With more than two years of lower fuel prices finally driving up sales volumes to match the peak demand year of 2007, there is a lot of good news for both consumers and fuel retailers. But there are other benefits that are not as obvious.
Credit-card fees, at least the portion based on a percent of the sales price, are down. Transportation costs of fuel into your stores and everything sold in the store are down considerably due to collapsing fuel surcharges. If you happen to own sites in markets that offer competitive choices for power or natural gas, those costs are down. And those carrying floating-rate debt are seeing big savings from interest rates that have remained near all-time lows for the eighth straight year.
Unfortunately, these costs savings are more vulnerable to a return to normalized prices than the recent fuel demand increase, which, thanks to higher SUV and truck sales, should stay through at least another trade in cycle. This is where that timeworn saying of “What goes up must come down” reverses and works to put an end to these other savings areas.
Put another way: The surest cure for low prices is low prices.
Buying Time
When low price and low volatility persist through several years of financial performance, the transition back to a more normalized price environment can be rough. Although the savings afforded by such periods are temporary, we see them across multiple budget years, bake them into our financial performance and may count on them to help “make the numbers.” Hedging practices aimed at reducing earnings and budget volatility—not based on simply speculating when prices may go up or down—can provide a valuable cushion during a transition back to normalized or much higher prices.
These tools give operators valuable time to adjust their own prices and to recapture the higher prices they need on sales to cover rising costs. We know that pool margins on gasoline expand when prices drop and contract when they rise. But just as those gasoline margins are contracting, costs from power and natural-gas bills to the fees paid on credit cards are rising as well. Fuel deliveries that cost 2.5 cents per gallon (CPG) from the terminal to the store with diesel at $2 per gallon will rise to 3 CPG for delivery of that same gallon if diesel costs go back to $4. Every delivery we take into the store from snacks to milk costs us more.
All these higher costs can be passed on eventually. The key is making sure you have the time to do so. That is what good hedging programs can do: buy time, make room and cushion the blow of rising costs.
Lock Down Costs
It is easy to predict where prices will go, but it is very hard to be right. However, with solid risk-management planning and well-planned hedging programs, you do not have to predict the market. You just have to be consistent.
This means the sometimes tedious work of measuring your exposure to low commodity prices across every segment of your business, and being able to model what will happen to your budget, margins and earnings if prices go back up.
In most cases, having a good hedging and price risk-management program is not about talking to bankers or traders. Often owners and operators want to reduce and manage their risks only to become frustrated and confused by these same bankers’ abbreviations and terminology. A more useful place to start is with your suppliers, carriers and distributors. Most of them can fix their prices for a quarter, a year or sometimes longer.
For example, fuel carriers can lock in their surcharge for a month or a year. We do this for many of our government and commercial contracts, as well as larger retail chains we service. Power and natural-gas providers should be able to go to annual or at least quarterly pricing. Ask your trash hauler to hold its surcharge, and request that your distributors lock theirs in as well.
Look at every direct-store delivery and add up just how much fuel surcharge you are eating in a year. Now double that and see how much less you would make per month when it is all added up. So get as many suppliers as you can to lock these costs down while prices are low and match them to your budgets and forecasts with more certainty.
If you want to lock in low interest rates with a swap or cover yourself for rising credit-card fees, you probably will have to talk to a banker or trader at some point. But build confidence with the things you can control directly and do not need a dictionary to understand. These day-to-day practices may not be as glamorous as putting on a big fuel hedge, but unless you are using that fuel for your own trucks, you are just gambling, not hedging. For that, I would recommend you go to Vegas, where the odds are probably better.
Doug Haugh is president of Mansfield Oil Co., Gainsville, Ga. He began his career at Exxon and co-founded FuelQuest, a provider of supply-chain management and tax automation solutions before going on to lead Mansfield Oil, which delivers more than 3.5 billion gallons of fuel every year to clients throughout the United States and Canada.
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