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CENTERS HOST RAPID GROWTH OF GROCERY GAS

By Glen A. Beres

Safeway plans to have about 300 fuel centers.

Supermarket and supercenter chains plan to erect hundreds of fuel facilities over the next five years as part of a continued push into the gasoline business, prompting mixed feelings on the part of shopping center owners.

Supercenters already account for some $11 billion in annual gasoline sales, according to Oil Price Information Service, a Lakewood, N.J.-based trade publication that covers the gasoline industry. That is expected to double by the end of 2005, at which time the trend could account for 20 percent of the total U.S. retail gasoline market, according to the publication.

“In the very near future, grocers not selling gasoline will find themselves at a disadvantage,” said Gerald Divaris, owner of Divaris Real Estate, a Virginia Beach, Va., commercial real estate brokerage and property management firm.

The list of supermarket chains, warehouse clubs, discounters, mass merchandisers and other supercenters that have either already entered the gasoline business or plan to do so reads like a Who’s Who of big-box retailers. Among the most prominent:

• Albertson’s. The Boise, Idaho, supermarket chain celebrated the grand opening of its 200th fuel center in November 2001. The 2,500-unit retailer plans to open some 70 additional fuel centers this year and has set a 500-site goal for the next five years.

Warehouse club chain Costco has fuel pumps at 150 locations and ultimately plans to offer gas at up to 80 percent of its 385 stores.

• Costco. Based in Issaquah, Wash., this warehouse membership club operates fuel pumps at about 150 of its 385 locations. All new sites are being built to accommodate fuel operations, and the company says it expects to have gasoline pumps at 75 percent to 80 percent of its club sites.

• Kroger. This Cincinnati-based supermarket chain sells gas at approximately 170 of its 2,300 grocery stores and 650 of its 800 convenience stores. “We have added and will continue to add supermarket fuel centers,” the company said in a recent 10Q filing.

• Safeway. The Pleasanton, Calif., chain sells gasoline at about 100 of its 1,750 stores in the United States and Canada. The supermarket chain has been accelerating the development of its fuel operations recently and has expressed plans to have about 300 fuel centers over the next five years.

• Wal-Mart. The Bentonville, Ark.-based discount giant has some 600 fueling stations nationwide between its 3,200 traditional stores, supercenters and Sam’s Club locations. Wal-Mart has been installing pumps at a furious pace in the past few years and expects to be selling gas at most, if not all, of its stores, according to a company spokesman.

Other supercenters that have made large commitments to selling gasoline include Ahold USA, BJ’s Wholesale Club, H-E-B and Meijer, and a number of smaller, regional supermarket chains have joined the fray as well. Meanwhile, such major players as Fleming Cos., The Home Depot, Publix Super Markets, Supervalu, Target Corp., Winn-Dixie Stores and others have recently begun testing the gasoline market and are reportedly planning broad fuel-center rollouts.

The factors behind this push by supercenters into gasoline include the increased traffic it would bring; added convenience for shoppers, which boosts customer loyalty; increased sales of higher-margin convenience store items to customers waiting to fill up; and higher grocery sales through affinity programs linking fuel purchases to in-store discounts, and vice versa.

The increased supermarket sales factor is important, because even though gasoline doesn’t generate much direct profit for supercenters, it can still indirectly provide stores with a significant increase in grocery sales.

“Since gasoline is a low-profit-margin item with high sales dollars, we expect to see our gross profit margins decrease as we sell more gasoline,” Kroger noted in its 10Q. “Although this negatively affects our gross profit margin, gasoline provides a positive effect on net earnings.”

Just how much of a lift can gasoline sales offer a supermarket? Supercenter fuel sites generally sell unbranded gasoline and undercut traditional gas station prices by between 5 cents and 15 cents a gallon. The typical supermarket site can expect to get an average in-store uplift of about $1 million per year, according to a recent study by Energy Analysts International, a Westminster, Colo.-based consulting firm.

Compared with regular gas stations, supermarkets sell enormous quantities of gasoline. The study shows that such chains as Albertson’s, Kroger and Safeway typically sell about 150,000 to 300,000 gallons of gasoline per month at on-site fuel centers. Discounters Costco, Meijer and Wal-Mart sell considerably more; any of their sites could typically sell between 300,000 and 600,000 gallons per month. Some high-volume locations may even exceed 1 million gallons per month. By contrast, a conventional gas station will typically sell roughly 80,000 to 100,000 gallons monthly, according to the Reston, Va.-based Society of Independent Gasoline Marketers of America.

