Team Boston - The Sun October, 2001 Volume 4, Issue 6 Page 2

Page 2

The Sun

Volume 4, Issue 6

Trend Forecast - Non Traditional Gasoline Retailing

The non-traditional gasoline retailing industry has many players, with more coming into the picture each month. Most of the attention, though, seems to be focused on mass merchandisers like Wal-Mart and membership organizations like Costco and Sam’s Club. These competitors have squashed smaller merchandise retailers with their arrival in a market and it is easy to imagine them doing the same with gasoline. However, a careful look at the relative advantages and disadvantages present with different segments of the hypermarket" industry, for want of a better term, indicates that the real volume grabber is going to be supermarkets and even smaller independent grocery stores.

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According to recent research conducted by Westminster, Colorado-based Energy Analysts International Inc., hypermarkets of all types (big box retailers, mass merchandisers, warehouse clubs, supermarkets, etc.) are expected to attain 8.1 percent of the current petroleum retailing market by 2002 and over 16 percent by 2005, with some 5,360 sites. The same research indicates that supermarkets will account for over 53 percent of this penetration. Others looking at the situation agree.

"While there is no question, the biggest threat to the individual retailer is the (hypermarket) that opens just down the street, and that the membership organizations are currently offering the lowest prices. I still believe supermarkets are the largest threat to the industry because of their number of locations, the customer shopping frequency, and their aggressive cross-merchandising," said Steven Montgomery, president of tb2b Solutions, LLC, a consulting firm that specializes in working with retailers to improve short-term and long-term profitability.

Unfortunately, although the average customer visits a supermarket 2.2 times per week, the Coca-Cola Retailing Research Council also discovered that the average supermarket customer is not a loyal customer. The visits are spread out among a variety of brands and locations according to product selection issues, immediate need or whim. And recently, hypermarket competitors began grabbing a share of the grocery visits.

"Today’s consumers are time-starved and being

being able to accomplish multiple tasks at a single location, and on a single trip, is highly desirable," said Montgomery. "I expect that being able to purchase gasoline and groceries at the supermarket will soon seem as natural as being able to purchase gasoline and foodservice at a c-store. Adding fuel gives them one more item to sell that the mass merchants have, although that too, is rapidly changing. I do not expect it will be long before we see chain drug stores also beginning to experiment with gasoline."

The membership organizations (Sam’s, Costco, B.J.’s) are using gasoline to drive membership. Their overall business model has a strong economic incentive to gain, and retain, new members who pay annual dues," said Montgomery. "Supermarkets are totally dependent on the amount of money consumers spend making purchases. This also impacts the way in which they price gasoline. The club organizations can afford to price gasoline lower because of the dues and because their average purchase is over $65 or greater compared to the supermarkets’ $23 or greater. Another major difference is that the supermarkets are doing more cross merchandising from store to gasoline. Everyone seems to be offering a 3-cent to 5-cent discount off the posted price to anyone who joins the frequent buyer program. Many have gone further in that they are offering discounts on gasoline based on the consumers’ total dollar purchases, purchase frequency and/or the purchase of specific items. There has been a lot of discussion about which of the new entrants offer the greatest threat to the industry."

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It may be going too far, at least at this time, to call the emergence of the hypermarket and supermarket fueling segment a crisis for the traditional industry. However, it’s likely not going too far to note that this represents a significant change in the role both branded and independent gasoline retailers play in the marketplace. Price consciousness is increasing, and offering a gasoline-based promotion is in vogue from supermarkets to small carpet cleaning services. Increasingly, gasoline will be a commodity or a tool used in a much broader marketing scheme.