Focus on convenience trading A Murco case study

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Page 1: Introduction

In the closing decade of the 20th century, the UK retailing industry has witnessed massive change mainly due to an increasing domination of major supermarket chains. Fundamental developments include:

  • the continuing decline of the corner shop
  • the disappearance of the filling station selling just petrol and oil.

Organisations have seen a need to make appropriate responses to these environmental changes. This case study examines how organisations with strong traditional
retail presence, such as Murco and SPAR, benefit when united. The ability to adapt enables them to serve local communities through such innovations as ‘convenience trading’. Consequently, they have benefited from synergy based on their shared experience. Murco ‘piloted’ the new concept by creating a convenience store in Haverfordwest, Dyfed which almost tripled the size of the existing retail sales area.

Background to Murco and SPAR

Murco is the UK subsidiary of Murphy Oil Corporation of the USA and supplies 400 service stations in England and Wales. Murco’s UK system is based around both its North Sea crude oil production and its oil refinery interest at Milford Haven, from which oil product terminals in Bristol, Reading and Birmingham are supplied. Product exchanges with other oil companies extend Murco’s marketing reach into northern and eastern England. the Murco service station network is located in neighbourhood and rural areas as opposed to major highways, serving the local market rather than long-distance motorists.

The SPAR organisation is a voluntary retail organisation founded on the principle of mutual confidence and co-operation between independent retailers and retail distribution companies. Originating in Holland, 1932, it was designed as a practical way to help the small private grocer compete against the ‘multiples’. The retailers voluntarily purchase most of their goods from one retail distributor in return for beneficial terms resulting from economies of scale. They also benefit from enhanced marketing impact, trading under one name, which has since become the premier brand in convenience and neighbourhood retailing.

In 1957, five wholesalers applied to SPAR international in Amsterdam for the franchise to run SPAR in the UK. Today SPAR is the world’s largest food store chain, with almost 19,000 stores in 28 countries and over 2,655 SPAR stores throughout the UK serviced by six independent retail distribution companies.

Page 2: Changes in the market place

Murco 5 Diagram 1

Through developing neighbourhood service stations, relationships are built with local residents who become regular customers for the service station shop as well as for petrol. Despite reasonable prices, petrol volume at such outlets is generally lower than at large trunk road stations or supermarket sites. Cash operating costs, however, are much the same irrespective of the volume of petrol sold. The net result is that unit costs at neighbourhood stations are higher than at trunk road locations, unless relatively high non-fuel sales are achieved.

Consequently, Murco had developed its stations to cater for the local market with small convenience stores operated by self-employed proprietors recruited from the local area. They offered confectionery, crisps, bread, milk and a small range of grocery lines. Until the 1990s this proved to be a success. The higher than average shop sales compensated for the lower than average petrol volume and a competitive unit cost structure was thus achieved.

Since 1991, the supermarkets increased their share of the retail fuels market at the expense of the major oil companies by operating a low-price strategy. When the majors (Shell, Esso etc.) fought back by matching the supermarkets’ prices, Murco’s traditional positioning was lost. Instead of a three tier pricing scenario with the major oil companies at the top, the supermarkets at the bottom and Murco in the middle, uniform pricing became the norm.
Forced to lower petrol prices, Murco was faced with three problems:

  • reduced petrol margins
  • reduced petrol volumes
  • reduced shop sales.

Income had fallen and unit costs had increased.

Page 3: Market opportunities

Murco was suffering from having its market positioning redefined by competitor activity. Consequently, Murco consulted with Elf and Gulf to explore the possibility of a merger. However they concluded that the required economies of scale would not be forthcoming.

The alternative was to develop the nonfuel income of the existing stations to a much higher level. To do so required an entirely new shop format, one capable of generating higher sales than Murco’s local convenience stores. Murco was aware that grocery shopping habits had been radically altered by two developments:

  • the relocation of the supermarket from the High Street to the edge of town
  • changes in the profile of the average household.

Shoppers found the new supermarkets to be very attractive due to the range and quality of the meal solutions they offered, the depth of their fresh and chilled food sections, and the ambience, although they did not necessarily wish to shop there more than once a week.

This indicated a market opportunity for Murco, if it could provide competitive solutions to customers’ needs right on their doorsteps. While shoppers inevitably would do their weekly purchasing at the large supermarket, they might be enticed to fill mid-week gaps by ‘topping up’ at neighbourhood stores. By developing its forecourt shops into stores capable of intercepting this midweek shopping, Murco could generate high levels of income. It required the stores to be rebuilt and re-launched with a range meeting the high standards of fresh and chilled foods offered by the superstores. They would also have to develop and maintain an acceptable pricing policy, and to provide an ambience shoppers would associate with the trusted superstores.

Creating a winning partnership

Murco understood it would require further expertise to carry through such a plan. Its alternatives were:

  • to invite one of the established supermarket groups to develop and operate stores at the service stations
  • to seek an alliance partner capable of assisting Murco in choosing the right locations, planning developments, equipment and control systems in addition to merchandising, pricing and promoting the stores.

