COVER STORY: Pump up the volume

Looking for an enticing promotion to lure customers into your store? How's this for an attention getter, borrowed from the Web site of Virginia Beach, Va.-based Farm Fresh: "A customer...recently paid just $.698 per gallon for 10 gallons of gas." Meet one of the most popular marketing tools being used by supermarkets nationwide. Fuel programs wielding promotional discounts have been hotter than ever over this summer, as gas prices climbed above $3 a gallon. Retailers and industry observers now expect that there's no looking back.

"These programs have been around for years, but today their objective has changed significantly," observes Charles L. Sharp, marketing professor at the University of Louisville in Kentucky. "Companies like Kroger originally conducted promotions when they first began offering fuel sales, to build awareness. Now retailers recognize that fuel promotions build traffic, because fuel is so expensive these days."

"Fuel centers will arguably be the fastest-growing trend in the supermarket sector in the next half of this decade," predicts Burt Flickinger III, a New York-based supermarket consultant.

The basic premise of these programs is that by letting shoppers earn discounts toward gasoline purchases when they shop in the supermarket, retailers will gain more loyal shoppers and a broader customer base. Grocers with on-site gas pumps, and even those without, are testing the waters with specials that tie into specific product categories and/or private label programs, and in many cases link up with existing loyalty card programs.

Public companies, including Costco and Kroger, are citing fuel sales in their quarterly financial reports, while privately held companies such as Giant Eagle, Publix, and H.E. Butt Grocery Co. are investing more capital and brain power into how to make fuel promotions work better.

As of today, one-third of supermarket companies surveyed by the Food Marketing Institute say that at least some of their stores offer gasoline service. "Our data show that gasoline sales is emerging as a common offering among supermarket-type formats, ranging from limited-assortment stores to supercenters," says Bill Greer, director of editorial services at FMI.

An informal online survey Progressive Grocer conducted during the summer found that 72 percent of respondents were planning special promotions tied to fuel sales.

Among the benefits for retailers, fuel promotions can:

--Drive new traffic to the store, and help retailers compete on a new level.

--Reward customers with a tangible, valuable incentive.

--Create excitement and attract positive media attention.

--Be used creatively to help drive other businesses, specific initiatives, and/or particular categories in the store.

For most retailers, however, the one thing these promotions don't do -- at least in the short term -- is add to the bottom line. As a general rule, supermarket fuel promotions are largely considered cost programs and break-even propositions at best. Nevertheless, for the retailers actively involved in fuel-based promotions, the advantages far outweigh the disadvantages, so it's a tradeoff that's well worth it.

"They cost something, but like any promotion you do to try and drive sales, fuel promotions position you favorably against the competition," explains Steve Smith, president and c.e.o. of Abingdon, Va.-based K-VA-T Food Stores, Inc., which operates 94 Food City supermarkets and 46 Gas 'N Go fuel stations in Kentucky, Tennessee, and Virginia. "Our first fuel promotion this summer was very successful. Now we'd like to do it again and see how we can make it even more effective."

For fuel-entrenched retailers like Pittsburgh-based Giant Eagle -- largely considered to be the standard bearer in the fuel rewards promotional domain -- significant investments are a requisite. The 216-store Giant Eagle's flexible, customer-friendly "fuelperks!" program is routinely viewed as the most powerful of its kind in the country, but that hardly happened overnight. On the contrary, the chain has been aggressively developing and refining its fuelperks! loyalty program for several years, to the point where it's now become an integral part of Giant Eagle's overall go-to-market strategy.

"This is something we believe in," affirms Dan Pastor, v.p. of Giant Eagle's GetGo fuel and convenience store subsidiary. "You've got to have the support from the top of the organization, straight down the line. We really get behind it by saying, 'This is the way we want to go to market.'"

The program is administered by Giant Eagle's CRM (customer relationship marketing) team, so the company sees it as a loyalty program above all else.

Giant Eagle's dedication to fuel operations may be an indicator of what's to come from other industry players in the next several years, observers agree. Beyond functioning as a sharp promotional instrument, fuel centers are helping retailers up the ante on competing on the basis of shopper convenience as well.

'Perks' for Giant Eagle

Giant Eagle first dipped its talons in the fuel rewards program over two years ago with a pilot program called "Save on Gas." Aside from the obvious universal appeal of providing consumers with cheaper prices at the pump, the gasoline-based discount rewards program also gave Giant Eagle an ideal vehicle to help it repair a perception that it was high-priced, amid a slew of new lower-priced competitors encroaching on its home turf.

