An interesting study wasrecently published by researchers in the Department ofEconomics at the Universityof Arizona that details the impact HomeDepot’s entry into the fuel business had onthe Nashville, Tenn., market.

The study found that hypermarts “do,in fact, place statistically significant andeconomically significant downward pressure on the prices of nearby gas stations.”The results show that adding a hypermartwithin two road miles of a traditional gasstation depresses that station’s price byapproximately 1.5 cents.

The study also examined the Nashvillemarket before and after Home Depot’s entryand compared the prices of nearby gas stations with those farther away. The resultswere mixed, with prices depressed in onelocal market, but increased in another.

“Overall, it appears the fears of some traditional retailers have been realized as thelow pricing of hypermarts’ gasoline hasnegatively affected the prices of nearby gasoline retailers,” author Jedidiah Brewer said.”The magnitude of the findings reveals thatmarginal firms most likely will be pushedout of the industry as hypermarts continueto increase in number and capture moremarket share nationally.”

The competitive landscape is littered with these hypermarts—supermarkets,mass merchandisers and drug stores—allof which present consumers with a number of options to meet their daily needs.

The convenience store industry remainsamong the strongest of the bunch. Theindustry’s store count soared 3.2% in 2006to 145,119. But hypermart growth has beenrecent and rapid. In the year 2000, therewere 1,140 hypermarts in the U.S. In 2002,the number grew to 2,434, a 113% increasefrom 2000. Energy Analysts International(EAI), in its “Outlook for the U.S. FuelsBusiness & Hypermart in Retail BusinessStudy,” estimates that by the end of 2007,as many as 7,000 hypermarts will be selling gasoline.

Typically, a hypermart location sells anestimated 250,000 to 350,000 gallons permonth. This volume is in stark contrast totraditional retailers who, as estimated bythe National Association of ConvenienceStores (NACS), sell approximately 110,000gallons per month on average.

Birth oF hypermart
Home Depot decided to follow in thefootsteps of other big box chains by addinggas outside some of its stores in Nashvilleand Atlanta. In the University of Arizonastudy, prices, brands, locations and characteristics were collected from approximately 550 gas stations and hypermarts in thegreater Nashville area. The study foundthat hypermarts “have a substantial marketpresence in Nashville and they price loweron average than traditional gas stations.”

The reduction in price had a profoundimpact on the market. “Net profit marginsin the retail gasoline industry are routinelyunder 1% of sales. As a rough calculation, ifthe price of gas is $2.50, a gas station onlymakes 2.5 cents off of each gallon of gassold,” the study said. “Adding one hypermart nearby the average gas station couldreduce the net profit from 2.5 cents per gallon to somewhere around 1 cent a gallon.”

Some traditional gasoline marketers inNashville have two or three hypermartswithin two miles, explaining why someretailers are so fearful about the future oftheir stations. “There comes a time whenyou say, ‘It’s time to throw in the towel,'”said one three-store operator who askednot to be identified because he is exploringhis strategic options, including selling to alarger oil company. “I’m proud of what wehave here, but I’m not going to watch mybusiness go under.”

The operator said his monthly fuel volume average has dropped more than 15,000gallons since 2002.

Home Depot was aggressive when itentered the Brentwood, Tenn. market, dropping pump prices about 14 cents shortlyafter its debut. Prices climbed back up by 11cents, ultimately resting at 2.5 cents lowerthan they were before the store opened, butnot before forcing one operator out.

“As hypermarts continue to enter,undoubtedly, marginal retailers will beforced to exit the market. This occurrencein the retail gasoline industry is not muchdifferent than the ‘Wal-Mart’ phenomenonbeing observed today,” the report concluded. “Societies globally are experiencingan unprecedented increase in low-priced,one-stop-shopping big-box stores andmass-merchandisers. Inevitably along theway, smaller, more nostalgic firms are leftstruggling for survival in the wake as theyadapt to the more competitive businessenvironment.”

Fighting back
So what can c-store owners do? Start byfocusing on what they does best: providing outstanding service and convenience.Todd Hale, senior vice president of consumer and shopper insights for research firm ACNielsen, said while hypermartsare getting a lot of attention, the averagenumber of household trips to the c-storeand the dollars spent per visit increasedconsiderably in 2006.

The average household made 14.4 tripsto a c-store last year, up 3% from 2005, andspent nearly $17 per trip, up 12.8% from2005. The higher ticket ring can be attributed to increased fuel prices.

By comparison, the number of annualtrips to every other retail segment felllast year, with the biggest drop, 6.9% tomass merchandisers. The annual household made 16.3 trips to mass marketerslast year. The average visits to other retailchannels includes:

* Grocery, 61.2 visits, down 3.3%
* Supercenters, 26.3 trips, down 1.5%* Drug stores, 14 trips, down 2.8%
* Dollar stores, 12.5 trips, down 0.8%* Club stores, 10.9 trips, down 1.8%

Hypermarts are desperate to tap intothe convenience industry’s store volumeand its customers’ pocket books. Chainslike Wal-Mart and Albertsons havelaunched deep-discount rewards programs that offer customers as much as 10cents off the pump price per gallon. Oneretailer, Smith’s Food & Drug, a chain ofsupermarkets operated by The KrogerCo., is offering customers who use itsFresh Values rewards card and a Smith’sbranded MasterCard as much as a 20-centper gallon discount if they buy $90 ingroceries.

While below-cost laws are considered by many to be effective, this type of discounting skirts the law and creates a legalgray area. Currently, at least a dozen stateshave below-cost gasoline legislation inplace while several others have considered but declined to pass such measures.

The best thing retailers can do is hitback. Fas Mart, Miller Oil and SpeedwaySuperAmerica are among the c-storechains that have very strong loyalty programs. Even smaller regional operators,like Oasis Stop ‘N Go in Twin Falls, Idahoand Mirabito Fuel Group in Sidney, N.Y.,are leveraging their fuel offerings with arewards system to create loyalty amongconsumers to keep them from being luredby the discounts hypermarts can offer.

Larger operators, such as Shell Oil, havethe muscle, not to mention the refiningcapacity, to turn the screws on hypermarts.For example, in June the Houston-basedrefiner-marketer announced a campaignthat offers customers who open a newShell Credit Card account an opportunity to earn 25 cents off per gallon on thepurchase of their first 100 gallons of Shellgasoline.

“The ‘Earn 25 cents per gallon’ promotion is a great way to create loyalcardholders and increase repeat business to our retail locations,” said CarolynYapp, Shell US card and payments manager. “This promotion is designed to helppeople get in the habit of using their newShell Card on a repeat basis, which shouldhelp turn new cardholders into loyal customers and drive even more traffic to Shell retail locations.”

Shell plans to be aggressive with thepromotion, which will run from July 2 toSeptember 30. With the goal of bookingmore than 25,000 new consumer creditcard accounts, the promotion will benefit Shell-branded wholesale, direct retailand multi-site operators by driving more site traffic and increasing the use o
f ShellCredit Cards, Yapp said. Shell Credit Cardusers are especially attractive customersfor retailers because there are no merchantservice fees on card transactions, whichfurther increases retail profitability andhelps cut into the margins being sacrificedto compete with hypermarts.