Retailers on the defensive as Big Oil takes gas-grocery tie national.
After 18 months of planning, POS upgrades and a chainwide rollout, this spring Family Express announced the introduction of its F.E. Perks fuel-rewards program, debuting just as the major-oil companies revealed their own loyalty strategies.
Timing against the majors was incidental, says Gus Olympidis, president and CEO of the 52-store, Valparaiso, Ind.-based chain. But if first-mover advantage means anything, his comes just under the gun.
“We’re all operating in a big ocean, and what’s relevant to us is that we’re in charge of our pond,” he says of his program, which rewards purchases of in-store, proprietary brands with cents off fuel. “We feel comfortable with the unique application and [where] our program sits relative to the big picture.”
The picture he describes is one in motion. By year’s end, the world of c-store loyalty may undergo a seismic shift. What is today a nicety for some could become a necessity for many. The reason: Major Oil.
In recent months major-oil brands have forged deals with regional grocery chains. The combination of Big Oil and giant supermarkets yields enormous synergies and market density, one that threatens to greatly cut into c-store frequency.
On the heels of its announced ties with supermarket giant The Kroger Co. this past February, Shell Oil Products U.S. revealed similar loyalty partnerships with Quincy, Mass.-based Ahold USA and its Giant Food and Stop & Shop chains, as well as with BI-LO, Mauldin, S.C., and Winn-Dixie, Jacksonville, Fla.
Houston-based Shell’s moves run in tandem with other major-oil companies, most notably London-based BP, which announced its partnership with the suppliers of the fuelperks! network, Irving, Texas-based Excentus. The fuelperks! program also has strong grocer-fuel ties with regional players such as Philadelphia-based Giant Eagle. And the other majors— ConocoPhillips, Valero and ExxonMobil— are following suit.
The entry of Big Oil into loyalty will affect retailers differently, based on the operator’s fuel brand, proximity to grocery stores and how involved the company already is with loyalty. But the moves raise a number of issues:
- A game changer?Will it force those without programs to react? Precedent in other industries and documentation in at least one other country say yes.
- Cannibalization. Erosion of existing in-store business may be a consequence, but can retailers find ways to minimize or eliminate this side effect?
- Fuel as currency.Making fuel discounts the final reward, particularly with price rollbacks at the pump, is so popular that gasoline may become the “currency” of choice. The trend may give c-stores an edge but at the same time force existing programs to mimic the model.
- Multiple brands. Retailers flying multiple flags face difficult choices, involving everything from branding to technology.
- First-mover advantage.Will the major-oil announcements spark a rush by retailers to claim first-mover advantage? Industry observers believe so, potentially setting retailers up for quick and possibly ill-advised choices.
- Ultimate benefit. Some believe the situation will help retailers see the importance of creating one-on-one relationships with valued customers. How retailers respond to major-oil efforts will vary by company, but Olympidis says the proof will lie in execution: “It’s like what people say about customer service: It’s a good idea, but knowing is one thing, and doing is another.
“For us, [starting a loyalty program] means we have to do it right, in a robust manner and in a way that … eventually integrates with a strategic plan.”
What the major-oil strategies bring to the loyalty equation is scale, says Anton Bakker, president and CEO of Outsite Networks Inc., Norfolk, Va. Today, about 10,000 fuel retailers have links to loyalty programs; Speedway SuperAmerica is one of the more prominent networks, with 1,600 sites. But this year alone, BP and Shell could add 16,000 more locations—10 times that Speedway number.
BP’s program, focused on its branded credit card, ties into fuelperks! and thereby connects to many regional grocery chains already using the popular rewards program. The initiative aims to make every BP gas station a redemption center for cents-per-gallon fuel rewards. At last report, more than 90% of eligible BP sites, representing more than 8,000 locations, have enrolled to receive the price-rollback software upgrade, spreading to about 90 marketing areas this year.
The scope of the Kroger-Shell deal is also pervasive. By mid-year, 6,000 of the network’s 14,000 sites will be in markets with grocer alliances and will have access to the program. By year’s end, Shell will have launched in 80 markets, according to Shell officials. Dan Little, manager of fuels marketing for North America for Shell, emphasizes the critical importance of securing exclusive agreements with grocers. “Anyone who makes the investment in hardware and software can create alliances with other retailers,” he says. “But the value is getting the premier grocer in the market. Our strategy is to have a direct, exclusive relationship with that premier [chain].”
