Stop Making Cents?
Is the cents-per-gallon metric costing the c-store channel millions of dollars in fuel profits?
Still, no one believes change can happen overnight, even with NACS’ help. Ricker says he’s already “dialed in to look at CPG.”
But he considers himself ahead of other retailers in that at least he realizes the importance of considering change. “We need to start including both of those figures so we can make the natural migration toward metrics that makes more sense long term,” he says.
Ricker also sees a hiccup with technology. Companies such as KSS need to build this data into their software because the more sophisticated operators are all using some kind of computer programs to run their retail strategies for fuel, he says.
“The software companies need to be able to provide the business intelligence and the viewing capability of looking at both CPG and margin percentage,” he says.
“Long term, you could probably migrate to just margin percentages, but in that migration process you’re going to have to have both.
“But we don’t even have gross margin percentage in the software right now,” he continues. “The software companies that do retail fuel pricing have to move the ball forward. The first to market on this is going to have a big advantage.”
Carpenter also believes an industrywide metric change would require changes to existing software, pointing out that such a change is “no easy task, but from a general reporting standpoint, there are ways we can figure it out.”
Of course, retailers are also facing that same legal tightrope that NACS has to consider when sharing fuel-margin percentages. Once software adapts to track fuel margin percentages, it might be very easy for a retailer to make the shift from CPG to margin percentage, but very complicated to really put those percentages into perspective without violating collusion laws.
“It’s very delicate,” says Miller of Miller Oil. “It’s one thing for me to ask [another retailer’s] opinion; it’s a whole different story for us to talk about our gross margins and how to figure them.”
There is another challenge that transcends the world of retailers and possible collusion: the supplier.
“[Suppliers will] still sell in cents of scheduled price less rebate in cent per liter, not percentage,” Gleason says. “So you’ve got to be … aware of how you buy and how you sell. How it’s priced [when buying] may be in cents but how you mark up [your fuel] needs to be based in percentage to make sure you’re recovering [what you need to].”
Despite the hurdles of software limitations, collusion laws and suppliers remaining in the CPG universe, retailers such as Gleeson push for change.
“Retailers operating with fuel need to make retailer returns,” he says. “As retailers we need to be able to reinvest in our assets. We can only achieve that by actually having money.”
Miller agrees: “Every year, when [fuel] cost rises, the true margin goes down. It’s a death spiral.”
CPG vs. Margin Percentage
Making the switch in fuel metrics from cents per gallon (CPG) to a percentage margin is a mental leap of sorts. Not only are recalculations involved, but so are perceptions of what is satisfactory and what is not. Going from one to the other may mean looking at some figures one day and being completely satisfied, then looking at those same figures the next day and feeling defeated. Here’s a quick look at how the two methods compare:
The CPG metric places an arbitrary, albeit historic, number—often 12 to 14—of physical pennies assigned to a gallon of gasoline, making that a financial goal. At the end of the day, retailers hope that what they pay for product and what they eventually sell it for brings in that amount.
Using a percentage to calculate the return a retailer makes on fuel would mean the actual goal in terms of cents per gallon would change, based on what product was actually bought and sold for. If that goal percentage was set at a certain level, actual cents per gallon would move well past the historic 12- to 14-cent range.
Tracking Inflation Rates
One of the biggest arguments for moving to a percentage-based measure for fuel is the inability of the CPG metric to keep up with the rate of inflation. The annual inflation rate, which is also in flux, takes into account the overall rise or fall (in the case of deflation) of what goods and services cost, indicating how much more or less it may cost today for those same goods and services vs. in the past. The chart below shows how the value of 12 cents in 1960 has grown to almost a dollar today due to inflation.
State Government Sees the Difference
Even state government—not typically thought of as fiscally forward-thinking—has understood the flaws of CPG accounting, according to Jeff Miller, president of Miller Oil Co., Norfolk, Va. He says his own state just this year repealed its old CPG-based excise tax and replaced it with a percentage-based calculation.
17.5 cents vs. 3.5%
The old CPG-at-the-pump rate vs. the new formula tied to wholesale gasoline for calculating excise taxes in the state of Virginia.
Will Change Mean Higher Prices at the Pump?
While the impetus to go from a CPG-based metric to a percentage margin is all about properly recouping operational costs and making profit, it may not necessarily mean higher prices at the pump.
Street competition would be the public’s best friend, says Steve Montgomery, president of b2b Solutions, Lake Forest, Ill. “I don’t see everyone saying, ‘I’m going to make 8% whether [gas is] $2 or $4 a gallon’ anytime soon,” he says. “It’s about the price on the street, where you’re at the mercy of your dumbest competitor.”
Others agree. Jeff Miller, president of Miller Oil Co., Norfolk, Va., says if the entire industry moved to percent margin on gasoline, it would be invisible to motorists on the street. Competition aside, price-collusion laws keep retailers from actually talking about how they came to their street postings, so a veil always exists between retailers. And for any successful operator, pricing is a continuous balancing act.
“It’s like selling fountain drinks for 79 cents a cup,” Miller says. “Some people may do it because a competitor is doing it, but if you’re not managing inventory or marketing [your product], then all you’re doing is losing money.”Even if pricing remains relatively unchanged, retailers such as Quinn Ricker, president and CEO of Ricker Oil Co., Anderson, Ind., believe the switch to marginbased decision making will still result in better profits at the all-important pump.
“My guess is we’d probably make some different decisions [on pricing],” says Ricker. “Day-in, day-out I don’t think a lot would change, but we’d be making a few different decisions than we would from looking at CPG. Small changes in fuel equal very big gross profit dollars. Tenths of a percent make hundreds of thousands in profits - or lack of profits."