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Fuel Management

Consistency Counts

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Last summer, a major fuel retailer decided to build a new convenience store right at the entrance to my neighborhood. I watched with anticipation as the massive holes were dug, underground tanks were installed, lines were run, and dispensers began to be installed. I got really excited when I counted 6 fuel islands, anticipating a high volume, low price operation that would be very convenient for me and my family.

When the station opened, I was happy to see that its prices were a full 5 cents lower than the nearest alternative. Yee Ha! (I’m from Texas) Like many c-store customers, the price of fuel is my main purchase criteria, so I tried it. My truck (I did say I was from Texas) seemed to like it just fine, too. Fearing that this pricing was just a “new store special”, I kept an eye on prices. After about 3 weeks and considerable price fluctuations, this new c-store was still always the lowest around. Then, I let my guard down.

One day after filling the tank at my new favorite c-store, I was on my way to work and did a double-take as I drove by the gas sign for the grocery chain where I used to purchase fuel. Their price was a full 10 cents lower than what I had just paid! I had been betrayed. Even though I only paid $2 more than I could have, my trust was lost. I returned to my old favorite, the grocery store, on the next fill-up.

I still check the prices when I drive past the new c-store. They actually have the lowest prices around occasionally, but I don’t go there. With price volatility being the norm, even if the new c-store seems to have the lowest price, I’m thinking that it may still be lower elsewhere, so I don’t stop.

Sometimes I wonder about the pricing policy underlying the pump prices I see. In the case of this new c-store, I just can’t figure it out. They are sometimes the lowest, but other times the highest. Maybe I’m just not in their target market. More likely is that their pricing policy is not the issue, but they have problems in execution. Inconsistent pricing policy compliance is a common problem for c-store managers today (check out our recent white paper on The Seven Deadly Sins of Fuel Margin Management).

Building and retaining customer loyalty is a key strategy for most c-stores. Customers may decide whether to trust you based on a single day’s drive-by on your location. Inconsistent pricing sends a message that your c-store cannot be trusted. For a c-store owner, the pricing of fuel can affect more than just the margins for that particular day—it can drive loyalty or drive them away.

Planning for the Unplanned, the Forecasted, and the Not-So-Obvious

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I’m from Texas. More specifically, I’m from Houston. Having said that, I’m long-familiar with the Gulf Coast phenom that spans from early summer to late fall: the mighty hurricane. Yes, my hurricane experience runs the gamut from volunteering for evacuee relief efforts (post-Hurricane Katrina), to being an evacuee myself (pre-Hurricane Rita), to hunkering down with my doomsday supply of water and canned food while watching the neighborhood outside blow away (during Hurricane Ike).  You can then imagine how thrilled I was to hear that forecasters have predicted an above-average hurricane season (Eighteen tropical storms, nine of which will be hurricanes) for 2013. Eighteen tropical storms. Nine hurricanes. I can’t wait.

But, forget about me.  What does this foreboding forecast mean for fuel managers and their operations?  What havoc could one of these storms wreak on their fuel plans and ultimately, their revenue?

Let’s think back to last fall’s major storm: Hurricane Sandy. If there was an award for unplanned and disruptive events, Sandy would get the Oscar® and lifetime achievement award. Even before Sandy came ashore, fuel demand skyrocketed as New Yorkers rushed to fill up, causing run-outs throughout the area. To compound the situation, highway closures cut off last minute fuel deliveries limiting the availability of supply to the fuel stations in need of replenishment. After the storm, fuel deliveries were still being made, but the lack of electricity at retail stations impacted the ability for fuel to be pumped from the tank to the consumers’ vehicles.  Severe flooding caused contamination of fuel tanks rendering them useless. Even to a Texan where things are big, that storm was a doozy.

But, not all weather-related disruptions are such dramatic events. In some cases, something as simple as a 10-degree drop in temperature can impact an organization’s fuel plans and cause fuel revenue to plummet along with the reading on the thermometer. Take a look at The Pantry. In February and March, during a prolonged cold snap, the usual Pantry patrons opted to stay home and keep warm rather than filling up their gas tanks. As a result, The Pantry’s fuel sales declined 7.9% compared to the previous year. Similarly, Stripes, Susser Holdings’ c-store chain, experienced the same effect.  Sam Susser, president and CEO of Susser Holdings, sited "significantly more cold-weather days than the prior two years” as the direct cause for a decline in Susser’s Q1 revenue.

Dramatic or not, it’s obvious that unplanned events such as weather can disrupt even the best laid replenishment plans and fuel operations.  And thanks to our forecaster friends, one thing is certain for the 2013 hurricane season: there’s a storm a’comin’.  Therefore, having tools in place to help better prepare for these events can alleviate some of the pain that is felt due to run-out and retain situations. (That’s the one good thing about hurricanes; they are forecasted. You know that they are coming well enough in advance so you can do your best to prepare for the impact that they will have on demand as well as your inventory and operations.) But, when putting together your fuel plans, don’t just take into account the big hitters such as Sandy and Ike. Remember to consider the less obvious players as well e.g. cooler weather. Yes, bad weather may only happen a couple times during the year, but it is still a disruption, and for a fuel-based businesses working on thin fuel margins, every penny counts.

Thoughts from WasteExpo: Managing Big Expenses in the Big Easy

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For those in the know, the largest event in the environmental and waste/refuse sector–WasteExpo– is going on this week in New Orleans. It is by far the largest gathering of companies in this sector each year. I was fortunate enough to present to leaders in the waste industry today about one of those primary expenses that can really eat at the bottom line, fuel for the fleet.

