energy analysts international

Copyright ©: EAI, Inc., 2003

Energy Analysts InternationalEnergy Analysts International

Westminster, Colorado


For For The California Energy The California Energy

CommissionCommissionJuly 11, 2003July 11, 2003

By By Joseph J. LetoJoseph J. Leto

EAI, Inc. EAI, Inc. 12000 North Pecos, Suite 31012000 North Pecos, Suite 310Westminster, Colorado 80234Westminster, Colorado 80234

[email protected]@eaiweb.com

U.S. Hypermart Petroleum U.S. Hypermart Petroleum Market Outlook:Market Outlook:

Emergence Of The New Competitive ArenaEmergence Of The New Competitive Arena

EAI (Energy Analysts International, Inc.)


Overview of U.S. Retail Business

Emergence of Hypermarts in U.S. Gasoline Retail

Outlook for U.S. Hypermarts Gasoline Retail

National

West Coast

Impact on Gasoline Marketing and Pricing

Presentation OutlinePresentation Outline

Figure ES-1


U.S. Hypermart U.S. Hypermart Petroleum Market Outlook Petroleum Market Outlook

Overview of U.S. Retail BusinessOverview of U.S. Retail Business




Emergence of Hypermarts Emergence of Hypermarts in Gasoline Retailin Gasoline Retail



What are Hypermarts And Their IncentivesWhat are Hypermarts And Their Incentivesto Enter the Gasoline Retail Businessto Enter the Gasoline Retail Business??

Large format store operating multiple “merchandise” centers under one roof. Range in size from 30 to 300 thousand sq. ft.

Gasoline is another addition to expand a hypermart’s image as a one-stop one-stop shop option.shop option.

Gasoline captures the C-store business and re-captures fill-in grocery re-captures fill-in grocery businessbusiness

Gasoline increases trip frequency and cross trafficGasoline increases trip frequency and cross traffic to the big box store

Gasoline discounting is a bigger traffic drawGasoline discounting is a bigger traffic draw than individual supermarket item discounts

Gasoline maximizes the use of underutilized real estateunderutilized real estate

Gasoline maintains and increase club membershipsincrease club memberships

Gasoline increases “same store” revenuesGasoline increases “same store” revenues and thus improve Wall Street financial performance image

Figure ES-2

Copyright ©: EAI, Inc., 2003* Comprising the top 50 cos.

ConvenienceStore

DollarStore

DiscountStore

MassMerchandiser

Super-markets

Chain Pharmacy

940

8,132

11,145

12,111

6,284

5,654

• Building (collectively) 70-100 sites per year

• Driving traffic frequency / gas, groceries, pharmacy

• Survival requires niche or cost advantage

• Growth shift to Supercenters or Neighborhood format

• Declining margins

• Acquisitions / Consolidations

• Market specialization

• Rapid growing segment expanding store size

• Pursuing discount convenience business

• Positioning for Baby Boomer wave

• Pharmacy is 60-70 percent of sales

• Non-pharmacy sales 1.5 to 3.0 MM$/Store

• Increasing non-fuel offering

• Majors selling company stores

• Consolidation of independent / jobber chains

Incr

easi

ng

Impu

lse

/

Con

veni

ence

Traf

fic

Incr

easi

ng

Des

tinat

ion

Traf

fic

• Costco• Sam’s• BJ’s

• Wal-Mart• Target• Kmart

• Kroger• Albertson’s• Safeway

• Dollar Gnr• Family Dlr• Dollar Tree

• Walgreen's• CVS• Rite-Aid

• Tosco• Speedway• 7-Eleven• Other Large

Chains * 21,319

Dom

inan

t

Com

pani

es

Sto

re C

ount

Cha

ract

eris

tics

/ Tre

nds

Figure ES-3

The Retail Channel Continuum


Dominant Hypermarts With Fuel SitesTen companies operate approximately 86 percent of all U.S. hypermart Ten companies operate approximately 86 percent of all U.S. hypermart

gasoline sites and represent 91 percent of U.S. hypermart gasoline salesgasoline sites and represent 91 percent of U.S. hypermart gasoline sales

DiscountStores

•Wal-Mart

Supermarkets

• Albertson’s• Ahold• Brookshires• HEB• Kroger•Safeway •

MassMerchandiser

Club

• BJ’s (club)• Costco (club)• Sam’s

MassMerchandiser

• Meijer's•Walmart Supercenters

Figure ES-4


Growth of Hypermart Petroleum MarketingFlowsheet of Key Business Drivers

MassMerchandiser

Supermarkets

DiscountStores

• HEB •Kroger• Safeway

•Wal-Mart

Existing Site Population

Existing Site Capability

Store Rebuilds/ Accommodate Gasoline Retail

New Store Growth

Gasoline Retail Inclusion in New

Store Plans

Performance Feedback from Existing Sites

• Instore• Gasoline Retail

Competing Conventional

Retail/C-Stores

New Alliances/Between

Petroleum Companies &

Merchandisers

Gasoline Pricing

Available Gasoline Supply

Hypermart Gasoline Marketing

Site Growth/Saturation

• BJ’s (club)• Costco (club)

