How Supermarkets Turned Pain at the Pump into a Positive

The Robin ReportThere’s something unnerving about the volatility of petroleum prices.

First they’re up, then they’re down – but somehow the downs aren’t ever as big as the ups and fuel prices continue their upward climb.

Recent weeks have brought another upward move for gasoline and other fuels. Clearly, fuel prices are picking the pockets of consumers to the point at which a large minority of them are changing how they’re stocking their pantries. Those consumers are making every effort to drive fewer miles, to shop less frequently, and to turn to hard discounters. They’re also on a constant quest for price breaks at the pump.
What impact is this having on the conventional- supermarket retail channel?
Oddly enough, many supermarket chains have turned high fuel prices to their advantage. They’re pumping up renewed attention on promotions that couple consumers’ supermarket food spend with a chance to earn substantial discounts at the gas pump.

To cite one example, Kroger Co., the nation’s largest conventional super market operator, offers its customers a discount of 10 cents per gallon or more on a fill-up of 35 gallons or less with each $100 of supermarket spend. Supermarket spending is stored on shoppers’ store-loyalty cards in the form of points to be redeemed at the pump later.

In many areas, the Kroger discount is available at Shell stations. Additionally, Kroger operates more than 1,000 fuel stations itself. It gives larger discounts at its own pumps in exchange for high food-spend rates, so the promotion results in circular spending. Kroger is far from alone in offering such a program. Other players include Giant, Stop & Shop, Safeway, Winn-Dixie and a host of others. Most are now focusing renewed marketing efforts on the programs, even adding a slate of fast-changing “bonus” items that carry with them extra points upon purchase.

Generally, large-scale retailers operate some or all of the fuel promotions themselves, but a third-party administrator, Austin, TX-based Excentus Corp. operates similar programs for smaller retailers under its Fuelperks brand. Typically, gas stations not operated by the supermarket chain pay the retailer 3.5 cents for every gallon redeemed. The retailer funds the cost of the balance of the discount.

The fuel-price promotions are a shrewd play because they cater to shoppers’ emotions. Consumers – particularly American consumers – have come to believe that cheap and plentiful fuel is their birthright. They feel betrayed somehow when that’s proven not to be the case.

But to their rescue are the supermarket promotions that allow them to pack their shopper-loyalty cards with points. When those cards are inserted into a fuel pump — voilà — the price of the fuel drops right before their eyes. A small win for the shopper, it seems.

Some food shoppers realize they might get the same saving by patronizing hard discounters or hewing more closely to sale items for their food purchases, but some swoon before the fuel promotions anyway.

One avid user of Kroger’s fuel promotion in Atlanta said that he uses the promotion nearly every time he fills up.

“With gas prices going up as they are now, I’m much more diligent about getting the points and using them,” he said.

He’s particularly pleased that Shell gas stations participate in the Atlanta market since he prefers to use his Shell-branded credit card. Kroger branded stations don’t accept the card.

Asked if he sees any downside to the promotion, he acknowledged it’s possible that grocery prices are pumped up a bit – no pun intended – to cover the cost of the promotion, but he can’t be sure of that: “Prices at the supermarket go up so fast it’s difficult to know just why, but it probably has something to do with promotions. I don’t really care. I have to buy groceries and gas anyway. I like the points.”

He also said it’s necessary to remember to use points before they expire every month. He said Kroger cashiers are good about reminding him when it’s time to redeem points.

A shopper in Seattle is a big fan of Safeway’s fuel promotion. She redeems the points exclusively at Safeway-brand fuel stations because those stations sell diesel fuel, which her car uses. Many other stations don’t offer Diesel, she said. She perceived no downside to the promotion because she sees Safeway as the low-price grocery leader.

Conversely, a shopper in Manassas, VA, who generally shops discounters Aldi, Food Lion and dollar stores, went to a Giant supermarket to take advantage of the fuel promotion.

She said she left without completing the shopping trip because the prices were comparatively high: “I saw it was no bargain to shop there to save some money on gas. The prices they charge for the food is not worth the gas money that could be saved.”

Similarly, a shopper in Staten Island, NY, said she’s well aware of supermarkets’ fuel promotions, but has never used them because they don’t appear to offer large enough savings to be worth the trouble to obtain them.

From food retailers’ point of view, the promotions have advantages that aren’t readily visible to consumers. They’re finding that fuel programs are useful in competing with hard discounters and other food retailers that don’t offer fuel at all, and by giving a price edge against membership clubs and convenience stores that do.

Kroger CEO David Dillon told a securities analysts’ meeting that high fuel prices are “more positive than not” for the retailer.

Walmart Stores may be losing some ground to conventional supermarkets partially because of high fuel prices. A large proportion of Walmart’s big-box units depend on drawing consumers from a catchment area up to 60 miles away from the store to produce a sufficiently large shopping pool. Shoppers now weigh the cost of travel against potential savings. Many opt to shop nearer home.

Walmart has launched a fightback strategy by offering its own periodic cents-off fuel promotions in some regions and by ramping up its move to small-box retailing.

The flea-sized Walmart formats are seen as a means to put a Walmart outlet close to the countless number of consumers who don’t intend to travel far to shop — not unlike how conventional supermarkets and drug stores have been sited for generations. The potential success of Walmart’s fledgling small-store strategy remains very much up in the air.

Consumers in the U.S. aren’t the only ones that have a chance to lower their fuel costs by shopping at supermarkets. The same phenomenon is playing out in countries as distant and far-flung as Australia, New Zealand and those in major parts of Europe.

In the U.K., something of a “war of the hoses” periodically erupts with chains such as Tesco, Sainsbury and Morrisons vying to hand food shoppers the largest fuel discount. So far, Tesco seems to be the winner since it captures the largest amount of money consumers spend on petrol in the entire nation.
Supermarkets’ innovative approach to cashing in on rising fuel prices illustrates as well as anything a basic fact of retailing: Stores that recognize not only what consumers want, but the need to help them overcome a vexing issue, are likely to be the winners.

David Merrefield About David Merrefield

David Merrefield is principal of DRM Initiatives, Inc., a retailer consulting group. He is the former Vice President and Editor of trade publication Supermarket News. He is based in New York City.