Westminster, Colorado
Copyright ©: EAI, Inc., 2003

EAI (Energy Analysts International, Inc.)
U.S. Hypermart Petroleum
Market Outlook:
July 11, 2003
By
Joseph J. Leto
EAI, Inc.
12000 North Pecos, Suite 310
Westminster, Colorado 80234
303-469-5115 jjleto@eaiweb.com
Copyright ©: EAI, Inc., 2003

Figure ES-1
 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
Copyright ©: EAI, Inc., 2003

EAI (Energy Analysts International, Inc.)
U.S. Hypermart
Petroleum Market Outlook
Copyright ©: EAI, Inc., 2003

EAI (Energy Analysts International, Inc.)
U.S. Hypermart
Petroleum Market Outlook
Copyright ©: EAI, Inc., 2003

Figure ES-2
?
 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 onestop shop option.
 Gasoline captures the C-store business and re-captures fill-in grocery business

Gasoline increases trip frequency and cross traffic to the big box store
 Gasoline discounting is a bigger traffic draw than individual supermarket item discounts

Gasoline maximizes the use of underutilized real estate
 Gasoline maintains and increase club memberships
 Gasoline increases
“same store” revenues and thus improve Wall Street financial performance image
Copyright ©: EAI, Inc., 2003

Figure ES-3
Supermarkets
Mass
Merchandiser
Discount
Store
•
•
•
Kroger
•
Wal-Mart
•
Target
•
Kmart
•
Costco
• Sam’s
• BJ’s
940
•
Building (collectively)
70-100 sites per year
•
Driving traffic frequency / gas, groceries, pharmacy
5,654
•
Survival requires niche or cost advantage
•
Growth shift to Supercenters or
Neighborhood format
Albertson’s
Safeway
•
Declining margins
6,284
•
Acquisitions / Consolidations
•
Market specialization
Dollar
Store
•
Dollar Gnr
•
Family Dlr
•
Dollar Tree
•
Rapid growing segment expanding store size
12,111
•
Pursuing discount convenience business
Chain
Pharmacy
Convenience
Store
•
Walgreen's
•
CVS
•
Rite-Aid
•
Tosco
•
Speedway
•
7-Eleven
•
Other Large
Chains * 21,319
11,145
•
•
Pharmacy is 60-70 percent of sales
Positioning for Baby Boomer wave
•
Non-pharmacy sales 1.5 to 3.0 MM$/Store
•
Increasing non-fuel offering
8,132
•
Majors selling company stores
•
Consolidation of independent / jobber chains
* Comprising the top 50 cos.
Copyright ©: EAI, Inc., 2003

Figure ES-4
Ten companies operate approximately 86 percent of all U.S. hypermart gasoline sites and represent 91 percent of U.S. hypermart gasoline sales
Supermarkets
• Albertson’s
• Ahold
• Brookshires
• HEB
• Kroger
• Safeway
Discount
Stores
• Wal-Mart
Mass
Merchandiser
• Meijer's
•
Walmart
Supercenters
Mass
Merchandiser
Club
• BJ’s (club)
• Costco (club)
• Sam’s
Copyright ©: EAI, Inc., 2003

Figure-ES-5
Flowsheet of Key Business Drivers
Major Hypermart Companies
Pursuing Fuel Business
Hypermart Fuel Site Growth Hypermart Fuel Site Performance
Mass
Merchandiser
• BJ’s (club)
• Costco (club)
• Meijer
• Sam’s (club)
Existing Site
Population
Existing Site
Capability
Competing
Conventional
Retail/C-Stores
Supermarkets
• Albertson
• Ahold
• Brookshire
• HEB
•Kroger
• Safeway
Store Rebuilds/
Accommodate
Gasoline Retail
Hypermart
Gasoline Marketing
Site
Growth/Saturation
Available
Gasoline Supply
New Store
Growth
Discount
Stores
•Wal-Mart
Gasoline Retail
Inclusion in New
Store Plans
Gasoline Pricing
New
Entrants
•23 companies since EAI’s last study in Feb. 2001
Performance
Feedback from
Existing Sites
• Instore
• Gasoline Retail
New
Alliances/Between
Petroleum
Companies &
Merchandisers
Copyright ©: EAI, Inc., 2003