• Albertson• Ahold• Brookshire

Hypermart Fuel Site GrowthHypermart Fuel Site GrowthMajor Hypermart Companies Major Hypermart Companies Pursuing Fuel BusinessPursuing Fuel Business

Hypermart Fuel Site PerformanceHypermart Fuel Site Performance

Figure-ES-5

New Entrants

• Meijer• Sam’s (club)

•23 companies since EAI’s last study in Feb. 2001


EAI’s Market Research Group surveyed approximately 21,600 hypermart sites as part of its hypermart retail analysis to characterize each site. This is being maintained on an ongoing basis. As part of this survey work, a number of topics was addressed including:

Presence of gasoline retail facilitiesPresence of gasoline retail facilities

Potential to accommodate gasoline retailPotential to accommodate gasoline retail

Gasoline brand Gasoline brand

Other profit centers such as convenience store, kiosk, car wash, etc.Other profit centers such as convenience store, kiosk, car wash, etc.

The focus of the research was on those companies that are already in the gasoline business with some of the research highlights below:

EAI was able to identify 2402 gasoline sites that are included in its Retail Market Information EAI was able to identify 2402 gasoline sites that are included in its Retail Market Information Base (this is slightly lower than EAI’s “top down” industry total of 2440 locations. (now Base (this is slightly lower than EAI’s “top down” industry total of 2440 locations. (now 2672)2672)

There were 737 sites identified as considering or planning gasoline retail-yields a total near There were 737 sites identified as considering or planning gasoline retail-yields a total near term potential gasoline site population of 3177. term potential gasoline site population of 3177.

The saturation of existing gasoline sites for the large retail chains that already have The saturation of existing gasoline sites for the large retail chains that already have gasoline is 44 percent (fraction of those sites that are capable of accommodating gasoline gasoline is 44 percent (fraction of those sites that are capable of accommodating gasoline retail that have already been converted)retail that have already been converted)

Among the top companies, the potential and existing gasoline retail sites as a percent of Among the top companies, the potential and existing gasoline retail sites as a percent of total sites is approximately 36 percent. For these top chains, the unknown fraction (no total sites is approximately 36 percent. For these top chains, the unknown fraction (no survey data) was 14 percent.survey data) was 14 percent.

Hypermart Gasoline Market OutlookHypermart Gasoline Market OutlookCharacterization of Existing Site BaseCharacterization of Existing Site Base

Figure ES-6


SoutheastSeaboard

RockyMountain

NorthernTier

Midcontinent

Gulf Coast

MidwestNorth

east

Seaboar

d

PacificNorthwest

PacificSouthwest

Hypermart Fuel Site Distribution 2002 Fuel Site Count / Annualized Build Rate2002 Fuel Site Count / Annualized Build Rate

Annualized fuel site addition rate is approximately 749 with the Midwest Annualized fuel site addition rate is approximately 749 with the Midwest experiencing the highest rate experiencing the highest rate

537/181

159/67

293/96

133/53

67/23

776/162

152/59

159/56

156/53

EAI Corporate level survey total = 2440 sites; this is slightly higher than totals from above (from EAI information base)

Rate of growth observation period extends from February 2001 to October 2002

* Top 3 chains shown - basis of fuel site count: Gulf Coast 3rd place nearly tied among 3 players

SafewayCostco Kroger

KrogerAlbertson’s

Safeway

CostcoSafeway

Albertson’s

Wal-MartHEB

Brookshires Bros. Sam’s

Albertsons

Wal-MartHy-VeesSam’s

Wal-MartKroger

Albertson’s

MeijerKroger

Wal-Mart

AholdBJ’s

Walmart

Wal-MartSam’sKroger

Top 3 chains Top 3 chains shown *shown *

Figure ES-7


TOP U.S. HYPERMARTSANNUALIZED GASOLINE SALES

EAI Estimate as of 4th Quarter 2002

Figure ES-8

0 0.25 0.5 0.75 1 1.25 1.5

AHOLD

BJS

HEB

SAFEWAY

ALBERTSONS

MEIJER

KROGER

COSTCO

SAM'S CLUB

WAL-MART

Gasoline Sales, Billion Gallons

Wal-Mart consists of Murphy, Tesoro-Mirastar and Sunoco-Optima alliances



Outlook for U.S. Outlook for U.S. Hypermarts in Gasoline RetailHypermarts in Gasoline Retail



EAI is forecasting overall hypermart gasoline sales to be 11.4 billion gallons in 2003 and reach 23.5 billion gallons by 2005. In comparison, EAI’s estimate for 2000 was 4.4 billion gallons.