The level of marketing commitment for Shell’s rollout is significant, according to Little. Without giving specifics, he compares the budget to last year’s global launch of its new fuel products. “The launch of the grocer rewards is bigger than that,” he says. “It’s the biggest we’ve ever had, and for every dollar we put in, our grocers have put in that and much more. Our marketing teams have been locked at the hip for the past year.”
It was about three years ago that Shell locked in on this competitive direction. The major then spent the past two years developing the program and creating exclusive arrangements, leading up to its go-live phase with Kroger last fall.
The partnering effort started with Shell eyeing Kroger, being possibly the single largest U.S. grocery chain. Once that tie firmed up, the next step was to review Shell’s own network to identify gaps. They began looking at what Little calls “super regionals,” resulting in the Ahold deal in the Northeast.
“We were looking for markets that were strategic and that didn’t conflict with Kroger,” says Little. “We’re able to provide these marketing alliances for over half of the Shell network with between five and six relationships, but for the rest, we’ll need maybe 20 relationships because [the grocery channel] starts to get fragmented.”
As Big Oil drives new loyalty programs across the country, the question shifts to the micro level: How will each local market be affected?
If recent history bears out, Bakker of Outsite says Australia represents a precedent. The number of the country’s loyalty programs, many involving grocery and fuel ties, went from about a dozen to 450 in just a few years. “Overnight, when the grocery [program] kicks in, fuel-volume changes take effect quickly,” he says. “Those who didn’t have a partnership, mostly independent stations, lost 15% to 30% of their base volume. That’s enormous.”
Bakker cites a 2007 report created by the Australian Consumer and Competition Commission (ACCC), in which the United fuel brand reported such losses and how its retailers suffered from 2003 until about 2005-2006, when the introduction of ethanol helped them regain footing. BP acknowledged losses of 4% and, similarly, needed about three years to recover its volumes.
The Motor Trade Association of Australia, in that same 2007 report, said supermarkets there now control close to 50% of the market volume and have been a “key factor” in volume shifting from independents.
According to Bakker, the majors in the United States will take about a year to fully mobilize, offering smaller players a window of opportunity. But, he cautions, “The race will really take off in the summer and by the end of the year will be in full rage.”
Countering Bakker’s sense of urgency, others are adopting a more contemplative approach. David Portalatin, director of industry analysis for The NPD Group Inc., Houston, says for many customers, the grocery-fuel tie is compelling, but he has no statistics on what the increased fuel volume means to customer retention or spend. Retailers “really need to build enough in-store loyalty to offset the cost of the promotion,” he says.
“The majors will have an effect,” says Robert O’Connor, operator of three-site O’Connor Petroleum Co. and Jetz Convenience Centers in Hales Corners, Wis. “But over time, the market will figure out ways to work with them and adapt.
“[The problem will be] if we start beating each other over the heads with this … we need to be careful that we’re not willing to lose money to keep these relationships.”
Even beyond strategy, the dilemma many retailers face comes as technology opens up more options. Upgrades to conform with impending payment card industry (PCI) standards have allowed many retailers to opt into major-oil and other sophisticated loyalty programs. But where one hurdle falls, technology barriers arise elsewhere. Bakker of Outsite says some of the new programs force retailers to use the single loyalty port in the store’s point-of-sale (POS) device, effectively negating any program the retailer currently has.
Many of these technology issues stem from multibranded operations. Drew Mize, vice president of product management and marketing for The Pinnacle Corp., Arlington, Texas, says not only technology but also market alliances and branded programs may differ across a retailer’s geography.
“One major may deal with a rollback, but is the other offering the same rollback or reward?” Mize says. “For the most part they don’t, and that’s the challenge you run into.”
FUEL AS CURRENCY
Where c-stores fit into the larger equation will be a retailer’s million-dollar question, because what appears to be constant is the appeal of fuel as the final reward. “Whatever reason, changes in fuel prices has a dramatic effect on the customer,” says Kevin Struthers, executive vice president of Fiscal Systems Inc., Madison, Ala. “The customer has an irrational and emotional reaction to fuel changes.”
Based on that phenomenon, fuel may become the tail that wags the dog. “We’re at a pivotal point: What’s the currency? Is it points or cents per gallon?” asks Steve Babick, president of MetroSplash. “We look for the market to flesh that out in six to eight months.” For Shell, the program works similarly in all markets. Taking Stop & Shop as an example, customers from those select Massachusetts stores can use their Stop & Shop card to save on fuel at participating Shell stations. For every 100 “gas rewards” points earned when shopping at Stop & Shop, customers save 10 cents per gallon instantly on their next fuel purchase, redeemable at more than 100 Shell stations, up to 35 gallons per purchase. The savings can add up to 30 cents or more per gallon. Customers can also redeem points at Stop & Shop gas stations.
