Don’t Miss Fuel's Big Inning

Resist raising prices to capture more margin at volume’s expense
Photograph: Shutterstock

FRAMINGHAM, Mass. -- Longtime managers in baseball have said the key to success is never giving up the big inning to an opponent. Instead, play for the big inning yourself. In fact, in 65% of baseball games, the winning team scores more runs in one inning than the loser scores in nine innings.

So it is in retail fuel marketing. While the average annual retail margin in the United States is 18 cents per gallon (CPG), the reality is that during the year we will swing from 5 CPG to 45 CPG and spend only 95 days at or around the 18-CPG average. A typical distribution will look like:

  • 95 days at 18 CPG
  • 180 days at 5 CPG
  • 90 days at 45 CPG
  • 365-day average: 18.6 CPG

While the 180 days at 5 CPG is painful, retailers must resist raising prices to capture margin at the risk of losing volume. The average U.S. fuel retailer sells 3,700 gallons per day per site, so targeting a 3-cent margin increase to assuage those 180 days of misery nets just under $20,000.

But the loss of 200 gallons per site, thanks to the elasticity effect from a price increase, generates an opportunity loss of $8,000 in fuel and another $172,000 in inside margin from lost fuel traffic. Here, the net loss in ongoing business is $160,000 from chasing margin at the expense of volume.

This sets a retailer up to miss the “big inning.”

Joe Petrowski is an adviser to BW Gas & Convenience, dba Yesway, Des Moines, Iowa, a c-store unit of Brookwood Financial Partners LLC, Beverly, Mass. He is also founder of Mercantor Partners LLC, a private-equity group focused on downstream energy distribution and retail convenience, and is the former CEO of Cumberland Farms and Gulf Oil.

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