newcomers welcome

For all the talk about gasoline volatility and dwindling fuel margins, there's no shortage of mega-retailers looking to fillup on fuel profits. Alongside traditional hypermarketers like Wal-Mart, Costco and BJ's, is a new breed of operators hoping to cash in on America's growing fuel demand. This includes the nation's largest home improvement retailer, Home Depot, and British powerhouse Tesco PLC.

Home Depot Fuel, which debuted in Brentwood, Tenn., in February, is using gasoline to attract new consumers while servicing its steady stream of contractors and doityourselfers. Amazingly, if the concept is deemed successful, Home Depot anticipates opening 300 fuel stations over the next five years, said Frank Blake, the company's executive vice president of business development and operations.

Home Depot may be the most recognizable of the new entrants, but it's hardly the only one. The chain worth watching is Tesco PLC, the UK retailing behemoth that will begin opening convenience stores and gas stations in California early next year.

Tesco has its work cut out. While its reputation is for being a foodservice operator, it's also an experienced marketer of gasoline, tobacco and financial services. But, in the U.S. market, Tesco will be just another face in a crowd of talented retailers fighting for market share.

Among the pressing issues Tesco faces are finding good corner locations, products distributors and a fuel partner. Then there's the labor issue. Many food-based concepts have failed just because they couldn't find people to operate them. The most prominent to come to mind is the Main Street venture in Texas in the late 1990s, a multi-million dollar flop.

But the one distinguishing feature Tesco carries across the pond is its ability to do foodservice and do it well. To rely on this skill alone, though, would be a colossal mistake. Bigger companies with deeper pockets have tried to corral California's convenience foodservice market with little success. Few companies had the deep resources, commitment to foodservice and knowledge of California's local markets that Chevron had when it launched Foodini's a decade ago and, still, the concept failed to catch on.

So while Tesco's entry into the market might cause some short-term groans for traditional c-store marketers, the onus is ultimately on Tesco to prove whether or not it's a worthy opponent capable of meeting the demands of finicky, time-starved U.S. consumers. History suggests it's up to the challenge.

While still in its nascency, Tesco realized it needed to change its offering to differentiate from the UK crowd. Against the recommendations of analysts and consultants, the company abandoned its deep-discount format for a variety of dressier mid-market formats. Its operations quickly grew to include more than 2,500 stores in the UK across multiple retail channels.

In this month's cover story, working with the Association of Convenience Stores in London, Convenience Store Decisions correspondent Andrew Don reports that Tesco is coy about answering questions regarding its U.S. ambitions because, company officials say, its plans are "commercially sensitive."

"Tesco is not only by some distance the best retailer in the UK, but I don't think there is a retailer in the world that is better at retailing," said Richard Hyman, a prominent London-based market analyst and chairman of Verdict Research. "I won't say it is better than Wal-Mart but it is probably the best competitor Wal-Mart has." Read Andrew's full report beginning on pg. 22.

State of the Industry
At its annual SOI conference in Chicago last month, the National Association of Convenience Stores (NACS) released the 2005 State of the Industry report. Despite high gas prices, low fuel margins and increased utility costs, the news was good for the industry.

Convenience store sales climbed 20.2% to reach a record $474.3 billion in 2005, the third straight year of revenue growth of at least 16%. A 26.2% hike in gasoline prices led to a 25.5% increase in motor fuels revenues to $329.5 billion in 2005. The average margin was approximately 16 cents.

In-store revenues also showed strong growth increasing 9.6% to $144.8 billion, with merchandise revenues rising 9.7% to reach $127.6 billion and foodservice revenues growing 8.8% to $17.2 billion.

"In a year of record high gas prices, we grew in-store sales. This goes to prove the theory that customers would be turned off by high gas prices and not come into the convenience store is not true," said Greg Parker, a member of the NACS Board of Directors who presented the SOI data on behalf of the association.

The results were mixed in other key areas. Credit card fees soared in 2005, costing the industry $5.3 billion, a staggering 39.5% hike over the $3.8 billion in 2004. But labor costs dipped as the industry reported fewer employees in 2005 despite a modest 1.8% increase in store count. SOI coverage begins on pg. 12.

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