The Hypermarket Gasoline Threat, Part 3 of 3

Fighting back: How HVRs forced c-store retailers to change their strategies

Melissa Vonder Haar, Freelance Writer

OAK BROOK, Ill. -- Despite the "flattening out" of hypermarket retailers entering into fuel and the unquestionable failure of some high-volume retailers (HVRs) with gasoline, these behemoths still pose a very real 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," David Nelson, president of Study Groups/Finance & Resource Management Consultants Inc., told CSP Daily News. Nelson conducts petro-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 HVR are picking up some of it."

It's an issue retailer Bill Kent is all too familiar with. When hypermarkets first entered his region, Kent, president of Midland, Texas-based Kent Oil, allowed himself to be outpriced by a reasonable amount, figuring he could make up the volume later by underpricing the HVRs himself. That didn't happen.

"We found that [the HVRs] were never happy with a reasonable spread," he said. "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 make up 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 on the fuel side.

Although it was painful, Kent believes he didn't have any choice. "I've seen too many people stay with the HVRs prices when it's comfortable, but then stop as soon as it gets uncomfortable," he said. "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 at times even benefit from it.

"In some cases, c-store retailers in very close proximity to an HVR have actually seen a lift in volume," Nelson said. "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 northern New Jersey, two independent retailers 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 five cents of Costco's price, calculating that customers would be willing to pay a few pennies more in lieu of a 20-minute wait at the hypermarket.

Click here to read Part 1 and Part 2.

For more on the subject see "Hyper Inflated" in the April issue of CSP magazine.