Supermarkets Fuel Competition

by John Lofstock

Jewel-Osco, Dominick's and Albertson's recently became the latest retailers to add gas pumps to supermarkets. The move was met with disdain by Midwest c-store and petroleum retailers who believe the volume generated by these new units could come at their expense.

"I expect the supermarket segment to continue growing its fuel business and the assault on c-stores to become a never-ending battle," said John Call, president and CEO of Painesville, Ohio-based Convenience Food Mart, which operates more than 350 convenience stores throughout the Midwest.

Supermarkets offering low-cost motor fuel are establishing a trend in major midwestern markets such as Chicago and Indianapolis. Those retail units are wresting market share away from the convenience channel. Supermarket chains are able to sustain lower fuel margins by driving profits in other parts of the store by using loyalty cards. Dominick's, for example, has approximately 100,000 registered members in its Fresh Values club.

In the Chicago area, Dominick's has two gas stations and Jewel has five. According to a recent study by Energy Analysts International, a Denver-based consulting group, more than 15 percent of the nation's gas stations will carry the names of supermarkets or big-box retailers such as Meijer, Kmart and Wal-Mart within five years.

The aggressive competition is prompting calls for legislation to stop what critics say is predatory pricing.

"It has put the service station on the endangered species list," said William Fleischli, executive vice president of the Illinois Petroleum Marketers Association. "An independent seller who survives on pump sales simply cannot compete. Only the corporations can compete. My members are dropping like flies."

The supermarkets have found that the gas pumps dramatically increase store traffic and build customer loyalty. Dominick's spokeswoman Wynona Redmond said gas discounts function like a coupon, "but we've discovered it gets a much bigger reaction than 5 cents off a can of peaches."

In a region that had the highest gas prices in the country last summer, customers aren't as concerned about fuel brand as they are price. Ever since Dominick's opened its fuel center in Shorewood, Ill., last April, the Gas City c-store across the street has lost 20 percent of its customers, said Paul Torstrick, Gas City's vice president.

Big Oil chains like Shell Oil Co. have responded by trying to beat the grocery stores at their own game. Shell is experimenting at some Midwest stations with coffee bars, wine sections and fresh baked goods. But the grocery chains stores still can sell fuel for 3 to 20 cents a gallon less, because they can negotiate high-volume deals with wholesalers for unbranded gasoline. Most independent stations are under long-term contracts to buy higher-priced branded gas.

As the supermarket segment becomes ensconced in the gas business, Fleischli is concerned that Bentonville, Ark.-based Wal-Mart Stores Inc. will gain the support it needs in its lobbying of Florida and Louisiana legislatures to repeal laws prohibiting it from selling gasoline below wholesale prices.

Illinois, like most states, does not have a below-cost law. Fleischli said his group is pushing for a state bill that would force the stores to sell at higher prices and will look into whether their practices violate antitrust law.

"What they're doing is purely predatory," Fleischli said. "We need something to stop them from driving everyone out of the business. It will mean less competition, not more."
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