Keep on Working to Win

Dear Don,

Great editorial (Longo's Viewpoint, Oct. 19, "Government's Crippling Effect"). I've been in the industry 30 years. I have never seen it this bad or seen such opposition to business at the state and federal levels.

You mention NACS lobbying (and by inference state organizations lobbying) and customers lobbying their representatives. Lobbying is but one step in the process and it comes on the down stream side of the process.

What I would like to bring to your attention is a partnership with a grassroots group such as Americans For Prosperity. Lobbying the current group of representatives has not proven to be hugely successful.

Grassroots groups educate and mobilize the voters. The real strength of our system is "We the people."

Just consider the possibilities if we change the legislators.

Legislation that understands the needs of business, free markets, and real reform of health care and the credit card mess.

Better legislators = better legislation.

We need to think outside the box and form new and unique partnerships if the free enterprise system is to survive and prosper.

I would enjoy the opportunity to continue this discussion with you at your earliest convenience.

Jim Zeiler

To read Don Longo's October 19 Viewpoint, go to http://www.csnews.com/csn/print/article_display.jsp?vnu_content_id=1004019005

Don’s Top 5 Things to Like About Brazil

Sindicom, Brazil’s confederation of petroleum wholesalers and convenience stores, invited me to Brazil to give the keynote address last month at the Expo Postos & Conveniencia, the country’s equivalent to the NACS Show in the U.S., although on a much smaller scale. The show attracted about 20,000 attendees to Sao Paulo’s Expocenter Norte pavilion which was filled with about 140 exhibitor companies including both product and service suppliers. With a large number of equipment vendors, the show floor resembled the PEI (Petroleum Equipment Industry) wing at the NACS Show.

Sindicom and a local fuel and lubricants distributor and convenience store operator called, Mime Group, sponsored my trip to Brazil, where I was given a tour of c-stores and gas stations throughout the southern state of Santa Catarina and in the huge business capital of Sao Paulo.

One of the things I liked best about Brazil is that sugar is used to both fuel the majority of the country’s automobiles and to make the country’s signature alcoholic drink, the caipirinha, which I absolutely fell in love with.

Ethanol made from sugar is the fastest growing fuel in Brazil, growing from 4 percent of the country’s fuel consumption to 14 percent over the past five years, according to Sindicom. More than 90 percent of new vehicles in Brazil are equipped with flex-fuel technology – meaning they can run on both traditional gasoline and ethanol, which is usually less expensive than regular petroleum fuel because it is not taxed as heavily.

(By the way, caipirinha is an alcoholic beverage made by crushing lime wedges into granulated sugar, and adding crushed ice and cachaca, a Brazilian rum made from sugar cane. As a crack investigative reporter, I made sure to do extensive taste tests at every stop of my whirlwind trip.)

I’ll be writing a complete analysis of the convenience store scene in Brazil, along with many market statistics, for CSNews’ November 9 issue, but here’s a quick look at five things I liked best about the country:

1. The beaches on Florianopolis, the capital of the state of Santa Caterina were just beautiful. Even in Brazil’s spring, the ocean water was temperate and there were plenty of sun-bathers out, along with wind- and kite-surfers.
2. Guarana Antarctica. This popular guarana-flavored soft drink is refreshing and tastes better than most of the high-octane energy drinks sold in the U.S.
3. Caipirinhas. Mentioned earlier, these sugar-cane rum based drinks go down easy, but pack a wallop.
4. The food. Whether we ate seafood (the moqueca was the best fish stew I ever ate), meat (at authentic churrascarias), or baked goods (loved the cheese bread), the food was as good or better than I’ve tasted anywhere in the world.
5. The people. Diversity, thy name is Brazil. British columnist and author A.A. Gill writes, “There’s no shade of the human color chart that isn’t indigenous. Here you’ll find cities of blue-eyed, blond Germans and Pradablack West Africans. Brazil boasts the largest expat population of Japanese outside Japan.” And there are millions of Italians, not to mention a large Jewish area in Sao Paolo.

