New hypermarkets

June 4, 2001
J. Leto and P. Rolniak grossly exaggerate the potential growth of hypermarkets in "New hypermarket entrants to challenge existing US gasoline marketers" (OGJ, May 14, 2001, p. 56).

J. Leto and P. Rolniak grossly exaggerate the potential growth of hypermarkets in "New hypermarket entrants to challenge existing US gasoline marketers" (OGJ, May 14, 2001, p. 56). They estimate that firms like Wal-Mart, Costco, et al., will capture 16% of retail gasoline sales by 2005, up from 3% in 2000. They further contend that hypermarkets will fundamentally change gasoline marketing.

I disagree strongly with their assessment.

The market share projections are unrealistically high because zoning laws will severely limit hypermarkets' choices of sites, and because zone pricing-which is widely used and lawful-is an especially effective defense against hypermarkets' low prices.

The impact of zoning laws on entry into gasoline retailing is confirmed by everyday observation and detailed studies. For example, it has been shown that the traditionally higher gasoline prices in San Diego and San Francisco, relative to Los Angeles, owe much to the difficulties in building new stations in the higher-priced areas. Zone pricing enables suppliers of convenience stores and traditional stations to meet competition in small geographic areas, thereby enabling hypermarkets' competitors to limit market share losses with strictly local price reductions.

Since smaller convenience stores will retain their locational advantages and speedy service, and traditional outlets their niches, hypermarket gains from low prices will be less than expected.

The claim of fundamental change is the biggest exaggeration. Lower costs through bigger volumes is nothing new, and gasoline retailing always has been among the most intensely price-competitive businesses. New entrants commonly have emphasized low prices based on huge volumes, and the entry of hypermarkets will be no more momentous than entry by independent marketers and many others in the past. Compared to the upheavals wrought by self-service and unleaded-reformulated fuels, the impacts of hypermarkets may be small.

The true significance of hypermarkets is the opportunity they afford to merchant and regional refiners by offering

a new distribution channel through which to challenge major refiners' dealers and distributors.

This added channel apparently has helped companies like Murphy, Sunoco, and Tesoro, and even may lead to higher refining margins in the long run. In Europe, hypermarkets were a market response to sky-high prices caused by confiscatory taxes.

Hypermarkets' incremental contribution in the US will be similar, but much smaller.

Thomas F. Hogarty
Adjunct Professor
Virginia Tech
Reston, Va.