Based on EAI’s gasoline demand outlook, this hypermart gasoline volume will represent a market share of 8.1 and 16.0 percent in 2003 and 2007 respectively (including EAI’s speculative volume addition for currently inactive hypermarts).

During the latter part of the forecast period, seven hypermart companies will be responsible for over 77 percent of gasoline sales. These companies include Albertsons, Kroger, Safeway, Costco, Wal-Mart, Sam’s Club and Meijer.

Several other companies will be close behind the top tier including BJ’s, HEB and Ahold.

Hypermart Gasoline Market OutlookHypermart Gasoline Market OutlookSales and Market Share OutlookSales and Market Share Outlook

Figure ES-9


U.S. Hypermart Site Inventory Existing and Potential Fuel Retail Locations

Figure ES-10

Supermarket Chainswith /Considering Fuel

14,999

Discount Chainswith/Considering Fuel

4892

Mass Merchandise Club Chains

with/Considering Fuel1096

Major Store ChainsNot Pursuing Fuel

30,977

Total U.S. Site Inventorywith/Considering Fuel

20,987

51,964

Total U.S. Large Retail

Chain Site Population Identified


Hypermart Gasoline Market Share Outlook

0.00%

5.00%

10.00%

15.00%

20.00%

Ga

so

line

Ma

rke

t S

ha

re, V

ol.

%

2002 2003 2004 2005 2006 2007

Year

Base Volume Speculative Vlm

Base Volume-Accounts for companies currently having gasoline retail Speculative Volume-account for companies not currently involved in gasoline retailing

Figure ES-11


Figure ES-12

Hypermart Gasoline Growth by Store Channel

0

5

10

15

20

Ga

so

line

Sa

les

, Bill

ion

G

allo

ns

2002 2003 2004 2005 2006 2007

Year

SPRM DSCN MMRC

Volume, billion gal/yr

Store Channel 2002 2007Supermarket 3.37 9.24Mass Merchandiser) 3.20 6.20Discount Stores 1.53 3.84

MMRC = Mass Merchandiser DSCN = Discount Store Includes base company volume forecast and not speculative volume


Hypermart Gasoline Market Share Outlook Hypermart Gasoline Market Share Outlook U.S. Western Regions: Base Gasoline ForecastU.S. Western Regions: Base Gasoline Forecast

Safeway, Costco and Albertsons dominate the West Coast. In the Rocky Safeway, Costco and Albertsons dominate the West Coast. In the Rocky Mountains Kroger, Albertsons and Costco are top 3 in gasoline salesMountains Kroger, Albertsons and Costco are top 3 in gasoline sales

0.0%

5.0%

10.0%

15.0%

20.0%

Ma

rke

t S

ha

re,

Vo

l. %

Pacific Northwest Pacific Southwest Rocky Mountain

Figure ES-13


EAI Micro-MarketsEAI Micro-MarketsPacific Southwest, West Texas, New Mexico RegionsPacific Southwest, West Texas, New Mexico Regions

Fresno

ReddingEureka

San Francisco

Phoenix

Tucson

Reno

Las Vegas

Midland

OdessaEl Paso

Lubbock

Albuquerque

Sacramento

San Diego

Los Angeles

Stockton

AmarilloFlagstaff

Figure ES-14


Hypermart Gasoline Market Share Selected EAI West Coast Micro-Markets, 2002

Gasoline market share in western states lag other parts of the U.S.; highestHypermart market shares occur in Phoenix, Salt Lake City and Las Vegas

Figure ES-15



Impact on Gasoline Supply, Marketing Impact on Gasoline Supply, Marketing and Pricingand Pricing



HYPERMARTHYPERMARTENTRYENTRYPHASEPHASE

ISOLATED ENTRANTS /

LOW PRICING &LIMITED VOLUMEIMPACT EXCEPT

FOR SITES INCLOSE

PROXIMITY

HYPERMARTHYPERMARTEXPANSIONEXPANSION

PHASEPHASE

AGGRESSIVE PRICING

SIGNIFICANT VOLUME IMPACT BUT LOCALIZED

ERRATIC MARKET BEHAVIOR

CONTINUED AGGRESSIVE PRICING

MAXIMUM VOLUME IMPACT

HYPERMART REDUCE RATE OF GASOLINE SITE GROWTH

LIMITED MAIN STORE UPLIFT

HYPERMARTS FOCUS ON GROWING GASOLINE RETAIL PROFITS

STREET PRICES INCREASE/STABILIZE

NEW CONVIENCE STORE – HYPERMART EQUILIBRIUM

EARLYEARLYMARKETMARKET

SATURATIONSATURATIONPERIODPERIOD

MATUREMATUREMARKETMARKET

SATURATIONSATURATION

Hypermart Competitive Market PhasesHypermart Competitive Market Phases Some U.S. markets, primarily in Texas, appear to be Some U.S. markets, primarily in Texas, appear to be

transitioning between the early market saturationtransitioning between the early market saturationPhase and the more mature market saturation levelPhase and the more mature market saturation level

