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Energy Analysts International

Energy Analysts International. Westminster, Colorado. EAI (Energy Analysts International, Inc.). U.S. Hypermart Petroleum Market Outlook: Emergence Of The New Competitive Arena. For The California Energy Commission July 11, 2003 By Joseph J. Leto EAI, Inc.

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Energy Analysts International

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  1. Energy Analysts International Westminster, Colorado

  2. EAI (Energy Analysts International, Inc.) U.S. Hypermart Petroleum Market Outlook: Emergence Of The New Competitive Arena For The California Energy Commission July 11, 2003 By Joseph J. Leto EAI, Inc. 12000 North Pecos, Suite 310 Westminster, Colorado 80234 303-469-5115 jjleto@eaiweb.com

  3. Figure ES-1 Presentation Outline • 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

  4. EAI (Energy Analysts International, Inc.) U.S. Hypermart Petroleum Market Outlook Overview of U.S. Retail Business

  5. EAI (Energy Analysts International, Inc.) U.S. Hypermart Petroleum Market Outlook Emergence of Hypermarts in Gasoline Retail

  6. Figure ES-2 What are Hypermarts And Their Incentivesto 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 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

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

  8. Discount Stores Mass Merchandiser Mass Merchandiser Club Supermarkets • Wal-Mart • Meijer's • Walmart • Supercenters • Albertson’s • Ahold • Brookshires • HEB • Kroger • Safeway • BJ’s (club) • Costco (club) • Sam’s Figure ES-4 Dominant Hypermarts With Fuel SitesTen companies operate approximately 86 percent of all U.S. hypermart gasoline sites and represent 91 percent of U.S. hypermart gasoline sales

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

  10. Figure ES-6 Hypermart Gasoline Market OutlookCharacterization of Existing Site Base 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.

  11. Figure ES-7 Hypermart Fuel Site Distribution2002 Fuel Site Count / Annualized Build RateAnnualized fuel site addition rate is approximately 749 with the Midwest experiencing the highest rate Top 3 chains shown * Safeway Costco Kroger Kroger Albertson’s Safeway Wal-Mart Hy-Vees Sam’s Meijer Kroger Wal-Mart Ahold BJ’s Walmart Pacific Northwest Northern Tier 159/67 133/53 Rocky Mountain Northeast Seaboard 67/23 Wal-Mart Kroger Albertson’s 152/59 Costco Safeway Albertson’s Midwest 537/181 Midcontinent Pacific Southwest Wal-Mart Sam’s Kroger 156/53 Wal-Mart HEB Brookshires Bros. Sam’s Albertsons 159/56 Southeast Seaboard 293/96 Gulf Coast 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 3rd place nearly tied among 3 players

  12. Figure ES-8 TOP U.S. HYPERMARTS ANNUALIZED GASOLINE SALES EAI Estimate as of 4th Quarter 2002 Wal-Mart consists of Murphy, Tesoro-Mirastar and Sunoco-Optima alliances

  13. EAI (Energy Analysts International, Inc.) U.S. Hypermart Petroleum Market Outlook Outlook for U.S. Hypermarts in Gasoline Retail

  14. Figure ES-9 Hypermart Gasoline Market OutlookSales and Market Share Outlook • 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.

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

  16. Figure ES-11 Hypermart Gasoline Market Share Outlook Base Volume-Accounts for companies currently having gasoline retail Speculative Volume-account for companies not currently involved in gasoline retailing

  17. Figure ES-12 Hypermart Gasoline Growth by Store Channel MMRC = Mass Merchandiser DSCN = Discount Store Includes base company volume forecast and not speculative volume

  18. Figure ES-13 Hypermart Gasoline Market Share Outlook U.S. Western Regions: Base Gasoline ForecastSafeway, Costco and Albertsons dominate the West Coast. In the Rocky Mountains Kroger, Albertsons and Costco are top 3 in gasoline sales

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

  20. Figure ES-15 Hypermart Gasoline Market Share Selected EAI West Coast Micro-Markets, 2002 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

  21. EAI (Energy Analysts International, Inc.) U.S. Hypermart Petroleum Market Outlook Impact on Gasoline Supply, Marketing and Pricing

  22. Figure ES-16 Hypermart Competitive Market Phases 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 EARLY MARKET SATURATION PERIOD HYPERMART EXPANSION PHASE MATURE MARKET SATURATION California Dallas PNW, Phnx, LV • 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 ISOLATED ENTRANTS / LOW PRICING & LIMITED VOLUME IMPACT EXCEPT FOR SITES IN CLOSE PROXIMITY YEAR 1 YEARS 3 INTO 4 YEARS 4 AND BEYOND YEARS 2 INTO 3

  23. Figure ES-17 Retail Gross Margin Trends Selected U.S. Micro – Market Gross Margin = Retail Price – Representative Rack Price

  24. Figure ES-18 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 1st 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).

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

  26. Figure ES-20 Presence of Refiners Supplying Unbranded Gasoline Across 42 Major U.S. Markets Only Two Refiners Have Unbranded Supply Presence Across The U.S.

  27. Figure ES-21 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

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