Expert Insight: The Race for Volume, Part 1: Pricing
When is cutting fuel prices good business and when is it a death spiral?
FLORHAM PARK, N.J. --It is no longer news that the race for gasoline volume is becoming increasingly tough for convenience retailers. The reasons are well known: more efficient vehicles, growth in alternative fuels, increasingly rigorous legislative standards, expansion of non-traditional competitors. The list goes on.
These same factors are likely to result in market declines in the years ahead, as well. It is clearly a challenging time, but it is also a genuine opportunity for willing retailers to embrace new ways of doing things.
Over the next several weeks, I will present a series of articles that share real-world insight into the best ways to rise above this challenge and win.
Start Your Engines
In the race for volume, I see retailers a lot like high-performance race cars, NASCAR, Formula 1, Indy cars; pick whichever you know best. There are winners that do almost everything right. Then there are those that typically finish in the top 25%, and the crew is genuinely happy with that result because they know they cannot realistically challenge the frontrunners.
And of course, there are the pack of backmarkers, those who need to seriously rev up their engines or risk being out of the race altogether. No matter where you sit in the pack, performance can be improved to stay in the race and remain competitive.
So, what is it that sets the winner apart from all of the other contenders? Is it well-executed tactics? The right brand? A well-tuned engine? A world class driver that can perform in varied racing conditions?
It is all of the above and more.
The secret to winning is making sure all of the parts are finely tuned and performing at peak levels with constant monitoring and proactive, preventative maintenance. That is the winning difference.
It is the same for retailers who are chasing gasoline volume. There are many parts that need to be finely tuned and performing at peak levels in order to win the race: pricing, facilities, operations, brand and location. All parts are essential, but not all are equal in their impact on generating volume.
A Pricing Tune-Up
Let’s take a closer look at fuel pricing.
I am very fortunate that my job allows me to meet convenience retailers around the world, and although every market is different and every site completely unique, I have found that the process of selling the necessary fuel volume is remarkably similar.
I often ask retailers to tell me the first action they take when volume starts dipping below expectations. The answer more often than not is to drop prices.
I understand that sentiment; pricing is a crucial element. If you have a poor pricing process or implement prices that do not meet your brand proposition, then you will lose volume. But how effective is pricing at maintaining or growing volume?
In our high-performance race-car analogy, is pricing the engine? The chassis? Or the steering wheel? To me, it’s a turbo charger, a small but powerful and vitally important “part” of the volume machine.
Pricing is a tactic that is best used in short bursts. It may be used frequently to course correct and get volume back to where it needs to be, but pricing is not an optimal volume driver. It is not as impactful as a great piece of dirt, excellent facility or unmatched operations.
Don't misunderstand me; it is necessary for improving margin, but growing volume through pricing is difficult. The competition normally will not allow any one retailer in the market to deviate too much from the standard pricing position without reacting to that change.
I have seen numerous examples of retailers chasing volume through pricing and gaining some short-term wins. But try to use that turbo charger too frequently, and it burns out or fellow racers start to use theirs.
Retailers start matching lower prices, and the death spiral begins—a chase to the bottom, where nobody gains volume and margin crashes. There is nothing pretty or inexpensive about a blown turbo charger!
No doubt, there are pricing opportunities. They exist by product, by site and by day. The expert driver is able to maneuver through the pack by exploiting every small opportunity, but a price drop across the board is not the most effective volume-generating move!
Coming in Part 2 of “The Race for Volume” series: Data.
See the July issue of CSP Magazine for more on how the challenge of fuel volume is affecting the convenience-store industry.
Ian Thompson is the senior vice president of strategy at Kalibrate Technologies.