In the fall of 1995, Todd Moser, director of the Petro Points program for the Calgary, Alberta-based fuel retailer Petro Canada, found himself standing on a fuel island outside a Petro Canada gas station attempting to sign up customers to the brand new loyalty program, which was then in the midst of a national launch.

As Moser stood out on the concrete island signing up members, a black Chevy pick-up truck pulled up and a dark-haired guy hopped out to pump his gas. Moser approached him to ask if he was interested in joining Petro Points.

The customer quickly read over the information pamphlet, and then said, “Yeah, I’m interested!”

“Great!” Moser said, taking out his pen to fill out the enrollment form for the customer. “What’s your first name, sir?”

“Elvis,” said the customer.

Elvis? Moser took a step back. Surely it couldn’t be— and it wasn’t. This particular Elvis was not Elvis Presley, the King of Rock ‘n Roll. He was, rather, world figure skating champion and Olympic Silver medalist Elvis Stojko— who in Canada, anyway, is nearly as popular as the other Elvis. Not to mention actually still alive.

“That was my close encounter with an Elvis— if not the Elvis,” says Moser.

The moral of this story is not that you never know when you’re going to run into an Elvis. Rather, the moral of the story is that, ten years ago, back when North American retailers were only beginning to think about customer loyalty, Petro Canada already recognized that building long-term customer relationships was the only way to create a sustainable competitive advantage in the cutthroat world of fuel and convenience retailing.

Ten years later, North American C-store operators find themselves backed into much the same corner: brutalized by price competition and stuck in a margin-eroding rebate war fought mostly through the big oil companies and their co-branded and private-label credit cards. But a new generation of operators is fighting back with innovative loyalty marketing strategies— and they’re getting results.

Although often simple in concept, these programs are revolutionary in their willingness to build customer relationships wherever they can provide competitive advantage. Loyalty programs are a challenge in the space; technology costs and razor-thin margins see to that. With competition and margin pressures as great as they’ve ever been, however, these innovators feel they have more to lose by standing still.

The heat is on
According to the National Association of Convenience Stores (NACS), there are over 130,000 convenience stores in the US. They come in all shapes and sizes— from 800 square-foot kiosks to 5,000 square-foot behemoths that sell everything from rotating hot dogs to dates with Paris Hilton— ok, maybe not. Combined, these retailers of all things convenient raked in a whopping $337 billion in the US in 2003— that’s an average of $3 million in sales per location, which represents an awful lot of Camels, Slim Jims and gallons of regular unleaded.

But all is not rosy in the land of 64-oz. sodas. Stiff competition is pressuring oil giants out of the retail gas and convenience store market. Shell Oil, ConocoPhillips, and Marathon are among the major oil companies who have turned retail stores over to multisite operators (MSOs)— less than 7 percent of fuel retailing stores are now owned by one of the five major oil companies. Hypermarkets and grocers, meanwhile, continue to encroach on the C-stores’ turf; the number of hypermarkets selling fuel in the United States increased by 28 percent in 2003, and that number is expected to triple to around 6,700 sites by 2007.

And if you think that this trend merely portends Wal-Mart taking on Shell in the battle of the pumps— the retailing equivalent of the gods duking it out on Mt. Olympus— then think again, says Gina Veazy, editor of NACS magazine, which covers the C-store space.

“More than half of all US convenience stores are either owned or franchised by an individual,” says Veazy. “Only about one in seven are owned by a business that owns 500 or more stores.”

And don’t get C-store operators started on gasoline prices. C-stores collectively sell three-quarters of all gasoline purchased in the US; they sold $220.8 billion worth in 2003 at an average price of $1.55 per gallon— a 15 cents per gallon increase over the year before. Although gasoline sales accounted for 65 percent of the industry’s total sales, they accounted for only 35 percent of gross margin dollars.

“Competitive pressure in many local markets led to an overall percentage decrease in margins,” says Veazy. “Overall, margins were at 8.8 percent, their lowest level since 1985. Retailers do not benefit from higher prices at the pump; they usually suffer from them.”

That’s because higher fuel prices lead to lower in-store sales, where margins are healthier. And when the fuel wholesalers aren’t squeezing the retailers, then the credit card associations are. Credit and debit card fees can equal 80 percent of a store’s annual profit. When gas prices go up, credit card transactions increase— NACS estimates that in 2004, at least 60 percent of all gasoline purchases were paid with plastic— which means interchange fee volumes go up.

And if that wasn’t enough, interchange fees often hit retailers twice— once at the pump and once again when the customer comes inside to make a purchase. Add to this trend the practice of big oil companies, grocers and mass-market retailers luring consumers with profit-crushing rebates of 5 to 10 percent on fuel, and the credit card associations often make more profit on a gallon of gasoline than the retailer selling it.

“And convenience stores, like all retailers, are hit by higher cost of goods sold, as higher fuel prices add to the cost of shipping goods to the store,” Veazy notes.

