Stop Making Cents?
Is the cents-per-gallon metric costing the c-store channel millions of dollars in fuel profits?
So if the industry were to move to a margin-percentage based perspective on gasoline, what would that scenario bring?
For one, a greater understanding of the overall numbers, says Mark Hawtin, senior vice president of strategy and business development for KSS Fuels.
Appreciating the effect of a price increase in one part of the business means putting every aspect of that business under the same metric. “We want to put all the core categories on the same footing,” he says. “If we want to trend fountain drinks vs. foodservice, we can, but coffee to fuel? There’s no easy way to make a direct comparison.
”Put simply, can we bring the forecourt and backcourt in alignment to weigh how pricing in one affects the other?
The CPG vs. margin percentage debate has been growing among KSS advisory group members for many months, especially among members who wanted to better integrate their ongoing analysis of fuel with their inside sales, Hawtin says.
“[It has] to do with revenue,” Hawtin says. “When we think margin rate and margin contribution, it’s difficult because [fuel and inside sales] are judged on a completely different basis.”
Comparing apples to apples has its advantages, Hawtin says, one being as a way to decide where to commit limited resources. “A retailer has restricted space to stock offerings,” he says. “They’re limited by the size of the store and the space available. So it’s a key parameter. From which category do I get the greatest margin contribution, and are [those products] getting their fair share of space in my stores?”
Admittedly, the balance of margin and space to sales is a complex one. Some lower-margin categories, such as cigarettes, may drive sales and higher market-basket rings. Yet many are space eaters with both subpar margins and sales.
Still, Hawtin’s fundamental question has relevance. And when applied to the fuel island, the question centers on: Are we getting the best margin we can? And of course, fuel is a set investment, Hawtin admits. To be in the fuel business at all, a retailer must make a commitment to equipment, canopies and lot space to accommodate that traffic.
So it’s not just looking at it as a percentage of gross margin, but also looking at fuel as a category and managing it that way, Ricker says.
His company is an example of a historic jobbership (albeit also a c-store focused one) taking over the retail that was once controlled by a major oil. “I’ll be honest—we weren’t a fuel focused company,” he says. “When we bought BP’s [stores here] … we bought the Indianapolis market, and suddenly we were selling a lot of fuel. Once we picked up all those gallons, it became a really big deal, and we had to be as good on fuel as we were inside the store. It’s really changed for us over time with all these oil company divestments and the volumes that we have now.”
If the industry switches from CPG, Ricker is confident fuel margin percentages will become inflation adjusted and, ultimately, market adjusted.
“It’s going to give you a more accurate picture of that category than looking at the static metric we’ve used for 40 to 50 years,” he says.
And that means thinking about fuel in classic category-management terms. “It’s so important that our retail fuel pricing person reports directly to me; we talk virtually every hour about fuel,” Ricker says. “Fuel is on my mind all the time.”
The problem comes in the down times, Ricker explains. “When the economy was doing well, our area was growing. … You didn’t have to be as creative and cute when it came to fuel,” he says. “Now, if you’re going to do well or even sustain your fuel volumes, you have to get very thoughtful about how you do so. We’ve put more efforts into fuel in the last year than we put into anything from a marketing perspective.
Bringing About Change
While retailers have different ideas about what change will mean, many believe pulling the industry away from CPG starts with NACS. Because of collusion laws and natural competition, retailers cannot compare fuel numbers (CPG or margin percentages) with each other and must rely on outside sources, such as NACS, Nielsen or even publications such as CSP, to understand how their numbers stack up to the industry standard.
“There needs to be a coordinated effort to look at this,” says Ricker. “NACS needs to take a leadership role, particularly in the SOI forum. When we’re going over our store numbers, we should not just be posting CPG up there—we should be posting the margin percentage.”
While the NACS State of the Industry Survey has in recent years published profit margin in terms of percentage of revenue, retailers interviewed believe more could be done to better understand the category in terms of margin percentages.
In response to that sentiment, NACS spokesperson Jeff Lenard points out that the survey “includes both calculations so that the data is actionable regardless of how retailers calculate break-even.”
The survey still stands as “the most comprehensive benchmarking tool in the industry,” though it continues to improve, Lenard says. “Over the past 40 years, it has significantly evolved from a one-page sheet of top-line industry data to near 200 pages of benchmarking data,” he says. Dave Carpenter, president and CEO of JD Carpenter Cos. Inc., Urbandale, Iowa, and current chairman of NACS, moves the discussion back to the central issue, agreeing the inveterate CPG model is undercutting fuel’s peak performance potential.
“We don’t keep up with cost increases and rate of inflation and dramatic price swings,” he says. “As price goes up, everyone wins but the retailer. As price goes up, either traders or large fund or oil companies win. We lose.”
When it comes to changing how NACS reports fuel at forums such as the State of the Industry Summit, Carpenter says discussions have been ongoing, with more NACS members expressing interest in fuel-margin percentages in recent years than in the past.
With this kind of vested interest, it would seem a natural move for NACS to lead the way in tracking fuel margin—but such a move is not without complications. As a neutral party, NACS can be a forum for open discussion while moderating concerns regarding price fixing and collusion.
“We just need to give serious thought on how we report,” Carpenter says. “As NACS, we have to be careful with sensitive topics like gas pricing, but it is incumbent on us in how we report gas.”
It’s a legal tightrope, certainly, but one to consider as energy around the topic grows. Though no real moves have been made internally, Carpenter says NACS has had serious talks about how to better relate fuel statistics at its annual summit. Among the considerations include how to obtain the numbers from its retailer sources and then report them in ways that tie back to other categories, as well as separating laid-in costs such as credit-card and transportation fees.
“For me personally, it is an important thing,” Carpenter says. “[With CPG], we’ve just done it for so long. It’s crazy to think people [still operate] that way. Gas is three to four times more costly than in the past.”