The program's initial premise was simple: Customers who spent $50 inside Giant Eagle's supermarkets were eligible to receive 10-cents-per-gallon credit toward a loyalty rewards discount on fuel. In the beginning, the process was paper-based, so shoppers had to bring in receipts to receive their rewards. (Some retailers, Hy-Vee and Farm Fresh, for instance, still use the paper-receipt method.)

Seeking to make the program as seamless and convenient as possible for customers -- and already armed with one of the industry's most sophisticated electronic customer databases as a result of its existing Advantage loyalty card program -- Giant Eagle was in an ideal position to make the program technology-based. By electronically tracking purchases inside its supermarkets -- and ultimately inside GetGos -- the retailer could easily tie in-store purchases to a customer's Advantage card, thus facilitating earnings to be credited on an ongoing, real-time basis.

Giant Eagle launched the new technology-based program, dubbed fuelperks!, roughly six months after it had introduced Save On Gas. Recalls Giant Eagle's Pastor: "A key point when we launched [fuelperks!] that was kind of revolutionary was that it was the first real-time program of both rewards and redemptions that enabled customers to literally go to a Giant Eagle store, shop, check out, go to fuel pumps that might be a couple hundred yards away, and redeem points immediately, with no waiting period. Consumers didn't have to hassle with receipts. It was something that was designed from its inception to be very consumer-friendly."

Out of the gate, fuelperks! generated exceptionally positive consumer buzz and considerable media attention. Today, nearly two years later, the novelty has yet to wear off.

"Quite the contrary," notes Giant Eagle spokesman Rob Borella. "We get continued strong and positive reaction, not only about the base program, but also all the ways consumers can now earn fuelperks! points. As the program has evolved, we've included fuelperks! credit for dry-cleaning purchases in our stores, for other retailers' gift cards, and for pharmacy purchases. We've created multiple consumer marketing efforts in our pharmacy business that are geared toward folks who might be Giant Eagle shoppers, but not users of our pharmacy."

Additionally, Giant Eagle has added to the savings pot: In recent months the retailer has begun offering double fuelperks!, as well as bonus discounts at its GetGo gas stations, with purchases of select items, in select markets.

Says Borella: "We're continuing to diversify the program, as well as earnings opportunities for it, while also using it to grow our other lines of it pharmacy, corporate brands, or market share in specific geographic areas. That's why you don't see one enhanced fuelperks! program; it's not a one-size-fits-all approach in all markets."

Consultant Flickinger credits Giant Eagle with "taking their marketing to a whole new level. Consumers are in more cash and credit constraint than at any time since the Great Depression. The only things not fixed on consumers' budgets are fuel and food. So Giant Eagle, by lowering prices and becoming the low-cost leader on fuel in their market, is building an incredible amount of consumer good will and shifting sales from other competitors, including nontraditional competitors."

He points especially to the edge Giant Eagle is gaining over Wal-Mart. "The irony in this is that even though Wal-Mart announced a pact with Murphy Oil nearly seven years ago to put Murphy fuel centers in outparcels of Wal-Mart parking lots, Wal-Mart is still struggling to get its first 400 fuel centers up. Giant Eagle, even with a record number of Wal-Marts opening in a couple of its key trading areas, has managed to be the low-price leader on fuel."

Flickinger estimates that Giant Eagle basically breaks even on its gasoline operations, after factoring in the costs of running the ongoing discounts. But, on the plus side, the program is introducing new shoppers to Giant Eagle, who would have otherwise required much more merchandising and marketing money to attract, he notes.

Giant Eagle's Pastor confirms that "essentially fuelperks! is funded by the amount of additional store sales that we get inside our multiple store formats -- both GetGo and Giant Eagle."

Making cents

On a much smaller scale, independent Tom Kishman in Minerva, Ohio has been running fuel promotions at Kishman's IGA and Gas N Go for the past two and a half years. He admits that he's still experimenting, and aspires to develop an electronic-based program tied to a loyalty card program similar to Giant Eagle's.

"One of the greatest things about having an electronic setup is that consumers can see the price per gallon at the pump changing," notes Kishman. "They see the price go down, and they feel like they've done something for themselves."

While Kishman's operation may lack the sophistication of larger companies', he says his programs have been quite successful in creating excitement, attracting new shoppers, and boosting in-store sales.

As Kishman sees it, cents-off promotions tend to be the most effective, because consumers easily understand discounts per gallon, as opposed to dollars off the total amount of gas purchased. "People will drive 15 miles to save a nickel a gallon," he observes.

