s had a lot of fuel businesses start up. Whatever the reason, HVRs are here, and they’re here to stay.”So while retailers in major cities may not face much competition from HVRs, those in more expansive regions will have to continue to fight for fuel volume.

“[HVRs] are still coming in,” says Kent, who operates stores in Oklahoma and New Mexico in addition to Texas. “Atone point, we had HVRs directly affecting maybe two of our locations; it’s way bigger than that now. It probably affects half of our locations.”

Fighting Back

Despite the “flattening out” of hypermarket retailers entering into fuel, these high volume behemoths still pose a threat.

“HVR retailers suck a lot of volume out of the market, making the economics more challenging for traditional c-store operators and the dealers that they serve,” says Nelson, who conducts petroleum-industry study groups with executives from more than 250 companies. “Many study-group members are reporting year-over-year declines in their dealer business that exceed declines in fuel consumption nationally. That volume is going somewhere, and HVRs are picking up some of it.”

It’s an issue Kent is all too familiar with. When hypermarkets first entered his region, Kent allowed himself to be outpriced by a reasonable amount, figuring he could make up the volumes later by under pricing the HVRs himself. That didn’t happen.

“We found that [the HVRs] were never happy with a reasonable spread,” he says. “The bigger the spread got, the more volume they got. We decided we didn’t have any choice but to protect our customer base and volumes.”

Protecting Kent Oil’s volumes required a complete shift in the company’s business strategy. Like many retailers, Kent had to stop relying on fuel for profit margins and turn to in-store purchases to makeup the difference. This meant a focus on higher-margin items in the stores, building larger stores to accommodate more margin-friendly products and accepting that a bevy of strategies would have to be tested to remain competitive with fuel.

Although it was painful, Kent believe she didn’t have any choice. “I’ve seen too many people stay with the HVR prices when it’s comfortable, but then stop as soon as it gets uncomfortable,” he says.“They lose their volume and are surprised when they can’t get it back. You don’t have the ability to price under them for a little bit to get your volume back—these HVRs will never let you price under them.”

Meanwhile, c-store retailers who choose to go head to head on price, who adapt in order to thrive in a new competitive environment, often not only survive the onslaught of HVRs but also can benefit from it.

“In some cases c-store retailers in very close proximity to an HVR have actually seen a lift in volume,” Nelson says. “The HVR retailer tends to drive a lot of traffic by their sites and, if there is a lot of congestion, people who value their time over a lower price will stop at a nearby retailer.”

Indeed, in New Jersey, two independents dropped their prices by more than 10 cents a gallon when they saw cars lining up 10- and 15-deep at a Costco location about half a mile away. One of the operators reasoned he would be out of business if he did not price within 5 cents of Costco’s, calculating that customers would be willing to pay a few pennies more in lieu of a 20-minute wait at the hypermarket.

While time has proven that HVRs may never unseat convenience stores as the place to purchase fuel, in many markets from the Northeast to the Deep South, they will continue to pose a legitimate threat to many operators because of their ability to price well under market

“The advice I’ve given other retailers is to protect your customer base,” Kent says.“Price with them at any cost. After all was said and done, we ended up with lower margins—which were painful—but we did end up with increased volumes. Eventually, if you can keep that model going, you’re OK.”

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