Figure ES-6
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 facilities
 Potential to accommodate gasoline retail
 Gasoline brand
 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
Base (this is slightly lower than EAI’s “top down” industry total of 2440 locations. (now 2672)
 There were 737 sites identified as considering or planning gasoline retail-yields a total near term potential gasoline site population of 3177.
 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 retail that have already been converted)
 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 survey data) was 14 percent.
Copyright ©: EAI, Inc., 2003

Figure ES-7
2002 Fuel Site Count / Annualized Build Rate
Annualized fuel site addition rate is approximately 749 with the Midwest
Safeway experiencing the highest rate
Top 3 chains
Costco
Kroger
Pacific
Northwest
Kroger
Albertson’s
Safeway
Wal-Mart
Hy-Vees
Sam’s
Northern
Meijer
Kroger
Wal-Mart shown *
Ahold
BJ’s
159/67
133/53 Rocky
Tier
Walmart
Mountain 67/23
Costco
Safeway
Albertson’s
Pacific
Southwest
152/59
Wal-Mart
Kroger
Albertson’s
Midcontinent
Midwest
537/181
159/56
Wal-Mart
HEB
Brookshires Bros.
Sam’s
Albertsons
156/53
Gulf Coast
Southeast
Seaboard
293/96
Wal-Mart
Sam’s
Kroger
776/162
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 3 rd place nearly tied among 3 players Copyright ©: EAI, Inc., 2003

Figure ES-8
th
WAL-MART
SAM'S CLUB
COSTCO
KROGER
MEIJER
ALBERTSONS
SAFEWAY
HEB
BJS
AHOLD
0 0.25
0.5
0.75
1
Gasoline Sales, Billion Gallons
1.25
Wal-Mart consists of Murphy, Tesoro-Mirastar and
Sunoco-Optima alliances
1.5
Copyright ©: EAI, Inc., 2003

EAI (Energy Analysts International, Inc.)
U.S. Hypermart
Petroleum Market Outlook
Copyright ©: EAI, Inc., 2003

Figure ES-9
 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, WalMart, Sam’s Club and Meijer.
 Several other companies will be close behind the top tier including BJ’s, HEB and Ahold.
Copyright ©: EAI, Inc., 2003

Figure ES-10
Existing and Potential Fuel Retail Locations
Supermarket Chains with /Considering Fuel
14,999
Discount Chains with/Considering Fuel
4892
Mass Merchandise
Club Chains with/Considering Fuel
1096
Major Store Chains
Not Pursuing Fuel
30,977
Total U.S. Site Inventory with/Considering Fuel
20,987
51,964
Total
U.S. Large Retail
Chain Site
Population
Identified
Copyright ©: EAI, Inc., 2003

Figure ES-11
20.00%
15.00%
10.00%
5.00%
0.00%
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
Copyright ©: EAI, Inc., 2003

Figure ES-12
20
Volume, billion gal/yr
Store Channel
Supermarket
Mass Merchandiser)
Discount Stores
2002
3.37
3.20
1.53
2007
9.24
6.20
3.84
15
10
5
0
2002 2003 2004 2005 2006 2007
Year
SPRM DSCN MMRC
MMRC = Mass Merchandiser DSCN = Discount Store
Includes base company volume forecast and not speculative volume
Copyright ©: EAI, Inc., 2003

Figure ES-13
U.S. Western Regions: Base Gasoline Forecast
Safeway, Costco and Albertsons dominate the West Coast. In the Rocky
Mountains Kroger, Albertsons and Costco are top 3 in gasoline sales
20.0%
15.0%
10.0%
5.0%
0.0%
20
02
20
03
20
04
20
05
20
06
20
07
Pacific Northwest Pacific Southwest Rocky Mountain
Copyright ©: EAI, Inc., 2003

