Albertson’s Inc. is entering the gasoline business in California, a step that raises the stakes in the competition for customers in the rapidly consolidating supermarket industry.
The Boise, Idaho-based grocery chain said it will open the first of seven new fuel centers at supermarkets in California this summer, making it the first major grocery chain to sell gas in the state.
Analysts expect other grocery chains to follow suit if Albertson’s and warehouse chain Costco Wholesale, which already operates 22 gas stations here, are successful. Consumers should benefit from increased competition and lower prices, analysts said. But independent gas station operators are likely to suffer.
“It’s not going to have a good impact on us by any means,” said Will Woods, executive director of the Automotive Trade Organizations of California, which represents station owners.
Albertson’s said it plans to sell unbranded gasoline for at least 5 to 10 cents less per gallon than is charged for major gasoline brands, and cheap enough to make some consumers drive a little farther and fuel up. Costco’s prices are in a similar range.
Grocery chains have operated gas stations in other parts of the country for some time, but only recently have they turned their sights to California. Strict environmental regulations and the high cost of real estate discouraged supermarket chains from getting into the gasoline business, observers said.
But now market chains, operating in a highly competitive business with thin profit margins, see cheap gas as a way to entice customers. In Albertson’s case, the chain plans to link discounts on gas to food purchases. Each month, 200 to 400 items in its stores with pumps will be linked to a discount on gas.
“Customers could conceivably get their gas for free,” said Cord Christensen, corporate manager of Albertson’s fuel centers.
Albertson’s, which has a total of 25 fuel centers in other states, says it will open another 575 nationwide during the next five years. Its first California locations will open in August in La Habra, Tehachapi and Morro Bay.
Costco has gas stations at 44 stores nationwide, about half of them in California. It plans to open eight more in the state this year.
Costco executives say they began putting gas stations into its warehouse locations in 1995, in an effort to boost sales and attract new members, who pay a fee to join the warehouse club. Customers must swipe membership cards to use the pumps.
Executives with the Issaquah, Wash.-based chain declined to comment on the profitability of its gas business. But it has been fined in Chino Hills, San Bernardino and Palm Desert for selling more than its permitted limit of 276,000 gallons a month, a sign of demand for its lower-cost gas.
At its San Bernardino store, Costco has pumped 659,000 gallons before being cited. It has since applied to the Air Quality Management District to have its limit raised to 850,000 gallons a month.
“We do a lot of volume, so we went back and told them it’s a zero-sum game. If we’re not going to get the business someone else is,” said Costco Chief Executive Jim Sinegal.
This aggressive pricing by retailers is worrying service station operators. “For well over a year, the independent marketers and service station dealers have been shaking in their boots about a large-scale entrance into gasoline retailing by these large entities,” said Trilby Lundberg, publisher of the Lundberg Letter, which tracks the gasoline business.
Service station owners claim that once big chains control more of the market, they will raise the low prices that once brought in customers. However, analysts say that has yet to happen in regions where Wal-Mart, Sam’s Club and Kroger, which is acquiring Ralphs, operate stations.
And at least one supermarket operator thinks the hype about retailers taking over the fuel business is overblown. “We’re not even considering it,” said Jack H. Brown, chief executive of Colton-based Stater Bros., which operates 112 markets in Southern California.
The strategy has pitfalls, he noted. Supermarkets that do not stay competitive at the pump risk signaling their groceries aren’t competitively priced. “You can’t be everything to everybody,” Brown said.