UPDATE: CVS & Walmart are testing new fuel discounts tied to minimum spend levels in their retail stores

Shoppers in many markets around the U.S. take advantage of them, but are discounts on gasoline an effective way to build supermarket shopper loyalty and drive traffic into stores?

Kroger certainly believes so. In announcing his chain’s strong first quarter earnings for 2011, Kroger chairman and CEO David Dillon commented that “the combination of having gas near our supermarkets is a very strong convenience… [customers] like the tie-in with our store sales.”

In various forms, fuel rewards have become a widely used tactic used by supermarket chains (and some other retailers) to keep shoppers coming back. Typically applied in conjunction with a frequent shopper card program, the per-gallon discounts kick in after a certain level of spending is reached in a calendar month.

The typical reward adds up to roughly $1.80 on an 18-gallon fill-up – attractive, but barely a half a gallon of fuel at current prices. When gasoline price anxiety is running high, however, the discounts seem to have some impact on shopper choices.

Some retailers, including Walmart, place gas stations in front of their retail stores, attempting to lure price-sensitive consumers in which discounted gas and then drive them to make additional purchases in the store.

Advocates of supermarket fuel rewards programs argue that incentives provide shoppers with a reason for loyal behavior – that is to confine their grocery purchases to one chain in order to qualify for the largest possible discount. But the actual dollar amounts involved for most participating households may not be so large. Is a fuel discount of between two and five dollars once a month meaningful to shoppers? More importantly, is it meaningful to the right shoppers?

Testing new strategies is vital to determining how to best align fuel related programs to drive both loyalty and visits.

Kroger tested new permutations of its fuel price incentive programs last fall in Indiana in an effort to win a greater share of shopping trips. Instead of a flat 10-cent per gallon discount for shoppers who spend $100 or more in a calendar month, the program was extended to allow shoppers to stack multiple 10-cent discounts by reaching higher spending milestones. The heaviest grocery shoppers – those who spend $1,000 or more in a month – would earn a $1 per gallon discount on up to 35 gallons fill-up.

Success of this test, along with other pilot program in five markets, has driven Kroger’s expansion of the program across more than 26 states.

Kroger is not alone in offering fuel rewards at company-owned filling stations. Costco has long offered discounted fuel prices as a benefit of membership along with a year-end rebate of a few cents per gallon for customers who pay with its private label American Express card. Rival Sam’s Club offers a nickel discount to its members. Meijer offers discounts to users of its credit card.

With oil prices fluctuating significantly at levels far above their historic averages, sophisticated grocers have an opportunity to increase the effectiveness of their fuel programs using testing. We’ll update you on innovative programs as we hear about them.

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