YEAR1

YEARS 2INTO 3

YEARS 3INTO 4

YEARS 4AND BEYOND

Figure ES-16

California

PNW, Phnx, LV

Dallas


Retail Gross Margin Trends Selected U.S. Micro – Market

Figure ES-17

0

5

10

15

20

25

30

Mar

gin

, cp

g

1998 1999 2000 2001 2002 1Q03

Gross Margin = Retail Price – Representative Rack Price


Gasoline Gross Margins Trends and OutlookOverall U.S. and Focus on Dallas-Ft. Worth

Overall U.S. gross gasoline margins have been on the decline since the 2000-2001 period. The market has deteriorated from the 13 to 14 cpg level to levels that are expected to be considerably lower in 2002 and 2003.

Those markets with the highest level of hypermart and independent HVR activity tend to have the lowest gasoline margins. Examples are Salt Lake City, Houston and Dallas-Ft. Worth for which gross margins (retail price less representative rack prices) were in the range of 4 t o 9 cents per gallon. With credit card discounts and gasoline transportation costs, the lower end of this range represents a negative cash flow.

The DFW market has been one of the most competitive markets in the country and retailers were realizing very low to negative profit level on regular gasoline sales for most of 2002. As of mid-October 2002, gross gasoline margins (those shown for DFW include transportation cost deduction) have been on the increase and were in the 15 to 20 cpg range during the end of the 1 st Quarter2003

EAI believes that the DFW market may be transitioning from the “early maturity stage” to a more mature stage with effective hypermart gasoline market shares most likely attaining the 25 to 30 percent level in some of the DFW suburban markets.

With this transition, the hypermarts have captured their desired market volume and some level of customer loyalty and appear to be a bit more focused on realizing positive cash flow for gasoline sales. This appears to be especially true for the supermarket chains where the gasoline discounts are often only the typical loyalty card discount of 3 cpg.

Also, more supermarkets have implemented cross merchandising (fuel reward programs) where gasoline discounts are awarded based on in-store purchases and result in an average gasoline sales price that can be considerably lower than the posted street price (upon which EAI DFW retail margins are based).

Figure ES-18


Gasoline Supply Channel OverviewWith the exception of refiner – hypermart affiliations, e.g. Wal-Mart,

most hypermarts obtain supply through unbranded gasoline channels.

Major Refiner With Branded Retail

Independent Refiner

Branded Company Operated

Branded Lessee Dealers

Branded Open Dealers

Branded JobbersBranded

Jobber Retail

Unbranded Jobbers

Unbranded Retail and

HVR’s

Unbranded Retail

HVR’s

Affiliated HVR’s

Branded Gasoline

Un

bran

ded

Gaso

line

Intra refiner gasoline spot or

contract sales and

exchanges

Transfer

Rack or DTW

Branded Rack

DTW

Unbranded Rack

Figure ES-19


0

5

10

15

20

25

30

35

VA

LER

OP

HIL

LIP

SFL

NT

HLS

EX

MO

BM

AP BP

CIT

GO

WIL

LIA

MS

SH

ELL

MU

RP

HY

PR

EM

CO

RTE

SO

RO

HE

SS

CO

OP

SU

NFI

NA

GA

RY

PLA

CID

OTH

ER

Su

pp

liers

Presence of Refiners Supplying Unbranded Gasoline

Across 42 Major U.S. Markets Only Two Refiners Have Unbranded Supply Presence Across The U.S.

Figure ES-20


Future U.S. Gasoline Market Larger retail sites, higher throughput and lower unit costs

Increasing number of large independent gasoline marketers and corresponding increase in wholesale market

Shorter term price outlook-downward pressure on retail and wholesale gasoline prices

Longer term retail price outlook-stabilization and increase of retail margins and street prices but not attaining recent historical levels (equivalent basis)

Refinery closures and more stringent refinery specifications will ultimately tighten product supply and will result in higher product prices and refinery margins

Some of the major oil companies will continue to retrench from retail and focus on E&P, refining and wholesale product marketing

Aforementioned trend will increase opportunity for large independent retailers

Large independent retailers will increase their petroleum purchasing and logistics capabilities (either internally or through third parties) further improving their supply chain costs

Figure ES-21

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