CAPE CORAL, Fla. -- In my role as a consultant, one question retailers often ask is whether adding E85, the 85% ethanol fuel blend, as a product offering would benefit their business. This question is on many minds.
The Fuels Institute’s new report Retailing E85: An Analysis of Market Performance, July 2014-August 2015, seeks to better understand the price relationship between this fuel and regular unleaded. It can also be viewed as a case study in the price sensitivity of consumers when presented with an alternative to unleaded.
Most forecasts and current market trends indicate that liquid fuels will remain the dominant transportation fuel for the next 20 years. Electric vehicles (EVs), however, continue to capture headlines and the imagination of everyone, and they are gaining market share as they improve upon range, speed of battery recharge and purchase price.
As I have previously written, these vehicles will gain market share and begin to change the landscape of the transportation market. But for the foreseeable future, there will remain a focus on the liquid fuels we retail today. Therefore, it is critical for fuel marketers to remain focused on their primary business.
It is important to remember that E85 can be used only by flex-fuel vehicles (FFVs), which are able to operate on fuels ranging from no ethanol up to 85% ethanol. At the end of 2016, there were an estimated 20 million FFVs in the United States, or close to 8% of the market. This means the market for E85 sales is constrained by the number of FFVs.
The new Fuels Institute report analyzes daily sales data, including prices and volumes, for both unleaded and E85 from 620 stores. This data set represents 22.2% of the nearly 2,800 facilities that sell E85. From this analysis, here are some key observations:
- It is difficult to correlate unleaded’s price to E85 sales. The original question that spurred this analysis was to determine if the decline in retail unleaded prices over the past three years had a diminishing effect on E85 demand. The two sample sets analyzed (this report and an earlier 2014 Fuels Institute E85 report) indicate that E85 continued to be priced at a level close to 50 cents per gallon (CPG) below unleaded. Meanwhile, E85 sales volume increased by the time of this follow-up report to reflect an average store volume of 4.77% of unleaded sales, compared with 2.79% in the prior report. However, these sample sets do not represent same-store or same-company performance, so it is impossible to draw a direct comparison.
- Factors other than price affect E85 sales. An analysis of the entire sample set and of 15 profiled stores indicates that while there is a correlation between price discount and E85 sales volume, it is far from exact or even consistent store to store. In studying the data, I believe location accounts for much of the inconsistency. For example, in the Midwest, where consumers are quite familiar with E85, there would appear to be a stronger correlation. But that is not to say retailers outside of this region have not been successful, provided they have done a good job educating their customers as well as setting optimum prices in relation to unleaded.
- Lower-volume stores reported stronger E85 sales in both gallons and percent volume. In this report, all analyses support this finding, but the analysis of the sample stores when organized into performance quartiles is especially illuminating. Examined this way, it is clear that stores with lower throughput volumes of unleaded tend to report higher E85 volumes, both in terms of real gallons and as a percent of unleaded volume. There is no definitive explanation for why this is the case, but the relationship between the two is clear.
- Energy parity does not seem to factor significantly in E85 pricing decisions. The data shows that very few retail stations post E85 prices that averaged near 23% below unleaded prices. The most successful, top-quartile stores averaged 19.6% below unleaded and generated E85 sales that matched 9.8% of the store’s unleaded volume. The E85 price for this quartile was 52.1 CPG below unleaded. If stations were to price E85 at or greater than 23% below unleaded, it is unclear whether they would generate greater volumes. However, when E85 prices drop significantly below unleaded, E85 volumes have the potential to spike.
Consumers are influenced by numerous factors when deciding to purchase E85. Convincing 20 million FFV drivers to opt for E85 instead of unleaded fuel requires careful study of market conditions and consumer behavior, and the development of strategies to maximize the return on investment. But there is a clear opportunity to consider E85 as part of the product mix to augment current volume as well as prepare for future optimized fuels, These fuels have the support of the auto industry, oil and ethanol industries, as well as retailers, who have already invested in the infrastructure to sell liquid fuels.
To download and read the full Fuels Institute report, Retailing E85: An Analysis of Market Performance, July 2014-August 2015, click here.