Grocers Give It the Gas (Discount)
By George Anderson
The U.S. is a nation addicted to cheap energy and, when the cost of gasoline goes up, there is nothing better for attracting consumers than prices lower than the competition.
Rewarding customers with discounts on gas has become a favorite vehicle for many grocers and other bigger box stores looking to keep shoppers coming back to buy.
Bill Bishop, president of Willard Bishop Consulting and a member of the RetailWire BrainTrust, told the Toledo Blade, “With the heightened sensitively about the price of gas, and people willing to look around for gas even at just 7 cents cheaper, these are very meaningful incentives for people.”
“Sometime in the future,” said Mr. Bishop, “retailers that can’t offer discounts on gasoline are going to find themselves at a disadvantage to those who do.”
Kroger, which operates gas stations at some of its stores, has announced it is changing its fuel-rewards program in the Toledo area. The company says the revisions answer customer requests for a program that is less complicated. On the face of it, however, it appears as though the grocer may be giving some advantage to Giant Eagle, a competitor with its own fuel-rewards program.
Kroger’s new plan, which begins May 1, will offer customers 10 cents off a gallon of gas on fill-ups for every $100 spent in its stores. Customers with Kroger Plus cards do not get their automatic 3 cents per gallon discount on top of the 10 cents off offer.
The current program offered by Kroger is tiered with consumer purchases. A customer who spent at least $150 in a given month on groceries was then entitled to four fill-ups the following month at a discount of 10 cents per gallon. Consumers could earn bigger discounts based on more purchases.
The Giant Eagle program offers 20 cents off per gallon on fill-ups for every $50 spent in its stores. Customers with Giant Eagle’s Advantage Card receive an additional 3 cents off per gallon on top of the 20 cents discount.
Moderator’s Comment: Will retailers that can’t or won’t offer discounts on gasoline find themselves at a competitive disadvantage in the future? Is there
a downside to offering discounts on gasoline tied to store purchases or holding a company’s loyalty card? –
George Anderson – Moderator
Gas discounting has the same dangers as all other loss leaders: (1) retailers hurt their margins (2) ending a program makes the competition look good and your own customers get angry (3) starting a program encourages the competition to do it too, so nothing is gained. In the short run, you might get more store visits from core customers, if they have to fill up often. You might get some publicity. But it’s a short-term thrill that can turn into a long-term loser.
One of our local stations seems to have a good thing going by offering a 10 cent/gallon discount with the purchase of a $6 carwash. This makes their per gallon price about 5 cents lower than Sam’s Gas across the street.
In CA, we don’t have many grocery stores that sell gas too, but I have noticed, in recent weeks, that gas prices can vary by as much as 30 cents/gallon from station to station, on a given day.
My store offers ¢-off per gallon on featured items. In lieu of a temporary price reduction funded by manufacturers, the SRP stays the same, but you get ¢-off on your gas. So the retailer protects margins but passes on gas savings.
You have a 4 week window to redeem and it is on one tank (15 gallons) of gas. I recently cashed mine in and saved $1.42/gallon, so I netted out paying less than $1.20/gallon.
This appears to be a win-win for the grocer. Even W-M doesn’t sell gas for $1.20.
Besides the “pump perks” this retailer offers the fast, friendly service and his prices, while not the cheapest in town are competitive. He’s doing it right. The competition is eating a lot of his dust.
There is somewhat of a disadvantage to those that don’t offer fuel, yet it is not insurmountable. The advantage to those that do is to expand their offering and create yet another destination or ‘reason’ for the consumer to stop there.
The problem with offering higher discounts to customers with a ‘loyalty’ card is just that… offering higher discounts with a ‘loyalty’ card. It will neither create loyalty nor place you at any significant advantage over your competitors. What it will do is place you at a disadvantage with your customers and other retailers who don’t require the inconvenience or respect you as a customer.
Offering fuel reward cards and other incentives is a great way for the grocer to take full advantage of attracting and keeping their customers. The cost of installing pumps on land that already has a store and parking lot is usually not much, especially in comparison to the rewards it brings their customers. Whether this applies to customers who are already there to do there shopping, or customers who are there just to get gas, having gas available at a reduced price keeps the retailer’s customers closer to the retail store, and drives more business into that store’s operations. The discounts can achieve multiple goals, including customer reward, customer loyalty, or just keeping the customer visits high. For key consumers, this is usually enough to keep them shopping at the retailer rather than somewhere else.
