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Fuels

2017 Fuels 50

CSP’s inaugural ranking of the most effective fuel brands spotlights a new era of convenience retailing

Gasoline is one tough sell.

It is purely functional—not fun. It is a necessity—not a choice. It is noxious, toxic and highly flammable. And the typical buying experience? Being forced to watch your money disappear gallon by gallon, cent by cent.

And despite a short-term goose from low prices, gasoline demand is hardwired to be flat or diminishing in the long term, thanks to tough fuel-economy standards and demographic trends. Those retailers who can counteract such forces and rack up the highest volumes are the magicians of the fueling industry. But who are they, and how do they do it?

For its inaugural Fuels 50 ranking, CSP partnered with Oil Price Information Service (OPIS) to present the most effective fuel brands in the United States. That effectiveness is measured by market efficiency, which OPIS calculates by dividing a brand’s market share by its outlet share. The higher a brand’s market efficiency, the higher its per-store fuel volumes.

While major oil dominates in market share, the Fuels 50 ranking is topped by many of the industry’s “new era” retail heavyweights: Wawa, QuikTrip, Sheetz and RaceTrac. These are private brands that recognize and maximize the critical link between the fuel island and the profitable store offer.

“It’s a continuation of something a lot of forward-thinking retailers have realized: They might need to have alliances with major brands, and to make sure they have a panoply of companies to buy from,” says Tom Kloza, global head of energy analysis for OPIS, Gaithersburg, Md. “But once you reach a certain critical mass, you don’t necessarily need that major flag—particularly if your business model is more about getting people inside the stores.”

"The real key is driving gallons, which drives traffic to the store,” says Mike Lorenz, executive vice president of petroleum supply for Sheetz, Altoona, Pa., which has more than 500 sites and ranks fourth in market efficiency. (See “Fuels 50” on this page.) “Over a third of your gas consumers will come into your store, so the more traffic you can drive to the site, the more people come in buying things at a higher margin.”

The Fuels 50, which includes brands with 15 sites or more, also features some small but mighty operators. Ranked first is Buc-ee’s, the Lake Jackson, Texas-based brand best known for its sprawling fuel islands, 70,000-square-foot “c-stores” and award-winning restrooms. With less than 40 sites, Buc-ee’s market efficiency is more than 3 points higher than that of the nearest fuel brand, and its gasoline was priced a whopping 10.2 cents per gallon below its market competition in 2016.

“It clearly means the fuel category is the carrot to attract people inside,” says Kloza, pointing out that Buc-ee’s was one of the first brands in 2016 to post $1.99-per-gallon gasoline when prices neared $2. (Buc-ee’s declined comment for this story.)

OPIS calculates market share and volumes based on Wright Express (WEX) fleet-card transaction data, which it considers as an appropriate proxy for a brand’s total fuel volumes. Because of the data sourcing, the Fuels 50 ranking does not fully capture the prowess of brands with small or no fleet business. For example, Arco, which has a policy of cash-only fuel sales and few fleet sales, does not appear. And Murphy USA’s Murphy

Express brand, which has earned a reputation for high volumes but has a small fleet business, ranks relatively low. Also not captured in the market-efficiency data: hypermarkets such as Costco, which do not accept WEX cards. These aggressive fuel retailers have the highest price differentials in their markets. (See them in the “Top 10 Low-Price Leaders” chart, p. 30.)

That said, the fuel brands topping the Fuels 50 ranking represent some winning formulas for boosting gallons:

» SUPPLY ADVANTAGES.

With size and established high volumes comes the ability to buy fuel several cents below the market wholesale average, and to tap into supply sources formerly reserved for major oil.

» OPTIMIZED LOCATIONS.

Brands that drum up the highest volumes have engineered their locations to grease the fueling purchase decision, with everything from location to acreage and fuel variety playing a role.

» STORE POWER.

