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 Hypermarkets Entering Petroleum Marketing

"Hypermarkets" -- the term collectively refers to the group of mass retailers that includes supermarkets, discount retailers, and warehouse clubs -- are increasingly entering the market to sell motor fuels.

The emergence of hypermarkets into petroleum marketing continues a trend of "channel blur."

  • A growing number of retailers are now selling motor fuels to entice consumers with "one-stop shopping of gasoline and in-store items. As of July 2007 there were 79 hypermarket companies in the United States operating at least one retail gasoline site. These companies represented over 4,300 "hypermart" sites (big-box retailers) and sold 14.2 billion gallons of gasoline. These sites sell approximately 275,000 gallons per month, about 2-1/2 times the volume of a traditional fuel retailer. It is predicted that by 2012 five companies will be responsible for 77 percent of all hypermarket motor fuels sales: Wal-Mart/Sam's Club, Costco, Kroger, Safeway and BJ's. (Source: Energy Analysts International, "Outlook for the U.S. Fuels and Hypermarts in Retail Study")
  • The rate of hypermarket growth is significant in the grocery channel. Of all new stores planned in 2004, 62 percent included fueling, an increase from the 18 percent just one year earlier (Source: Food Marketing Institute).
  • Wal-Mart has approximatley 1,300 gasoline retaling sites inclusive of Wal-Mart sites (Optima, Murphy and Mirastar), Neighborhood Stores and Sam's Clubs (Source: Energy Analysts International).
  • The growth of hypermarkets is a phenomenon that began in the early 1990s in select markets like West Texas, but really became evident in the late 1990s. In 1997, they commanded 0.3 percent of the motor fuels market; by 2000, that market share had grown 10-fold to 3.0 percent. Only two years later, that figure nearly doubled, with hypermarkets enjoying 5.9 percent market share in 2002 (Source: Energy Analysts International).
  • Interestingly, some supermarkets chains, and other retailers including Sears, experimented selling fuel in the 1960s and 1970s, but the idea failed to generate sufficient consumer interest.

Hypermarkets are looking to use motor fuels retailing to find new profit centers.

  • The addition of fueling on site allows additional sales on the property, which might have been underutilized parking spaces. In addition, since they don't need to acquire additional real estate to sell motor fuels, the investment may be viewed as marginal.
  • Hypermarkets are hoping that motor fuels sales can lure more customers into their stores by offering discounted motor fuels prices, particularly upon opening fueling facilities.

Convenience stores are still the dominant retailer in petroleum marketing, and are working to enhance their offer to customers.

  • Convenience stores sell more than 80 percent of the gasoline purchased in the U.S. -- more than $405 billion in motor fuels sales in 2006. The remainder of the motor fuels sold in the U.S. are through hypermarkets, service stations without convenience store operations and "kiosk" operations, which are typically small convenience operations with a very limited product selection and limited customer access.

  • In addition to convenient locations and longer hours, and easy in-and-out access, convenience stores have one other significant advantage with customers -- their smaller size makes it easier for customers to see regular faces working there. The average convenience store employs 10 people to operate the store in a given week; that's usually a fraction of the labor at a hypermarket in a given shift.

Market conditions in the U.S. are not as favorable to hypermarkets as they are in other countries.

  • Metropolitan areas, with real estate at a premium, should see less market penetration by hypermarkets, since they already have smaller, congested parking lots.
  • Hypermarkets have the lowest market penetration in the Northeast, while it is approaching saturation level is the Gulf Coast area and seeing rapid expansion in the West and Rockies. NPD Group reportsthat hypermarkets have more than 20 percent market shares in Denver, Houston and Seattle-Tacoma.
  • Retailers located near highways may be less affected, since travelers are most concerned with easy access to fuel.
  • While more than half of the motor fuels in France is purchased at hypermarkets (52 percent market share in 1999 according to Datamonitor), and more than one-fifth of fuels in the United Kingdom is purchased at hypermarkets (21 percent of fuel sales in 2001 according to Datamonitor), the evolution pattern is much different in the U.S. where a convenience store or gas station has been on nearly every corner for decades.
  • Retail gasoline margins in the U.S. are already slim -- and less than in Europe -- and are lower than hypermarkets experience in their stores. Consequently, multi-national hypermarkets entering the U.S. gasoline market in a significant way will experience an erosion in their overall profit margins.
  • Compared to Europe, gasoline is much cheaper in the U.S., and there's less of an opportunity for mass merchandisers to undercut on price. While hypermarkets are luring customers on the promise of cheaper prices, they can only reduce them so much, since approximately 90 percent of the cost of a gallon of gas is determined (through taxes, wholesale prices, refining costs, and distribution costs) before it even arrives at the retailer.
  • Eventually, hypermarkets must allocate all costs, including overhead and real estate costs or their returns to shareholders will suffer.

Ultimately, the customer will determine which retail outlet best meets his/her needs.

  • The typical shopping radius for convenience stores is 2-6 miles; the typical shopping radius for a hypermarket is 20-40 miles. It remains to be seen if gasoline customers will regularly drive out of their way to fill up at a hypermarket, or if they will purchase gas as part of their planned visit to a hypermarket.
  • Time is at a premium in today's society, and many potential customers may not find value in traveling considerable distances, waiting in line, or have limited options for related services or payment options to save on gas prices.
  • Consumers define "convenience" differently at hypermarkets, where they define it as one-stop shopping, as opposed to the easy access and speed offered at convenience stores