Guest Column: Price Volatility Challenges Fuel-Margin Management
Tips for retailers to get the most from their pumps
HOUSTON -- Fuel marketers spend considerable time and effort developing their retail pricing policy and strategy. Whether choosing to optimize gross margins, sales volumes, in-store traffic or some combination of these, they know that fuel pricing is a lynchpin to their overall business success.
Getting the pricing strategy right is certainly important, but pricing implementation and management of fuel margins is often even more challenging.
Since 2004, day-to-day price swings of three cents or more increased from 6% to nearly 50% of the time. Daily movements of more than five cents went from 1.5% to 25%. This ongoing price volatility adds stress to the pricing strategy and the margin management processes.
Retail fuel pricing is a site-level challenge. While national and regional average prices are volatile, these averages can actually mask additional local volatility. For instance, when national price indexes drop three cents, local fuel costs in one city may be flat while fuel costs in another city may drop by six cents.
Further complicating implementation, a set pricing strategy may call for some sites to employ a price-follower strategy and others to assume a price-leadership role.
This article, extracted from the recently published whitepaper "The 7 Deadly Sins of Fuel Margin Management," outlines several operational challenges that plague fuel retail-margin management and offers some best practices that can address how automation solves these issues.
Slow Pricing Execution
The impact of poorly executed pricing decisions can be costly. Suppose company policy requires updating all pump prices by 8:00 a.m. If a site delays updating signage and pump prices until midday, a normal three-cent daily price move every other day will result in $15,000 of annual loss due to lost sales or lower margins. If these delays happen at 10% of sites in a 100-site chain, the loss is $150,000 a year. This loss doesn't account for the impact of lost in-store traffic.
Site-level Pricing Policy Compliance
Site managers are busy people, responsible for both fuel and store operations. As the process for competitive surveys and price changes is typically manual, non-compliance rates are high. Individuals responsible for setting prices may be unaware of non-compliance issues. If a pricing policy states that adjustments are to be made by 8:00 a.m. daily, each minute after that risks sales and margins. Discovering these delays the next day or at the end of the month is too late.
To ensure compliance, retailers should automate the process and controls for daily competitor surveys and pump price updates. Responsible parties should be notified immediately if information is not entered on time or if pricing or margin policies are not met.
According to the NACS 2012 Consumer Survey, 63% of customers consider price the most important factor when buying fuel. Once a loyal customer, motorists may no longer price shop before they fill up. But when they see fuel for pennies-per-gallon less down the street, their trust is lost and now they're price shoppers again. A single bad day of missed price adjustments can ruin customer loyalty and result in months of lost sales.
Fuel Purchase Costs
It is easy to ignore fuel purchase costs as a margin lever, since fuel prices are largely market driven. Many conclude that purchase costs are beyond the retailer's control, or perhaps that only the big chains have purchasing leverage.
Regardless of volume, volatility introduces opportunities for agile purchasers to take advantage of those who just accept their supplier's daily price. When prices are up on average by three cents on a day-to-day basis, one supplier's price may be up by two cents and another's price is up by four cents. Yet another supplier increases its price at 6:00 p.m. compared to others that increase it at midnight. Supply contracts use different indexes that do not track volatility the same.
Through savvy fuel contracting and purchasing automation, it's possible for retailers to gain a competitive advantage while maintaining or improving gross margins.
Effective Margin Management
Price volatility creates both a margin-management challenge and an opportunity. However, timely access to information, effective fuel purchase automation and agile decision-making processes with appropriate controls will enable a winning margin-management process.
The challenges of price volatility and site-level policies demand site-level implementation. Poor execution at the site is a frequent cause of margin-management problems. Now, retailers can stay steps ahead of their competitors as they automate and implement, reducing delays in price changes and the likelihood of errors.
Scott Cilento has more than 25 years of experience directing operations in a technology-based business or government enterprise. As senior vice president of value assurance, he works directly with Houston-based FuelQuest's product management, sales, services and support organizations. Cilento is responsible for ensuring a customer's return on investment using an end-to-end, value-driven customer engagement process.