To the layperson, fuel is not always the most exciting thing to talk about, but when you are a fleet-based company, it is typically the largest expense after head count. So, given the pure financial impact, it commands attention and scrutiny! That being said, one of the most discussed topics this year is fuel price volatility.

The volatility that we have seen in the market since 2004 continues (with no signs of stopping). When you have a daily movement of 3 cents or more happening nearly 50% of the time, something has to be done to lessen its effects. Luckily, there are ways that companies can combat these movements, given a good plan and the technology to execute it. When you manage your fuel effectively, you can use this volatility to your advantage and not be caught on the wrong side of a 10 cent price swing – which can translate to $800 for a single load.

One of the other hot topics this year is invoicing. Given recent events in the news about fuel invoices, it’s not surprising that this audience is talking about how to ensure that the invoices they are paying are correct.

To underscore this, when we bring on a new client, we review past invoices as part of our benchmarking service, and have seen invoice inaccuracies up to 25%. When you are talking about an invoice to the tune of $20,000 to $25,000, it pays to check each one thoroughly. However, if you don’t have technology to help, this can eat up a lot of hours and the tendency will be to not scrutinize them. This is definitely not something that you want to do since even a variance of 1% of the typical fuel invoice is $200-$250, and these can quickly add up.

At the heart of this issue is the fact that fuel invoicing can be a real challenge–with the types of fuels available, contracts that pricing is tied to, the index the price is based on, and changing fuel tax rates, there are many details to manage and reconcile. We have even seen examples of customers receiving invoices from suppliers that were meant for other customers. Mistakes happen, but a $25,000 mistake can really ruin your day. To put it another way, you would hate to have all of your strategic effort around managing fuel volatility and efforts to optimize usage possibly be lost due to a single invoicing error.

Looking Ahead to the Future of the Retail Fuel Industry

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Last week, FuelQuest held its 9th annual GRAIL conference in San Diego. Excitement was high as representatives from companies across North America travelled to the industry event. GRAIL attendees heard presentations from noted economist Dr. Philip K. Verleger of PKVerleger and Greg Scott, SVP Supply Operations, from Cumberland Gulf Group. An industry panel discussion followed which included Paul Stone, formerly of Shell International and an independent director for FuelQuest and was moderated by Matt Tormollen, FuelQuest President and CEO.

After hearing similar messages from both Verleger and Scott on the future outlook of the retail fuel market, one thing that stuck in my mind was the importance of carriers and fuel suppliers working with retailers and fleets to help each remain competitive to combat not only fuel volatility but non-traditional competitors. Although each approached it from a different angle, one thing that they both focused on was the changing market dynamics for fuel retailers and that adaptation will be necessary for retailers to survive alongside declining gasoline consumption, competition from big-box retailers and other non-traditional competitors.

Specifically, Greg Scott stressed that retailers will need to embrace alternative fuel offerings as well as revamp beverage and fresh food offerings to continue to drive customer loyalty – the “same old tired salty snacks just won’t cut it” and “fresh, good tasting food service” is a necessity.

The other side of this future state and something that retailers have been combating since 2004 is fuel volatility. Combating volatility requires both retailers and suppliers to work together and be nimble to take advantage of the opportunities that volatility presents. Companies and suppliers who support load shifting tactics with good performance and accurate billing will help retailers and fleets remain successful and become trusted partners.

Highlighting this need, the 2nd annual FuelQuest Q Awards brought it into focus this year as two of the winners led their respective categories in load shifting, with the third leading the pack in invoicing accuracy. These trusted partners delivered accurately and dependably throughout the previous year to help make FuelQuest customers successful in their respective businesses.

So congratulations to Falcon Fuels (for delivered supplier of the year), Pro Petroleum (for carrier of the year for the 2nd year in a row), and U.S. Oil and Refining (FOB rack supplier of the year)!

Wrapping up another exciting GRAIL conference, we can now look forward to next year’s event in Nashville in 2014!

NACS 2012

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Matt Tormollen“Whoa! You gotta try this,” was heard over and again as the annual NACS/PEI tradeshow started with a bang in Las Vegas on Monday. The exclamation was made as record crowds surged through the Las Vegas Convention Center with energy drink vendors handing out free samples at seemingly every corner booth.

Perhaps artificially fueled by these energy drinks, the crowd seemed very enthusiastic and the show was indeed a busy one. It didn’t hurt that this year’s show is in Las Vegas, the entertainment capital of the world, and many international attendees could be seen among the attendees.

The enthusiasm could possibly have been the industry collectively blowing off a little steam after another tough year. Fuel retailers in particular were pinched this year as fuel prices remain high and fuel price volatility continues to increase.

Or maybe the energy on the show floor indicated a sense of optimism in this U.S. election year that things will improve for an industry that is arguably the lifeblood of the U.S. economy. Witness these facts from NACS:

  • Convenience stores sell approximately 80 percent of all fuel sold in the United States.
  • The U.S. convenience store industry alone serves nearly 160 million customers per day.
  • An average store selling fuel has around 1,140 customers per day, or more than 400,000 per year.

At the close of the first day of the show, I couldn’t help noting the irony of the now famous slogan “What happens in Vegas, stays in Vegas.” The energy of the tradeshow crowd (artificially induced or not) seemed to indicate attendees are optimistic about what next year will bring, but unlike the slogan, I’m sure they want to bottle this enthusiasm up and take it with them when they leave Las Vegas, to prepare for what looks like another tough year ahead.

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