It’s no coincidence that the top Fuels 50 brands include many of the industry’s savviest, most progressive retailers. A large c-store featuring a high-quality foodservice program and other high-appeal categories seals the fuel-purchase deal for many customers.

As the No. 2 Fuels 50 brand—and the perennial leader in OPIS’ market-efficiency rankings of chains with 50 sites or more—Wawa has an approach to fuel sales that is as effective as it is efficient.

In November 2016, the chain opened its 500th fuel location and sold its 20 billionth gallon of fuel—only 20 years after entering the gasoline business. It credits this success to delivering on the customer’s value equation.

“Our high volumes play an important role in our overall business strategy to meet our customer’s need state,” says Brian Schaller, senior vice president and chief fuel and real estate officer for Wawa Inc., Wawa, Pa. “The intersection of food, fuel and convenience is where we aim to best serve our customers and deliver on our purpose of fulfilling their lives every day.”

This sounds simple. But even as Wawa’s total gallons grow, its per-store-per-week fuel volumes are under pressure, Schaller says.

“We see that to be a somewhat common challenge in the industry as cars become more efficient and alternative fuels continue to enter the marketplace,” he says.

Wawa strives to be the value leader in all of its markets. That sometimes—but not always—means having the lowest gasoline price. Its price differential in 2016 was only 2.8 cents per gallon (CPG) lower than the competition, a sliver of the double-negative-CPG differentials that many hypermarkets pushed. This reflects the power of the total Wawa offer.

“As the brand matures, you don’t have to price as aggressively,” says Norman Turiano, principal of Turiano Strategic Consulting LLC, Cape Coral, Fla., and former fuel manager for Wawa. “They’re willing to take on more ‘stickers’—people who would match your price, and you would allow them to. And that makes sense, because when you have 20 sites, you’ll price a lot differently than when you have 500 fuel sites. When you dominate like that, you don’t have to price as sharp; you can rely on your entire offer.”

Wawa’s pricing strategy appears to vary depending on its market. Take, for example, its mature Northeast region vs. Florida, which it entered in 2012. In the Sunshine State, the brand has a reputation for below-market pricing. “They are much more aggressive in price in a place where they’re establishing their name,” Kloza says. “And the way they’re establishing their name in Florida, it’s just incredible.”

Wawa goes the extra mile to ensure below-market pricing; this includes taking a page  from major oil and investing in an ocean-going vessel to bring in fuel. In 2016, Wawa acquired an articulated tug barge with a storage capacity of about 185,000 barrels, according to an OPIS report. The barge—with an estimated purchase price of $80 million—gives Wawa an edge in Florida, which is not supplied by pipeline or rail. RaceTrac Petroleum, which competes with Wawa in Florida, has also chartered its own barge.

But this does not mean new-era retailers are giving it away. “They are able to regularly sell gas at a low enough margin to make up for it on the volume,” Turiano says, “and generate the profits in the store.”

As a group, these private brands are the most sophisticated fuel buyers in the industry. “There was always a myth that bigger chains could buy 3 to 4 CPG below what everyone else was charged,” says Kloza. “It’s not a myth anymore.” Some of these operators can now buy 5 to 10 CPG below the market average. He chalks this up to the United States’ swelling gasoline supply, which has grown thanks to the development of shale oil, which is suited for lighter petroleum products.

One company has the greatest ability to buy cheap and smart, says Kloza: Costco. The Issaquah, Wash.-based warehouse club has more than 500 U.S. sites, with $9.1 billion in 2016 fuel sales. It also has the highest price differential among the fuel brands that OPIS tracks, a whopping 20.88 CPG below its competition.

“We all know if there was a market-efficiency rating for Costco, it would be off the charts,” says Kloza. Fuel serves as a lure to sell memberships, where the real money is made. “Gas is the magic elixir for that company. It really props up the frequency—and for Costco, it’s all about the frequency.”

Price is just one big lever that Fuels 50 brands pull to gain volume. The rest can be found on-site.

