Stop Making Cents?
Is the cents-per-gallon metric costing the c-store channel millions of dollars in fuel profits?
Picture that 20-ounce bottled soda in your store cooler. So enticing on a hot day. The sweat of condensation dripping as you pull it off the shelf.
Now consider how you determine its value to your business. You price out the percentage of profit made on the sale of that individual soda by subcategory, brand or fluid-ounce basis. It’s Business 101.Now rethink the equation. What if you priced your profit based not on percentage margin but an arbitrary amount—say, 10 cents a bottle—and focused on making that same 10 cents all the time, every year, no matter the hard cost for that bottled soda?
Absurd? Well, think about your No. 1 destination—gasoline—and the centsper-gallon metric that’s the current industry norm.
Apples to oranges? Or just unquestioned habit founded on an anachronistic measure?
For as long as retailers can remember, the industry has measured gasoline and other fuels based on cents per gallon (CPG). It’s a practice that resonates through internal spreadsheets and into NACS research for its annual State of the Industry Survey. For the past several months, CSP has talked to leading industry executives and data specialists who are questioning the wisdom behind this age-old metric, and whether it’s time to apply profit percentages to a category that generates 75% to 80% of our industry’s total annual revenue.
In short, these critics say CPG pricing methods may be costing our channel millions of dollars in lost profits, preventing greater alignment between the forecourt and backcourt, and impeding construction of short- and long-term business projections.
“I likened it to cigarettes and how [because of evolving] cigarette programs, the price of cigarettes goes up but the margin per pack is staying the same,” says Jeff Miller, president of Miller Oil Co., Norfolk, Va. “There was a huge outcry in that margins were dropping like a rock. Now if a pack of cigarettes was always [‘X’ cents per pack], it would be different … but that’s not the way we do it.”Since discussion began in earnest with CSP editors, several prominent retailers have volunteered to voice their opinion on the matter, creating a chain of thought that may eventually spark change.
These operators are hoping to move the industry from CPG to the kind of percentage-based accounting used for just about every other area of the store. Formulating the basic core of a retailer’s lifeblood: practical, comparable margins.
What’s at stake going forward is an industry more in tune with its own decisions, the day-in, day-out choices that can turn a good year into a stellar one, or a make-or-break year into a make year.But no one is expecting industrywide change overnight. Some challenges:
- Collusion laws put retailers on edge, keeping many guarded about discussing price in groups or behind closed doors.
- Accounting technology may need updating to help retailers with daily conversions.
- Inertia may exist within an industry so set in its ways that such a fundamental change is tantamount to reinventing the wheel.
“Fundamentally, we’ve been caught up in the CPG world that’s out of the ’50s or ’60s; we’ve had a lot of inflation since the ’50s, ’60s and ’70s,” says Quinn Ricker, president and CEO of Ricker Oil Co., Anderson, Ind. “Ten cents in the ’50s or ’60s is not the same margin or profit as it is today. We need to look at this differently or we’re going to hurt our industry overall.
”Propelling this change in thinking is a fuel analytic company and the retailers that make up the company’s newly formed Client Advisory Club. It includes retailers Ricker and Miller; Frank Gleeson, retail director of Dublin, Ireland-based Topaz Energy Group Ltd.; Ari Haseotes, president and chief operating officer of Framingham, Mass.-based Cumberland Farms Inc.; and Florham Park, N.J.-based KSS Fuels.
The Old Way
As far as retailers can tell, CPG emerged in a time when fuel was cheap and sold in a way that was isolated from anything else even remotely connected to running a retail store.
“It was fuel and repair for years,” says Steve Montgomery, an industry veteran and president of b2b Solutions, Lake Forest, Ill. “When I got to Amoco, we measured everything in that per-gallon basis … and when gasoline and c-stores merged, [we said] with fuel, it’ll be CPG, and we’re going to measure everything else gross-profit percentages and dollars.”
And for years it did work. Retailers such as Miller point out that for decades, gasoline nationwide hovered in the range of $1 to $2.
The biggest difference starting from the late 2000s is the dramatic increase in the price of gasoline at retail, now averaging from $3.50 to $4 a gallon, all the while with CPG goals still in the range of 12 to 14 cents.
The scenario is punishing retailers in many ways because it doesn’t take into account increasing costs of labor, health care and, the worst of it, sharp increases in credit-card fees.
Miller brings up the routine example of buying loads of gasoline. Purchasing a load of 8,500 gallons in the past was, for example, $3 per gallon, with the retail price at $3.12. That load will cost $25,500 to bring in and give a retailer $1,020 for his time. But now the price is $4 a gallon per load and $4.12 on the street. That’s $34,000, or $8,500 more in initial expense to bring in—way more than the $1,020 the retailer is making to sell it.
“Now you’ve got to go to the bank and hit your credit line,” Miller says. “If you look at it over a period of years, as the price of gasoline has gone up, there’s no reflection of the cost of living, the economy; everything you use goes up for whatever reason, yet we choose not to adjust our margin.”It’s as if gas pricing has lived in its own bubble, ignoring the world around it.Ricker concurs. “CPG is not inflation-adjusted; it’s static,” he says. “You hit 10 cents per gallon one year, you’re up 10.1 cents per gallon the next year and think you’re great—but that rate’s not going to keep up with inflation.”
According to Gleeson of Topaz Energy Group, operators across the pond are also feeling the inflation pinch when it comes to CPG—although there it’s measured in cents or euros per liter.
“We’re now in an upward market and will be for some time,” he says. “Retailers need to get an adequate return and at least keep pace with inflation. The old way of cents per liter does not put us in a go-forward position. The old ways of doing business on fuel are gone.
”Why the disconnect? The reasons go back to a commonly held belief of gasoline as a traffic builder and, in some cases, a loss leader. Much of the industry has spent years, and in some cases decades, weaning themselves off gasoline as its profit driver, turning instead to prospects such as foodservice to make margin, Montgomery says.
If a formula does exist, it ties back to retaining volume, he says. “What we’re really talking about is the price on the street where you’re at the mercy of your dumbest competitor,” he says. “One of the [industry’s] mantras for many years has been: Gallons are forever, margins come and go—meaning that fuel margins will go up and down, but do what you have to do to protect your gallons.
”The paralyzing fear is of losing gallons and customers to a lower-cost competitor. It’s an ingrained, fatalistic mindset in that retailers feel they have no control over margins because of street competition, and that volumes are more valuable than profitability.
Add to that the pressure coming from the oil companies to protect ratable (essentially branded) fuel. Major oil historically needed to protect the volumes contracted that tie back to what they produce at their refinery. So again, it’s a mindset tied to volumes and ultimately gallons sold—not profit opportunities.
Those days, however, are basically gone.“Until two years ago, the major oil companies were running the show,” Miller says, referring to how most of Big Oil in recent years has turned over its retail operations to the distributor class of trade. “This is how the major oil companies were doing it, so if that’s the way the jobbers and dealers were talking about it, that’s what you did.”
So today, with the transition complete, retailers are now in the driver’s seat, operating without the deep pockets of a major oil company to rely on when fuel margins are squeezed.
“More and more of what we see of big oil networks is that they’re becoming more of an independent or chain business,” Gleeson says, pointing out that such retailers need healthy profit margins to continue doing business—and if they lack proper margins, have to leverage assets for credit in order to afford gas costs. “They don’t have the ability to go up supply chain.”
And with jobbers and dealers less tied to major-oil dictums, Miller poses the question of what a now more retail focused segment thinks.