Higher Fuel Margins, Sales & Happy Customers

Retail gasoline and diesel fuel margins are volatile, unreliable, and sometimes unprofitable. WAMU-FM in Washington, D.C., reported recently that the Capitol region has been losing gasoline service stations at an accelerating rate. Nearly 1,000 stations have shuttered operations in Washington, Maryland and Virginia in recent years.

Why? Experts say part of the reason is because fuel margins are so thin. Typically, you need 12 cents per gallon to break even but the markup in the first half of this year has been only about 10 cents per gallon.
Why are fuel margins so tight?  Competition, of course, but equally (or maybe, more) important is the fact that fuel retailers react to the market (rack and delivered prices, competitor prices, existing sales volumes) when setting pump prices. In such a reactive mode, fuel margins (like any other retail profit measure) are a hope-for-the-best proposition. Fuel retailers are at continual risk of fuel sales being marginally profitable, and sometimes unprofitable (statistics show gasoline fuel gross margins are below net operating costs roughly 25 percent of the time).
What to do about fuel margins? Raise pump prices? No, that drives sales down and customers away. Focus on merchandise and food sales? Okay, but that masks the problem and forces c-store owners onto big-box retailers’ and grocery store chains’ turf.  Hope you outlast the competition and then raise pump prices?  Everyone else is doing that, and how long is that going to take -- assuming you make it to that “promised land” of less competition?
Here’s what you can do to capture higher fuel margins (and achieve other benefits): go on offense. The best defense is a good offense. Offense against what?  The futures market where gasoline and diesel prices (among other commodity prices) are set. Evidence is overwhelming -- statistical and behavioral -- that the futures market drives spot prices which set rack prices that determine retail prices. The futures market is the driver.  And it’s going to stay that way.  But tools are available that enable retailers to control their “destination” -- and the “destination” of their customers. Friendly tools.  Today.
Your destination is higher fuel margins -- and increased sales and happy customers. 

-- Tom Langan, WTL Trading

Comments

[Joel Mascitelli]

Tom,
This is a great idea for small companies like mine. I hope you provide more information in your next blog.
Joel in Colorado