With pressures like these, it’s no wonder that C-store retailers are looking for answers. The good news is that 2003 saw a robust 54.6 percent increase in pre-tax profits, reversing a three-year decline. This increase was largely the result of improved operating efficiencies and controlled labor costs. In-store margins also increased 1.4 percent to 30.8 percent, the first time that gross margins have exceeded 30 percent since 1998.

Let’s see— competition over a commodity product fixed around price; operations at parity; and healthy margins in an under-utilized area of total sales. Sounds like a prime playing field to manage customer yield through the targeted application of recognition and reward. In other words, this looks like a job for loyalty marketing.

Fanning the flames in Canada
For a look at how to do it right, rewind back to the Roaring Nineties, when Petro Canada was suffering from the same brutal head-to-head gas price competition that US retailers face today. The C-store infrastructure was then in its infancy— a 200 square foot kiosk was considered state of the art. With no backcourt revenues to speak of, all fuel retailers had was gasoline— and everyone was hungry for market share. Marketing, however, consisted mostly of fuel-related rebates, incentives, discounts, free car washes and rampant couponing.

“With incentives, discounts and short-term promotions, you’re only buying the customer’s loyalty until the next fill-up,” says Moser. “It really took a toll on the industry in terms of cost.”

Petro Canada saw that none of their competitors were really leveraging their marketing dollars to build long-term loyalty. They took a hard look at the AIR MILES loyalty coalition in Canada, which was then, as now, the predominant loyalty program in the country. While AIR MILES unquestionably promoted customer loyalty, Petro Canada did see one downside to joining— they wouldn’t own the customer database. So they swallowed hard and decided to launch a proprietary program.

The first step required an investment in infrastructure. Loyalty software applications really didn’t exist back then, and ten years ago the company’s IT infrastructure was “not what it is today,” says Moser. So they did a lot of testing. The end result— a magnetic stripe, POS-activated card, which was considered state of the art in 1995— is still in use today. The company rolled out the program in three test markets, fine-tuning the model through customer and associate feedback. One key learning told them that on-site communication gave them a competitive advantage over AIR MILES (which boasts Shell Canada, a key competitor, as a coalition partner) and Air Canada’s Aeroplan, neither of which offered retail locations. Offers are thus created to drive customers back to the site, where they can earn points and redeem for rewards.

“Even today, 95 percent of our enrollments are on site,” says Moser. “That represents a significant cost savings for us.”

Ten years later, Petro Points boasts eight million members in Canada. Initially designed to drive fuel sales alone, the program is now aimed at driving convenience store purchases as well, and offers one of the most diverse rewards structures in its class. Every dollar spent earns 10 Petro Points, which are redeemable at levels as low as 800 points for a package of Skittles to 650,000 points for international airline flights.

The multi-tender program allows people to participate whether using cash, Petro Canada’s basic proprietary card, its co-branded Citi Petro Points MasterCard, or a linked Sears Canada credit card. Customers can even redeem points through the Sears Club for virtually unlimited categories of merchandise. Petro Points members can also donate their points to the Canadian Cancer Society, which is a popular option with consumers.

Moser makes active use of that proprietary database. His team tracks the percentage of active members within 12 months, three months and monthly. They’re pleased with the activity rates, and Moser notes that average spend per member is notably higher than non-members, and that members make up a “significant portion” of overall sales.

“Obviously having the ability to segment and target offers is one of the biggest reasons to undertake a proprietary loyalty program,” says Moser. “Our goal is to maximize the value of the database to benefit the brand. There are pros and cons to a proprietary database—we see our own transactions, but that’s it. A coalition database would have more value, because I have no way to measure customer potential by share of wallet. But there’s so much data there that’s good to have—even the information on the enrollment application is useful— that it’s worth it.”

Building the coalition bonfire
In the US, the fractured marketplace makes it difficult, if not impossible, for a C-store player to evolve a loyalty program on the national scale of Petro Points or AIR MILES. But several regional players have shown a
willingness to create unique value propositions that leverage both coalition and proprietary program models on a micro scale. The result offers a point of differentiation from the same old co-branded fuel rebate cards.

Kickback Points is a multi-tender coalition-style convenience store loyalty program established five years ago by the Twin Falls, Ida.-based Stop N Go and Oasis convenience store brands. Since its inception, the program has gone from a startup with just a handful of members to a surging loyalty coalition with 67,000 cardholders and over 50 participating locations in five States.

“Five years ago, no one in the fuel retail or C-store industry was concerned with cultivating loyal customers,” says Pat Lewis, CEO of Kickback Points. “The industry is moving now, but back then no one was doing anything. But we were concerned, and we started to look for a turnkey solution for a loyalty program. We talked to lots of consultants that told us how they thought we should do it, but we weren’t satisfied. So we decided to design our own program. How hard could it be?”

Eight months and lots of development capital later, Lewis had settled on a value proposition he could leverage. Based on a magnetic-stripe membership card, Kickback Points rewards customers with a hard benefit rebate on purchases and soft benefits such as prizes and sweepstakes entries. Customers can
only earn points for purchases made inside the convenience store, which draws participants inside
to pay for their fuel— leading to incremental sales on high margin items.