-- Don Longo, Editor-in-Chief, Convenience Store News

How Fuel Retailers Can Make Money on the Money Margin

As discussed in my previous Spare Change blog post, fuel gross margin must exceed 10 cents per gallon for a retailer to profit on fuel sales. Given that, history shows retailers actually lose money on gasoline sales 25 percent of the time (to view chart, go to http://wtlf3p.wordpress.com/). Weak and unprofitable margins are likely to continue given increased competition and other market pressures.
Fuel retailers leave themselves at the mercy of the market for fuel margins. They react to the most volatile component of fuel cost (i.e. the rack price), their own sales volumes, and what the competition is doing. Is that any way to run a business? Retailers try to make up for low fuel margins with high margin c-store sales. But that “strategy” just masks the problem; it doesn’t solve it. Is the primary business of gas stations to sell gas or store items? Is the reason most people stop at gas stations to get gas, or something in the store?
How can retailers directly solve the problem of low fuel margins; i.e. how do they make money on the money margin? As discussed in my first post, retailers need to be proactive about their fuel margins. Essentially, that just means retailers need to control their rack prices. The easiest and most effective way to control rack prices is to control futures.  Futures prices set spot prices that, in turn, set rack prices -- Futures prices  Spot prices  Rack prices
Returning to the equation for fuel gross margin:
FGM = Retail price – Futures – Basis – (Rack/Spot differential) – Transportation – Taxes
If the Futures price is locked or limited, the retailer controls the most volatile and heaviest potential drag on fuel margins. The futures price may be locked with futures contracts or commodity funds; it may be limited with futures or commodity fund call options. On balance, locking the futures price with a commodity fund (UGA for gasoline, UHN for diesel fuel) is the simplest and most economic choice (e.g., six shares of UGA is equivalent to 100 gallons of gasoline futures). A commodity fund may be held indefinitely (like a stock) without the need for “rolling” the position like a futures contract. The fuel retailer may then easily hold the commodity fund until an advantageous time to sell. (More on that “advantageous time” in a future post.)
The Basis is an important component but less volatile and less of a potential drag on fuel margins. For example, since 2005, the Basis for U.S. gasoline has averaged 4.1 cents per gallon with a standard deviation of 8.2 cents per gallon. Over the same period, gasoline futures have averaged 195.2 cents per gallon with a standard deviation of 56.3 cents per gallon.
The Rack/Spot differential is a relatively stable and predictable 1 to 3 cents per gallon.  It reflects the cost of moving product from spot locations to rack locations, plus the cost of operating a rack.
Transportation is the cost of trucking product from a rack to a retail station. It is also stable and predictable and averages 2 cents per gallon.
Lastly, Taxes are a combination of federal and state taxes and are stable enough (though too high!). Taxes by state and product are shown here http://www.api.org/statistics/fueltaxes/.
What’s the bottom line? Control futures and you control the money margin. Control the money margin and you make money selling fuel – consistently and predictably. Even better, control futures and you may increase sales and customer loyalty, and achieve other benefits.  That’s called a Fuel Price Protection Program.
Next … The Roads to Higher Margins: Fuel Card or Storage

-- Tom Langan

Channel Competition: Are Convenience Stores Feeling the Heat?

A recent blog on the Nielsen Wire, http://blog.nielsen.com/nielsenwire/consumer/channel-competition-convenience-stores-feeling-the-heat/ provides some insightful commentary about the state of the convenience industry:
“If, when walking or driving around town, you’ve thought to yourself that it seems like there are a lot of new convenience stores that have sprouted up over the last few years, you’d be right.  Since December 2001, more than 20,000 new locations have opened, bringing the total to almost 145,000 such stores in the U.S.  But facing high gas prices last year as well as competition from groceries and mass merchandisers and the effects of the economy, C-stores have actually been pulling back.  Since the end of 2007, more than 1,400 c-stores have closed.
“Chain stores, such as 7-Eleven and BP, account for more than 52 percent of c-stores, while independently owned stores make up the balance.  That said, only 14 percent of c-stores are from chains with more than 500 stores; the rest of the chain stores are part of local or regional companies such as WaWa, Get Go and Nice N Easy.
“So what makes one store more successful than another? Execution.  “According to Nielsen research, consumers want convenience, obviously, but they also want a clean, organized store and the ability to check-out quickly,” said Tom Pirovano, Director of Industry Insights at Nielsen.
“C-stores dominate a number of high-volume categories such as tobacco (85% share of all channels), ice (57%) and beer (56%) and they outsell food, drug and mass merchandisers (including Walmart) combined in these categories.  C-store sales of tobacco and beverages generate more than $90 billion annually.
“A Convenience Store News/Nielsen survey found that customers want their stores to offer gas, snacks and prepared food, a category that has shown growth as the quality of those food service items has improved.  Doughnuts and muffins are the top prepared food category, followed by sandwiches and hot dogs.
“Stores that offer prepared food that looks fresh and smells good and cross merchandise those with other items are likely to hit a homerun,” continued Pirovano.
“Despite their seeming ubiquity, the challenges facing the c-store channel are numerous: rising credit card fees, competition from small format groceries, a desire for healthier foods and competition from club and mass retailers selling gas are just a few of the issues c-store owners face.
“The key to success is innovation.  C-store retailers need to constantly fine-tune their offerings in the face of increased competition from other channels while never taking their eyes off the basics of cleanliness and efficiency,” said Pirovano.
“Other c-Store Facts:
• Texas leads the nation with more than 14,000 stores, followed by California and Florida
• Nevada showed the most growth in the last year, with 31 new stores coming online
• C-stores skew to African Americans, smaller households without kids, lower-income households and single males.
• Seattle, Dallas/Ft. Worth and San Francisco lead metro areas with the most c-store growth, while Miami, Houston and Tampa showed the steepest declines.”
I think Tom Pirovano is correct in pointing out the many challenges faced by convenience store retailers, particularly credit fees, as well as rising taxes on tobacco and a leveling off of growth in fuel consumption rates as Americans drive less. But, despite all that — and the recession, c-stores are doing better than most other forms of retailing. Low ticket products like candy and snacks, as well as other tobacco products drove c-store sales during the first half of this year, and I suspect foodservice sales at convenience are up as well. A recent story on csnews.com, based on Nielsen research, seems to bear this out. See “At ‘09 Halfway Point, Candy, Snacks and OTP Drive C-store Sales” at http://www.csnews.com/csn/search/article_display.jsp?vnu_content_id=1003998033.