Beyond that basic guideline, a little creativity can go a long way, he says.

"We've done double rewards in a period of time when we knew it was going to be slow. We've also done what I call 'ping-pong' promotions, where customers get rewards in the store to use for fuel, and then get a coupon based on the fill-up to use back in the store. Another recent promotion we did around graduation was to give customers 50 cents off each gallon of gas if they bought a full-sheet graduation photo cake." Kishman's IGA's fuel rewards are good for up to 15 gallons of gas.

Cents-off promos are also going a long way for West Des Moines, Iowa-based Hy-Vee, which has more than 220 retail stores and 67 Hy-Vee Gas locations in the Midwest. But as is typical with Hy-Vee, store directors can add their own two cents.

"Every day Hy-Vee Gas offers a three-cent-per-gallon discount for customers who bring in a receipt from that day's purchase at their Hy-Vee store," explains spokeswoman Donna Tweeten. "However, Hy-Vee store directors have the local autonomy to run bigger promotional tie-ins. Many store directors have, and continue to offer additional per-gallon discounts that coincide with various levels of spending within the food store."

In essence, Hy-Vee views each individual fuel station as a "marketing tool to increase sales in our food stores," says Tweeten. The company plans to continue executing such promotions regularly, she adds.

K-VA-T's first-time "Fuel Bucks" promotion ran in select markets from May through the end of July, and convinced c.e.o. Smith and his team that fuel promotions hold a lot of promise.

"We had been a conventional fuel purveyor up until this year, but technology has allowed us to do other things," says Smith. "We wanted to keep the promotion simple, so we said that for every $25 customers spent in the store (excluding cigarettes, alcohol, pharmacy items, gift cards, or video), they'd get one fuel buck via the Catalina coupon dispenser. For every $10 they spent on store-branded merchandise, they got another fuel buck." Customers had to present their ValuCard to the Gas 'N Go cashier to activate the perks.

While K-VA-T didn't expect profitability, it did want to increase transaction size and private label penetration. "We definitely accomplished both," confirms Smith. "Our sales were up significantly, and private label sales were up significantly, too; we actually exceeded our goals. We exceeded our goals on redemption as well."

Smith says he was surprised to see that the promotion also increased coupon usage in general. Apparently, as consumers get used to the great value they're getting on gas, they begin to see coupons in a whole new light. "The redemption of Catalina coupons has gone straight up."

Also, because the summer promotion was the first for his Food City banner, local media showed a lot of interest, notes Smith. "There were even cartoons about it in the local paper."

Now Smith and his staff are looking at revisiting a fuel promotion "with some modifications," he says. "We'd like to take the program we did and make it even more effective. That may mean partnering with suppliers for ideas."

Media frenzy

Giant Eagle's fuel promotions have also generated a lot of media attention. To maintain momentum, the chain kicked off a new back-to-school multimedia advertising campaign that focused not only on the fuel-savings program, but also on the sale of other retailers' gift cards inside Giant Eagle stores.

"The TV ad features a student going back to college, wearing a pair of shoes purchased with a Dick's gift card from Giant Eagle, a pair of jeans bought with an Old Navy gift card, and typing on a laptop that she bought from Best Buy with a gift card," says Borella. "The message: 'Everything you need for back-to-school can earn you fuelperks! credits.'

"It's making a mind shift with our customers that gift cards aren't for gifts anymore -- they can be used for everyday purchases, as an alternative form of currency to earn fuel discounts."

In addition to the gift card tie-in, Giant Eagle is also experimenting with a promotion linked to its corporate brands in Erie, Pa. and Youngstown, Ohio. The retailer also hopes to do more cross-promotions with WetGo car wash locations, a new brand that it began aggressively building last year, according to Borella.

With Giant Eagle setting the bar high, other retailers just getting into fuel operations in its markets will be playing catch-up, says Flickinger. "Giant Eagle has one of the top real estate and store-engineering departments in the country. They've really been working hard at this for a few years."

But retailers outside Giant Eagle's territory may have time to experiment, as fuel promotions shouldn't lose their appeal any time soon, observers agree.

"[T]hese promotions are going to hold their sizzle for the protracted future, because gas and fuel will continue to be an issue, perhaps an even greater issue," says Sharp.

Rob Plaza, senior equity analyst at Zack's Investment Research in Chicago, agrees that more supermarkets will be getting into fuel operations in the coming years. "As long as retailers have space in their parking lots, you'll see fuel stations pretty much everywhere," he says.

--With additional reporting from Meg Major
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