RaceTrac Petroleum brands appear twice in the Fuels 50: the state-of-the-art RaceTrac (6) and the dealer-driven RaceWay (31). That’s because they have similar elements that boost fuel volumes, says Max McBrayer, chief supply officer for the Atlanta-based company, which has more than 435 stores.

It begins with a high-traffic location and includes a consistent, well-displayed market price, clearly visible price signage, well-maintained dispensers, and an adequate number of fueling positions to minimize wait times.

A typical Sheetz location is also highly engineered to facilitate fuel buying. This includes a high-traffic location with proper ingress and egress, adequate space for cars and brightly lit canopies.

“Gasoline is a hostile retail transaction,” says Lorenz of Sheetz. “No one likes to buy gas. We have to make it as simple and easy as possible.”

Then there are the “extras”: free air and ATMs, automotive supplies for travelers and clean restrooms. The box, meanwhile, must have the right combination of products, environment and staff to connect with the customer.

For example, Sheetz stores can carry up to 400 different beverages in their coolers.

“It’s a huge selection—more than the average competitor,” Lorenz says. The chain’s made-to-order foodservice program, as well as a large menu of subs, hot dogs, hamburgers, salads and wraps, aims to cater to a wide selection of tastes.

“Food and fuel work hand in hand,” Lorenz says. “Generally, we’re driving gallons to drive traffic, but having the breadth of offer is also a draw.”

Scott Hartman, president of Rutter’s Farm Stores, York, Pa., which ranks 13th in the Fuels 50, says product offer and format go hand in hand. For example, the 60-store chain offers biofuels and diesel for both cars and trucks, which requires the necessary parking and space for ease of traffic flow and maneuverability.

Rutter’s has been building larger facilities on 3, and sometimes up to 10, acres of land. Larger locations with a wider range of fuels attract larger traffic counts and a greater range of vehicles. To that, Hartman adds pricing methods, combined with rewards programs and social media, to draw in fuel customers.

“It’s building the box that goes with the forecourt facility,” says Hartman of the critical fuel elements. “You can have a nice forecourt and lousy box.”

Part of creating a meaningful connection with customers is understanding their “missions,” says Joseph Bona, president of Bona Design Lab, New York. Successful retailers know what customers want on multiple levels, and they fulfill many of those needs to ultimately become a fuel destination.

“It’s not just gas in and of itself,” Bona says. “It’s a combination of food and fuel. Those who understand it’s for multiple purposes—that’s what separates good [retailers] from the rest of the pack.”

While private companies dominate the Fuels 50 ranking, public companies are part of the minority. Until Marathon Petroleum Co.’s (MPC) Speedway at No. 15, the ranking is conspicuously devoid of brands connected to public companies and major oil.

“It’s pretty rare to see a traditional major brand with an efficiency anywhere near the new-era independents,” says Kloza. This is a direct reflection of the majors’ move more than a decade ago to divest company-ops to focus more on fuel production and exploration.

That said, there are a few standouts. Kloza points to Chevron, San Ramon, Calif., which had a positive 8.4-CPG price differential to its competition in 2016 but ranked third in market share, reflecting the ability of that brand to price at a premium.

“There’s something magic about the Chevron name in Western real estate,” he says, pointing out that the brand has “a certain gravitas” among fuel marketers and consumers in that region. Shell’s 3.49-CPG differential and leading market share also reflect brand strength.

And major oil is showing a renewed interest in retail as projections suggest flat to declining fuel demand in the coming decades. BP is exploring a return to company-ops on the East Coast, says Kloza, and MPC and Tesoro’s decision to hold onto their retail sites to secure a dedicated market for gasoline has proven savvy.

Meanwhile, don’t be surprised to see one or more of the Fuels 50’s large private brands go public as a way of fueling growth. Kloza’s bet is on one of the most efficient U.S. fuel retailers: Wawa.

“They’re not stopping with Florida,” he says. “Whatever critical mass is, they’ll be in other states early at the end of this decade or in the next decade.”

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