-- Don Longo

Fuel Gross Margin is the MONEY Margin for Fuel Retailers

Part 1: Where’s the Money?
Fuel gross margin or FGM is the money margin for fuel retailers.  It is the common measure of fuel sales profitability. FGM minus net operating cost (NOC) equals a station’s net fuel profit margin. Given that most retails stations have an NOC of 10 ¢/g or more, FGM must exceed 10 ¢/g for a station to profit by selling gasoline or diesel fuel.
The equation for fuel gross margin is:
Fuel Gross Margin (FGM) = Retail price – Delivered Cost – Taxes
Delivered Cost = Rack price + Transportation
Rack price = Spot Price + Rack/Spot differential
Spot Price = Futures price + Spot/Futures differential
(The Spot/Futures differential is referred to as the Basis.)
Bringing all the components together:
FGM = Retail price – Futures – Basis – (Rack/Spot differential) – Transportation – Taxes
Fuel retailers control their retail price, though the retail price is affected by factors outside the retailer’s control (competitor prices, fuel sales volumes, convenience store sales and traffic).  Fuel retailers have no control over the other components of FGM – futures, basis, rack/spot differential, transportation costs, and taxes.  Retailers are at the mercy of the market for those other components.  So, bottom line, retailers have very little control over their FGMs and, therefore, little control over their net fuel profit margin.
Given the significant volatility in futures prices, some degree of volatility in basis, and little (but some) volatility in the rack/spot differential, transportation, and taxes, it is not surprising that data over the last five years show a wide range in FGMs.  This wide range is exhibited in the following histograms (frequency distributions) based on U.S. average data and is representative of areas across the country.
Go here to view charts: http://wtlf3p.wordpress.com/

As indicated on the charts, the 5-year average FGM for regular gasoline is 18.4 ¢/g (median 16.7 ¢/g) and the 5-year average FGM for diesel fuel is 22.5 ¢/g (median 20.2 ¢/g).  In 2009, the average FGM for regular gasoline decreased to 14.9 ¢/g.

With NOCs of 10 ¢/g or higher, the net profit margin in 2009 on regular gasoline in the U.S. is less than 5 ¢/g, and less than 4 ¢/g in California.
Will average FGMs improve on their own?  Not likely, given increased competition in retail fuel marketing from big-box retailers and grocery stores, whose primary objective is profitable store sales – not profitable fuel sales.  Add a weak economy and political pressures to keep retail prices down and you have a recipe for FGMs averaging 12 to 17 ¢/g for the foreseeable future.
So what’s a fuel retailer to do?  Most have decided to make the best of their C-store sales and hope for the best with FGMs.  Will C-store sales make up for low margin fuel sales?  For some, yes.  For others … that’s a big gamble and, as the casinos in Las Vegas can attest, few gamblers win.
Well informed and creative fuel retailers will also make the best of their C-store sales, but they will go on offense to improve their fuel sales profitability.  Going on offense entails understanding and utilizing currently available tools to manage futures prices and basis, and thereby actually set forward FGMs – not just hope the competition disappears or the market magically gets better.
Which type of retailer are you?  Do you want to just hope the market takes care of your business, or do you want to take care of your business?
Next … Part 2: Making Money

-- Tom Langan

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

Will Consumers Come Out for 4th of July?

