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Convenience stores build more traffic for Home Depot

By Ed McKinley

The Home Depot is joining the growing ranks of big-box retailers that operate traffic-building convenience stores in underused portions of their parking lots.

The Atlanta-based chain, the largest home improvement retailer and second-largest merchant in the U.S., is starting with four freestanding convenience stores under the Home Depot Fuel name to sell gasoline and convenience items outside its home goods centers in suburban Nashville, Tenn. The first one opened in February; the other three are expected to open by the middle of the year.

By 2010 Home Depot could be operating convenience stores in conjunction with as many as 300 of its home centers, the company announced in January at its annual meeting with analysts and investors. Home Depot currently operates about 2,000 stores in North America and, on average, opens another one every 48 hours. Convenience stores could help sustain that growth by giving shoppers more reasons to visit Home Depot, observers say.

“It’s an effort to attract more traffic to their stores,” said Michael Cox, a vice president and senior research analyst at Piper Jaffray & Co., Minneapolis. “Traffic has been an issue for Home Depot, as their store expansion strategy does involve cannibalization of their existing stores.”

But though building stores close together could result in cannibalization, the practice can be said to block competitors, too, he says. If a Home Depot has to lose customers to a nearby new store, that logic goes, better that the new store be another Home Depot.

The traffic-building rationale makes sense, says Jeffrey Lenard, director of communications of the Alexandria, Va.-based National Association of Convenience Stores. He notes that most retailers make only a penny or two per gallon on gasoline sales and are thus offering the gas just to sell more of something else.

“They won’t make their money on fuel,” said Lenard. “They’ll make it on the customers that the fuel brings to them. They want people to say, ‘I’ll go to Home Depot, get my gas and get my weekend home repair supplies.’ ”

If shoppers do start equating Home Depot as much with gasoline and donuts as with plywood and power tools, the retailer will join a growing contingent of about 2,000 supermarkets, nearly 1,300 discount stores and roughly 750 wholesale membership clubs that sell gas, according to Energy Analysts International (EAI), a Westminster, Colo., energy consulting firm. The approximately 4,000 big boxes that sell gas account for less than 3 percent of motor fuel outlets, but they sell 7.7 percent of the gas bought in the U.S., according to EAI, while convenience stores sell 75 percent.

Supermarket chains committed to the gasoline business include Ahold, Albertsons, Brookshire, HEB, Kroger and Safeway, EAI says. Among discount chains, Wal-Mart and Meijer sell gasoline; the wholesale clubs with gas pumps outside include BJ’s, Costco and Sam’s Club.

Half the supermarket chains responding to a 2005 survey by the Washington, D.C.-based Food Marketing Institute, a supermarket industry trade association, said they intend to incorporate gas pumps and convenience stores into their parking lots at some of their new stores. The percentage of new supermarkets with gas pumps is expected to surpass 14 percent this year, according to the survey.

The trend is especially strong in the Western states, where nearly 43 percent of new supermarkets will have gas pumps and convenience stores, versus 22 percent in the Midwest and 9 percent in the South, according to the institute.

Not enough chains in the Northeast responded to the survey to generate a figure for that region, and this is no coincidence. At Home Depot stores in the Northeast and in large cities nationwide, shoppers are already vying for scarce parking spaces, which would preclude the addition of convenience stores, says the convenience store association’s Lenard. Additional real estate to expand those lots is in short supply too.

Motorists in less densely populated areas also respond more readily to discounted gasoline prices, he says. “It works better in areas where a 10-mile trip to buy gas takes 10 minutes, not an hour or two,” Lenard said. Drivers decide where to buy gas based on convenience and price. Because home center locations will not prove convenient for some potential customers, price may make the difference, he says.

The association calls the movement to combine big boxes and convenience stores “channel blur,” because the phenomenon makes the boundaries between channels of retailing less distinct.

Lenard says part of the attraction in selling gas at big-box stores lies in the quest to provide one-stop shopping. Contractors could stop by Home Depot in the morning to gas up, grab a cup of coffee and pick up a breakfast sandwich while stocking up on building materials, he says.

Home Depot has dabbled in convenience in the past by allowing local vendors to set up hot-dog stands inside store entrances and by establishing contractors-only checkout counters and exits. The chain has provided self-scanning devices to shorten checkout lines and has kept the doors open 24 hours a day, seven days a week at some stores, Lenard says.

Home Depot did not respond to Shopping Centers Today’s requests for comment. Neither did Home Depot make much noise in the local media about the stores it opened in the Nashville area. “They didn’t make much of a to-do about it,” said Clint Brewer, editor of the Lebanon Democrat, a daily newspaper in Lebanon, Tenn., a town near the first Home Depot Fuel, in Brentwood. Brewer says he is unable to recall any advertising, grand openings, signs or media coverage.

Linda Lynch, community relations director for the city of Brentwood, does not remember any ads or news stories about Home Depot Fuel either, but she did notice that the store had opened, because she saw the price of gasoline on an electronic sign as she passed by on Interstate 65.

A couple of weeks after the opening in Brentwood, the electronic sign touted unleaded regular at $2.19 a gallon, matching the price at a nearby Costco, says Thomas Funari, general manager of Cool Springs Galleria, which sits almost directly across I-65 from Home Depot Fuel and is owned by CBL & Associates Properties, Chattanooga, Tenn. The Home Depot Fuel building is made of brick and does not stand out from its surroundings, Funari says. He recalls no splash of orange, Home Depot’s signature color, on the convenience store structure or signs, though that could be because of building codes.

For all the lack of flamboyance, Lenard says he sees the mating of a convenience store with Home Depot Fuel as “an idea that has legs.”

Everybody is selling convenience these days, he says, citing ice cream at Toys ‘R’ Us, candy at Best Buy and Michaels crafts stores, convenience items in the front of supermarkets instead of their usual positions at the rear, and Blockbuster stores with so much food, so many soft drinks and such a wide selection of magazines that customers could forget they are in a DVD/video rental store.

“It’s nothing that’s new,” said Lenard, referring to Home Depot’s move. Rather, he says, it is “just a further iteration” of the convenience movement.