Supermarket partners foot the bill for the bulk of the discount, but retailers do pay a transaction fee, though specifics vary, Little says.
While guarded about actual results from rolled-out markets, Little says the numbers have exceeded expectations, without significant “cannibalization” of existing business. “The customers who come onto our site and slide a Kroger card largely are new customers we’ve never seen in our Shell network; or for returning customers, [they] are increasing purchases significantly,” he says. “For every existing gallon, we’re seeing four or five new gallons.”
As major-oil loyalty becomes pervasive, the concern shifts to the effect on a retailer’s business. “Initial efforts have been focused on discounting gasoline, and I think there needs to be more of a concerted effort to get the customer inside the store,” says Greg Gilkerson, president of Temple, Texas-based PDI, which is close to an agreement with a partner to provide loyalty with its enterprise- software solutions.
“Loyalty,” he explains, “needs to be more comprehensive in relationshipbuilding. Once I know who you are, I should be able to interact with you on a personal level.”
To help retailers be responsive, programs need the ability to stay “fresh and not be fixed,” says Brad Prizer, vice president of marketing for Retalix USA, Plano, Texas. “Marketing [people] should be able keep them fresh.” O’Connor of Jetz firmly believes marketing is the differentiator. As a result, he’s devoting much of his effort toward keeping his promotions, rewards and in-store “clubs” (buy five, get the sixth free) new and compelling.
To enable innovative marketing strategies, retailers such as Olympidis of Family Express and O’Connor maintain control of their programs, creating niche and dominance within their own communities.
O’Connor is creating ties with surrounding businesses to build an offer that can compete with the area hypermarket. “We have to be careful not to lose money to keep these [major brand] relationships,” O’Connor says. “If you’re playing with some big partners, they may dictate terms and you may lose your independence.”
etailers facing the front end of this latest major-oil-and-grocery twist in loyalty may fear its effects. But some look forward to its eventual metamorphosis. Pat Lewis, CEO of KickBack Rewards Systems, Twin Falls, Idaho, who also operates 13 Oasis Stop ‘N Go convenience stores, hopes that one day he can operate his loyalty program alongside his branded-fuel supplier, Shell.
“I don’t think it needs to be an either/or situation,” Lewis says. “There’ll be certain customers where one program appeals over another, and some may like the ability to double-dip, earning point rewards for their purchases with me and earning a cents-per-gallon discount when they shop at Kroger.”
Lewis expects great things to come as more retailers feel forced to jump onto the loyalty bandwagon. As retailers start to know their customers more, he says, a host of new marketing developments will emerge—everything from mobile marketing to social media.
“When you start marketing with intelligence, knowing all [your customers’] demographic information and every profit center they use to market in a one-on-one manner,” he says, “it’ll make you wonder how you ever did it in the past.”
Doing the Math
Suppliers queried also provided input on a loyalty ROI scenario.* Though the numbers are estimates, the percentages provide a place for retailers to start imagining scale and scope.
First, calculate loyalty lift per month at the forecourt: 100,000 gallons/month x 5% average increase = 5,000 gallons/month increase 5,000 gallons/month x 10¢/gallon margin = $500
Second, calculate loyalty lift per month inside the store: $80,000/month x 10% average increase = $8,000 $8,000/month x 30% in-store margin = $2,400
Third, add forecourt to in-store: $500 + $2,400 = $2,900 in total loyalty lift per month Next, subtract monthly costs for a basic program ($150) and the cost of rewards issued, which average $30 per day ($900): $2,900 – $150 – $900 = $1,850 or the monthly return on investment.
0.36% of total sales = the full cost of an integrated loyalty program
Sources: CSP, supplier sources.
* Note: Different suppliers give different product and payment structures, ranging from so-called “hosted” models that charge transaction fees to those that sell software and hardware.
How to Compete With Major-Oil Programs
- If possible, join the major brand to avoid potential loss in volume.
- Find ways to increase inside sales, possibly using additional promotions to lure customers inside.
- Keep things in-house and tie proprietary products to fuel rewards.
- Use loyalty databases to design one-on-one marketing strategies, possibly using mobile and social-media opportunities.