September, 2001

Fruits of Thought

Gas As A Loss Leader

The produce industry has never really come to grips with Wal-Mart. To shippers, Wal-Mart is a big customer, and to retailers, a tough competitor. Yet the concept of what a true national supermarket chain is – yet one which, if push comes to shove, doesn’t need to make money on even a category as large as food – hasn’t really sunk in. But the gas station owners seem to have gotten the idea.

Wal-Mart has gotten into the gasoline business, installing gas pumps at many of its stores. It doesn’t take a marketing genius to see that inexpensive gasoline is one of the things that can really motivate people to travel…and on a regular basis. So, beyond whatever Wal-Mart might make in selling gasoline, it is reasonable to surmise that Wal-Mart hopes to gain customers for its stores and increase the frequency of their shopping at Wal-Mart by offering great prices on gasoline.

This analysis is unremarkable and, in fact, other discounters, such as Costco, have similar ambitions. It is interesting to note, though, that this marketing strategy – take a high frequency item that is an important part of the family budget and price it aggressively to attract frequent shoppers to the store – is the exact justification for selling food in general and perishables in particular at mass marketers.

Wal-Mart recently announced that it would open eight new distribution centers by the spring of 2002. The facilities are necessary to accommodate its rapidly growing supercenter business. Fully half of the centers will be perishables warehouses specifically to handle food. The new units will be located in Hopkinsville, KY; Henderson, NC; Shelby, NC; Reeders, PA; Cleburne, TX; New Caney, TX; Louisa, VA; and Williamsburg, VA.

However the gas station owners don’t like it. Here is the problem: the gas station owners specialize in gasoline. It is their bread and butter. Even where they have a little convenience store, that store is expensive and depends on a flowing gas trade to attract customers. It didn’t take gas station owners long to figure out that if Wal-Mart’s motivation is to get folks to the local supercenter, Wal-Mart will undercut prices at local gas stations and not care if gasoline is only modestly profitable or even a loser.

Since gas station owners can’t beat Wal-Mart on a commercial level, they’ve tuned to politics. In state after state, laws are being considered or have been passed making it illegal to sell gasoline below some specified mark-up. Don’t laugh, in Germany, Wal-Mart was fined not too long ago for selling products too cheaply. There you have a whole country whose economic policies are designed to make life difficult for discounters.

Most of the press attention has gone to the gas station owners who feel threatened by Wal-Mart. But I can’t help but wonder if the big oil companies aren’t urging the little guys on. After all, Tony the Tiger aside, gasoline is fundamentally a parity product – despite the hype all comparable gasoline is the same – and Wal-Mart doesn’t need the major oil company brands. In contrast the little gas station owners are extremely dependant on the major oil companies.

Think of it as a divide and conquer. As long as a major oil company is selling to thousands of independents, the oil company is pretty important. The minute Wal-Mart becomes the big buyer selling gasoline under what is, in effect, a massive private label program, the oil companies will be adding a lot less value. Oil companies will really become commodity gasoline vendors, a low margin business at best.

As Wal-Mart grows, it is a quandary to know how the industry should respond. Some retailers seem to be doing a good job. Albertson’s, for example, is turning to micro marketing in its stores to combat a kind of homogeneity at Wal-Mart. You can visit one Albertson’s with a kosher deli, bakery and butcher shop to appeal to one client and find another down the road with an ethnic hair care section to appeal to a different client.

Target doesn’t have Wal-Mart’s heft or technological sophistication, but it gets the buzz. And it gets customers, who otherwise wouldn’t be caught dead in a mass merchandiser, with its designer program, including common household elements designed by architect Michael Graves. In its version of the Supercenter, Target seems a little more upscale on perishable desserts and sushi programs and what not.

Shippers like Wal-Mart’s approach whereby a shipper can really help build its own business by working with Wal-Mart, but nobody likes operating a business at the sufferance of someone else. There is this nagging fear that in an age of production surpluses, every shipper needs Wal-Mart more than Wal-Mart needs the shipper, and store by store, distribution center by distribution center, this fear becomes more pressing.

One bright spot – produce shippers often gripe that retailers overcharge for produce. Well, if laws are going to stop Wal-Mart from using gasoline as the wedge product to get customers in, maybe that role can fall to produce. After all, if Wal-Mart can get consumers to prefer Wal-Mart produce because it is equal in quality but is priced better, then the high frequency of produce purchases is going to drive customers to the cereal aisle, the pharmacy, the undergarments, towels, electronics, toys and, yes, even gasoline. And there is no law against that.  pb