There are a lot of variables that could make the difference to these equations if you stop to think about them. Is the discount coming off a price that is similar to or higher than competitors’? Are the prices in store similar to or higher than competitors’? Do customers have to drive further to reach the store offering the gas discount? Bottom line – are the discounts really worth having? Perhaps the stores not offering gas discounts are actually better value for the things customers want to buy. But how many will do the sums rather than be lured by the apparent offer of cheaper gas?
I seem to remember when gas stations began to do more with milk pricing and I wondered why my growth had flattened out. It was not going to my traditional competitors. The retail lines of consumption continue to get blurred and matching convenience and price in such a demand category has to be part of the arsenal that supermarkets will need to have at their disposal, or they’ll lose sales in other areas of the store offering.
I am amazed that gas stations with the highest prices do so much business but apparently it is a combination of location and people that just aren’t concerned about price. As gas prices continue to rise, I am expecting people will become more price conscious and this has to aide the stores with gas discounts and lower prices. Grocery stores that offer gas price reductions based on grocery purchases should have a very potent competitive advantage over ones that don’t.
Fuel-rewards offerings are a natural for a healthy frequency marketing program. Food and gas are staples on equal footing in the U.S. …except for the price thing, which makes fuel price relief hot now. It’s hard to see it cooling any time soon. Retailers who invested in both fuel distribution infrastructure and frequency marketing capability now look prescient. For those who have not, this will be a tough asset to emulate quickly. As with all discounts, however, this will likely evolve into a perceived entitlement. So fuel-reward program sponsors need to plan next steps for the time when this is no longer a differentiator.
I agree with Bill Bishop. I also think this has the potential to become financially onerous if retailers keep ramping up the rewards. Cutting back on the rewards can be bad PR. Margins on gasoline are already paper-thin. It could reach the point where you have to wonder whether meeting/beating competition on gasoline is worthwhile, based on the tangible and perceived benefits.
What is important here is how the discount is perceived by the consumer. In the Pittsburgh market, Giant Eagle is king with 51 percent of the grocery business. It’s nearest competitor, Shop ‘n Save is a distant second with 21 percent. The difference is the gas perk offered by Giant Eagle. Just go to any Giant Eagle, especially with the Getgo’s adjacent to the store and you can readily see why. 20 cents a gallon off for a $50 dollar purchase is a very big deal in light of $3 plus per gallon gasoline prices. In contrast, their poor competitor, Shop ‘n Save, with a nearby store, is nearly deserted. The Pittsburgh customer goes to the store with the gas perks, plain and simple.
This may seem like a great idea, and so it may be. But not necessarily.
Not every desirable product sold at a discount will promote the core business lines. Anyone remember the hype at the beginning of supermarkets offering videos to rent? — it was touted as a huge business builder but ended up with quite modest effects. Or consider a chain of high-style movie houses that experimented with gourmet sandwiches and treats instead of popcorn; the theaters were not nearly clean enough or bright enough for this kind of food, and patrons were turned off to it.
To make an informed decision on this idea, retailers would need to have statistically valid data for at least the following questions:
– What are the points of buyer resistance to buying gasoline at retailers instead of dedicated gasoline stations? (Probably quality, product mismatch — the two product channels repel each other, the hassle of a dual-process — in the car for gas, park for groceries.)
– How strong are these points of resistance and in what percentage of customers?
– What percentage, for example, of gas buyers care about the quality of gasoline; to what extent do they care; and how will they perceive the quality of the gasoline offered by this retailer?
– What is the strength of the sense of value of the discount being offered? What percentage of consumers see 10 cents per gallon as a “very high” value? Twenty cents?
– How much of a discount is necessary to overcome the sense of resistance to buying gas at this retailer?
The retail world is full of stories of great-sounding ideas that flopped, even after some success in small roll-outs. I am not saying this would flop in a large roll-out. I am only saying let data drive the decisions, not hunch or common sense or assumed logic.