These gallons can translate into a lot of grocery purchases, which is great for the supercenters. But shopping center owners are not always enthusiastic.

Mike Peirce, vice president of Oakbrook Terrace, Ill.-based Mid-America Real Estate Group, noted that some retailers, such as Dominick’s Finer Foods and Meijer, prefer to install fuel centers on the traditional corner lot rather than within their own parking lot. Peirce, however, said he would rather sell that prime corner location to a major brand like BP, Shell, Texaco or Exxon Mobil and let it develop the site into a gas station.

Kroger sells gas at 170 grocery stores and 650 convenience stores.

“The national gasoline brands pay top dollar for those sites,” Peirce observed. “Also, supercenters usually demand a contract restricting any other gas stations in the center. A lot of them, such as Wal-Mart, even have their own real estate division and self-develop their own properties, so I become a land flipper. When the big-box retailers get into gasoline, it’s more of a negative for a developer.”

Mid-America, which provides site acquisition, management and leasing services to shopping center owners, has worked with numerous supercenters selling gasoline on-site, including Costco, Cub Foods, Dominick’s, Jewel-Osco, Meijer, Sam’s and Target.

Another challenge that faces shopping center developers seeking to add gasoline operations is that the process often leads to lengthy land-use hearings. Fuel centers owned by supermarkets typically require a variance from the city or town where they plan to operate, according to Craig Ramey, senior vice president of investments for the Northwest region at Jacksonville, Fla.-based Regency Centers. This can draw “intense focus” to that part of the project; local gas station operators may band together in opposition, fearing price competition from supermarket stations whose owners have the advantage of size and deep pockets, he said. Some station owners have even sued gasoline supercenters for selling fuel at prices below those outlined in the state’s “minimum price” laws.

“We’ve seen local operators successfully shoot down plans for a service center on a supermarket site by arguing against it at a local board meeting,” Ramey added.

Independently owned grocery stores seeking to sell gas can present even more problems, observed Norman M. Kranzdorf, chairman of Kramont Realty Trust, Plymouth Meeting, Pa. Their lack of experience could be “problematic,” he said, and warned that allowing retailers to put up a minimart or convenience store adjoining the fuel station could keep customers out of the shopping center.

“You don’t want them to drive away because they’ve gotten everything they need without having to go into the supermarket,” Kranzdorf observed.

However, Kramont has numerous supermarket chain tenants that have either already built fuel centers or are looking to add them, and Kranzdorf said that “for the most part, if it fits into the plot plan correctly and doesn’t disrupt the traffic flow, we welcome the added income.”

Divaris, whose company has worked on numerous leasing deals with supercenters selling gasoline on-site, including Costco and Wal-Mart, said that from a shopping center developer’s perspective, this trend linking grocery or general merchandise and gasoline is a winning formula.

Centers adding pumps can expect a lot more scrutiny from local agencies and a good deal of opposition from gas station operators, too, owners caution.

“Most shopping centers have a gas station on the lot anyway in a prime corner spot,” Divaris noted. “However, these supercenters are more interested in erecting inbound pumps within their own parking lots as a convenience to customers. You don’t need to tie up that valuable corner property with a gas station. You have an added attraction to your center that represents a more productive use of the space. And you also get outparcel prices for a less valuable space. There’s really no downside.”

Mark Mancuso, vice president for community center development at the Waltham, Mass., office of CBL & Associates Properties, agreed. Mancuso has worked on deals involving BJ’s Wholesale Club service stations.

“It’s another means of getting more consumer traffic to the site,” he said. “It also gives the retailer more opportunities to capture information on its customers and better understand them [through gas sales, discounts and affinity programs].”

Mancuso noted that in the past, owners have been concerned about the environmental liability of having supermarkets and other retailers getting into the gasoline business. But this issue has been greatly diminished by new tank technologies, stricter regulations and much more stringent government oversight, he said.

Even developers expressing concerns about supermarket gas stations concede they bring a lot of benefits, too. Regency’s Ramey, who has worked on fuel center deals for Albertson’s and Safeway, said his company still considers the strategy a positive one for developers, since it gives supermarket tenants a way to expand their business.

“This trend won’t go away any time soon,” he said. “Every new supermarket I’m working on has a fuel center in its plans, and many existing ones are looking to go back and put fuel centers on as many sites as they can.”

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