CSP Magazine

Industry Views: Low Fuel Prices Come With a Cost

I struggled with this month’s column because I am writing it on tax day—April 15—and you will read it in July. The fear in writing about a timely topic is that it may no longer be true when it is in print, leading readers to believe what my children secretly suspect: I am not as bright as I have led them to believe.

However, based on many factors in play, I’m comfortable that oil prices will remain relatively constant by the time you read this.

Making such a prediction can be risky; nearly no one anticipated the drop in prices that began last summer. But I am in good company: ExxonMobil CEO Rex Tillerson expects the price of oil to remain low over the next two years because of ample supplies and relatively weak global economic growth. In a recent presentation, Tillerson said Exxon assumes a price of $55 a barrel for global crude, which is about what the price is as I write.

Rystad Energy, a Norwegian firm that tracks oil production, estimates U.S. oil production will average 9.65 million barrels per day in 2015, exceeding the previous record set in 1970, further exacerbating the worldwide glut. And while low oil prices means rig counts will continue falling to address the glut, Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS), feels this will not be seen until at least next year.

So what does this mean for those of us who sell retail fuel? As always, a mixed bag.

Dance to the Music

The Federal Reserve said in its latest survey of U.S. business conditions that falling oil prices were giving consumers more money to spend on other products outside of energy (unless we count energy drinks, that is).

There are also reports that lower gas prices are causing some buyers to switch from cars to SUVs. SUV consumption will offset gallon efficiency to some degree, but more important, the data indicates that we will see an increase in vehicle miles traveled, with more opportunities presented for the sale of higher-margin store merchandise.

Lower gasoline prices also reduce the attractiveness of an alternative fuel such as compressed natural gas (CNG). As CNG becomes less economically attractive, it becomes less likely to become a mainstream transportation fuel, which means retailers will find it less necessary to invest what initially is at least $500,000 to develop the capability to sell CNG.

Keep in mind, however, that the attractiveness of electric vehicles will not diminish as easily, because it is a cheaper, more available alternative that better addresses the greenhouse-gas issue that is a growing legislative topic.

Strategies to Consider

During the first decade of this century, the retail landscape saw refiners leaving the downstream business behind, resulting in an increase in independent operators. In many cases, these retailers failed to compete with “new era” retailers such as QuikTrip, Sheetz and Wawa, and high gasoline costs at the rack required a large amount of capital to pay for fuel deliveries, which resulted in their subsequent exit from the business.

With lower gasoline costs today, many sites that were struggling or shuttered may be given another life. This is an opportunity for new entrants, but these reopened sites will also provide additional competition for those now in operation.

While selling more gallons technically provides an opportunity for more profitability, it is understood in the industry that, at a retail level, price volatility is our best friend. Contrary to what consumers believe, when prices rise, retailers have the lowest (if any) margins, and when prices fall, we make up for it. This year has all the makings of one that may see us selling increased gallons with reduced margins. Consider:

  • This is an opportunity to focus on the marketing of store merchandise on the busy forecourt. “Less is more” is very applicable here. We should take a close look at the amount of signage we employ on our forecourts, then clean it up and focus on the items we believe will drive success.
  • If vehicle miles traveled increase this summer, consider focusing on promoting cold beverages on the forecourt—clearly an impulse item—rather than items customers already expect to find inside. Promote foodservice, another category that commands high margins.
  • Pricing in a stable market is tricky, especially when giving up margins to gain volume when the margin may not return. This may be the year you consider using pricing software to make more informed decisions. An extra penny in margin over the course of a year adds $15,000 in gross profits to the average U.S. station’s bottom line.
  • Finally, review your exterior appearance now, before that boarded-up station up the road reopens and potentially looks better than yours. And remember that your customers view your bathrooms as part of their shopping experience. Don’t get caught with your pants down.

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