EL DORADO, Ark. — About 20% of Murphy USA’s tobacco customers don’t buy gasoline.
That’s good to know, said Andrew Clyde, president and CEO of the roughly 1,400-store convenience retail and fueling network, as he discussed this year’s rollout of Murphy USA’s Murphy Drive Rewards (MDR) loyalty program during the company’s first-quarter 2019 earnings call.
The program today has 6.5 million participating customers. “Imagine what might happen if we send a targeted offer that invites them to experience a discounted fill-up experience at Murphy USA,” Clyde said. “It would mean higher conversion between merchandise and fuel, a higher share of wallet and more sticky customers.”
An insightful loyalty program could be a considerable asset for Murphy as the convenience channel faces rising gasoline prices, falling demand in core categories such as tobacco and an unpredictable regulatory landscape.
For retailers like Murphy, the job is to harness that complex interplay of gasoline, tobacco, pricing, margins and, in many ways, the tobacco consumer specifically. With Murphy, for example, gasoline prices rose in the first quarter, but its gasoline margins remained high, led in large part by strong merchandise sales, especially tobacco.
“We have once again improved our fuel-margin break-even metric by 19 basis points over the prior-year quarter, driven almost exclusively through higher merchandise contribution margin,” Clyde said.
During a CSP Tobacco Update webinar this past spring sponsored by Swedish Match, analyst Nik Modi gave a peek into where the convenience consumer—and particularly the tobacco buyer—may be headed. The picture, for the most part, is cautiously upbeat.
Modi, managing director of RBC Capital Markets, New York, started by pointing to key positive signs: U.S. gross domestic product (GDP) growth was a healthy 3.2% in the first quarter of 2019; consumers are carrying less debt and have more savings; and total retail sales are off to a good start for the year. Unfortunately, a big source of uncertainty is the country’s extended trade war with China, Modi said. Recent stock selloffs are indicative of the fear investors have over President Donald Trump’s trade actions.
“Consumers are fine, but the concern comes from manufacturers who may start layoffs,” Modi said. “There’s a raft of implications from the trade discussion.”
Second, gasoline prices have risen. Modi said he was surprised to pay more than $50 for a recent fill-up, he told the webinar audience. At that time, average gasoline prices had hit $2.48 per gallon, a three-year high. As of press time, the U.S. national retail average was more than $2.80 per gallon.
In a quarterly survey of c-store retailers conducted by CSP and RBC Capital Markets in March, only 50% of retailers believed gas prices were helping their businesses; in a December 2018 survey, 71% believed gas prices helped their businesses. “That’s mainly because gas prices have gone up,” Modi said.
Other numbers reflect a dichotomy in retailers’ attitudes about consumers. In the March survey, 75% of retailers said traffic was up, while only 69% agreed in December of last year. Those same retailers, however, felt less secure about the financial health of their customers, with only 65% of those surveyed in March believing consumers were healthier economically vs. 77% of retailers responding positively in December 2018.
Beyond the economy, electronic cigarettes and other forms of nicotine delivery are influencing the tobacco category. Reviewing preliminary industry sales numbers from the recent NACS State of the Industry Summit, Joe Teller, category management director for Swedish Match, Richmond, Va., said other tobacco products (OTP), led by e-cigarettes, have become the fastest-growing segment of the category—and a strong growth driver for c-store merchandise overall. For the first time that Teller can recall, OTP gross-profit dollars have offset cigarette losses.
“Not just partially offset [cigarette dollar losses] like in the past, but more than offset those losses,” he said. “That’s really an amazing story.”
While new products and trial are motivating today’s tobacco consumer, Clyde of El Dorado, Ark.-based Murphy USA hopes to further shape customer behavior through loyalty. Clyde expects Murphy’s MDR program will have a positive effect on volumes and margins because it “successfully [appeals] to our different customer segments in a manner that provides value to them, our supplier partners and our bottom line over the life of the customer.”
For instance, if a customer has bought only single packs—never a two-pack, three-pack or carton of tobacco—the MDR can target that specific customer and initiate an automated communication to drive behavior change, Clyde said. To participate, customers sign up with their phone number at the point-of-sale inside the store or at the dispenser. “And once you’ve done that, we start capturing points on behalf of that member,” Clyde said. “And we have a lot of members that do that, and they’re doing it because that’s another way that they can earn immediate discounts on certain tobacco and other products.”
Prior to MDR, he said, Murphy had “countless examples of changing behaviors on a small scale, but the [MDR] opportunities that lie before us to change behaviors across large groups of customers based on the segmented and targeted offers is immense.”
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