The Hypermarket Gasoline Threat, Part 2 of 3

Retail successes, failures ... and what about Texas?

Melissa Vonder Haar, Freelance Writer

OAK BROOK, Ill. -- The number of high-volume retailers (HVRs) getting into the gasoline business in the early 2000s had many convenience retailers scrambling to compete. At the same time, some of the HVRs found themselves struggling, as well.

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.

David Nelson, a petroleum industry veteran and president of Study Groups/Finance & Resource Management Consultants Inc., 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 told CSP Daily News. "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 our 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 gasoline 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," said Mike Lopez, a marketing research coordinator for Denver-based Energy Analysts International (EAI). "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."

Perhaps the biggest reason some fuel programs succeed, however, is location.

"Unbranded gasoline tends to thrive where there's room for it," Lopez said. "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 fuel-selling HVRs, one retailer 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," Bill Kent, president of Midland, Texas-based Kent Oil, told CSP Daily News. "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," said Kent, who operates stores in Oklahoma and New Mexico in addition to Texas. "At one 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."

Click here to read Part 1.

Coming in Part 3 of this series: Fighting Back. And for more on the subject see "Hyper Inflated" in the April issue of CSP magazine.