In a recent commentary, "Breaking Silos: How to Drive Store Traffic Through Competitive Fuel & Product Pricing Strategies," Stein asserted that by looking at [image-nocss] the two silos together, the retailer can find opportunities to buy volume cheaply on one side, and use those extra customers to maintain volume and increase margins on the other side.
"The first step in this process of tearing down silos is to develop a mentality that analyzes the total site. This not only applies to just the fuel and store, but to other major business units on site, such as car washes and fast food offerings," said Stein. "Too many retailers incorporate separate processes and management teams to determine fuel versus in-store strategies and pricing. These processes must be revised so that management looks at the total site in order to analyze and determine the correct strategies for the entire store."
Stein suggested the following steps:
Use data and analytical tools to understand the impact of fuel sales on the store, car wash or food service sales, and vice versa. Develop pricing policies and tactics to meet the desired strategy. Evaluate these strategies and determine where gross profit can be increased for the total site operations. The goal, added Stein, is to focus the store's fuel pricing strategies and inside promotion strategies on the maximum combined fuel and store gross profit, rather than fuel profit alone.
One option may be to lower fuel prices to grow fuel customer traffic, counting on the competitive fuel pricing to generate more in-store profit than will be lost through discounting fuel. Or the strategy may be to increase fuel prices, thereby increasing margins without negatively impacting the in-store business. Of course, in addition to the fuel price, in-store pricing should be re-evaluated when thinking of changing fuel price strategies, he said.
For grocery stores, the in-store spend per extra fuel customer is usually quite high, he said, making it a good tradeoff to lower fuel prices for more traffic into the store. The challenge is to know the maximum discount to generate traffic and still offset the loss of fuel profit.
"For fuel sites with convenience stores, the in-store spend per customer is typically five dollars or less, so retailers must carefully analyze fuel prices before deciding to lower them to be sure it will pay off," Stein said. "Convenience store operators are usually already giving away a significant amount of in-store gross profit margin through regular promotional pricing of the main convenience store categoriescigarettes, milk, beer, soft drinks, etc. So evaluating the fuel price and in-store pricing strategies in tandem will ensure that the result will be beneficial. The goal is to use the extra store customers delivered by the fuel-price discounting to maintain store volume with lower levels of in-store promotional pricing."
To implement a total-site strategy, Stein suggested that retailers estimate the correlation between fuel volume and store traffic and determine if the store has either a high/low fuel-to-store correlation along with a high/low fuel price elasticity. To do this, retailers must analyze historical data to see the effect of prices on the fuel and store, as well as the effect of competitor prices. This can best be accomplished using business analytic tools specifically developed for this purpose.
"If the location has a high fuel-to-store correlation and high fuel price elasticity, then the cost in gross fuel profit of a given increase in fuel customers is relatively cheap," said Stein. "In other words, a relatively high proportion of fuel customers go into the store and the increase in store traffic creates scope to increase store sales and potentially reduce in-store promotional pricing. This may allow the retailer to increase core category prices and achieve even greater increases in store gross profits."
For those sites with low fuel-to-store correlation and low fuel price elasticity, the retailer will apply the opposite strategy, according to Stein. In this case, the operator may increase fuel prices to gain profit, with the knowledge that the consequent reduction in fuel volume will be relatively low and the impact on store traffic will also be low. The net result is likely noor very slightvolume decline but overall gross profit increases. Once again, in-store promotion strategies should be reviewed to determine if there should be more or less.
"Retailers face the challenge of increasing gross profit while maintaining market share, revenue and volume. The key is to carefully analyze and plan how to do this without knee jerk increases in prices to drive margins or decreases to drive volume," said Stein. "After careful analysis, new strategies will not likely dictate dramatic changes in prices to achieve results. Having a pricing strategy that eliminates the fuel and store silos and correlates prices for bothas well as volumehelps retailers strike a balance that maintains volume and profits for the total site."
KSS is a leading global provider of pricing software, analytics and consulting services to fuel retailers and wholesalers in the oil and gas, convenience store and retail industries. It helps fuel marketers identify and efficiently execute optimal pricing strategies. The company's U.S. headquarters is in Florham Park, N.J., and its international headquarters is in Manchester, United Kingdom.
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