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    Managing Margins

    With gas prices climbing, promotions and new buying strategies help lure customers and improve miniscule margins

    By D. Gail Fleenor

    Many c-store operators have lost sleep over the shrinking margins and fickle customers spawned by high gas prices. The reasons for rack price increases change daily: high demand, delayed refinery expansion by oil companies, ethanol production increases, new fuel-efficient vehicles and threats of hurricane season. Prices at the rack have soared even when the price of oil has dropped.

    Early last month, a top industry analyst expected prices to improve later this year. "The fear about hurricane season will underpin prices in the second half of the summer," said Tom Kloza, publisher/chief oil analyst of Oil Price Information Service (OPIS), Wall, N.J. "I think refiners and marketers will both do well, with larger-than-normal margins through mid-summer."

    "But prices might approach earlier highs if significant hurricane activity threatens refining centers," he said.

    "The next predictable big move will be the decline in gasoline prices in the fourth calendar quarter," Kloza said. "This move would point to wholesale (and retail) prices at least 50 cents per gallon lower than where they stand at mid-June."

    While consumers have not changed their driving habits due to high gasoline prices, shopping behavior has changed. Consumers will change where they purchase gas for a cost difference of as little as one penny, according to the 2007 NACS Consumer Fuel Report. The nationwide poll of more than 1,200 consumers found that more than one in four would make a left turn across a busy street to save just a penny per gallon. Almost half would turn left across traffic for a 3-cent per-gallon savings. One in five consumers would drive 5 minutes out of their way to save a penny per gallon.

    Two out of three drivers list price as the most important determinant of where they will purchase gas, with just 22 percent saying location is the most important factor. This represents a significant shift from a 1999 NACS survey, when price ranked behind location as the main reason for selecting a store to purchase gasoline.

    Gas price sensitivity can impact inside c-store sales. One in four customers in the NACS survey said they buy less inside the store when prices are high, while more than half of those polled said their inside spending stayed the same.

    "Before these high gas prices, some customers might buy $5 of gas plus a drink and snack inside," said Mark Stutzman, president of Premium Management Group, a Bay Springs, Miss.-based firm that manages 13 c-stores. "Now, they only buy $10 worth of gas. Inside sales have been kind of soft, so we're running promotions to keep them coming into the store."

    Other marketers have seen little change in store sales. "We haven't seen drops in sales at the pumps, and we continue to build our sales inside," countered Bill Shipley III, president of Shipley Energy, the York, Pa.-based company that operates 23 Tom's stores.

    Credit-card costs hit c-stores hard during times of high gas prices. Almost half of drivers in the NACS survey said they were more likely to use credit cards when gasoline prices rise, leading to additional interchange fees, which erode what's left of retailers' profit.

    "As prices go up, margins get crimped, and credit-card fees go up, so there's no money to spend on attracting customers," said Brian Fisher, president/owner of Fisher Stores, New Bern, N.C., and president of the North Carolina Association of Convenience Stores. Fisher operates 14 stores under the Fuel Markets banner. "There's a tremendous amount of suffering going on and customers don't want to hear about it."

    Finding Solutions

    Some c-store chains are using promotions to lure customers, while others are considering going unbranded or trying new buying strategies.

    "One thing we're pushing in most stores is cash and credit pricing," said Walt Dwelle, managing partner at Nella Oil, based in Auburn, Calif. "We like to give that discount to the cash customer as opposed to the credit-card companies. We're using two-tiered discounting for cash pricing." Dwelle said his cash sales were up 15 percent with credit sales off "a corresponding amount, maybe a little more."

    Nella Oil, which operates more than 45 units under the names Flyers Stores and Olympian Stores, is also looking at loyalty programs.

    "We aren't offering any promotions on fuel currently," Stutzman said. "One of our local competitors is giving customers one dollar off with a fillup of 12 gallons or more. We're looking at doing something like that."

    During times of high rack prices, some fuel retailers consider going unbranded. "I read an article about differentials between branded and unbranded at the rack. This caused me to unbrand a third of our stations a couple of years ago," Fisher said.

    The West Coast is faring a little better this year because inversions in rack prices are not as dramatic as in previous years, according to Dwelle. "We are primarily unbranded with our own Flyers and Olympian brands," he said.

    Shipley said his chain has benefited from the move his company made to convert more locations to unbranded. "It has given us more flexibility in buying -- we've seen some improvement. It also gave us the chance to present a new product, Tom's Gasoline, to customers. In the 12 locations we converted in February, there has been some interest in our unbranded, private-label product."

    Some c-store chains are considering buying strategies and contracts to improve margins. "We're attentive to the fact that price motivates customers. We have flexibility in buying and the capacity to make good decisions. We look for different suppliers, contracts and ways to buy fuel," Shipley said.

    Nella Oil's Dwelle said his company does "a fair amount of hedging on NYMEX and differentials between NYMEX and the West Coast spot market, which helps smooth out some price spikes."

    "We've always been aggressive on the buying side with fuel. We're not doing anything differently right now," said Mike Ports, president of Ports Petroleum, the Wooster, Ohio-based company that operates 16 Fuel Marts. "We maintain a different strategy than some. We market the same way all the time."

    Flexibility in buying is often not as easy for small chains. "I talked to several independents about trying to get a contract, so we would have a predictable price," Fisher said. "So far, it hasn't worked out. It's easier for large chains to get contracts than for the majority of us out here in the business."

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