CINCINNATI -- Falling profit margins on gasoline sales have played havoc with Kroger Co.'s earnings this year, but that is not stopping it from building more supermarket fuel centers, according to a report by The Business Courier of Cincinnati. Nor is it necessarily limiting them to locations where it has adjoining food stores, the report added.
The company has been adding new supermarket fuel centers at a brisk clip in recent years, the report said. It currently has 850 across the country, up from 781 at the end of its 2008 fiscal year (January 2009) and 696 [image-nocss] at the end of fiscal 2007. It also sells fuel at about 770 convenience stores.
The chain has 36 gasoline outlets in the Tri-State area, with four more slated to open in the next few months, said the report. One of those is an offsite fuel outlet under construction in Norwood. The location is five blocks down the street, and on the opposite side, from a new Kroger Marketplace at Surrey Square shopping center that opened in June. Kroger bought the 0.6-acre corner property in October for $390,000. It will be Kroger's second in the areait built one over the summer a block away from the nearby Kroger food store.
"Any new store we open, we try to put them there," Rachael Betzler, spokesperson for Kroger's Cincinnati-Dayton division, told the newspaper.
At some stores, such as Norwood, there is not room to build fuel centers with the supermarket. So it is now building gas stations nearby if it can find an appropriate location. "We are constantly looking for opportunities," Betzler added.
The Norwood fuel center, along with another at Newport Pavilion, will help to fill in what has been a bit of a hole in Kroger's local coverage. Although it has lots of gasoline outlets in the suburbs, where it has been building new stores, they are pretty scarce in the urban core.
Kroger fuel centers are part of the chain's one-stop-shopping strategy that has gained momentum in the economic slowdown. Customers are trying to consolidate shopping trips, said the report, and Kroger wants to encourage them to make more purchases at Kroger.
In the past, fuel sales have not materially impacted Kroger's earnings, but that changed for the worse during the last quarter that ended November 7, said the Business Courier. The company reported adjusted earnings of 27 cents per share, down from 36 cents in the same quarter in 2008. Lower fuel margins alone reduced earnings per share by about eight cents during the period, Kroger's CFO Michael Schlotman told analysts during a December 8 conference call, the report said.
Kroger regularly breaks out fuel sales and fuel-related metrics in its financial reports because fuel margins and operating expenses tend to be much lower than for its food store business, said the report. Despite low margins, fuel centers can deliver a high return because of their rapid inventory turns and positive effect on overall store sales, the paper said, citing Kroger's 2008 fact book.
Gasoline sales are increasingly impacting Kroger's top line. From fiscal 2005 through fiscal 2008, they increased steadily from $3.5 billion to $7.5 billion and from 6.5% of total food store sales to 11.8%. Similar sales figures for fiscal 2009 have not been disclosed, but in the second and third quarters, Kroger fuel sales at comparable stores (excluding new stores) declined by 28% and 10%, respectively, according to the report. That reflects sharply lower gasoline prices this year compared to last summer and fall.
Big-box gasoline retailers like Kroger, Walmart and others have increased their share of the market, but they still represent a small percentage overall, said Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA). "Their rewards programs can be attractive to their grocery customers," he told the Business Courier.
Most of the major franchise chains, including BP and Shell, have instituted their own rewards programs.
Many grocery chains, including Kroger, started off emphasizing cut-rate pricing, which was a huge concern for the industry, Gilligan added. Most have since stopped using gasoline as a loss leader. Now they are operating at least at break-even, he said.
"A gasoline retailer can live with five-cent swings day-to-day. They can't live with 20-cent swings, because the street doesn't move that quick," Gilligan told the paper. "There's no way you can go out and raise your price on your street sign 20 cents."
Ed Weglarz, executive vice president of the Associated Food & Petroleum Dealers, told the paper that big-box retailers like Kroger and Costco buy their gasoline directly from refiners. But it is not necessarily the same branded gasoline as independent stations buy. Megadealers are growing in part because American consumers put an inordinate emphasis on the price of gasoline, Weglarz added. Many people will drive five miles to save five cents a gallon, which makes no sense, he said.
Cincinnati-based Kroger has about 2,470 supermarkets and multi-department stores in 31 states under two-dozen local banners, including Kroger, Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and City Market. The company's c-stores are in 16 states: Loaf 'N Jug in Colorado, New Mexico, Nebraska, Montana, North Dakota, Oklahoma, South Dakota and Wyoming; Turkey Hill Minit Markets in Pennsylvania; Tom Thumb Food Stores in Florida and Alabama; Kwik Shop in Illinois, Iowa, Kansas and Nebraska; and Quik Stop Markets in California and Nevada.
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