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Kmart Fuels Competition

With 79-cent king-size candy bars and 99-cent soda, Troy, Mich.-based Kmart Corp.'s year-old, K Express program is giving convenience store operators a run for their money. And the company said it will keep the pressure on the convenience store and petroleum marketing industry to drive new business.

Convenience retailers in Michigan said they are concerned about the discount merchandiser's new retailing concept as it encroaches their market.

"Hypermarkets really put a strain on margins in Michigan and make it difficult for us to maximize profit potential," said J. Patrick Cobb, retail operations manager for Marine City, Mich.-based Blue Water Oil Co. "Our concern, as well as every other chain's concern, is losing fuel volume and the ancillary in-store sales associated with the customers' trips to the convenience store."

To drive volume to its stores, Blue Water's 12 Express Food Depot units have co-branded with McDonald's and Subway, and offer Amoco as the fuel brand. "If we have to keep lowering prices to compete with the big-box chains, and lose foodservice volume, we are going to find ourselves in a very difficult situation," said Cobb.

That's just what K Express wants. Kmart offers aggressive pricing on gasoline as well as all core conven-ience items like cigarettes, snacks, candy, dairy products and beverages. For non-gas items, the retailer has a significant advantage over smaller convenience store chains because it can utilize the same buying and distribution network that supplies its large stores, a logical strategy since K Express units are located on the parking lot perimeter of the bigger stores.

Historically, convenience stores make about 5 cents per gallon on gas, but pump up prices on candy, snacks and beverages. K Express is able to pursue even lower fuel margins, while still maximizing margins on in-store categories because of its buying clout.

To date, Kmart executives have said very little about the 20 or so K Express stores. "It's a pilot program. Gas stations are part of the formula to bring destination and frequency," said Cecil B. Kearse, Kmart's executive vice president of merchandising.

In Auburn Hills, Mich., though, the concept has won popularity. Cars typically line up three deep at the store's 12 pumps for the fuel, which sells for about 8 cents less than at other c-stores and gas stations in the market, said Hakim Mohamed, manager of the Auburn Hills K Express.

Kmart is also recruiting convenience store industry veterans to run the fueling facilities. Before joining K Express, Mohamed had managed a Marathon Oil convenience store in Michigan.

In Auburn Hills, Mohamed said about 60 percent of customers coming to K Express also visit the SuperKmart on the other side of the parking lot. The first K Express opened just over a year ago in Canton, Ohio. Today, Kearse said locations are sprinkled through the Midwest and South in four formats: the traditional gas station/c-store, such as the one in Auburn Hills; a gas station with kiosk; a combination c-store/kiosk; and a K Express that also features a Penske auto maintenance center.

Kmart executives would not divulge K Express's sales or overall performance. They also did not say whether K Express would be rolled out on a larger scale or which format was strongest. But clearly the concept is steadily growing.
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