A Fresh Look at Managing Retail Fuels

Branded or proprietary? How many grades or blends?

A Fresh Look at Managing Retail Fuels

June 2023   minute read

By: Keith Reid

The industry operates in an uncertain world today. The push for lower-carbon transportation has ramped up with significant federal dollars being allocated to build out a national charging network. The specifics are ill defined, to put it mildly, and no one is quite sure exactly how convenience retailers will fit into the mix or the role low-carbon liquid or gaseous fuels will play.

While this uncertainty is understandable, most of these questions will play out over decades instead of months or even years. Yet the industry gets no break, because today’s market features inflation, a potential recession and significantly increasing operational costs. 

So, how do you prepare for the future while still doing business in today’s hectic and uncertain world? Insight into some of these issues was provided by Gabe Olives, the chief information officer at Impact 21. He is a leader in Conexxus and has a solid base addressing technological integration, but Olives also has extensive experience in the broader retail fueling world.

Major or Proprietary Brand

Olives started his presentation looking at a question that has been asked by retailers and marketers for most of the industry’s history—do you go with a major oil company brand or develop your own proprietary brand? “It’s a decision that must be weighed out on a case-by-case basis and will be tied to the growth state of the company,” Olives said.

The big thing from a fuel perspective is generally the assurance of supply.

Olives noted that one traditional factor driving these decisions—fuel quality—is not as critical today as it was in the past. A significant number of proprietary brands meet Top Tier fuel standards along with their major oil counterparts. The major oil company brands tend to have built-in brand recognition and consumer trust, but even those advantages are not the most attractive selling points when it comes to the decision to carry these fuels.

“The big piece is brand support,” Olives said. “The forecourt layouts—typically signage, canopy structure, etc.—are often funded by the brand. In my world, the larger piece is the technology stack. The point of sale, payment networks, mobile payments, loyalty and the like. And the big thing from a fuel perspective is generally the assurance of supply.”

A downside with a major brand is that brand recognition can be a double-edged sword. Any scandals or other notable bad press from other actors in the networks can carry over in consumer perceptions to your sites.

Conversely, a proprietary brand can be unified between the store and a forecourt in a more seamless fashion, both in the consumer’s mind and then in the offers. “You want to unify as best as possible or to maintain the look and feel of the location, because the forecourt is what’s going to grab the customer’s attention,” he said.

Fuel Logistics Technology

On the supply front, you have the traditional branding decision tradeoff between being able to find the lowest prices on the spot market versus the security of a branded supply contract and the fact that some of that higher wholesale price goes into supporting the brand’s programs and offers. Olives noted that these supply models can be leveraged independently to maximize efficiency and bottom line and leverage arbitrage opportunities.

It’s important that your cost of inventory includes all the ancillary pieces, taxes and transportation that is on the buy side.

“If you buy rack based upon contracted supply or best buy model, formulas are generally contracted to a particular supplier, and it’s based upon metrics, including various add-ons to the benchmark price,” Olives said. “Or you can get down to where you source your own supply directly from refiner, ship it over pipeline or other means. You need to be able to keep product at your stores in tough times when working with suppliers—credit and ratability. You also must have the ability to protect your volumes in a reasonable fashion because creditors want ratable customers.”

As with all operational decisions, the retailer must constantly be able to review, with the appropriate historical data, to project what’s going on in the marketplace to optimize its offers. Data can also help manage the cost aspects of the fuel product and help the fuel buyer make better purchasing decisions.

“What is the value of the product I’m going to be replacing or buying today?” Olives said. “What is the value in the tank so we can make good decisions on our retail positioning? The more efficient your process is, the more real time that data is maintained, [the more that supports the] alignment between the financial team, accounting team and the fuel logistics team. It’s important that your cost of inventory includes all the ancillary pieces, taxes and transportation that is on the buy side.”

He noted that the evaluation side needs to take a holistic view of what that CPG number means. It’s often strictly retail minus cost of goods, which is the standard across the industry. But then from an analysis perspective it’s important to keep an eye on credit card fees and to do a rolling review of your projections along those lines. And then there are fuel discounts.

“[Commercial] fuel discounts are a reality in gasoline, though relatively small,” said Olives. “You’ll give a large logistics carrier $.02 off if they use your sites. Over-the-road and diesel are a different ballgame. This is where you see a lot of cost-plus deals where you’ve agreed to accept that fleet card and you’re locked into a cost-plus based on the OPIS price at the rack closest to your location, plus the taxes and freight.”

Olives pointed out that with the settlement it may appear to the accounting staff as a credit card fee instead of a fuel discount. And as margins have expanded, those credit costs have increased greatly. The best practice recommendation is that discount needs to be booked against the cost of goods or sales on your P&L.

Tomorrow’s Fuels Today

You want to understand what is available that will allow you to increase your conversion rates.

Olives noted that the product mix has become far more interesting today than in the past. “In the old days, it was three grades of gasoline. You might have offered diesel,” he said. “Now those are table stakes, in addition to more advanced blends such as E85 and E15 becoming more and more ubiquitous and also the blend ranges,” he said.

Keeping an eye on policy is critical over the next 10 to 20 years. The buzz is pointed towards EVs today, but there are other fuel blends that may be required depending upon policy shifts to get to the CAFE standards that may be mandated for future internal combustion engines. Adaptability is key.

“As you’re building new sites, try to build in flexibility as you lay out your tanks and piping, etc., so you don’t have to do a lot of rebuilds,” he said.

Incorporating Technology

According to Olives, a key to marketing success is customer assurance. You build and support this by an offer to attract them, but you need the systems and people in place to continue that and to create an overall effect to delight the customer.
On the fuel side, one of the biggest pieces is managing your pricing.

“A lot of tools have been brought up over the last 10 to 15 years,” Olives said. “[For example,] you have price discovery tools and the ability to optimize those and then, in the extreme, execute those automatically without any intervention. All things that should be looked at to help your offer. And then layer in more sophisticated data sets. There’s a correlation between the inside and the outside fuel sales.”

The goal of the analysis can be to drive a higher rate of conversion—getting those fuel customers into the store. “While fuel margins have been great the last several years, and we project that they will continue to be good, there are going to be times when operators will work to increase their inside sales by lowering their fuel margins and getting people on the lot.”

At a more granular level, the more sophisticated data sets can help analyze inside sales, traffic counts and day parting. There’s mobility data to understand how many customers are passing by the stores. Through various partners, the consumer can be tracked to know their destination or where there was significant dwell time.

For example, “They went to a competitor a half a mile away after being at your site five days out of the last 60,” said Olives. “There’s a tendency to stay with what you know, which helps simplify your support. But at the same time, you want to understand what is available that will allow you to increase your conversion rates.”

Payment and Loyalty Perspectives

Payment is a rapidly changing world and retailers need to be on the ball, according to Olives. “Everyone’s doing mobile today, but you need to keep track of the other payment types that your consumers are demanding,” he said. “Today’s consumers want it their way. They know how they want it, when they want it and where they want it.”

Proprietary brands can have significant advantages on the loyalty front according to Olives. “You can combine your loyalty programs together to incentivize customers with fuel discounts, and it’s very enticing, especially in times of high fuel prices,” he said.  

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