fuel discounts simply irresistible

Loyalty programs are cultivating a new breed of price-conscious consumers.

As long as gasoline prices remain high, consumers will be attracted to fuel discounts. That’s the common sense that led retailers to create customer loyalty programs in which fuel discounts are the prize, instead of the more customary prizes like airline travel or cash back. To make it even more attractive to c-stores, this type of program can be implemented in a store that doesn’t even have gas pumps.

However, just because fuel discounts are popular, are they right for all c-stores? Are they inexpensive, easy to integrate and cost-effective? Here is the information you need to decide if one of these programs is right for you.

How Does It Work?
According to Kirsten Paust, vice president retail systemsfor Gilbarco Inc., it all begins with choosing the right partner. “There areseveral ways to incorporate fuel discounting into a retail operation, and itall begins with the point-ofsale (POS) technology,” she said.

When a customer swipes a credit card at a self-service gas pump, a number ofelectronic functions happen at lightening fast speed. First, the pump sendsyour credit card information to a box inside the store called a fuel controller.Then, the fuel controller communicates with the credit card company, gets theauthorization, and tells the pump it’s okay to begin fueling.

“Speed is essential,” said Mike Finley, vice president, global product marketingfor the Radiant Global Petroleum and Convenience Retail Division. “Customerswon’t wait.”

Adding fuel discounts to the POS options does not change this basic technology model. It does, however, make it more complicated and more difficult to perform at customer-pleasing speed.

“A basic example of a fuel discount program is when the customer buys a car wash and gets a fuel discount,” Paust said.

In this scenario, there are several functions added to the POS-fuel controllerrelationship. A screen prompt asks if the customer wants to purchase the carwash in order to take advantage of the fuel discount. When the customer pressesthe “YES” button, the fuel controller adds the car wash charge to the creditcard, and sends the electronic message to reduce the price per gallon at thepump. The best part is when the customer stands vigil at the pump and watchesas the price resets to the reduced rate.

Building from this basic scenario, implementations can become quite complex.Imagine 500 locations, each with 10 to 25 POS stations, where every purchasethe customer makes in any location equates to a point system on a sliding scaleof multiple fuel discounts redeemable at any participating location.

Customer Loyalty Cards Required
A complex scenario requires the use ofcustomer loyalty cards. Cardholders swipe their loyalty card when they makeapplicable purchases, and their accounts are credited appropriately. Then, whenthey redeem their rewards at the pump, their accounts are automatically debited.There may even be cumulative credits, like a loyalty card and a branded oilcompany credit card where both give credits toward savings at the pump.

To make it very easy for the retailer, the rewards are transacted through a third party vendor called a Rewards Center, such as Metrosplash Systems Group. When the fuel controller sends the credit card for authorization to a processing center, it also sends the customer loyalty card data to a separate rewards center for the account to be updated with the current credit or debit.

The rewards center frees the retailer from having to create an IT network to meet the demands of a complex rewards program, while simultaneously making it possible for retailers who do not own gas pumps to connect fuel discounts by partnering with a gas vendor.

Pros and Cons—Basic vs. Complex
Both basic and complex implementationshave advantages and disadvantages. The right one to deploy depends on what youwant to get out of the system in the end.

A basic system is less expensive, does not have the cumbersome cards and gives very simple reports. You can know how many car washes you’ve sold, but not who are the specific buyers. If your number of car washes increases, the system is working.

However, a basic system probably won’t quench the thirst that data-centric companies have for information. With a complex system, individual customers can be attributed to their purchases. The data-mining possibilities are limitless. In fact, your customer knowledge begins at sign up, where they are asked to complete a questionnaire.

Can You Afford It?
There are two costs associated with this type of rewardsprogram:

  • The cost of implementation.
  • The cost of the shortfall resulting from discounting fuel.

The cost of implementation is relatively inexpensive, especially when you consider that you need to upgrade POS technology every few years anyway. A simple POS upgrade costs $7,000 to $8,000 for the first one and about $5,500 for additional stations.

The more significant question is how can you account for the revenue lost by discounting fuel. Mark Lilien, a consultant with Retail Technology Group in Stamford, Conn., explains that this is not actually a customer loyalty program. He contends this is a fuel discounting program, a loss leader.

Lilien said this is more suitable for a larger retailer for several reasons. First, larger retailers offer loss leaders every week; fuel would just be another one. Second, large retailers offer more products so they have far greater opportunity to make up the revenue shortfall caused by the loss leader. Third, the average c-store sale tends to be less total dollar amount than the average sale amount at large retailers making it more difficult to recoup a shortfall.

Dan Kernan, pricebook manager, RH Smith Distributing Co. Inc., seems to have the answer. He earmarks 20 to 22 items in the store that qualify for fuel discounts. Three items are constant: fountain drinks, coffee and car wash. The other items rotate based on profit margin concessions offered by the manufacturer or distributor. After a year with one store in the pilot program, his revenue growth is in double digits.

The company, a Conoco jobber based in Grandview, Wash., operates 13 Smitty’s convenience stores and three cardlocks.

In Conclusion
The consumer mindset craves discounted gas. Every retaileris ultimately going to have some kind of fuel discount reward program. The technologyis already here. Therefore, the question becomes more “how” to do it than “whether”to do it. That’s why it’s important to plan the strategy for making up the revenueshortfall first. That will guide what kind of system will generate maximum returnin your situation.

Industry Model:

RH SMITH DISTRIBUTING CO. INC., GRANDVIEW, WASH.
Number of Stores in a Fuel Rewards Program: 2
The Hook:
Customers buy merchandise earmarked for rewards points. The POS addsthe credit to their Loyalty card at each purchase. Points are good for30 days. Customers are encouraged to accumulate points and realize maximumdiscount at the pump. Frequent shoppers earn $1.00 or more off each gallonof gas up to 15 gallons.
The Revenue Equalizer:
Fountain drinks, coffee and car wash havethe most profit margin built in. An additional 17 to 20 items are rotatedbased on manufacturer or distributor concessions.

Industry Model:

UNITED OIL CO., PITTSBURGH, PA
Number of Stores in a Fuel Rewards Program: 3
The Hook:
With a car wash, customers save 10 cents per gallon (adjustable).
The Revenue Equalizer:
The car
wash delivers a large enough profitmargin to make up the revenue lost in the fuel discount.

Industry Model:

PUBLIX CONVENIENCE STORES
Number of Stores in a Fuel Rewards Program: 7 PIX conveniencestores and all Publix supermarkets.
The Hook:
Publix offers customers discounts on the purchase of gasolineat Publix PIX locations in one of the following two fashions:

One, if a customer brings a Publix receipt from any Publix store locationwith a purchase $30.00 or more, the customer receives a discount of 3cents per gallon. The transaction would need to be completed (paid for)inside of the PIX location for the discount to occur.

Two, if a customer uses a Publix gift card to purchase gasoline at aPIX location, the customer will receive a discount of 3 cents per gallon.The gift card transaction can occur at the pump.
The Revenue Equalizer:
The large store model makes this just another loss leader.

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