The chosen partner would also have to have a logistical system that could maintain supplies of fresh and chilled produce, develop attractive meal solutions, and be capable of training Murco’s locally recruited self-employed retail proprietors – key players in the concept.

Page 4: A new partnership arrangement

Murco selected SPAR as a suitable alliance partner for its Withybush outlet, as it possessed the essential requirements of expertise and logistical support as well as being a recognised
brand across Europe. As a distinct franchise, it was of particular value in the chilled, fresh and prepared food sectors which were to be of vital importance at this particular store.

In the early 1980s, SPAR UK Ltd realised the future lay in convenience trading - an American concept which offers the customer “What is wanted, when it’s wanted”. Under the “Eight Till Late” banner, SPAR attempted to do something different from the rest of the UK grocery retailing industry. Its offer complemented, rather than competed with the multiples, providing a distinct, differentiated service to other sectors. Emphasis was placed on:-

  • extended opening hours
  • fast and friendly service
  • sensible prices
  • core convenience range
  • extensive ‘Own Brand’ product range
  • clean and attractive stores.

Convenience trading has become one of the fastest growing concepts in the UK grocery industry. It is characterised by the emergence of many new trends, in particular the rise of forecourt retailing as well as the major superstores operating small numbers of convenience
stores in both stand alone and forecourt concepts.

The forecourt store is well placed to exploit the convenience opportunity. Whilst the offer itself may vary from location to location, it essentially consists of a combination of impulse, top-up and emergency products allied to a concise grocery range within a friendly store environment with long opening hours.

Convenience operators and petrol companies alike have recognised the importance of having a strong retail offer, and partnerships have been formed which link the retailing strength of the grocery industry with the knowledge and experience of the forecourt operators.

Page 5: Pilot project

Murco first approached SPAR UK Ltd in August 1998 with a view to implementing
a joint forecourt programme at its site in Withybush, South Wales. Murco and SPAR developed the following objectives:-

  1. Murco’s site at Withybush would be developed to trial a modified form - the interceptor store concept
  2. the development of the store would increase retail turnover
  3. estimated Gross Profit would improve
  4. the site would be developed as the main 24-hour convenience store in the area with a strong emphasis on snacks
  5. new concepts such as hot food and scanning would be introduced.

The Withybush site

  • The forecourt and store are situated within a retail park off the main A40 trunk road to Fishguard
  • the site is on the outskirts of Haverfordwest to the north of the main town area at the top of a new ‘relief road’
  • there is limited housing development - the main concentration of residents is to the east of the site around the Cardigan Road in the area known locally as Prendergast
  • the Withybush Hospital has 380 beds for patient care plus an accident and emergency department. The hospital has 1,000 staff and includes a coffee shop, pharmacy and a small gift shop
  • access to the site is via a roundabout which also serves as one of the entrances to the hospital and to the retail shopping area, and all traffic using the retail park has to pass the forecourt both in and out.

A challenge to the success of the project was the extent of retail competition in the area:

  • a local Londis store in Prendergast with an estimated turnover of about £10,000 per week
  • another petrol forecourt store 8 tenths of a mile to the north operating with a 24hr store on site
  • a Kwik Save supermarket directly opposite the forecourt
  • a full size Safeway superstore 1/4 mile to the south
  • a full size Tesco superstore two miles to the west.

The site thus presents a challenge when considering its position on the road, and the proximity of a main foodstore. This together with the‘traffic’ generated by customers to the retail park and adjacent hospital site indicated that the concept of an ‘interceptor’
store would need to be modified. Murco felt better placed to tap into the late night market providing hot food and meal solutions.

Research undertaken

Extensive market research was carried out to find the profit potential of the area and the site location. Detailed calculations were made using published market research data showing:

  • the types of consumers living in the site neighbourhood
  • their typical consumption patterns, i.e. how much they spent on specific types of merchandise.

Armed with this information, the planners were able to forecast a ‘low case’ turnover and a more optimistic ‘best case’ projection. On the basis of the research findings it was agreed that, through offering a comprehensive range of impulse snacks, the site should become the main destination store for many busy working people, i.e. the hospital and the retail park employees, looking for convenience meal solutions and ‘ready-to-eat’ snacks.

To reinforce the new focus of the store the SPAR fascia was advertised boldly on the shop front and two external tower fascias. The new SPAR imagery was installed inside the store to help create both a professional and ‘fresh’ looking store. The shop floor sales area was more than doubled, and the layout of the store was designed so that it invited the customer to walk through the store, creating further impulse purchase opportunities.

A new ceiling, lighting, counter, off licence area, hot food area and a larger dairy cabinet were all included in the refit. Scanning was introduced from day one to enable day-to-day operational reports and data to be produced and to efficiently track the store’s performance.

As the staff are often the first point of contact a customer has within the store, it was agreed a key element to the success of this site was the training and development of its management and staff.

Page 6: Conclusion

It is expected the partnership venture between Murco and SPAR will prove to be successful, building on the existing strength and reputation of two highly respected players in their individual fields. The venture paves the way for new opportunities in retailing based on a convenience concept that complements existing retailing patterns, rather than creating direct head-to-head competition with the existing supermarket chains.

Murco | Focus on convenience trading