More Americans are planning celebrations this July 4, even as they deal with the recession and recent increases in gasoline retails have caused many to curtail travel, according to the National Retail Federation’s 2009 Independence Day Consumer Intentions and Actions Survey.

With the holiday falling on a Saturday, 144 million people are expected to the July 4 holiday this year by attending or hosting a cookout, barbecue or picnic. (62.6 percent of those surveyed, compared to 61.2 percent last year.) That could be good news for c-store operators, many of whom have suffered through the wettest spring in recent memory.

After 18 days of rain out of the last 22 here in the NYC area, I'm more than ready to fill a few coolers with ice, soda, beer and wine and position my husband in front of the grill as family and friends gather.

But c-store have opportunities outside the ice cooler too. According to NRF's  survey, 14 percent of consumers plan to purchase merchandise this month. I've already impulse-purchased a themed T-shirt for my preschooler and glow sticks to take to the fireworks.

Also, Monday's news that gas prices have apparently peaked may put a few more drivers on the road.

When the survey of more than 8,600 people was taken in early June, the recent uptick in gas prices had caused 44.5 percent of respondents to change their Independence Day plans.

A little sun could finally put people in the mood to move -- and spend.

-- Barbara Grondin Francella

Hot Fuels Hot Topic

Last week, Costco agreed to install temperature-sensitive gas pumps that will slightly adjust the amount of fuel dispensed to account for the fuel lost to expansion as outside temperatures rise above 60 degrees. This was the retailer's way of removing itself from national and state class action lawsuits by drivers over the sale of "hot gasoline."

This has only served to increase temperatures and maybe blood pressure levels among industry advocates representing petroleum marketers who are spending millions to fight these lawsuits, which groups like the National Association of Truck Stop Operators say are without merit.

The National Conference on Weights and Measures hasn't yet approved the equipment Costco has agreed to install, and gasoline industry groups contend the equipment will cost consumers more through increased gasoline prices, and provide no tangible benefit in the way more fairly priced fuel.

If Costco installs this equipment and markets it as a way for consumers to get what they think they are paying for, how will other gas marketers compete against that message? Will some others feel compelled to install similar equipment? How are consumers supposed to judge what a fair price is in their market, if retailers are no longer selling the same "size" gallon?

-- Barbara Grondin Francella

Archaic Laws Weigh on Convenience Stores

There are two laws I can think of off the top of my head that have made news headlines recently for their effects on convenience store retailing, despite the fact that subject of those news stories -- the laws themselves -- are decades old.

Earlier this week, Maryland counties were encouraged by state Comptroller Peter Franchot's team to enforce a law some have called "archaic" that enforces a soda fountain license fee. The fee is anywhere from $25 to $60, but has not been used in years, and will allow fees to be collected from all restaurants, convenience stores and other places where soft drink dispensers are found.

And earlier this year, a federal judge declared unconstitutional Wisconsin's 70-year old law minimum markup on gas. With the ruling, gas retailing experts predicted lower prices on fuel would follow, along with increased competition.

Why has taken so long for these laws to come into the public's eye? In Maryland's case, it is the increasingly frequent instance of a budget shortfall, which is causing lawmakers to look to new places to find funds. At least the lawmakers haven't proposed a hike in the state's excise tax on tobacco products -- knock on wood -- like the slew of other U.S. states doing just that.

Is there an antique law in your state that has crimped your convenience retailing business? Let us know about it!

-- Mehgan Belanger

Local Price, Not So Nice?

Seeing new customer price sensitivity, retailers of all stripes are considering the potential of localized pricing strategies, something, of course, c-store operators have been doing for years at the gas pump.

According to a survey of retailers by RSR Research taken last fall, in the midst of the country's economic meltdown, a renewed interest in localized merchandise pricing is spurring renewed interest in retail technologies that would support that strategy.

But beyond the internal and information technology challenges -- what does "local" mean, anyway? By store, by neighborhood, by zip code, by demographic makeup? The question remains: Do customers really want to pay different prices for the same merchandise, at one chain's stores? How would they feel paying $4.49 for a sandwich at the store closest to home, but $4 for the sandwich in a store next to their office?

We see this to a degree at fast feeders. Happy Meals in Manhattan carry a much heftier price tag than those picked up in New Rochelle, N.Y., which is 25 minutes away. Considering the cost of doing business in New York City, it's understandable.

But if c-stores started selling merchandise at localized prices, would it ultimately help them price more competitively in some areas, while making a few cents more margin on the same products where they could get away with it? Can promotions be used to accomplish this without confusing or upsetting your loyal customers who may frequent more than one store?