Big retailers jump into discount gas market

By Teresa F. Lindeman
Pittsburgh Post-Gazette

With gasoline around $3 a gallon, consumers are hunting everywhere for the lowest prices, and more and more that means going to a big box retailer like Costco or Wal-Mart or to a place offering fuel discounts like Giant Eagle's GetGo stores.

"Everybody is in the business now," said Travis Sheetz, vice president of operations for the Altoona, Pa.-based Sheetz convenience store chain.

Nationally, sales through branded oil company stations fell to 52 percent of the total market last year from 55 percent the year before. Grocers, discounters and big box chains moved up to grab 11 percent. In some markets they've taken as much as 20 percent, said David Portalatin, an industry analyst for research firm NPD Group who compiled the rankings.

In the Pittsburgh area, for example, a ranking of gasoline sellers last year put Sunoco and BP in the top two spots, based on sales of gas through stations carrying their brand names. Sheetz ranked third, but the new big-box style of gas retailer — merchants such as Giant Eagle, Wal-Mart and Costco — collectively moved into fourth place, ahead of Exxon.

"Wow," Portalatin said. His figures also showed an impressive spike in gas sales at GetGo linked to the discount program rolled out by Giant Eagle a little more than a year ago.

Retailers of all persuasions have discovered what the gas stations and convenience store owners already knew. "Gas is really a traffic driver," said Sheetz. Like milk, it is one product that consumers have to buy regularly.

Once consumers are in a store, chances of getting them to buy merchandise with higher profit margins go up.

Because it's not exactly hard to find places to buy gas, the newcomers had to get creative to persuade consumers to seek out a particular site.

Giant Eagle's fuelperks! program rewards loyalty card holders by giving them 10 cents off a gallon at GetGo stations for every $50 spent in its stores.

The program, which has been offered by other chains around the country, triggered complaints from a trade group of independent gas station owners who questioned whether it amounted to selling gas below cost. Both the Pennsylvania attorney general's office and the Federal Trade Commission reviewed the Giant Eagle program and declined to take any action. Only the state milk marketing board responded. It requires that milk purchases not be counted toward fuel discounts.

Unable to block the program, Giant Eagle's competitors seem ready to try to develop their own versions.

Grocer Shop 'n Save is considering a program that would help customers earn discounts on gas sold at Sunoco stations, and Foodland is looking at a program involving an independent distributor, according to Hugh J. Campbell, a Sunoco station operator and president of the Petroleum Retailers & Auto Repair Association Inc.

"We have to compete with Sheetz and Costco," said Campbell.

The big-box retailers that have tried offering gas have been successful enough to expand their offerings rapidly, although critics claim the stores are willing to lose money on fuel in return for the store traffic.

Expanding chain

Warehouse club operator Costco, of Issaquah, Wash., had just 40 gas stations in 1998. At the end of 2005, the chain said, it sold more than $3 billion worth of gas through 225 gas stations, a 32 percent increase over the year before.

"Members are willing to wait in line to get gas, knowing that Costco will give them the best value in town," said company executives in the annual shareholders letter, adding that Costco made a profit on gas last year despite the turbulent energy market.

Whether the company always has cheaper prices is hard to tell. A California Web site called LoveToKnow.com claims Costco gas prices usually run between 10 and 20 cents less than the local market.

Enough consumers seem to be buying from the big-box stores to fuel an expansion. Five years ago, there were 445 gas stations at Wal-Mart stores and Sam's Club sites. Now the Arkansas company has a 1,388 stations, according to a spokesman, although most are operated by third parties.

Even hardware chain Home Depot is trying its hand. If four convenience store sites opened in the first half of this year do well, the Atlanta company is projecting it could have 300 by 2010.

Battle for business

Competition for gas customers has, in turn, had the effect of forcing those who have sold fuel for years to develop even more creative ways to attract consumers and profits. Sheetz is in the midst of testing restaurant-style offerings complete with different amounts of seating as well as credit cards with radio-frequency chips that don't have to be run through a machine.

Sheetz has long had a reputation for offering low gas prices but it has demonstrated it is willing to get into the discount battle, too. Last summer, the chain introduced a credit card that offers users rebates on gas and food. The company did not release numbers on how many users have signed up.

"We're real happy with it," said Sheetz. "I think as fuel prices go up it's going to get more popular."

Smaller independent operators are trying everything from adding cash-only pumps to car washes to gas discounts on Sunday to keep customers coming back.

Meanwhile, the new entrants to the gasoline market may have discovered the magic power of gasoline to bring cars to the parking lot, but they've also begun to discover its drawbacks, said Jeff Lenard, a spokesman for the National Association of Convenience Stores. "They're finding out, guess what — there's not much money to be made selling gas."

Credit card fees, real estate expenses and other costs have reduced profit margins and the pinch is exacerbated by the strategy of keeping gas prices down for competitive reasons.

Costco's last year's financial results noted that while the company's gross margins rose in most of its merchandise categories, those improvements were offset by sales of lower-margin goods, primarily gas.