Amazingly, Lewis says that even members who were only buying merchandise eventually began to buy fuel. He saw the average ticket size double through with a combined merchandise plus fuel purchase. Customers also stocked up on items they didn’t need that day, just to earn rewards points— a significant behavior shift for convenience store shoppers.

Lewis’s company owned other businesses in the Twin Falls area, including restaurants, some truck stops and car dealerships— and Kickback Points allowed them to combine the customer databases and cross-market. Soon other businesses in the area began to ask how they could get involved in the program, and a coalition business model was born. Two years after the program launch, Lewis resigned as president of his parent company and became CEO of Kickback Points.

“There are four main drivers of consumer loyalty: quality, service, convenience and price,” says Lewis, channeling Ray Krok. "All C-store operators will tell you that they compete on three of those four drivers. It’s the price part that causes defections. Our idea was to leverage the program to take the focus off price. The open-earn, open-burn structure of the coalition really helps us get this idea across, because our members can earn and redeem across a wide variety of businesses."

Kickback Points has generated tremendous cross-promotional activity with other retailers, and uses instant rewards on receipts, event-triggered messages, direct mail and e-mail campaigns to alert members to promotions. Seventy to 80 percent of program redemptions are cross-sells, and Lewis sees customers drive across town to redeem a reward. The data reveals that members who fuel within the network at least three times in a row exhibit a 50-60 percent retention rate.

“That’s due as much to our quality services as it is to the loyalty program,” says Lewis. “They’re both important.”

With success naturally comes a vision of expansion. The program is now in five States, and Lewis expects to be operating in 20 States by the end of 2005. If he can sign enough C-stores in a market to pick up 20 percent of the fuel volume, he figures, then he can be a dominant player in that market. What’s to stop Kickback Points from stringing chains of C-stores together from coast to coast?

“It’s been our plan from the beginning,” he says. “Program expansion builds value— for the merchants, for customers and for us. It’s an easy concept to sell to other businesses— even without pump participation, we have four years of data to show that the program changes customer behavior. But if you don’t expand and evolve your program, then you’ll reach a point of diminishing returns.”

Keeping the home fires burning
For smaller C-store operators, proprietary programs tied closely to a retailer’s brand identity
can reap dividends in the form of stronger customer relationships. Maverik Country Stores, whose 170 convenience stores are spread across Utah, Idaho, Wyoming, Nevada and Arizona, created its own loyalty program in August 2002 that has helped the company increase sales and learn more about its customers’ behavior, says Darin Harker, Maverik’s card services manager.

The magnetic-stripe Adventure Club Card offers Maverik’s customers a simple but effective value proposition: for every $275 spent on gasoline over a three-month period, members receive a $5 rebate
on convenience store merchandise (not fuel). The rebates increase to $10 for each $525 spent and to $15 for each $750 spent. The rewards average to about two cents off per gallon. Membership in the program also includes percentage-off discounts at local partner businesses just for showing the card.

The 1.8 to 2 percent funding rate is small potatoes compared to the 5 percent perceived value required to move the needle in most loyalty programs, and it’s indicative of the trouble C-store operators have in funding programs with such small fuel margins. It’s also just a standard rebate play that has already been beaten by the big boys and their credit card rebates. But the key to success here is offering rebates for redemptions in the backcourt— thereby turning the Maverik C-stores into full-blown redemption centers chock-full of instant-gratification rewards.

“Before we had a loyalty program, at least one third of our fuel customers never came into the store. Once they’re members of the Adventure Club, they make more trips inside, where we’re likely to upsell them bakery items and sandwiches, which are big profit drivers for us,” Harker says.

The bare-bones program has reaped such positive results that this year Maverik plans to begin offering rewards for all purchases, not just fuel, at its operations. Developed in-house, Maverik’s Adventure Club Card has proven a popular link to the brand with customers, who have requested the opportunity to earn more points through additional channels. Although no such plans are in the works yet, Harkin says, customer demand may eventually drive program expansion.

A thousand points of light
Maverick, Kickback Points and Petro Canada are just three of the scores of successful regional and small-scale fuel and C-store loyalty programs operating in North America. Faced with withering pressures on their margins, volatile oil prices that keep consumers’ eyes fixed on the big price signs out front, and encroachment on their turf by hypermarkets willing to sell fuel as a loss leader, C-store operators have no choice but to adapt or succumb to the forces of natural selection. Petro Canada’s Moser says that today’s marketers can’t afford to settle for the status quo.

“This is not a high-margin business,” says Moser. “Rebates proliferate because they’re not hard to do— but what can you really offer? When you rely on rebates to do your work for you, that means that you’ve really kind of given up on marketing altogether. For us, we can’t even begin to compete on price. So you look for other avenues to differentiate. If you aren’t doing that much, then why do you even have a marketing department?”

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Rick Ferguson is the Editorial Director for COLLOQUY. Kate Fitzgerald is a freelance writer and regular contributor to COLLOQUY. Both of them really love rotating hotdogs.