Figure ES-14
Pacific Southwest, West Texas, New Mexico Regions
Eureka
Redding
Reno
San Francisco
Sacramento
Stockton
Fresno
Las Vegas
Flagstaff
Amarillo
Albuquerque
Los Angeles
San Diego
Phoenix
Tucson
Lubbock
El Paso
Midland
Odessa
Copyright ©: EAI, Inc., 2003

Figure ES-15
Hypermart Gasoline Market Share
Gasoline market share in western states lag other parts of the U.S.; highest
Hypermart market shares occur in Phoenix, Salt Lake City and Las Vegas
SHARE DEMAND
15.0%
13.0%
11.0%
9.0%
7.0%
5.0%
3.0%
1.0%
-1.0%
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500
450
400
350
300
250
200
150
100
50
0
Copyright ©: EAI, Inc., 2003

EAI (Energy Analysts International, Inc.)
U.S. Hypermart
Petroleum Market Outlook
Copyright ©: EAI, Inc., 2003

Figure ES-16
Some U.S. markets, primarily in Texas, appear to be transitioning between the early market saturation
Phase and the more mature market saturation level
HYPERMART
ENTRY
PHASE
California
HYPERMART
EXPANSION
PHASE
EARLY
MARKET
SATURATION
PERIOD
Dallas
MATURE
MARKET
SATURATION
ISOLATED
ENTRANTS /
LOW PRICING &
LIMITED
VOLUME
IMPACT
EXCEPT
FOR SITES IN
CLOSE
PROXIMITY
PNW, Phnx, LV

AGGRESSIVE
PRICING

SIGNIFICANT
VOLUME IMPACT
BUT LOCALIZED

ERRATIC MARKET
BEHAVIOR
YEAR
1
YEARS 2
INTO 3

CONTINUED
AGGRESSIVE
PRICING

MAXIMUM VOLUME
IMPACT

HYPERMART
REDUCE RATE OF
GASOLINE SITE
GROWTH
YEARS 3
INTO 4

LIMITED MAIN
STORE UPLIFT

HYPERMARTS FOCUS
ON GROWING
GASOLINE RETAIL
PROFITS

STREET PRICES
INCREASE/STABILIZE

NEW CONVIENCE
STORE – HYPERMART
EQUILIBRIUM
YEARS 4
AND BEYOND
Copyright ©: EAI, Inc., 2003

Figure ES-17
1998 1999 2000 2001 2002 1Q03
30
25
20
15
10
5
0
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Gross Margin = Retail Price
EL
PH
SA
– Representative Rack Price
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PA
Copyright ©: EAI, Inc., 2003

Figure ES-18
 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).
Copyright ©: EAI, Inc., 2003

Figure ES-19
With the exception of refiner – hypermart affiliations, e.g. Wal-Mart, most hypermarts obtain supply through unbranded gasoline channels.
Major Refiner
With Branded Retail
Branded
Gasoline Transfer
Branded Company Operated
DTW
Branded Lessee Dealers
Intra refiner gasoline spot or contract sales and exchanges
Rack or
DTW
Branded
Rack
Branded Open Dealers
Branded Jobbers
Affiliated
HVR’s
Branded
Jobber Retail
Unbranded
Retail and
HVR’s
Independent Refiner
Unbranded
Rack
Unbranded Jobbers
Unbranded Retail
HVR’s
Copyright ©: EAI, Inc., 2003

Figure ES-20
Across 42 Major U.S. Markets Only Two Refiners Have
Unbranded Supply Presence Across The U.S.
35
30
25
20
15
10
5
0
VA
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PH
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Copyright ©: EAI, Inc., 2003

Figure ES-21
 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
Copyright ©: EAI, Inc., 2003