NONFOODS: Petroleum Operations: Drill down

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NONFOODS: Petroleum Operations: Drill down

By D. Gail Fleenor - 11/01/2007
For some grocers, selling fuel has quickly become as commonplace as slicing deli meat. And like many a food retailer's traditional in-store departments, the location and layout of a fuel operation are proving to be the keys to its success.

There's little doubt among supermarket operators that fueling stations can enhance overall sales volume and shopper loyalty, by delivering added value. Determining the right spot for a fuel operation, however, isn't easy, as a tremendous amount of outside factors come into play, such as vehicle traffic levels, zoning and environmental requirements, and, of course, the volatility of oil prices.

Simply having a spacious parking lot doesn't automatically make a given store a good location for fuel, explains Thomas Montgomery, retail services manager at Grand Rapids, Mich.-based Spartan Stores.

"Typically, when we're looking at a supermarket location, we look at population, but when considering a fueling center we look at different things, such as traffic counts and the competitive environment, including the number of stations nearby, how old the stations are, and whether they are branded," says Montgomery. "We also consider whether a site is conducive to a fueling center physically."

Given this complexity, Spartan hired a consultant to provide research and evaluation of sites. "We think using a consultant was necessary for us, upfront," notes Montgomery. "We are experienced at supermarket site research, but not fuel research. We use SFS Corp. out of Kansas. They have done work for Kroger and big-box guys, so they have fuel experience."

Consultants can help estimate volume for a proposed fuel center, estimate the volume of a connected convenience store, and advise how large the store should be. In the long term, however, Montgomery thinks his company will take this function internally, as it has supermarket site evaluation.

Laying this groundwork appears to have paid off. Spartan, the nation's 10th-largest grocery distributor, recently opened its 16th fueling station, and its long-term growth plans call for an additional 10 to 15 stations over the next three years.

Spartan sells fuel under its four supermarket banners: D&W Fresh Markets, Glen's Markets, Family Fare Supermarkets, and the recently acquired Felspausch. All Spartan's fueling locations, except the one across from company headquarters, are located at supermarket sites and include a Quick Stop convenience store.

"Quick Stop blends all our locations together," says Montgomery. While all Spartan locations sell unbranded fuel, Montgomery says the fuel is branded with the particular banner, such as Glen's. "We sell unbranded fuel, but it is actually branded. Our brand is already well known in the marketplace through our supermarkets. [An outside] branded fuel would be of no value to us; it would be double branding."

Watch for price pitfalls

When exploring whether to pair a fueling site with an existing supermarket, Montgomery says he looks at the store's overall volume performance first, to make sure it's high enough. "We have a fuel rewards program which gives customers cents off per gallon when they purchase things in the store, so a low-volume store would not be a good candidate for a Spartan fueling location," he explains.

"This cents-off-per-gallon offer is what the big-box guys are doing, and it does work," adds Montgomery.

Still, research in advance can't cover every contingency in the decision whether to open a fuel site, he notes. "Research doesn't take into account how competition in an area will react to the addition of your fueling center. For example, if the area is mostly branded, competition is usually not price-aggressive. But if the area is mostly unbranded or has a big box with fuel, it is very price-oriented. If an area is all branded and a supermarket offers unbranded fuel at lower prices, volume at the site can skyrocket," says Montgomery.

"The opposite is also true," he continues. "If all competition in your area is unbranded, then you will find extreme fuel-price sensitivity. Fuel is more price-sensitive than food. People will drive to save a penny or two, so you have to know who your competitors are, and especially who the price guys are in an area."

Brookshire Bros. fills up

Brookshire Bros. president and c.e.o. Jerry Johnson seeks the answers to two main questions when mulling a fueling site at one of his stores. "We consider the proximity to intersections and ask: How easily does traffic flow through?" says Johnson. "Next we look at the square footage allotted for a fuel station on the supermarket layout, and make sure it doesn't take away from parking space needs."

The Lufkin, Texas-based retailer has fuel stations adjacent to the majority of its Brookshire Bros. supermarket locations, which it says demonstrates its commitment to offering fueling service to customers. A Tobacco Barn outlet or a B&B Express convenience store accompanies each fuel station.

Brookshire also recently completed a merger with Polk Oil Co., also based in Lufkin, bringing the grocer's number of convenience stores with fuel to over 100. Carl Ray Polk Jr., president of Polk Oil, will continue to manage the 29 Polk Pick It Up convenience stores, in addition to taking over the management of the Brookshire Bros. stations, as part of the deal.

"Due to the layout of some of our centers, some lend themselves better to fueling sites than others do," observes Johnson. One poor candidate, for example, was a store in an L-shaped shopping center right at the intersection of the angle, which Johnson says cut down on visibility. Also, the peculiar layout of the parking lot limited ingress and egress.

Parking is always a major challenge when adding fuel to an existing supermarket site, affirms John Dzwonczyk, president of Avon Lake, Ohio-based JGD Associates, whose company has designed and consulted on hundreds of fueling sites.

"Parking may be insufficient if fuel is added to a site," says Dzwonczyk. "Many supermarkets occupy leased space that makes the parking lot a common area, and it might be a problem to reduce parking from a zoning standpoint. There may be covenants prohibiting fuel sales, and there may be traffic issues that make locating a fuel offer problematic."

There are, fortunately, many complementary similarities as well when evaluating a supermarket site and a fuel site, adds Dzwonczyk. "If a site has good traffic, it has good potential for fuel sales," he says. "Competition is another issue the two have in common. Nearby competition can make an area a habitual location for fuel purchasing. Too much competition in an area can mean price cutting, which can squeeze profits."

Also, access to adjacent roads is as crucial to supermarkets as it is to fueling sites. Dzwonczyk notes that a supermarket with a good customer count should have an advantage, since customers don't have to negotiate the roads again to fill up.


The right site

Consultants and retailers with fuel experience agree that the answers to these questions should help grocers decide if a given store is a good candidate for adding a fuel operation:

--Is there enough space available on the site to accommodate a fueling center, including queuing of customers?

--Can parking requirements for the store still be met when the fuel center space is carved out of the supermarket parcel?

--Will the fuel center space impede traffic in and out of the lot?

--Is there sufficient space for fuel trucks to service the site? If the fuel site has strong sales, that could increase the risk that fuel deliveries may interfere with peak supermarket traffic flow.

--How far from the store will the fuel center be located? Depending on distance, considerations can include adding a fuel kiosk restroom, security when transferring money, and visibility for monitoring/managing the fuel operation.

--How much and what type of competing fueling stations surround the site?

--Does placement of the fuel center allow for easy ingress/egress, including "drop-in" traffic which might not be visiting the supermarket? Easy access to traffic on primary roads is also needed for strong sales.

--Is the fuel center visible to passing traffic, or is it obscured by signage or the supermarket itself?

--Is the fuel center addressed in the supermarket lease or land lease? If not, when a fuel center is added to an existing location, the lessor may require that certain environmental concerns be met. Additional rent or some monetary concession will likely be required for the addition of a fuel center, which could impact site feasibility.

--Are there any known changes in city/county/state road plans that might affect the fuel site? These could include widening a road that could put the fuel center too close to traffic, or altering traffic flow that could affect drop-in sales.

--D. Gail Fleenor